THE LIABILITY OF CLASSIFICATION SOCIETIES SOME PRACTICAL ISSUES

PART II - THE WORK OF THE CMI 275 THE LIABILITY OF CLASSIFICATION SOCIETIES SOME PRACTICAL ISSUES HENNING JESSEN * Recently, there has been a renaissance of academic literature discussing the liability of classification societies. 1 The case law of different legal orders might support this revival but very often disputes between classification societies and other legal stakeholders are settled amicably and are thus not officially reported. 2 The CMI has addressed the related problems extensively in the past (especially between 1990 and 1998) 3 and again during the last two conferences in Dublin (2013) 4 and in 2014 (Hamburg). 5 For the Hamburg meeting it has been agreed that this short presentation will focus on just two practical issues of this rather sensitive issue, i.e., first, the legal effects of European Union (EU) law on the liability of classification societies. Second, some possible legal consequences will be addressed which could be drawn from the analysis of EU law and recent case law on the topic of limitation of liability. Due to limited space and time, reference is made in the footnotes for further academic reading and legal analyses. * Professor for Maritime Law and the Law of the Sea at Hamburg University, Germany. 1 See, e.g., de Bruyne/Vanleenhove, An EU Perspective on the Liability of Classification Societies: Selected Current Issues and Private International Law Aspects, 20 Journal of International Maritime Law (2014), pp. 103; de Bruyne, Liability of Classification Societies: Cases, Challenges and Future Perspectives, 45 Journal of Maritime Law & Commerce (2014), pp. 181; Mansell, Flag State Responsibility (2010), pp. 117; Lagoni, The Liability of Classification Societies (2007), pp. 259. 2 For example, on a possible liability of classification societies, there is very few case law available under German law and only one case involving a classification society has been decided by the German Federal Court, see BGH NJW-RR 1998, p. 1027, the case related to a new-building project and mainly dealt with negligent supervision of a shipyard by the classification society, see generally Basedow/Wurmnest, Third Party Liability of Classification Societies (2005). 3 By 1999, the CMI had drafted rules for principles of conduct for classification societies and their possible liability as well as Model Contractual Clauses for Use in Agreements Between Classification Societies and Governments and Classification Societies and Shipowners. 4 Presentation of Denise Micallef, available online at <http://www.cmi2013dublin. com/download/file/191/>.

276 CMI YEARBOOK 2014 Maritime debt Restructuring Shipfinance, Cross-border Insolvency and Wrongful Arrest Liability of Classification Societies & Piracy 1. Binding EU Law Directed at Classification Societies (Regulation EC/391/2009) On a global level, there are estimates that currently more than 100 private organizations offer services under an official label marked as classification societies to the maritime industry. 6 This evidences at least two effects: First, the global market for marine surveying and certification is generally not limited to a handful of traditional names of the classification business. Rather, there has been an intense commercialization of those services including rigorous competition and even attempts of hostile takeovers between different classification societies. The issue of commercialization includes both the private classification functions performed on behalf of ship owners as well as the public functions known as statutory certification performed on behalf of flag states. 7 The importance of this dual role of today s classification societies, performing twin functions for both private and public clients, also in the area of offshore oil and gas or in soft sectors like maritime education, cannot be stressed enough. 8 Both functions of classification societies are essential to fight against substandard shipping. 9 However, this is also a source of problems as, invariably, the dual role of classification societies may create situations of conflict of interest. Second, shipping accidents and marine casualties still happen 10 and sometimes the results of marine casualty investigations especially in cases of structural failure may point to the organization which has officially certified the safety of the vessel, even if it is a highly reputable institution with a long history of clean certification activities. And sometimes the possible reasons for a marine casualty can only be explained by using scientific data and research results of classification societies. The recent breaking apart and loss of the vessel MOL Comfort in 2013 is a good example for this. Since two major marine casualties occurred in European waters in 1999 5 Presentations of John Hare and Henning Jessen, available online at <http://www.cmi2014hamburg.org/down-loadcenter/documents/>. 6 See Mansell, Flag State Responsibility (2010), at p. 139, referring to the GISIS database of the International Maritime Organisation (IMO). 7 The main elements of statutory certification relate to almost all IMO-governed aspects of ship design (especially load lines, stability, propulsion, steering equipment, etc.), pollution control, accident and fire prevention, etc. 8 See, e.g., Honka, The Classification System and Its Problems with Special Reference to the Liability of Classification Societies, 19 Tulane Maritime Law Journal (1994), pp. 3; de Bruyne, Liability of Classification Societies: Cases, Challenges and Future Perspectives, 45 Journal of Maritime Law & Commerce (2014), pp. 181, at 182. 9 See generally: Witt, Obligations and Control of Flag States (2007), p. 274. 10 The 2014 Allianz Safety and Shipping Review refers to an annual number of 93 large ship losses as well as 2.596 reported marine casualties, both in 2013. These numbers mean that on a global scale eight ships are lost per month while far more than 200 marine casualties happen every month.

