Winter 2015

IN THIS ISSUE:

TWO WRONGS DON'T MAKE IT RIGHT - FALSE RECORD KEEPING OF ILLEGAL OVERBOARD DISCHARGES LEAD TO CRIMINAL PENALTIES

 

An Italian shipping firm, Carbofin S.P.A. ("Carbofin"), pleaded guilty to three counts of violating the Act to Prevent Pollution from Ships by falsifying ships' documents in order to conceal the illegal discharge of oil-contaminated waste, following prosecution by the Department of Justice Environment and Natural Resources Division, the U.S. Attorney's Office, and the U.S. Coast Guard last month in United States District Court for the Middle District of Florida.

 

The investigation began in April of 2014, when the M/T Marigola, a commercial liquefied gas vessel, called on the Port of Tampa to unload its cargo. U.S. Coast Guard inspectors boarded the ship to conduct a Port State Control examination, and obtained from crewmembers mobile phone video footage showing a hose connected between two points in the ship's engine room. Upon further investigation, the inspectors determined that the hose had been used on multiple occasions to discharge oily engine room waste - such as sludge, waste oil, and machinery space bilge water - directly into the sea. Crewmembers also reported to the investigators that the vessel's Chief Engineer directed them to discharge the waste while in international waters, under the cover of darkness. None of these discharges were recorded in the ship's oil record book, which was maintained by the Chief Engineer.

While oily engine room waste is regularly produced in the normal course of ship operation, and the disposal of this waste is highly regulated, all disposals and transfers of such waste, whether through incineration, processing through onboard oil water separators, or disposal to a barge or other shore-based facility, must be recorded in a vessel's oil record book. As such, under the terms of the plea agreement, Carbofin is obligated to pay a $2.75 million criminal penalty, $600,000 of which will be used to support the protection and preservation of natural resources located in and around the Florida National Keys Marine Sanctuary.

SCRUBBING MARPOL AWAY?

 

MARPOL Annex VI regulation 14.4 sets January 1, 2015 as the deadline for shipowners to comply with the new sulfur content requirement that limits the emission of sulfur and particulate matter to 0.10% m/m (1000 ppm) for vessels operating in The North American Emissions Control Area (ECA).  

 

Shipowners face two options in order to comply with the regulation and avoid penalties: (1) use a fuel with a lower sulfur content or, (2) equip their vessel with "scrubber" like technology that will limit the emission of sulfur into the air by routinely cleaning the exhaust gas from the main engine and the vessels main generators.   By choosing to equip their vessels with scrubbers, Shipowners may actually get a temporary break from the regulation and de facto obtain an extension of the January 1, 2015 deadline while they implement the new technology.  At least two carriers have cut deals with the U.S. Coast Guard and the U.S. Environmental Protection Agency waiving enforcement of the regulation against some of their vessels--for up to two years--so that the installation of the scrubbers on board can be completed.

[1] http://gcaptain.com/horizon-lines-secures-eca-sulphur-limit-waiver/
[2] http://www.downstreambusiness.com/item/Royal-Caribbean-Two-Year-Break-2015-ECA-Deadline_139639
U.S. COAST GUARD HAS STATUTORY AUTHORITY TO BAN A VESSEL CONTINGENT UPON SUCCESSFUL IMPLEMENTATION OF AN ENVIRONMENTAL COMPLIANCE PLAN

In May 2010, the U.S. Coast Guard revoked the Wilmina's certificate of compliance and banned the Wilmina from reentering any U.S. waters for three years, or until it developed an environmental compliance plan ("ECP") and successfully completed a year of audits. This revocation was based on a finding that the Wilmina bypassed its oily water separator ("OWS") and dumped oily bilge water directly overboard, in violation of the International Convention to Prevent Pollution from Ships ("MARPOL") and the Act to Prevent Pollution from Ships ("APPS").  

 

After the Coast Guard issued its order, Wilmina Shipping brought an action before the United States District Court for the District of Columbia to challenge the Coast Guard's statutory authority to issue the ban or to require an ECP with audits. In their claim, Wilmina Shipping alleged violations of the Administrative Procedure Act ("APA"), the Ports and Waterways Safety Act ("PWSA") and the U.S. Constitution. The District Court issued two decisions in the matter.

 

In its first decision in Wilmina Shipping AS v. U.S. Dep't of Homeland Sec., dated March 27, 2013, the District of Columbia held that the U.S. Coast Guard does not have the statutory authority to ban a vessel for a period of time without providing a method of reinstatement, but the Coast Guard does have the statutory authority to ban a vessel until it implements an ECP and successfully complies with the ECP for a reasonable time period.

 

Subsequently, in a cross-motion for summary judgment on the merits, Wilmina Shipping argued that the District Court should have invalidated the entire Coast Guard order because it was not severable, the agency violated its own policies, and the evidence did not support the order.  

