IMO CODE TO IMPOSE
NEW BURDENS ON VESSEL OPERATORS
Co-authored By:
John Patrick Paraschos
New York
According to industry sources, disasters at sea result in losses that exceed U.S.$10 billion per year. Although more than 80% of these accidents are attributed to human error, most regulatory efforts (national and international) to improve safety at sea have traditionally focused on correcting the technological and design causes of these accidents. In 1993, the International Maritime Organization ("IMO") - the United Nations agency charged with regulating the industry standard for shipping safety - adopted a new set of rules intended to address the causes of human error in maritime accidents. The International Management Code for the Safe Operation of Ships and for Pollution Prevention ("ISM Code" or "Code") was incorporated into the Safety of Life at Sea Convention of 1974 ("SOLAS") as Chapter IX, making it automatically mandatory for all Convention signatories. The Code is no doubt an effort by the maritime industry to improve safety on its own and, thus, preempt government officials around the world from imposing their own new and, likely, widely differing safety standards. Under the Code, the maritime industry will have for the first time an internationally uniform standard of management for safe operation of ships and avoidance of pollution. This article outlines the Code's provisions and details the procedures by which shipowners will be required to operate into the next century.
The Code is the most far-reaching regulatory change in shipping of this century. Through SOLAS, it will have effect in over 130 nations and become applicable to over 19,000 vessels. By July 1, 1998, all passenger ships, oil and chemical tankers, gas and bulk carriers and high-speed cargo craft must be certified under the Code or they will be prohibited from entering most major ports in the world. By July 1, 2002 all other cargo ships and mobile offshore drilling units over 500 gross tons also must be certified. The ISM Code requires all shipowners to develop their own Safety Management System ("SMS"). The Code does not prescribe the text of an SMS, but requires shipowners and operators to address specific topics in their SMS. Each shipowner's SMS must contain the following topics: (i) the safety and environmental protection policy of the company; (ii) instructions and procedures to ensure safe operation of ships and protection of the environment; (iii) defined levels of authority and lines of communication between and among shore and shipboard personnel; (iv) procedures for reporting accidents and nonconformities to a designated on-shore individual required to have access to the "highest level of management;" (v) procedures to prepare for and respond to emergency situations; and (vi) procedures for internal audits and management reviews.
A company must operate under its SMS for three months before it can be independently assessed for a document of compliance ("DOC"). After the company operates under its DOC for three more months, each of its vessels must be individually assessed for a separate safety management certificate ("SMC"). By July 1, 1998, most commercial vessels must have an individual SMC in order to enter the ports of SOLAS signatories. The United States Coast Guard has confirmed that it will not allow any ship lacking ISM certification to load or discharge cargo in a U.S. port. In theory, a company must have established an SMS no later than December 31, 1997 in order to have a realistic chance at full compliance by July 1, 1998. The SMS must establish procedures to identify, report and respond to potential emergency shipboard situations, and a program for emergency exercises both ashore and at sea. All equipment and technical systems, the failure of which could result in hazardous situations, must be identified and their respective standby systems must be incorporated into the maintenance routine. Not only must accidents and hazardous occurrences be reported in accordance with the procedures to be established, each incident, even a "near miss," must be investigated and addressed by the company. The shipowner or operator must appoint a designated person with direct access to the "highest level of management" who receives such reports and is responsible for "monitoring the safety and pollution prevention aspects of each ship." Such person's knowledge almost certainly will be imputed to management, exposing shore-based personnel to stricter responsibility for events at sea. Management potentially may face criminal liability for its actions and omissions, and if the mishap is a result of some fault known to management, both insurance cover and the right to limit liability theoretically could be voided.
In the past, determining the appropriate safety standards applicable to a particular shipowner was not an easy task for the courts. However, the ISM Code now will serve as the minimum benchmark by which the industry will be judged. Prior to the ISM Code, a number of institutional relationships and practices acted as buffers to protect the industry from unlimited liability. These buffers included the division of responsibility for management (including safety) between owners, agents, operators, managers and charterers, and the common use of separate shipping companies with low capitalization and common ownership. Because it was possible to control exposure, a shipowner's risk of liability for loss or damage had traditionally been predictable, and therefore insurable at an acceptable cost. Under the Code, however, the owner or responsible party cannot easily delegate responsibility. There is a strong possibility that a court would find a shipowner that fails to operate its vessel in accordance with the ISM Code to be in breach of its duties of due diligence. The mere physical separation between the vessel at sea and the owner ashore will not allow the owner to avoid liability; privity is likely to be the issue. Privity is proven by showing that management personnel knew or should have known of circumstances giving rise to the risk and failed to address that risk. With the designated person link to "the highest level of management," an owner will have little chance to disprove privity. Therefore, a finding of non-compliance with an SMS may lead to loss of the right to limit liability of the shipowner under the Limitation of Liability Act, 46 U.S.C. § 183. This, combined with possible loss of insurance cover, could in extreme cases result in financial calamity for the shipowner/operator. The effects of the ISM Code on the structure and practice of the industry may be profound. Many shipowners operate under more than one flag. With unresolved questions of ISM reciprocity, it will no longer be as easy or convenient for a shipowner operating a large number of vessels to have each ship operating under a different flag or different manager. Transfer of management from one manager to another will be much more complex, as each ship is eligible for its SMC under only one company's DOC. The SMC issued to a ship is in respect of that ship's compliance with the SMS of its company at the time of evaluation. As each management company will have its own system, before any new SMC can be issued to the vessel, the ship and crew will have to operate under and demonstrate compliance with the new company's SMS.
Shipowners now must ensure that managers, bareboat charterers, or any party assuming responsibility for the ship also has contractually assumed all duties and responsibilities imposed by the Code. If a company chooses to subcontract certain operational responsibilities such as manning, technical support and maintenance to third parties, it must identify in the SMS the role of such subcontractor and its relation to the requirements of the relevant sections of the ISM Code. Regardless of the extent of the subcontracting, the responsible company must ensure compliance with the Code. The company must demonstrate each subcontractor's compliance with relevant policies, or the inspectors will insist upon an on-site evaluation of the subcontractor. Smaller, self-managed shipowners with limited resources will likely subcontract their technical safety management operations to larger management companies, already operating under their own approved SMS.
The ISM Code, in imposing a higher degree of accountability on the shipping industry, will alter existing corporate procedures and legal structures, and affect insurance and commercial relationships. The Code is part of a continuing erosion of immunities traditionally available to owners and operators. Of particular importance is the variety of documentation required, including DOCs, SMCs, incident reports and management's responses, all of which is likely to be discoverable in litigation. This paper trail reinforces the Code's channeling of accountability - from the vessel at sea to the management's office at home.
