Ship and rig recycling
International conventions and local regulations combine to create a complex regime, which is often overlooked. The sale of a ship or rig to an intermediate buyer, who then sells the asset on to a shipbreaking facility, will not necessarily insulate the original owner from future liability or reputational damage.
Against this background owners and other parties involved in transboundary movements of marine assets for recycling may find the following comments helpful.
Frequently asked questions on ship and rig recycling
What is the Basel Convention?
The Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal made at Basel on 22 March 1989 is widely known as the “Basel Convention”. It is an international treaty between (currently) 187 states (out of 193 UN members states). Therefore most countries around the world are parties. A notable exception is the United States of America, which signed the Basel Convention in 1990 but never ratified it.
The Basel Convention was introduced to regulate – and to some extent discourage – transboundary movements of hazardous wastes, by subjecting each such movement to the prior informed consent of the competent regulators in (1) the state of export of the waste, (2) the intended state of import, and (3) any transit states. Movements of hazardous waste undertaken without such consent constitute illegal traffic under the Basel Convention.
The Basel Convention is an agreement between states, and so is not directly applicable to private parties. However each state party to the Basel Convention is required to implement that convention in its own legal system. In addition, while the Basel Convention sets a baseline for compliance, it does not prevent states from introducing more onerous requirements, or wider prohibitions, than those laid down in the convention. The EU, for example, has introduced additional requirements and prohibitions in respect of a number of hazardous substances. It is therefore critical in every case to consider, not so much the language of the Basel Convention itself, but the implementing legislation and any relevant legislation in each of the jurisdictions of export, transit and import.
That is why we often refer to the “Basel Convention regime” (in the sense of “legislation implementing the Basel Convention in a relevant jurisdiction or jurisdictions”), rather than the Basel Convention itself.
Regional conventions introduce regulatory regimes in Africa, the Mediterranean and elsewhere. For owners of end-of-life marine assets, local due diligence is required to understand and manage the often conflicting requirements in states of export, import and transit.
Why is the Basel Convention regime relevant to ship and rig recycling?
The Basel Convention itself does not refer specifically to ships or rigs. It refers instead to hazardous waste. Waste is defined in such a way that a ship or rig becomes “waste” from the time when its owner forms an intention to scrap/recycle it. Such intention is usually formed in advance of the owner contracting to sell the asset for recycling, and well in advance of the closing of the sale of the asset to the buyer. The Basel Convention is therefore directly relevant to the transboundary movement of rigs and ships which their owners have identified for demolition, because these rigs and ships almost always contain quantities of hazardous materials (for example, asbestos, mercury, PCBs and others).
It is worth noting that the EU, under Regulation (EC) 1013/2006 (known as the “European Waste Shipment Regulation”) has introduced legislation extending Basel Convention obligations to all waste, whether or not hazardous. The European Waste Shipment Regulation is directly applicable in all EU member states and bans the export of waste from the EU for recovery to any location outside of the OECD (and bans the export of waste from the EU for disposal to any location outside of the EFTA).
It has long been recognised that a ship may constitute waste within the meaning of the Basel Convention and at the same time be defined as a ship under other international rules (as was noted by the Conference of the Parties to the Basel Convention recorded at its seventh meeting in 2004 in Decision VII/26 on Environmentally sound management of ship dismantling). The same principle applies to rigs.
The recent decision of the District Court of Rotterdam in the Seatrade matter (District Court of Rotterdam judgment of 15 March 2018 in criminal case number 10/994550-15) confirms, unsurprisingly, that the position is exactly the same under the European Waste Shipment Regulation (in that case ships were held to have constituted “waste” for the purpose of the regulation notwithstanding that they were still in commercial service and carrying cargo during part of the voyage to their final destination.)
Compliance with law should not be considered as optional. Compliance with anti-bribery legislation is now universally accepted as a critical issue; the position in relation to compliance with environmental laws such as the Basel regime should not be any different.
The Basel Convention requires each state party to introduce appropriate national or domestic legislation to prevent and punish illegal traffic (and many state parties have introduced such legislation). In the EU, the European Waste Shipment Regulation requires member states to ensure that penalties are in place to punish infringements of the regulation, and that such penalties be effective, proportionate and dissuasive; in addition, Directive 2008/99/EC (known as the “Criminal Law Directive”) requires member states to criminalise breaches of the European Waste Shipment Regulation. Criminalisation extends to the producer of the waste, other undertakings involved in a shipment of waste and/or its recovery or disposal, and generally anyone inciting, aiding or abetting the commission of an offence under the regulation.