 

In its second decision, dated December 2, 2014, the District Court further held that the APA allows courts to sever agency orders and uphold one portion while striking another so long as the upheld portion is able to operate independently and maintain the order's designed purpose. The District Court also held that banning a vessel until it successfully implements an ECP without first obtaining a criminal conviction is permissible under the PWSA because under the PWSA the Coast Guard is authorized to require a ship to satisfy certain requirements before entrance is permitted into U.S. waters and that authority is beyond the criminal penalties of PWSA.  

 

Additionally, the District Court found that the ban does not violate the policies and procedures of the agency because Coast Guard's policies give it broad discretion to implement "a variety" of control actions to regulate the safety of U.S. waters.  Finally, the District Court found that lack of precedence does not render the order invalid because agencies are able to change policies so long as there are good reasons for the change.

MMWR IN THE NEWS

 

EPA Releases Sulfur Emissions Enforcement Policy for Ships, gCaptain, January 21, 2015

 

OW Bunker Subsidiaries Attack with Arrest Cases of Their Own, TradeWinds, January 16, 2015

 

OW Mounts Offensive, TradeWinds, January 8, 2015

 

Skuld Outlines ECA Issues, Tanker Operator, December 19, 2014 

 

Got Fuel to Burn, Got Roads to Drive, TradeWinds, December 19, 2014

 

MMWR WELCOMES LUCIO PINTO AS TRAINEE
The firm is pleased to announce that Lucio Pinto, an Italian trainee lawyer, will be completing a three-month internship with our Maritime and Transportation group in New York City.

Before starting this adventure in the United States, Lucio completed his five-year degree at the faculty of law of Genoa. He then moved to Milan where he worked as a trainee lawyer in the boutique law firm Studio Legale Fiore, mainly involved in general civil litigation. He also worked as an intern at the Chamber of National and International Arbitration of Milan.

EPA RELEASES POLICY FOR ASSESSING PENALTIES ON SHIPS THAT VIOLATE THE "SULFUR IN FUEL" STANDARD

On January 15, the U.S. Environmental Protection Agency ("EPA") published a "Policy for Violation by Ships of the Sulfur in Fuel Standard and Related Provisions."  This policy describes the methods by which the EPA will assess civil penalties for violations of pollution regulations involving the North American and U.S. Caribbean Emissions Control Areas ("ECAs"), which were created under the International Convention for the Prevention of Pollution from Ships ("MARPOL") and are enforceable in the U.S. under the Act to Prevent Pollution from Ships ("APPS").

An important goal for the EPA   is deterrence.  With that goal in mind, EPA's policy concentrates on two components: (1) the "economic benefit" component; and (2) the "gravity" component.  These two components are then combined into a "preliminary deterrence amount" which is adjusted pursuant to subjective factors, as described below.

 

The "economic benefit" component is a mathematical formula based on factors such as the relative price difference between compliant and noncompliant fuel, and the amount of noncompliant fuel burned while within the ECAs.  The policy includes methods for estimating these factors when actual data is not available.

 

The "gravity" component is intended to reflect the seriousness of the violation.  One factor, for example, is the actual sulfur content of noncompliant fuel burned while within the ECA.  Another factor is the number of recordkeeping violations.

 

The "economic benefit" and "gravity" components are combined into a "preliminary deterrence amount."  That combination is then adjusted according to factors designed to provide flexibility to account for the unique facts of each case such as degree of willfulness or negligence, degree of cooperation, history of noncompliance, litigation risk, ability to pay, and performance of a supplemental environmental project.

 

As of January 1, 2015, the permissible sulfur limit within ECAs was reduced to 0.1 percent.  In contrast with other areas of the world, it is clear that the U.S. Coast Guard and EPA are actively enforcing the North American and U.S. Caribbean ECAs.  Now, with the publication of this policy, there is also clarity as to the civil penalties that might be imposed on vessels that violate the ECAs.

arbitrator with Serious medical condition ALONE is not a ground for vacating an award

 

In Zurich American Ins. Co. v. Team Tankers A.S., petitioner Vinmar International Limited argued, among other things, that the failure of an arbitrator to disclose a serious medical condition, potentially affecting the arbitrator's cognitive capacities, constituted conduct, or misconduct, under the Federal Arbitration Act that justified a vacatur of the award. As petitioner failed to prove the applicable law was disregarded and that any prejudice resulted, the District Court for the Southern District of New York denied the petitioner's motion to vacate and determined that the arbitrator was not required to disclose his terminal medical condition.

 

The Arbitration

 

Over the course of ten hearings and pursuant to the rules of the U.S. Society of Maritime Arbitrators ("SMA"), a panel of three arbitrator considered a dispute between charterers Vinmar International Limited, Inc. and its underwriter Zurich American Insurance Co. sought to recover from the ship managers, Team Tankers A.S., for alleged damage to a cargo of 3,500 metric tons of acrylonitrile ("ACN") transported pursuant to an Asbatankvoy charter party from Houston to South Korea aboard the M/V SITEAM EXPLORER. While testing on spec before loading and at delivery, the product showed signs of discoloration 42 days after arriving in South Korea, where it was held in shore tanks. Product samples taken from the same batch just after discharge in the shore tanks showed signs of discoloration as well, albeit not as strong. Other samples taken before loading in Houston showed no discoloration at all.

