Compensation of Damages Caused to Shipowners by Missile Attacks: How Will It Work?
Who Will Be Eligible for Compensation, Which Losses to Be Covered and How the Application Should Be Submitted: Discussing Advantages and Disadvantages of the Document Draft
The Ministry of Communities and Territories Development of Ukraine has recently published a draft of the Procedure for Issuing Guarantees on Reimbursement of Damages caused by russian invasion against Ukraine and hostilities at the territory of Ukraine to charterers, operators and/or shipowners of the sea-going vessels and inland vessels flying Ukrainian and foreign flags. The Government’s idea itself to create so-called “guarantee fund” from the state for shipowners in case of causing damages due to ongoing russian invasion is undoubtedly positive and should be supported. However, it is worth to ensure that declared mechanism for receiving a reimbursement shall be clear and understandable for the potential applications and will effectively work on practice.
What Was the Shipping in Ukraine in 2022-2024?
As you know, as a result of military invasion of russia to Ukraine, which is ongoing almost for three years, the shipping in the North-Western region of the Black Sea has been significantly restricted and territorial sea and inland waters of Ukraine have been included to the List of Areas with Potential Danger according to the Circular of the Joint War Committee of the Lloyd’s Market Association.
During the first half of 2022 Ukrainian sea ports did not actually work until signing of the Grain Initiative in Istanbul with participation of Ukraine, russia and Turkiye under the mediation of UN. After the Grain Initiative has been signed Ukrainian ports resumed its work and first bulk carrier vessels have called Odesa, Chornomorsk, Pivdennyi for loading of grain and foodstuff. The Grain Initiative has been working for a year until in July 2023 russia announced its exit from the deal and refused to extend the Initiative for another 120 days. Thereafter Ukrainian shipping has stopped again until September 2023. The first vessel was container ship “Joseph Schulte” operated by Bernhard Schulte Management, which sailed from Odesa port early in the morning on 16th of August 2023.
In September 2023 the Ukrainian Marine Corridor has been opened due to joint efforts of Ukrainian Navy Forces, the Ministry of Infrastructure of Ukraine, Ukrainian Sea Port Authority and other authorities. The corridor ensures export of Ukrainian agricultural commodities to the ports of Africa, Asia, Europe and America. Export of Ukrainian agriproducts has become a key factor of food safety in many countries. According to official statistic, for the period from September 2023 to October 2024 more than 3000 vessels have passed through Ukrainian Marine Corridor and have transported more than 80,5 mln of cargoes.
Six sea ports are currently operating in Ukraine, including three ports of the Great Odesa (Odesa, Chornomorsk, Pivdennyi) and three ports on the Danube River (Izmail, Reni, Ust-Dunaysk). War risks are known to be a traditional exclusion from insurance coverage, which could be a reason not to reimburse damages to the shipowner whose vessels have been suffered as a result of war risks impact. That is why Ukrainian Government created a mechanism for providing guarantees to shipowners, charterers and fleet operators on reimbursement of damages caused during vessel’s passing Ukrainian Marine Corridor and stay in Ukrainian ports under cargo operations.
For that purpose, UAH 2 bn (USD 47,62 mln) is suggested to reserve in the state budget of Ukraine for 2025. The cover shall be available both to Ukrainian and foreign vessels excluding vessels, whose owners are the residents (both individuals and legal entities) of russia or belarus as well as individuals and entities including in the sanctions lists according to the Ukrainian Sanctions Act. The guarantee mechanism shall be extended to the vessels, which are located at the territorial sea of Ukraine, within borders of Ukrainian Marine Corridor and water areas of the opened sea ports of Ukraine subject to transportation of non-military cargoes on board of these vessels and if the port call took place after 1st of January 2024 and the damage has been caused after 1st of January 2025.
Who Will Be Entitled to Reimbursement of Damage?
According to clause 5 of the Procedure, a shipowner, who has valid insurance agreement of P&I policy shall be entitled to reimbursement of damage. Let us please remind you that according to the art. 20 of the Merchant Shipping Code of Ukraine, the definition “shipowner” shall mean legal entity or individual operating the vessel on its own name notwithstanding to the fact whether such entity is the registered owner or operates the vessel on another legal grounds.
Along with that the definition “registered owner” means an individual or a legal entity, which realizes the rights over the vessel equal to title (ownership) rights. Therefore, in fact the right to claim compensation shall be available both for registered owners, charterers and operators of the vessel.
A condition precedent for shipowner reimbursement claim at the expense of the guarantee fund will be lack of insurance cover for the damages caused as a result of the russian invasion against Ukraine in the insurance agreement or P&I policy or when the insurance cover does not extend the territory of military actions or areas with navigation restrictions caused by hostilities, attacks, terrorism and related danger.
It should be noted that in previous years a condition precedent for receiving a compensation was a written refuse of the underwriters to pay a reimbursement under the insurance policy. This requirement has now been removed. It is unclear at the moment, whether a shipowner will be entitled to compensation from a guarantee fund if its underwriter has refused to pay the compensation under the policy, which includes war risks? Or if the amount of compensation paid by the underwriters will partially cover the damage caused by war risks?
