What is Fund Convention – 15 Things Everyone Must Know

There are several inter-governmental treaties and agreements across various industries and sectors. They are put in place to improve cooperation, build mutual trust, and safeguard the environment. From treaties on nuclear programs to agreements on how water is to be shared, these conventions play a very important role.

In the maritime and shipping sector too, there are several conventions in effect. These include treaties on piracy, shipping routes etc. One of the most important agreements is regarding pollution.

There are different types of pollution that may be experienced while at sea. Accidental grounding of vessels can lead to reef damage. This damage can alter the complete ecosystem of a region. Similarly, pollution due to discharge of fluids and hazardous material from a ship can affect the marine environment.

An issue that concerns ship owners and operators is the risk of an oil spill. Oil spills are the persistent leakage or discharge of oil and its products (or derivatives) into the ocean. It has enormous consequences for the region, in terms of economy, flora, fauna, and livelihood.

There have been numerous oil spills throughout the course of maritime trade, many of which have caused near irreparable damage. Oil spills may take anywhere from a few days to a few years to completely clean up.

Oil pollution through the Exxon Valdez incident, Deepwater Horizon incident, Kuwaiti oil fires, and the Black Sea spill have severely polluted the Earth.

Due to the transitionary nature of ocean and sea currents, the effects of oil spills are far-reaching. Even regions remote from the spill may be affected.

To combat these spills and reduce the fallout from them, several treaties have been put in place. They have included strict regulations on ship and platform designs, regulations on oil carriers, rapid response frameworks for containing oil spills etc.

One such treaty is the “International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage”.

Established in 1992 and referred to as the Fund Convention or FUND92, it is a step forward in the payment of compensation and dues to parties affected by oil-related pollution and damage.

It is an international maritime treaty drawn up in response to the initial 1969 CLC fund treaty and is administered by the International Maritime Organization (IMO).

This treaty includes the International Oil Pollution Compensation Funds (IOPC Funds) that was created in response to the 1967 Torrey Canyon spill.

Over time, the treaty has been inclusive of several oil-related damages and provides comprehensive coverage to affected parties.

Exxon Valdez oil spill — Image for representation purpose only

In this article, we will delve into the working and principles of the Fund Convention.

We will primarily look at 15 facts and points that you must know about this Convention and its impact.

1. What is the Civil Liability Convention (CLC)?

The Convention on Civil Liability of 1969 was a landmark step towards making shipowners liable for oil spill-related damages. Known as the CLC, ship owners and operators are provided with a maximum liability for damages.

In case of an oil spill or similar disaster, they are only required to pay damages less than or equal to this limit. The CLC Protocol of 1992 increased liability limits and introduced various changes. Other amendments were adopted in 2000 to make the liability stricter.

Ships carrying more than 2,000 tons of oil are required to furnish insurance proof citing that they can cover liability in case of an oil spill. If the shipowner is found to be at fault (i.e., guilty), there is no liability limit.

On the other hand, if the shipowner is found to not be directly at fault, the liability is capped at different limits. For up to 5,000 DWT ships, liability is capped at 4.51 million SDR. Between 5,000 and 140,000 DWT, liability is 631 SDR for every ton over 5,000 DWT. For ships over 140,000 DWT, liability is capped at 89.77 million SDR.

Note, SDR refers to Special Drawing Rights and is the foreign exchange reserve assets maintained by the International Monetary Fund (IMF). It provides a unit of accounting between different currencies of member countries.

Although it is NOT the same as the Foreign Exchange (Forex), it is used in matters relating to industry and government treaties.

2. What is the Fund Convention?

The Fund Convention was drawn from the original CLC Treaty of 1969 and was ratified in 1992. It aimed at relieving ship owners from liabilities that were beyond their control. It also removed damage cap limits in some situations, so that guilty parties were liable to pay for complete damage.

The Fund has the power to indemnify ship owners and operators in case of certain oil pollution scenarios. This is mainly due to unforeseeable circumstance, and when they are in full compliance with international treaties and caused no willful damage.

The Fund is primarily operated in order to cover any compensation to the victims of oil pollution in cases where either the liability is not sufficient, or when the shipowner is not liable to pay. For instance, the maximum liability is capped at certain limits by the CLC treaty.

However, when damages exceed this cap, there must be some source of funds from which remaining damages can be paid out. This is what the Fund Convention achieves. By consolidating funds from different sources, there is a ready supply of compensation to oil spill victims when the CLC does not cover it.

3. Who Uses and Contributes to the Fund?

The funds from the FUND92 Convention are used to pay out damages to the victims of oil pollution. This includes inhabitants of nearby islands, fishermen and other small vessel operators who were affected by the spill, and the families of crew members who were either handicapped or killed in the spill or its resulting aftermath.