PART II - THE WORK OF THE CMI 277 ( M/V Erika ) and 2003 ( M/V Prestige ) the EU intensified its maritimerelated regulatory activity, especially via the so-called Erika Packages I - III between 1999 and 2009. 11 But already in 1994, an EU Directive had stated that worldwide a large number of the existing classification societies do not ensure either adequate implementation of the rules or reliability when acting on behalf of national administrations as they do not have adequate structures and experience to be relied upon and to enable them to carry out their duties in a highly professional manner. 12 This remark stands in sharp contrast to a highly sophisticated self-regulation of the most advanced classification societies, both in quality and quantity. Nevertheless, by 2009, the EU agreed on an extensive recast of the former Directive 94/57/EC and the act was split into a Directive (2009/15/EC) 13 and a Regulation (EC/391/2009). 14 Regulation EC/391/2009 is directed primarily at the classification societies and has empowered the European Commission with extensive competencies and enforcement instruments at the EU level. These powers have been identified already at least partly as problematic from the perspective of public international law. 15 Above all, under Regulation EC/391/2009, EU members have transferred their rights to grant recognition to classification societies and to withdraw recognition again in case of serious irregularities exclusively to the Commission (see articles 4 and 7). The Commission has pushed forward a rather delicate agenda of mutual recognition of class certificates (art. 10) 16 and it may impose severe financial penalties on classification societies in cases of serious or repeated failure to fulfil the minimum criteria [ ] or if worsening performance reveals serious shortcomings in its structure, systems, procedures or internal controls (art. 6). Effectively, Regulation EC/391/2009 ensures that only those classification societies which are members of the International Association of 11 See generally Jenisch, The European Union as an Actor in the Law of the Sea: The Emergence of Regionalism in Maritime Safety, Transportation and Ports, 48 German Yearbook of International Law 2005, pp. 223; Reuß/Pichon, The European Union s Exercise of Jurisdiction Over Classification Societies, 67 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht (2007), pp. 119, at 125. 12 Introduction to Council Directive 94/57/EC on common rules and standards for ship inspection and survey organizations and for the relevant activities of maritime administrations; for an extensive discussion of this legal act see: Begines, The EU Law on Classification Societies, 36 Journal of Maritime Law and Commerce (2005), pp. 487; Lagoni, The Liability of Classification Societies (2007), p. 291. 13 OJ 2009 L 131. 14 OJ 2009 L 131/11. 15 Reuß/Pichon, The European Union s Exercise of Jurisdiction Over Classification Societies, 67 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht (2007), pp. 119, at 130. 16 See Fairplay Magazine of 4 November 2010, pp. 22 ( ROs must learn to share in class ); Tradewinds of 27 April 2012, p. 2 ( Brussels smells a class conspirary ).