What Type of Losses to Be Covered by the State?
According to the Procedure, it is suggested to extend the guarantees for five groups of damages:
- damages caused by constructive loss of the vessel, whereafter carrying out of replacement repair is impracticable;
- losses and expenses related to removal of constructive damage of the vessel, which impacted vessel’s seaworthy including costs and expenses for rescue operations;
- losses caused by loss and/or spoilage of the cargo;
- losses caused to third parties as a result of collision with another vessel, floating or fixed facility;
- losses and expenses related to removal of wrecks of vessel and/or cargo, marking of the place of accident; expenses related to pollution of the environment and payment of related penalties; expenses related to damage to life or health of a crew member or passenger and their repatriation caused by aforesaid circumstances.
From our point of view the list of risks should be extended by adding costs and expenses for repair of vessel’s hull, machinery and mechanisms if such expenses have been caused or related to the russian invasion. Also, third group shall include not only spoilage (ukr. “porcha vantazhu”), but also damage to the cargo (ukr. “poshkodzhennia vantazhu”), which is indicated as a separate risk in the insurance policies and rules.
Most known russian attacks on merchant fleet in 2024
We would like to remind you that during 2024 russia has repeatedly attacked civil (merchant) vessels, which have been moored in the ports under cargo operations or were passing Ukrainian marine corridor. Most known cases include attack of m/v “GOLDEN LION” during her stay in Odesa port on 20th of September; attack of container ship “SHUI SPIRIT” during her stay in Chornomorsk Fishery Port on 9th of October (7 civilians have been reported killed); missile attacks on m/v “OPTIMA” and m/v “NS MOON” (both vessels have been stayed nearby Odesa port under cargo operations, attack took place on 14th of October.
Who Will Assess the Damage Caused?
As in the previous editions of the Procedure, the draft of the Procedure suggests to assess the damage in accordance with the Law of Ukraine “On Appraisal of Property, Property Rights and Professional Appraisal Activity in Ukraine”. That means that assessment of damage caused will be conducted by the independent appraiser, which is a holder of the qualified certificate issued by the State Property Fund of Ukraine.
A document, which confirms the appraisal, shall be the independent appraisal report, which shall be subject to compulsory review (i.e. re-checking) by the State Property Fund of Ukraine. Appraisal shall not be required for reimbursement of damages of fifth group (removal of vessel’s wrecks, sea pollution, payment of penalties for pollution of the environment, damage caused to life and health of the crewmembers).
From our point of view, it is worth to allow the shipowners to submit a survey report as evidence of the damage caused as a result of attack because marine surveyor is the most competent and experienced professionals in evaluation of nature of the damage caused to vessels and cargoes while “ordinary” appraisers may lack experience and expertise. Besides, survey reports are widely accepted by underwriters, P&I clubs as proper evidences of damage caused in various marine accidents.
How Will the Procedure of Reimbursement Look Like?
For receiving a compensation, the shipowner shall submit the following documents to the Ministry of Development within 180 days from the accident:
- an application with description of event and damages caused;
- certified copy of the insurance agreement or P&I policy;
- independent appraisal report (for the losses of 1-4 group) or documents, which confirm the costs and expenses incurred (for the losses of 5th group).
Documents in a foreign language should be submitted with Ukrainian translation certified by the notary public. Documents could be submitted both in paper (by a registered mail or courier post) and electronic form (by e-mail with digitally signed copies).
Certainly, a positive aspect is reducing a list of documents, which should be submitted to the Ministry with the application. A requirement on compulsory notarized Ukrainian translation of the documents could complicate the process. The thing is that major P&I Clubs do not practice issuing of “paper” polices (with “wet” signature and seal) and some clubs do not have seals at all as they are not compulsory for doing business in EU.
According to the actual requirements of notary records, the notary certifies the translation through stitching the translation either to original document or to a notarized copy thereof, which could be produced only from original document. Hence, to meet this formal requirement and submit notarized translation to the Ministry, a foreign shipowner shall first receive the original of the insurance policy or the insurance agreement from an underwriter, send one to Ukraine and only after that Ukrainian notary shall be able to certify the translation. From our point of view, Ukrainian translation certified by the translation agency with indicating details of the translator’s diploma will be enough for that purpose.
If the documents do not meet requirements of the Procedure, the Ministry of Development shall prepare and submit the proposal on allocation of funds from the reserve fund of the state budget to the Cabinet of Ministers of Ukraine.
Unfortunately, the draft of the Procedure does not provide for the deadlines of processing the application of the shipowner and making a decision by the Cabinet of Ministers, which could be extremely useful for potential applicants. From our point of view, lack of clear deadlines for processing of application reduces the attractiveness of this mechanism for potential applicants and allow public officials to take their time in making a judgement.
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