The CLC addressed the issue of paying damages via liability charges against guilty ship owners. However, there was still the issue of determining where and whom to collect the fund from. This was laid down in the 1992 treaty, and responsibility was laid upon the countries that import oil and have ratified the treaty. They are the beneficiaries of the oil industry, and IMO decided that they would also have to pay for any damages inadvertently caused while transporting oil.

To understand why IMO adopted this approach, we know that only countries directly use oil. Individuals do not import oil, and so they can be indemnified from any such payment.

On the other hand, it is countries that have created a global demand for oil. Without this demand, there would no risk of oil spills or pollution. Thus, ratified nations are held responsible, and fund any compensation efforts.

Note, only ratified nations are allowed to access the funds from the Convention in case they are not able to cover damages.

4. What is the Payment Made to the Fund?

Payment related details are laid down in the Convention. Not all countries have to pay the annual contribution, only those which have imported over 150,000 tons of oil.

This is mentioned in Article 10 of the FUND, and is aimed at ensuring that small countries do not needlessly pay for damages. Since their impact on global spills is minimal, they are not held accountable as compared to the countries that import vast quantities of oil.

To prevent countries from bifurcating their oil industries such that each group imports less than 150,000 tons, the FUND92 lays down that this import value is inclusive of any and all parties involved in import within the country. Thus, the government will still have to pay the annual amount, irrespective of the number of subsidiaries.

5. Fund Disbursement When the Ship Owner Is Not Capable of Covering Damages

According to the CLC, any ship carrying over 2,000 tons of oil needs to make provisions to pay for any possible oil pollution. This insurance is put in place to prevent a situation where the shipowner may not have the funds necessary to cover damages.

However, 2 situations may arise. One, a ship carrying less than 2,000 tons of oil may cause an oil spill. Two, during a journey, company finances may drastically change which could alter its ability to pay for any damages. In both these situations, the shipowner is no longer able to pay for damages caused.

The Fund Convention pays for the compensation in both these cases, since the ship owner’s liability does not cover the total payout. There are several provisions to ensure that the company can insure an oil spill, however, unforeseen situations like those stated above may arise.

6. Fund Disbursement When Damages Exceed the Limited Liability of the Owner

The CLC fixes a limit on the liability of a shipowner in case of an oil spill. But, the actual cost of compensation and damage may far exceed this cap. In such cases, the Fund is obliged to pay for the remaining compensation from the oil spill.

To prevent the company from escaping any liability, their annual contribution is appropriately increased in the following years. Moreover, an additional fine may also be imposed on the government to dissuade such behaviour in future.

7. Fund Disbursement When the Ship Owner is Exempted from Liability

The shipowner is exempted from paying any liability or damages in 3 scenarios. These are:

1. Natural and unforeseeable phenomenon. So, a shipowner cannot sail into a cyclone which has been predicted, and then claim exemption from liability;
2. A deliberate attempt to sabotage or create damage by a third party is also grounds for a shipowner to not pay any liability; and,
3. Negligence of the government or any other authority who is responsible for maintain navigational aids and other facilities.;

In these 3 situations, the shipowner has no need to pay any compensation. However, there is yet another category- war damages. In this situation, no compensation will be paid to the parties involved in the war. As they go for conflict of their own volition, the Fund does not cover any payment of damages.

8. Limits of Fund Payment and Compensation

From the Fund Convention regulations, the following rules are applicable to maximum compensation payout in case of an oil spill:

1. Maximum compensation is capped at 203 million SDR when the oil received annually by any 3 contracting states is less than 600 million tons; and,
2. Maximum compensation is capped at 300.74 million SDR, when the oil received annually by any 3 contracting states is equal to or more than 600 million tons;

A contracting state refers to any member country, and the 3 contracting states mentioned in the above regulations are usually the top 3 governments in terms of oil import quantities. Note, the compensation amounts mentioned here include any payouts received in line with the CLC damage regulations. This payout limit is comprehensive and definite.

9. Functions and Management of the Fund Convention

The Fund Convention operates the International Oil Pollution Compensation (IOPC) Fund. IOPC is independent of the IMO while FUND92 is administered by the UN. To create an impartial body capable of fairly distributing compensation and damage payouts, the IOPC has its own body of auditors, officers, and other functionaries. It functions outside the purview of the IMO and UN, although annual meetings are held at the IMO headquarters in London.

The first function of the IOPC and FUND92 is a collection of the annual fund contributions from each contracting state. As discussed above, only some states need to pay this contribution.

The second function is to ensure that appropriate compensation is paid to any and all victims of oil pollutions. This is only to the contracting states and subject to insufficiency of CLC compensation funds.