278 CMI YEARBOOK 2014 Maritime debt Restructuring Shipfinance, Cross-border Insolvency and Wrongful Arrest Liability of Classification Societies & Piracy Classification Societies (IACS) can be recognized under EU Law. 17 The Regulation also ties EU regulatory activity to the parallel global agenda of the IMO. The fourth Recital of the Regulation states that the objective of equal levels of safety and of environmental protection and uniform establishment and application of the necessary professional standards for activities of classification societies should be pursued through measures that adequately tie in with the work of the [IMO] and, where appropriate, build on and complement it. Furthermore, the Member States and the Commission should promote the development by the IMO of an international code for recognized organisations. This so-called RO Code as referred to in Recital 4 of the Regulation has now been agreed after years of negotiations at the IMO level. 18 By 2015, the RO Code will provide a consolidated IMO instrument containing criteria against which ROs (i.e. classification societies) are assessed and authorized on the global level. It will also give guidance for subsequent monitoring of ROs by flag state administrations. Ultimately, in 2015, the IMO s success in drafting the RO Code as a consolidated instrument will mandate at least some editorial updates in Regulation EC/391/2009. 2. Public Issues Relating to Limitation of Liability (Directive 2009/15/EC) Regulation EC/391/2009 remains quite silent on the issue of liability of classification societies. 19 On a global scale, the IMO s new RO Code has also eschewed any new hard law on the liability of classification societies and has just included a soft remark in footnote 3 of para. 8.4 ( Liability ) that flag states may also consider placing a limitation on the level of liability and indemnification to be covered under [ ] insurance or other compensation arrangements. However, the liability of recognized organizations is addressed in Directive 2009/15/EC which is primarily directed to the EU Members and mandates them to establish a working relationship with recognized organizations, i.e. classification societies (art. 5 para. 1 of the Directive) in 17 On the role of the IACS see, e.g., de Bruyne, Liability of Classification Societies: Cases, Challenges and Future Perspectives, 45 Journal of Maritime Law & Commerce (2014), pp. 181, at 183; Begines, The EU Law on Classification Societies, 36 Journal of Maritime Law and Commerce (2005), pp. 487, at 500; Lagoni, The Liability of Classification Societies (2007), pp. 24. 18 The RO Code was adopted by the IMO s Marine Environment Protection Committee (MEPC), at its 65 th session, by means of resolution MEPC.237(65) and by the IMO s Maritime Safety Committee (MSC), at its 92 nd session, by means of resolution MSC.349(92). The Committees also adopted amendments to mandatory instruments which are expected to enter into force on 1 January 2015 by means of resolutions MEPC.238(65), MSC.350(92) and MSC.356(92) to make parts 1 and 2 of the RO Code mandatory under MARPOL annexes I and II, SOLAS and the 1988 Load Line Protocol. 19 Apart from two rather general remarks in Recitals 7 and 18 of the Regulation.

PART II - THE WORK OF THE CMI 279 the form of a formalized written and non-discriminatory agreement art. 5 para. 2). Effectively, those agreements are international public-private partnerships. 20 The strange, cumbersome, confusing and unclear wording of the following art. 5 para. 2 b) of Directive 2009/15/EC (and its predecessors) has been analyzed and criticized extensively elsewhere. 21 In fact, this miscarried sub-provision should be clarified and updated completely whenever there is a suitable occasion for the EU in the future. However, at least the case-based scenarios of art. 5 para. 2 b) of Directive 2009/15/EC evidence a political acceptance within the EU that a possible liability for classification societies should be established as part of the working relationship between EU flag states and their recognized organizations (which is, in most cases, a contractual relationship). Recital 17 of the Directive adds a strong harmonization argument to this legal and political debate. 22 A majority of the 28 EU members now applies the principle of limitation of liability in their function as flag states and public clients of classification societies. Denmark, for example, has slightly increased the financial limits as mentioned in art. 5 para. 2 of Directive 2009/15/EC and has included provisions in its RO Agreement that it shall be entitled to financial compensation from the RO to the extent that [ ] personal injury or death was, as decided by [ ] court, caused by the RO, up to but not exceeding an amount of 5,000,000,-. 23 A following clause states the same for loss or damage and limits liability of classification societies up to but not exceeding an amount of 2,500,000,-. 24 These contractual clauses provide at least appropriate legal foreseeability for both contractual partners and they 20 Reuß/Pichon, The European Union s Exercise of Jurisdiction Over Classification Societies, 67 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht (2007), pp. 119, at 121. 21 See especially (relating to the original text of the preceding Directive 94/57) Begines, The EU Law on Classification Societies, 36 Journal of Maritime Law & Commerce (2005), pp. 487, at 521: [ ] strange and cumbersome wording [ ], at 524: [ ] the whole liability scheme is confusing and presents several problems of construction. ; de Bruyne, Liability of Classification Societies: Cases, Challenges and Future Perspectives, 45 Journal of Maritime Law & Commerce (2014), pp. 181, at 189: One of the problems is the unclear phrasing and the use of undefined terms in the Directive. There seems to be no difference in treatment between the notions of reckless act and gross negligence. 22 The provision states that divergence in terms of financial liability regimes among the recognised organisations working on behalf of the Member States would impede the proper implementation of this Directive. In order to contribute to solving this problem it is appropriate to bring about a degree of harmonisation at Community level of the liability arising out of any marine casualty caused by a recognised organisation, as decided by a court of law, including settlement of a dispute through arbitration procedures. 23 See clause 6.2 of the Agreement Governing the Authorisation of [Recognised Organisation (RO)] to Undertake Statutory Certification Services on Behalf of the Danish Maritime Authority, available online at <http://www.dma.dk/ships/recognizedorganisations/sider/thedanishclassagreement.aspx>. 24 Ibid., clause 6.3 of the Danish RO Agreement.

