Shipping - Toxic Ships

[Pages:3]Client Alert 07-013

Shipping

If you have questions or would like additional information on the material covered in this Bulletin,

please contact the authors: Alex Andrews (London) ddi: +44(0)20 7772 5850 aandrews@

Sally-Ann Underhill (London) ddi: +44 (0)20 7772 5857 sunderhill@

...or the Reed Smith Richards Butler attorney with whom you

regularly work.

February 2007

This bulletin is presented for information purposes and is not intended to constitute legal advice.

Reed Smith Richards Butler LLP is a limited liability partnership registered in England and Wales with

registered number OC303620 and registered office at Beaufort House, Tenth Floor, 15 St Botolph Street, London EC3A 7EE. Reed Smith Richards Butler is regulated by the Law Society. ?Reed Smith Richards Butler LLP 2007. All rights reserved.



Toxic Ships

The shipbreaking industry

At the end of a ship's life it will be sold and dismantled to recover the steel.

In 2006, Bangladeshi, Indian and Pakistani shipbreakers took delivery of over 310 ships with a total light weight of over 1.9 million tons. The majority were beached in Bangladesh which has, in recent years, become the most popular area for ship demolition, no doubt related to the fact that it is the one paying the highest price for regular tonnage. Other players in the field are China and Turkey.

Problem vessels

A number of cases where vessels have become embroiled in legal battles over their sale for scrap have hit the trade headlines in the last year. As well as the valuable steel, the ships may also contain large amounts of hazardous materials. The problems tend to involve a vessel which has either been partially decontaminated by owners or not decontaminated at all prior to sale for scrapping. Central to this is obviously the cost of decontamination.

In January 2006 a decommissioned French warship, Le Clemenceau, set sail for Alang in India for scrapping. Greenpeace claimed it was laden with hundreds of tons of toxic asbestos and should not be allowed to dock in Alang because of the danger to workers' health if it was broken up. As a result of Greenpeace's intervention, a committee appointed by India's Supreme Court sat on 20.1.06 to determine whether the vessel had been rendered safe enough to beach at Alang. A 30 ton discrepancy was found between the amount of asbestos a French firm said it had removed from the vessel and the amount received at a waste site and so India sought more information before allowing the vessel to enter its waters. Ultimately Greenpeace won a court order banning the vessel from entering Indian waters and in February 2006 the French State Council decided to order the vessel back to a French dock.

One day after Le Clemenceau was ordered back to France a giant cruise ship, the SS Norway, which was on its way to Bangladesh for demolition was `outed' on the Greenpeace website as carrying 1250 mt of asbestos on board. The consequence of this was that the Bangladeshi courts banned the scrapping of the SS Norway in its territory. The vessel was ultimately renamed The Blue Lady and in August 2006 the Gujarat authorities determined that she could be recycled at Alang on the grounds that she contained toxic and hazardous material within permissible limits. The Supreme Court's final decision is due in March 2007, which means that there has been a significant delay for the owners.

In May 2006 the situation again hit the trade headlines when the Polembros vessel, the Alfaship, a single hull tanker, which was the subject of a shipbreaking contract in Bangladesh, was targeted as another alleged example of dumping of toxic ships in Asia. Once again the vessel appeared on a Greenpeace list on its website of 50 ships that `might be scrapped soon.' Once it appeared on the site, the Bangladeshi authorities issued a temporary order refusing to allow its scrapping. When Polembros suggested an inspection of the vessel, the Bangladeshi court refused and imposed a blanket ban on its breaking there. She was reported as having left Bangladesh heading for a new breaking yard in China. The effect of an appearance of a vessel on the Greenpeace website, as far as the Bangladeshi government is concerned, appears to be that it will not be allowed to Bangladesh for breaking.

In January 2007 a vessel with which we were concerned, which was heading for Chittagong shipbreaking yards, also appeared on the Greenpeace website in its watch list of `50 ships in the spotlight'. The vessel had previously obtained a no objection certificate from the Bangladeshi Ministry to allow it in. Once its name appeared on the Greenpeace website the importer of the vessel was asked by the country's shipping department to decontaminate it ? it being believed that the vessel had asbestos, toxic paint and fuel residues on board. Again, she did not ultimately enter Bangladesh for breaking.

NEW YORK LONDON PARIS LOS ANGELES WASHINGTON, D.C. SAN FRANCISCO PHILADELPHIA PITTSBURGH OAKLAND MUNICH ABU DHABI PRINCETON N. VIRGINIA WILMINGTON BIRMINGHAM DUBAI CENTURY CITY RICHMOND GREECE

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Shipping

Environmental issues are now of paramount importance and there is obviously a need for the responsible handling of hazardous materials. An interesting issue arises, however, as to the source of Greenpeace's information on such vessels. In our case a sharp drop in the market per ton meant that it was advantageous for the buyer of the vessel to be relieved of its contractual obligations.