The cost of compliance with the Basel Convention regime is small; the potential cost of non-compliance, however, is potentially very high:
- Criminal prosecution of the owners of the ship or rig;
- Criminal prosecution of any others (whether natural or legal persons) involved in the transboundary movement of the ship or rig—this may extend for example to directors, employees and agents of the owners and/or to the owners’ contractors (for example, towage contractors and ship managers) and generally (as highlighted by the Secretariat of the Basel Convention in its Instruction Manual on the Prosecution of Illegal Traffic of Hazardous Wastes or Other Wastes, “anybody involved in an illegal transboundary movement, including the generator, the exporter, the importer, the individuals completing the paperwork (freight forwarder, broker, shipping facilitator or coordinator) and the disposer”;
- Owners may be forced to incur the cost of taking the ship or rig back to the original place of export;
- Breach of representation or warranty in any financing, insurance or other contractual documents;
- Reputational damage.
Breaches of the Basel Convention regime are now prosecuted far more aggressively than they used to be, assisted in part by the publication by the Secretariat of the Basel Convention of an Instruction Manual on the Prosecution of Illegal Traffic of Hazardous Wastes or Other Wastes.
On a more positive level, corporate social responsibility can make your reputation shine, and compliance with environmental laws should be a matter, not of reputation risk, but reputation opportunity!
Is it not sufficient to comply with the Hong Kong Convention?
The Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (known as the “Hong Kong Convention”) is aimed in particular at minimizing and, to the extent practicable, eliminating accidents, injuries and other adverse effects on human health and the environment caused by ship recycling.
The Hong Kong Convention covers simultaneously:
(i) the design, construction, operation and preparation of ships so as to facilitate safe and environmentally sound recycling;
(ii) the operation of ship recycling facilities in a safe and environmentally sound manner; and
(iii) certification and reporting requirements.
A number of IMO guidelines have been developed and adopted to assist states in the early implementation of the Hong Kong Convention:
- 2011 Guidelines for the Development of the Ship Recycling Plan;
- 2012 Guidelines for Safe and Environmentally Sound Ship Recycling;
- 2012 Guidelines for the Authorization of Ship Recycling Facilities; and
- 2015 Guidelines for the development of the Inventory of the Hazardous Materials.
There are two major points to note in relation to the Hong Kong Convention:
(1) Unlike the Basel Convention, the Hong Kong Convention is not yet in force. (It was adopted in 2009 but will only come into force 24 months after its ratification by 15 states representing 40 per cent of the gross tonnage of the world’s merchant shipping, provided the combined maximum annual ship recycling volume of these states during the preceding 10 years constitutes not less than 3 per cent of the gross tonnage of the combined merchant shipping of the same states.)
In addition, in the same way as the Basel Convention, the Hong Kong Convention is only an agreement between states, and so is not directly applicable to private parties, but requires implementation into the respective national or domestic laws of the state parties.
However, it is also worth highlighting that:
(a) There is nothing to prevent individual states (or a group of states such as the EU) from implementing the standards of the Hong Kong Convention into their own national or domestic laws before the Hong Kong Convention actually comes into force. In the EU, Regulation (EU) No 1257/2013 on ship recycling (the “European Ship Recycling Regulation”) has been trying to achieve precisely that (and most of the provisions of that regulation will have come into force by 31 December 2018).
(b) It is now usual for contracts between buyers and sellers of ships or rigs to require compliance with the technical standards of the Hong Kong Convention and related IMO guidelines.
(2) The Hong Kong Convention does not address the issue of the transboundary movement of ships or rigs to recycling facilities and does not dispense with compliance with the Basel Convention regime.
As noted above, most of the provisions of the European Ship Recycling Regulation will have come into force by 31 December 2018, and from that date, ships flying the flag of an EU Member State will (unless otherwise excluded from the scope of the regulation—as to which, see below) (1) fall outside the scope of the European Waste Shipment Regulation, and (2) only be permitted to be recycled at one of the ship recycling facilities listed in the European List of ship recycling facilities.
This brings up a few important points:
(1) It is worth noting at the outset that “ship” is defined in the European Ship Recycling Regulation as “a vessel of any type whatsoever operating or having operated in the marine environment, and includes submersibles, floating craft, floating platforms, self-elevating platforms, Floating Storage Units (FSUs), and Floating Production Storage and Offloading Units (FPSOs), as well as a vessel stripped of equipment or being towed”. This definition seems sufficiently wide to extend to most if not all mobile offshore drilling units.