280 CMI YEARBOOK 2014 Maritime debt Restructuring Shipfinance, Cross-border Insolvency and Wrongful Arrest Liability of Classification Societies & Piracy make the inherent risks of statutory certification services insurable for classification societies. 3. Concluding Thoughts on Limitation of Liability for Classification Societies Attorneys might wonder what the benefit could be for the private law discussion of liability of classification societies by gazing at protracted subparagraphs of an EU Directive and by analyzing deeply hidden clauses of RO Agreements between some EU flag states and their chosen recognized organizations. After all, the cases on a possible third-party liability of classification societies to cargo-owners or buyers of vessels have no public element but are solely questions of private law, especially of so-called negligent misrepresentation or general tort law. 25 However, the answer is quite simple: Different legal orders do increasingly accept the legal concept that a possible liability of classification societies should be limited to a maximum amount. This should be true even if the classes are not explicitly mentioned in the applicable and existing limitation conventions. On a supranational level, the EU refers to political harmonization and is thus actively supporting the inclusion of limitation provisions in contractual agreements between public clients (i.e. EU flag states) and classification societies. And both the French Erika judgment 26 and the final verdict from New York on the Prestige 27 serve as another recent confirmation (remarkably from two different legal orders) that classification societies might generally benefit from the channeling provision of the Civil Liability Convention of 1992 (CLC 1992) as any other person who, without being a member of the crew, performs services for the ship (see art. Article III para. 4 b) 1992 CLC). The CMI has discussed the related problems of the liability of classification societies extensively between 1990 and 1998 and is now pondering to re-open the international debate. Specifically, there is still a legal gap in the balanced global maritime system of limitation of liability as classification societies are missing their share in the conventions. For historic 25 On the tort of negligent misrepresentation in different legal orders see, e.g., Daniel, Potential Liability of Marine Classification Societies to Non-Contracting Parties, 19 University of San Francisco Maritime Law Journal (2007), pp. 183, at 233; Lagoni, The Liability of Classification Societies (2007), pp. 160. 26 Cour de Cassation, Judgment of 25 September 2012; see also Tradewinds 27 September 2012, p. 9 ( Erika ruling pushes liability in spill cases ). 27 Reino de España v. American Bureau of Shipping, Inc., 691 F.3d 461, 476, 2012 AMC 2113, 2136 (2d Cir. 2012), 29 August 2012; for a discussion of the proceedings see Naeemullah, A Decade Later, $1 Billion Saved: The Second Circuit Relieves a Maritime Classification Society of Unprecedented Liability for Environmental and Economic Damages in Reino de España v. American Bureau of Shipping, Inc., 37 Tulane Maritime Law Journal 2012-2013, pp. 639.

PART II - THE WORK OF THE CMI 281 reasons, they are not mentioned explicitly anywhere, neither in the CLC 1992 nor in the London Limitation Convention of 1976/1996 (LLMC). The same is true for the Bunkers Convention, the Wreck Removal Convention or the HNS Convention (the latter not being in force). However, drafting a specific liability convention for classification societies will not be easier in 2014/2015 (and the years to come) as it already was in the 1990s. Old debates and frictions would most probably re-appear, such as a discussion of the advantages of a fee-based limitation system as preferred by the classification societies themselves. This approach will nevertheless still be rejected as unfeasible by a lot of other legal stakeholders. In any case, fee structures of classes are irrelevant and not comprehensible to third parties. 28 Instead of drafting a completely new convention one could remind international regulators i.e. primarily the IMO of the legal developments of the past decade and as suggested by this short contribution to the 2014 CMI Conference in Hamburg. In the 21st century, it seems to be time for some explicit legal clarifications, at least in the LLMC (preferably a new subparagraph including classification societies in art. 1) and in the CLC 1992 (preferably a new sub-paragraph including classification societies in art. III para. 4). By doing this, it would be possible to undisputedly identify classification societies as persons entitled to limit liability. It has been argued, however, that from a political point of view it is even easier to draft a completely new convention as compared to amending an existing one. However, this is not ultimately convincing as in the case of a possible new liability convention for classification societies there still seems to be a number of highly sensitive and controversial legal questions. 29 Generally, the case of classification societies may serve as an illustration of the complexity of multi-layered systems, where national, EU and international legislation and administration is closely intertwined and even supplemented by private contracts. Pushing for an explicit inclusion of classification societies in existing conventions and, thus, achieving a necessary legal clarification in the area of limitation of liability is in my opinion preferable to drafting a new act which might, in the end, only add another complicated legal layer to the already fragmented world of maritime liability conventions. 28 See explicitly Lagoni, The Liability of Classification Societies (2007), p. 323. 29 Summarized by Lagoni, The Liability of Classification Societies (2007), pp. 316-330.