Greenpeace

Greenpeace maintains a list on its website of 50 ships which might be scrapped soon. It asks the owners of these ships to declare that their ships will be decontaminated before scrapping at Asian countries. It states that until that time Greenpeace will follow and monitor these (and other) ships. It actively asks for harbour masters and others to provide it with information about ships suitable to add to this list. The current list is comprised of chemical tankers, container ships, oil tankers, passenger ships as well as `other' and `scrapped' vessels. Anonymous information is welcomed.

Legal regime

Groups such as Greenpeace rely on the Basel convention, and EU legislation implementing it, to give legal support for their actions.

The Basel Convention is an international treaty designed to reduce the movement of hazardous waste and specifically to prevent the dumping of hazard waste from developed to less developed countries. It came into force in May 2002. Although the 163 Basel parties decided in October 2004 that end-of-life vessels can be considered hazardous waste, due to the particular nature of the trade and the timing of when the vessel becomes waste there are numerous exceptions to its application to ships as it stands. Annex VIII of the Convention lists wastes that are characterized as hazardous under Article 1 of the Convention. This list includes waste asbestos. Other waste from oil tankers identified on the Greenpeace site includes aluminium and zinc anodes, lead-acid batteries, hazardous substances in paints and coatings, refrigerants, steel, electrical installations and oil.

The European Waste Shipment Regulation (259/93/EEC) calls for a full ban on the export of hazardous wastes from Europe to developing countries. Whist Greenpeace claims that such activities are contrary to EU law, the shipping industry denies such claims. The European Commission has said that it is unable to apply EU law unless the ship becomes waste in EU waters.

The Future

In 2003 the IMO adopted guidelines for ship recycling. However it is clear from the examples cited above that compliance with these guidelines is not enough to prevent problems. In October 2006 the IMO's Marine Environment Protection Committee (MEPC) agreed to establish a working group before MEPC 56 in July 2007, to speed the development of a draft convention on the recycling of ships, to ensure that there is a legally binding and globally applicable set of breaking rules and recycling standards. The plan is that MEPC 56 will consider the working group's report and continue to develop the draft convention and guidelines, with the aim being that the new convention will be adopted at a diplomatic conference on ship recycling in 2008-9.

This is obviously some way hence, so what should you be aware of if you are hoping to sell your vessel for scrap before then?

Practical considerations and legal options

? A general awareness is needed that this is an area of uncertainty and unpredictability, possibly depending on the, arguably, arbitrary posting of your vessel on the Greenpeace website.

? Greenpeace is of the view that all single hull tankers will contain hazardous waste, and if they appear on the Greenpeace site they are unlikely to be allowed to enter Bangladeshi yards for breaking.

? India appears to be more receptive to non-standard vessels but there is a tendency for long and expensive delays before such vessels will be allowed there for breaking.

? If your vessel's name appears on the list on Greenpeace's site one approach may be to ask Greenpeace where they got her name from. If a party to the transaction has given the name to Greenpeace to gain a tactical advantage or financial gain, Greenpeace may be willing to reconsider whether to list the vessel depending on the true state of the vessel. Notification of the impending breaking of the vessel to Greenpeace may also be in breach of the confidentiality clause in the memorandum of agreement (MOA).

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Shipping

? As regards your MOA for the sale of the vessel, it may be possible to invoke the doctrine of frustration, which takes place `when there supervenes an event (without the default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulation in the new circumstances: in such a case the law declares both parties to be discharged from further performance.' National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675.

? The effect of frustration is to discharge both parties automatically. Its operation does not depend on the action or inaction of the parties.

? In the circumstances described above there are two possible ways to construe the supervening events:

- That the sale contract becomes physically or legally impossible of performance because of the position taken by eg the Bangladeshi government.

- That the delays consequent on involvement in Indian legal proceedings are likely to be so severe as to frustrate the contract. The problem in this situation is determining the length of delay required before the doctrine can be invoked. This is entirely a question of fact but both the duration of the actual delay and the uncertainty as to the duration of any future delay may be combined to lead to the assessment that the contract is frustrated.

Given the global IMO phase out regulations concerning single hull oil tankers over 5000 DWT by 2010 and the inevitable and natural wastage of ships, the need to establish an internationally enforceable set of rules is of priority to ensure certainty for the industry.

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