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Oil Spill Liability a Complicated Legal Web

BY Quinn Bowman  June 7, 2010 at 1:35 PM EDT

The amount of damages ultimately sought against BP and others is under examination.; Getty images

House Speaker Nancy Pelosi, President Obama and several members of the Senate, including New Jersey Democrat Robert Menendez and Louisiana Republican David Vitter, have proposed changing or eliminating a $75 million liability cap in the Oil Pollution Act of 1990. This limit applies to damages a company that spills oil must pay to make up for lost economic activity, lost tax revenue and damage to natural resources as a result of an oil spill. The Senate Environment and Public Works Committee will hold a hearing on the issue Wednesday.

Although Congress continues to debate the issue, other laws may apply that could affect the amount of damages ultimately sought against BP and others. The NewsHour spoke with several environmental and maritime law experts to get a sense for the larger legal framework that will ultimately guide who pays how much to clean up the Gulf oil spill and compensate those affected by the damage.

Attorney General Eric Holder announced June 1 that the government has opened an investigation into whether there were violations of civil or criminal law by parties invovled in the oil leak.

This legal framework will help determine who is held financially responsbile for the largest environmental disaster in American history, and by how much. According to government estimates, at least 22 million gallons of oil has leaked into the Gulf of Mexico — double the size of the Exxon Valdez tanker spill off the coast of Alaska in 1989. Many of the laws governing liability for an oil spill were written after that incident.

Four Categories for Liability

University of Houston law professor Tracy Hester, an environmental law expert, describes four “baskets” of liability for companies that spill oil. A company like BP can face fines and lawsuits under a number of different jurisdictions.

Cleanup and Containment

The Oil Pollution Act of 1990, which passed in the wake of the Exxon Valdez spill, is the central federal law governing the government’s response to the current Gulf oil spill.

According to Hester, the OPA holds the responsible party liable for all the costs related to cleaning up and containing spilled oil, without a limit.

Government and private parties can also collect money from the responsible party if they help with the cleanup under the National Contingency Plan established by the OPA. The NCP guides the current government response to the oil leak.

The OPA also creates a fund consisting of taxes paid by oil companies that is designed to pay up to $1 billion to help with cleanup costs per incident.

Damages

Separate from the cleanup, the responsible party, under OPA, is liable to pay for damages caused by the spill to businesses, governments (via lost tax revenue) and for damage to natural resources.

The current cap for this liability for offshore facilities is $75 million, which is being debated in Congress. Hester points out that if it is shown that the responsible party for the spill showed “gross negligence, willful misconduct or a failure to comply with operating or safety regulations” the $75 million cap is waived and the party is on the hook for an unlimited amount of damages under OPA.

BP America Vice President of Resources Darryl Williams told a Congressional committee on May 27 that the company expects to exceed that cap and would pay “all legitimate claims” in court.

Noah Hall, a professor at Wayne State University Law School in Detroit who specializes in environmental litigation, said the cap on damages is unlikely to be a major barrier to pursuing damages against BP because a violation could be found that will waive the cap, or affected parties will sue in state court for damages.

Hester said the question of gross negligence or regulatory noncompliance will become a hot legal issue. “I expect lots of litigation over that question,” he said.

Tort Liability

Each state has its own laws dealing with oil pollution and people affected can file lawsuits in state or federal court to collect from a company that spills oil.

People can also sue for personal injury and other claims under state laws. That includes punitive damages not covered under the OPA. Federal lawsuits will be filed as well. According to Law360, a newswire for business lawyers, 115 state and federal lawsuits have been filed over the Gulf oil leak.

Hall said that lawsuits will likely take years to be resolved.

“The reason Exxon Valdez is so relevant is that the Supreme Court decision only came down two years ago, so it took 20 years for lawsuits to be settled,” he said.

“In the Exxon case, the Supreme Court upheld the economic damages (about $500 million for the plaintiffs in that specific litigation) but slashed down the punitive award from about $5 billion (later reduced to $2.5 billion by the court of appeals) to about $500 million, on the theory that punitive damages cannot exceed the amount of actual economic damages,” Hall added.

That spill only dealt with one state while the Gulf spill will likely involve several Gulf states as oil spreads. The size of the Gulf leak, according to government estimates, is also expected to be larger than the Exxon spill.

Criminal and Civil Penalties

On top of the other categories, the government could charge BP and other companies involved in the spill with violations of civil and criminal laws.

The federal Clean Water Act levies a $1,100 civil penalty per barrel of oil spilled, Hester said, which has no cap. That rate increases to $4,300 per barrel if a company is found to be “grossly negligent,” he added.

Those are maximum fines allowed by law. “Usually in a settlement or plea agreement you take into account factors like good faith efforts or litigation risk that can adjust penalties lower,” Hester said.

Professor Hall wrote in his blog Great Lakes Law that the U.S. Justice Department has several laws at its disposal.

“Government attorneys have many laws to use in this case, and would likely pursue violations for discharge of pollution under the Clean Water Act (section 309). Criminal charges could be brought under the Refuse Act and the Migratory Bird Treaty Act, both of which use strict liability, so the government would not need to show that BP intended to violate the law or was even negligent in its operation and response in order to bring charges.”

Added Complexity

Adding to the patchwork of civil and criminal legal frameworks is the fact that while BP is the “responsible party” in the spill, Transocean Ltd., an offshore oil drilling company, owned the Deepwater Horizon.

The New York Times reported that government investigators are having difficulty figuring out which company was even in charge of the Deepwater Horizon when it exploded.

Transocean has claimed liability under the Limitation of Liability Act of 1851, which the company claims makes them responsible for just $26.7 million – the value of the sunken rig.

Hester said that the Oil Pollution Act allows responsible parties to even file contribution claims against each other

“(BP and Transocean) could have claims against each other under OPA and each of parties might have different position legally depending on what they were doing,” Hester said.