An Introduction to Ship Source Oil Pollution Regulations in the People’s Republic of China
As the world’s largest importer of crude oil, China recognises the risks posed by marine pollution from ships and has ratified international conventions on liability and compensation alongside domestic legislation aimed at preventing and responding to pollution incidents.
An overview of applicable regulations can be found below, including a detailed review of the requirement for advanced contractual arrangements with Ship Pollution Response Organisations (“SPROs”).
Contracts with SPROs must meet International Group Guidelines to maintain cover. A list of key provisions of the International Group contractual requirements is included in our Guide.
However, the 1992 Fund Convention, which provides a second level of compensation for pollution damage caused by a release (or threat of a release) of persistent mineral oil from a tanker, is applied only to the Hong Kong Special Administrative Region and Macau.
The Regulations provide for strict liability for ship-sourced pollution and cover any ship-sourced pollution and any ship-related operation that causes or may cause pollution damage in the internal waters, territorial waters and the contiguous zones, exclusive economic zone and continental shelf of the PRC and all other sea areas under the jurisdiction of the PRC (wherever the pollution occurs).
The Regulations established the Chinese Oil Pollution Compensation Fund (COPC Fund) in 2012, which provides a second level of compensation for claims of pollution damage from persistent and non-persistent oil cargoes, as well as bunker fuel.
The COPC Fund receives its funding through a levy of RMB 0.3 per ton on receivers of persistent oil cargo. Much like the IOPC Fund, the COPC Fund provides compensation in situations where a court determines that:
- the limit of liability of the responsible party is exceeded
- the responsible party is financially incapable of providing compensation
- the responsible party is exempt from liability
- the source of the spill is from an unknown ship
The limit of compensation per incident under the COPC Fund is CNY 30 million, or roughly US$4.4m at time of publication. This differs considerably to the compensation available under the 1992 Fund Convention, which provides a per incident limit of 203 million SDRs.
The COPC Fund also differs from IOPC in that the COPC Fund gives preferential status to certain claimants, meaning that some claimants may not receive compensation at all in the event the per incident limit is exceeded. As set out in the Fund’s claims manual, compensation for response action taken by authorities is paid first, followed by other clean-up activities, direct losses of industries such as fishing and tourism, expenses incurred to restore the marine environment and fishery resources, costs of monitoring pollution and finally any other costs approved by the state council.
Pollution fines in China can typically be much higher than in countries party to the 1992 Fund Convention. Recent legislative changes removed previous caps on fines for pollution incidents. Depending upon the severity of the incident, those liable for pollution will face a substantial fine of between 20%-30% of the total direct losses arising from the pollution incident.
In 2019 the International Group and the COPC Fund signed a Memorandum of Understanding which addresses the way in which the groups will work together in the event of an oil spill in Chinese waters.
Shipowners are required to contract with the level of SPRO that corresponds to the size of the vessel, type of cargo and location of cargo operations involved in a particular port call. The levels are set out in the Table of Contracting Requirements, below.
Originally, the China Maritime Safety Agency (MSA) published a list of approved SPROs, but this is no longer the case. The approval function has been delegated to regional MSAs, but no published list exists to date. A new organisation-China Diving and Salvage Association- is due to take over responsibility for training and assessing capabilities of SPROs and maintaining an SPRO database in the future, but it is not expected to be in a position to perform that function for some time (see Notice to Members No. 2 2020/2021).
Due to the number of SPROs operating in various ports, Members are advised to discuss SPRO options with their local agents as Owners are required to perform checks to ensure that an SPRO is approved at the necessary level.
In circumstances where a vessel is likely to call regularly at multiple ports in China, an Owner may choose to appoint multiple SPRO’s through a SPRO consortium. There are a number of these consortiums which typically have agreements with other SPROs across a large network at ports throughout China. This enables the shipowner to sign a single agreement which is then applicable across those ports.
Likewise, Members may choose to use SPRO agents, who can organise an SPRO for one off calls or enter into Consortium arrangements on behalf of an Owner.
There is no requirement to use SPRO agents or consortiums.
The MSA originally published a model contract with two compulsory articles which could not be changed-Articles 1 and 2.
The International Group has drafted recommended additional clauses in the form of the ‘IG Sample Agreement with footer dated 20th November 2014’. Though changes to domestic law made in 2020 mean that the parties are now free to negotiate all terms, the IG’s 2014 wording still includes the MSA’s Articles 1 and 2.
Many SPROs agree to contract on IG terms. When Members receive a SPRO contract for review they must check for the following:
- Is the contract in the form of the IG Sample Agreement dated 20th November 2014? If not, every effort should be made to convince the SPRO to accept the IG wording or find an SPRO that will accept IG wording.
- Does the SPRO have valid and adequate liability insurance (Article 5, Clause 4 sets out minimum requirements)?
- Has the SPRO provided a finalised tariff?
When Members are asked to sign SPRO contracts on terms that vary from the IG Sample Agreement dated 20 November 2014, or have not been provided with evidence of liability insurance and finalised tariffs, they are advised to contact the Club prior to signing to ensure the contract does not fall foul of IG guidelines.
On 1 March 2020 the MSA’s Measures of Administration on Agreement for Ship Pollution Response Regime came into effect which also require Owners to report any SPRO that does not meet their emergency standby obligations. Owners are still required to directly report any cases of ship source pollution in the waters of the PRC. The Measures also provide that in cases where a port does not have an SPRO with the required level of response capability, the Owner is not obligated to contract with an SPRO.
Article 2, Clause 7: The Owner retains control of any response action.
Article 3, Clause 1: SPROs should provide an agreed tariff
Article 3, Clause 3: Where a spill response action lasts more than 5 working days, SPROs may receive interim payments of a reasonable amount every 15 days.
Article 4: The parties must have the right to disclose the terms of the agreement to their insurers and government authorities
Article 5, Clause 2: The parties may terminate on 30 days notice, or at anytime during a spill service response after discussing with the MSA.
Article 5, Clause 4: The SPRO must provide evidence of insurance that meets or exceeds the minimum for their applicable SPRO level.
Article 7: The parties agree that disputes under the contract will be referred to court in China.
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