(2) While most EU-flagged commercial ships will be subject to the European Ship Recycling Regulation, some ships fall outside its scope, namely:
(a) Naval vessels and ships owned or operated by a state and used only on government non-commercial service;
(b) Ships of less than 500 gross tonnage (GT); and
(c) Ships operating throughout their life only in waters subject to the sovereignty or jurisdiction of the Member State whose flag the ship is flying. These will remain subject to the requirements of the European Waste Shipment Regulation.
(3) While the European Ship Recycling Regulation seeks to exempt the vast majority of EU-flagged commercial ships from compliance with the European Waste Shipment Regulation, it provides no exemption from compliance with a range of prohibitions which are directly relevant to the export of ships or rigs for demolition and recycling, for example prohibitions regarding the export of ozone depleting substances, fluorinated greenhouse gases and mercury.
(4) Critically, the legality and effectiveness of the EU’s attempted exemption of EU-flagged ships from compliance with European Waste Shipment Regulation is, in so far as it affects the rights of non-EU parties to the Basel Convention in respect of particular ship or rig movements, doubtful at best:
(a) There is, it seems to us, a strong argument that this purported exemption will (again, to the extent that it affects the rights of other state parties under the Basel Convention) conflict with the requirements of Article 41 of the Vienna Convention on the Law of Treaties;
(b) The European Ship Recycling Regulation will not exempt the owner of an EU-flagged ship which is physically located in, or transiting through, a non-EU state from compliance with any domestic legislation implementing the Basel Convention in that non-EU state. (To give an example, a Maltese-flagged ship which is being sold “as is, where is” in Singapore for recycling purposes will be subject to Singapore’s laws implementing the Basel Convention; however the owner will also in addition be required under the European Ship Recycling Regulation to ensure that the ship is only recycled at a ship recycling facility that is included in the European List.)
To the extent that an EU-flagged ship or rig is to be exported from a non-EU jurisdiction, then the European Ship Recycling Regulation seems totally ineffective in replacing the Basel Convention regime.
To the extent that an EU-flagged ship or rig is to be exported from an EU-jurisdiction to a non-EU jurisdiction, then compliance with the European Ship Recycling Regulation will not insulate the owner from (i) the risk of prosecution for breach of any domestic laws implementing the Basel Convention in any state of transit and/or the state of import and/or (ii) the risk that take-back obligations might be imposed by the state of import.
The draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, as agreed at negotiators’ level on 14 November 2018, contemplates that:
There will be a transition period starting on the date of entry into force of that Agreement and ending on 31 December 2020;
During such transition period, unless otherwise provided in the Agreement, Union law shall apply to and in the United Kingdom, with any reference to “Member States” in Union law being interpreted as including the United Kingdom.
It appears therefore, subject to an agreement actually being reached on these terms, that the European Ship Recycling Regulation will continue to apply to British-flagged ships and to transboundary movements of EU-flagged ships from, to or through the United Kingdom beyond 29 March 2019 and for the remainder of the transition period in the same way as if the United Kingdom had remained an EU member state.
How can Wikborg Rein help?
The Basel Convention, the European Waste Shipment Regulation and the European Ship Recycling Regulation have introduced complex regimes, the full implications of which need to be considered extremely carefully. Local due diligence is required to understand and manage the often conflicting requirements in states of export, import and transit. Owners and other parties involved in ship or rig recycling projects need legal advisers who are experienced with all aspects of the Basel Convention regime, the practical issues arising in connection with Basel notifications, and the idiosyncrasies of the application process in a range of jurisdictions.
Our team has assisted clients in more than 50 recycling projects in Europe, West Africa, Asia and the Americas, and has unparalleled experience in:
- General advice regarding shipments of waste;
- Local due diligence;
- Drafting and negotiation of agreements for sale and recycling;
- Drafting and negotiation of supervision agreements;
- Management of applications to regulators in jurisdictions of export, transit and import;
- Liaison with regulators;
- Drafting and negotiation of bank and corporate guarantees to regulators;
- Drafting and negotiation of bi- and tri-partite towage contracts;
- Assistance in disputes under agreements for sale and recycling;
- Assistance in connection with investigations/prosecutions of alleged breaches of waste shipment legislation.