Lastly, the third function is to hear and pass judgement on any disputes or grievances relating to the Fund, the collection of annual fees, and the payment of compensation.

10. Supplementary Fund – 2003 IOPC Protocol

Despite having a 2-layer compensation framework for any oil spill-related damages, certain nations felt that there should be an additional layer. For this, the Supplementary Fund was created as a part of the 2003 IOPC Protocol. It created an additional fund from which any damages and compensations could be paid out from.

This fund is only used when both the CLC and FUND92 are not able to cover damages. It is part of the IOPC Protocol but is optional. So, contracting states have an option to join and contribute to this fund. The principles and operations for this Supplementary Fund are similar to the other 2 funds. It covers any pollution within the territorial waters and Exclusive Economic Zone (EEZ).

11. Who Uses and Contributes to the Supplementary Fund?

Since the Supplementary Fund is a protocol of an existing convention, it follows the same basic rules as the FUND92. Contracting states that have an annual import of 150,000 tons of oil are eligible to contribute.

An additional condition for states to join this Supplementary Fund is that the country must import a minimum of 1 million tons of oil in a year. Only then will it have to contribute to the fund.

This fund works in a split and deferred manner. This means that a part of the contribution has to be mandatorily paid. The deadline for this is 1st March. The rest of the payment only has to be made should the fund require it. The portion paid is to finance the administration and basic operations of the Supplementary Fund. Till date, no compensation has been paid from this Fund.

12. Limit on Supplementary Fund Compensation

Unlike the CLC and Fund Convention payouts, the Supplementary Fund is very specific and rigid in terms of compensation. Irrespective of the incident, damage cost, quantity of oil carried, or gross tonnage of the carrier, this compensation is fixed at 750 million SDR. Note, this amount includes any payments from the CLC and Convention funds i.e., it is not 750 million over and beyond the initial compensations.

13. Functions of the Supplementary Fund

The Supplementary Fund is a part of the IOPC, Fund Convention, and a direct result of the original CLC 1969 Convention. However, it is governed and administered by an independent body.

This body manages the fund and any operations separately from the FUND92. For this, a unique Governing Body (GB) and Auditor group are used. However, it reports directly to the Secretariat of the 1992 Fund.

The first function of the Supplementary Fund is the collection of any fund contributions from a contracting state. As discussed above, only states that need to cover any damages are required to pay. Additionally, this payment is only when the CLC and FUND92 cannot cover the damages. Lastly, the payment is done post-oil spill, and not annually (unlike the Fund and CLC).

Any grievances brought to the attention of the Supplementary Fund Assembly is directly forwarded to the Fund Convention for redressal. It does not have any separate legal body to handle post-payment issues.

14. Countries That Have Ratified the 1992 Fund Convention and 1992 CLC

As of 2018, the Fund Convention of 1992 has been ratified by 115 countries. This accounts for nearly 95% of the global merchant fleet tonnage. The CLC has also been ratified amongst a majority of countries. Since it was put into effect much earlier (1969), there are some countries that have ratified the CLC but not the Fund.

Major contracting states for the 1992 CLC include China, Mongolia, Saudi Arabia, Egypt, Ukraine, Indonesia, and India. Of these nations, only India is also a member of the Fund Convention. The remaining countries have only ratified the CLC.

Major contracting states for the 1992 Fund Convention include Russia, Australia, Canada, South Africa, and most of Europe (UK, Germany, Spain, and Italy are some of these nations). Countries that have NOT ratified the Convention so far include Bolivia, North Korea, Honduras, and Lebanon.

15. Annual Timeline of the IOPC Fund Convention

Anyone who has been a victim of oil pollution due to some maritime disaster or oversight can approach the IOPC and Fund to obtain suitable compensation. The IOPC meets 2 to 3 times annually and oversees matters relating to the redressal of grievances and disbursement of funds.

The timeline of the IOPC and FUND92 is as follows:

1. 31st December: End of the financial year;
2. 1st Jan – 31st May: Preparation of financial statements and auditing of IOPC accounts;
3. June: Review of financial statements by Joint Audit Body (JAB);
4. 1st October – 30th November: Approval of financial statements by the Governing Body (GB) and Assembly;
5. November: Issuing of financial statements as a publication for anyone to access; Provided to all stakeholders and governments;

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Disclaimer: The authors’ views expressed in this article do not necessarily reflect the views of Marine Insight. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Marine Insight do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader.

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About Author

Ajay Menon is a graduate of the Indian Institute of Technology, Kharagpur, with an integrated major in Ocean Engineering and Naval Architecture. Besides writing, he balances chess and works out tunes on his keyboard during his free time.

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What is Fund Convention – 15 Things Everyone Must Know