“Server” – landmark judgment of the Supreme Court on wreck removal

The Norwegian Supreme Court has in a recent judgment in the “Server” case clarified a number of unsettled issues that will have an impact on other wreck removal cases, including whether the owners can use their right to limit liability as a defence against a wreck removal order. Wikborg Rein acts for the vessel’s owners, managers and P&I insurers.

The “Server” grounded at Fedje, off the west coast of Norway, on 12 January 2007 and broke in two. The forward section was ­salvaged and the aft section sank at the grounding site, partially inside a nature reserve. The vessel’s mast was initially visible­ above the waterline, but was later ­submerged.

The incident caused a significant oil spill and the state immediately initiated a clean-up response. As the clean-up costs approached the vessel’s limitation amount for clean-up costs, owners and insurers argued that they were not obliged to remove the wreck because the removal costs would exceed the ­limitation amount.

The wreck posed no hazard to navigation and the possible grounds on which a wreck removal order could be made was either that wreck was considered “unsightly” or that it “may cause damage or inconvenience to the environment”. The first is an aesthetic requirement only, whilst the second requires an actual or threatened negative impact on the ­environment.

The Norwegian Coastal Admin­istration issued a wreck removal order on the basis that the wreck was partly located in a nature reserve and that this would be an inconvenience to the ­environment. No surveys or environmental assessments were undertaken. Upon administrative appeal, the Ministry of Fisheries and Coastal Affairs upheld the wreck removal order, but only on the basis that the wreck was “clearly unsightly”. The Ministry did not consider whether the wreck also posed a risk to the environment.­

Both the District Court and the Court of Appeal held that the wreck removal order was validly issued on the basis of the wreck being a risk to the ­environment, but nevertheless found that the risk was minimal and that the ­inconvenience caused by substances in the wreck did not exceed background levels along the Norwegian coast. The District Court also held that the wreck could not be considered unsightly since it was not visible above the water.

The case was appealed and the Supreme Court delivered its judgment on 9 February 2017. 

Assessment of the validity of removal order

The Supreme Court first considered whether the courts could uphold the validity of the wreck removal order on the ground that the wreck posed a risk to the environment in circumstances where the Ministry had based its ­decision solely on the condition that the wreck was unsightly.

The Supreme Court held that, providing that there is legal basis for the order for wreck removal, the decision is within the authorities’ discretionary competence, which in general should not be subject to the courts’ judicial review.

The Supreme Court further held that when an administrative decision is to be made on a discretionary basis the courts’ assessment of the validity of the decision must be based on the same statutory condition as considered by the authorities. To do otherwise would mean that the courts may end up maintaining a decision which the authorities would not have made.

Thus on the issue of the validity of the wreck removal order the Court of Appeal’s decision was set aside and the case was referred back to the Court of Appeal for it to consider whether the wreck could be considered unsightly.

This decision has general application for Norwegian administrative law. Since the authorities in many instances are now not permitted to introduce alternative legal grounds during the courts’ review of their decisions, it can be expected that the authorities will consider more carefully and thoroughly the legal basis for their decisions before imposing significant and burdensome duties on ­private parties.

Removal order could be issued to owners, not managers

The next issue that the Supreme Court considered was whether the wreck removal order could be issued to the ship managers. The wreck removal order was based on the Norwegian Pollution Act section 37 (2) which provides that a wreck removal order may be issued to the “owner” of the ship at the time of the incident or when the order is issued. The question was whether the managers could be considered as an “owner” for the purposes of this provision.

The Supreme Court initially noted that although section 37 (2) referred to the “owner” this was not limited to the ­registered owner and the “real” owner also fell within the definition. The Supreme Court commented that ­management agreements are commonplace in shipping and that the mere existence of such agreements does not turn a manager into a “real” owner. The Supreme Court however remarked that the close relationship and lack of ­formalities between the owners and managers of the “Server” might open up the possibility of considering the ­managers as the “real” owner, but it did not address this further as it had not been argued by the state. It was held that the wreck removal order had not been validly issued to the managers.

In our opinion there are many ­reasons why the duty to remove a wreck should rest with the vessel’s owner rather than the manager. The owner has the financial benefits and risks of the operation of the vessel, whilst the vessel’s manager only receives a limited management fee. The owner will normally be the party taking out insurance and the managers are often not covered by the owner’s P&I insurance. The channelling of liability towards the owner is found in legislation such as the Harbour and Fairways Act and the duty to pay for salvage. The Wreck Removal Convention, which Norway is currently considering implementing, also channels liability to the registered owner.

Limitation of liability is no defence against wreck removal order

The Supreme Court also considered the question as to whether the owners may rely on their right to limit liability as a defence against the duty to perform a valid administrative order issued by the authorities when wreck removal costs would exceed the limitation amount. If limitation is not a defence it would expose the owners to liability in excess of the limitation amount and for all practical purposes impose an unlimited obligation to incur costs to remove the wreck. If it was a defence, the limitation amount would represent the maximum economic liability for the owners. It was not disputed that limitation could be relied upon if wreck removal was performed by a third party, such as the authorities, and the costs filed in a limitation fund.

In previous years the Norwegian authorities have in wreck removal cases such as the “Hedlo” and “John R” accepted that the owners’ duty to remove the wreck was subject to limitation. However, this attitude changed in the early 2000s, when the authorities started to argue that the duty to remove a wreck and conduct clean-up efforts was absolute, irrespective of the right to limit. In 2005 Norway made a ­reservation under the Limitation of Liability Convention 1976 as amended by 1996 Protocol for wreck removal and clean-up efforts and implemented higher limitation amounts for such claims. Since the wording of the new provisions on limitation in the Maritime Code was identical to the earlier ­wording ­implementing LLMC 1976, the ­diverging interpretations of the right to limit liability continued.

The Supreme Court did not find a clear answer in the wording of the provision the Maritime Code or in the LLMC 1976. Consequently, the Supreme Court turned to a statement in the ­preparatory works describing the ­existing law prior to the introduction of the national ­legislation on the higher limits for wreck removal and clean-up efforts. The preparatory works stated that the higher limits of liability for such costs only applied to claims from third parties and that “[c]osts which the owner incurs if the owner himself initiates removal and clean-up measures (…) are thus not subject to limitation of liability. (…) The owner must himself cover any such costs in addition to claims by third parties resulting from the marine casualty.”

This interpretation of the law ­prevented the owners from relying on the right to limit liability as an absolute cap on liability. In order to provide ­owners with an incentive to perform wreck removal and clean-up efforts, the legislator introduced a national rule whereby the owners are entitled to file such costs in the fund, thereby competing with the claims of third party claimants. In other words, the owners would be given a discount on costs which they would incur in addition to having to put up a limitation fund.

On this basis the Supreme Court held that the owners were prevented from relying on the right to limit liability as a defence against the wreck removal order, irrespective of the costs involved.

Where next?

Even though the Supreme Court has had its say on the matter, it remains to be seen whether the conditions for validly ordering the removal of the “Server” wreck are fulfilled.

In any event, the decision has ­provided useful clarification of the law. Most importantly, the highly ­disputed interpretation of the relationship between the owners’ duty to take action and their right to limit liability has been clarified. Further the decision on the limits of judicial review of an ­administrative decision will have general application in administrative law to the potential benefit of numerous ­private parties.