February 3, 2014

What makes an effective pollution liability regime?

Most jurisdictions have reasonably well developed laws on the recovery of property damage and property damage related economic loss. This is essentially tort law, a body of which each relevant jurisdiction has. The US OPA goes beyond that by imposing strict liability (subject to very limited defences) and dispensing with the requirement that the party claiming economic loss must show that the loss flows from property in which he has a proprietary interest. Nevertheless, the claimant still needs to show that his economic loss has been caused by property damage (owned by him or not). However, it is not axiomatic that economic loss entirely decoupled from property damage should be recoverable. It is not recoverable in any other similar contexts where the law of tort applies, e.g. a negligent release of a toxic substance from an on-land chemical plant or car being negligently driven into an electricity sub- station.

Most jurisdictions also have laws which enable the recovery of environmental damage and clean up costs. It is also the case that in most jurisdictions there is no cap on liability for such liability.

In short, there already exists in most relevant jurisdictions strict liability in an unlimited amount for damages to property and property related economic losses, environmental damage and clean up costs.

Following the Macondo spill, there was a great deal of focus on the $75 million liability cap for property, economic and environmental damages. The consensus amongst economists was that there no justification for this cap. It was said to discourage safe behaviour because it artificially reduced the oil companies’ perception of how much unsafe behaviour leading to pollution would cost it and also act as an unjustified subsidy by society of an oil companies’ operations. There were powerful calls for the removal of the cap, which led to bills being proposed in Congress. However, both Republic and Democrat Senators blocked the proposed legislation arguing it could have unintended consequences. The thrust of those counter-arguments were as follows:

  1. The $75 million cap is in respect of no fault strict liability. Generally speaking, most systems of law require some form of moral culpability to be established to justify the imposition of very high levels of liability.
  2. The limits of liability do not apply anyway where there has been a breach or a violation of an applicable safety, construction or operating regulation which has proximately caused the incident. There would tend to be such a breach or violation in the case of most serious pollution incidents.
  3. The limits of liability do not apply to clean up costs in any event, which would tend to be the largest cost.
  4. The limits of liability do not apply to state law based damages claims, which in most cases do not have any damages caps.
  5. Therefore the ‘incremental’ incentive for the properly informed oil company to behave well that is brought about by increasing or removing the cap in respect of ‘damages’ would be minimal if anything at all.
  6. Increasing limits of liability would only be effective to the extent that Oil Spill Financial Responsibility (OSFR) requirements were also increased. In other words, someone’s assets (whether the operators’ or someone else’s such as an insurer’s) needed to be put at stake to meet the increased liability limits in order for there to be a real incentive to behave better. An increased potential for liability without it really ‘hurting’ was valueless.
  7. The smaller operators may not be able to afford the Increased OSFR requirements or there might not be the insurance capacity to provide it and so they might cease to participate in offshore exploration and production activity altogether.
  8. Reduced participation of the smaller operators in the exploration and production industry could adversely affect both the supply of oil and jobs.

Arguments (1) to (5) are unobjectionable. Arguments (6) to (8) are more worrying. There is a powerful school of thought which says there is no place for entities that cannot pay the cost of the damage they cause. Nevertheless, leaving all of that aside, by the time that one reaches the stage of having to apply the remedial or punitive laws of a particular jurisdiction, the system has failed. In truth, whether a law is drafted that says the maximum liability that can be imposed on an operator for a pollution incident is $500m, $1bn or $10bn or no limit at all is unlikely to make much, if any, difference to an international oil company’s attitude towards mitigating the risk of an incident occurring in the first place, especially in the light of what BP has gone through because of Macondo. Time spent drafting ‘tough new laws’ that seek to exact massive retribution on oil companies is unlikely to reduce the risk of pollution incidents happening. The principal thing that will actually reduce the frequency of serious pollution incidents is further massive investment in technology and people, rewarding people for prioritising safety over everything else, intelligent regulation and rigorous independent supervision. That appears to be fully recognised by the oil and gas industry and appears to be recognised by most of the relevant jurisdictions, particularly in the wake of Macondo.

It has been observed that not too much reliance should be placed upon Macondo in terms of reminding people that the damages liability cap in the OPA is illusory because, in time, people will forget what happened. To the extent oil companies fail in their cost/benefit analyses that the $75 million cap on damages liability is illusory and it is liable to skew their assessment of the true cost of unsafe behaviour, then this would be a powerful reason to remove the cap. However, it would be very surprising indeed if oil companies have ever been lulled into a false sense of security by the damages cap per se (as opposed to other factors).