 

The arbitration award was rendered in favor of the respondents Team Tankers. The majority of the arbitral panel held that the petitioner Vinmar failed to prove that the contamination of the ACN cargo had taken place while on the M/V SITEAM EXPLORER. The majority decision went further to explain that, even if the contamination had occurred onboard the ship, Team Tankers would not have been held liable because it "exercised the statutory due diligence to make the ship seaworthy" and therefore remained within the exclusionary rule of COGSA § 4(1). Lastly, the majority found that petitioner Vinmar would not have been entitled to damages, in any event, because the sale price it obtained from the allegedly discolored ACN was within market range for unadulterated ACN (especially, in the context of a falling market), and did not reflect the sale of a distressed product.

 

The Motion to Vacate the Award

 

Petitioner Vinmar moved to vacate the award on the grounds of: (1) manifest disregard of the law; and (2) corruption and misconduct of one of the arbitrators.

 

In considering the allegation of manifest disregard of the law, the District Court determined that the panel majority did not erroneously apply COGSA. In dicta, the District Court cited the Second Circuit decision in Westerbeke v. Daihatsue and confirmed that in order to set aside an arbitration award, petitioners would need to show that "the arbitrators knew of the relevant principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it." As a consequence, a mere erroneous application of the law, short of knowing what the "correct law" was, and consciously deciding to not apply it, will not suffice to grant a

vacatur. This represents, in the words of the District Court, an "extraordinary burden" to be overcome by the party that moves to set aside an arbitration award. As such, petitioner's claim of manifest disregard was denied.

 

Of the two arguments, the second challenge was the more creative in that petitioner alleged that the neutral arbitrator engaged in misconduct by failing to disclose a serious health condition, which was detected after the proceedings started, and that allegedly affected the arbitrator for several months during the pendency of the arbitration. This same condition resulted in the resignation of the arbitrator from another, contemporaneous panel and eventually to his passing.

 

Specifically, petitioner argued that the arbitrator's failure to disclose his condition constituted corruption under sections 10(a)(2) and 10(a)(3) of the Federal Arbitration Act ("FAA"). Section 10(a)(2) permits a court to vacate an arbitration award "where there was evident partiality or corruption in the arbitrators, or either of them." while section 10(a)(3) permits vacatur "where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced."

 

Petitioner further argued that the lack of disclosure also violated SMA Rule 9 requiring arbitrators "[p]rior to the first hearing or initial submissions ... to disclose any circumstance which could impair their ability to render an unbiased award based solely upon an objective and impartial consideration of the evidence presented to the Panel." According to petitioners a violation of SMA Rule 9 would constitute a misconduct in the sense required by § 10(a)(3) to justify vacate an arbitration award.

 

The District Court explained that under the FAA, an arbitrator has no duty to disclose medical conditions, as the parties only have a right to unbiased and uncorrupted arbitrators, but not to perfect arbitrators. Given that the nondisclosure of the medical condition did not amount to corruption or misconduct and even the petitioner agreed that during the course of the arbitration there was no evidence that the terminally ill arbitrator was incompetent, the District Court likewise dismissed petitioner's second claim as well. In essence, the argument sought "to transform a personal tragedy into a second chance for a parties (sic) disappointment with the outcome of their arbitration. Such a result would run counter to the twin goals of settling disputes efficiently and avoiding long and expensive litigation.

Montgomery McCracken's Maritime and Transportation practice serves all sectors of the maritime industry including ship owners, charterers, pilots, cargo owners, shipyards, terminals, commodities traders, non-vessel operators and non-vessel operating common carriers. The multifaceted practice includes cargo and products claims; bankruptcy and restructuring; corporate and finance matters; sustainable growth; and defense of criminal investigations, including corporate compliance matters.
 
For additional information, please contact any of the attorneys within the firm's  Maritime and Transportation  practice group.

STAY CONNECTED WITH US:
Follow us on Twitter  
View our profile on LinkedIn 

Attorney Advertising

This publication should not be considered legal advice and should not be relied upon without consultation with appropriate professional advisers. This publication is intended to provide general information only and nothing in it should be acted upon without consultation with legal counsel. Receipt of this publication does not create an attorney-client relationship between the recipient and Montgomery McCracken.

Montgomery McCracken Walker & Rhoads LLP is a Pennsylvania Limited Liability Partnership. The firm is headquartered at 123 S. Broad Street | Philadelphia, PA 19109. © 2015 Montgomery McCracken Walker & Rhoads LLP.