The legal framework for salvage operators and the 1989 Salvage Convention

Introduction

The principles of salvage and salvage law have evolved over many centuries. A fundamental concept is that the salvor should be encouraged by the prospect of an appropriate salvage award to intervene in any casualty situation to salve the ship, cargo and bunker fuel and to save life and prevent damage to the environment.

The salvor’s right to a reward is based on the benefit conferred by their services to the maritime property. It has been a long standing principle that payment for the services should be based on success, the so called “no cure, no pay” principle.

Salvage is conducted under the principles set out in the articles of the International Maritime Organisation’s Salvage Convention of 1989 – though it wasn’t fully implemented until 1996. Since that time over 60 maritime nations have ratified the Salvage Convention.

Until comparatively recent times, payment for salvage was restricted to a reward for the saving of life and property at sea, which historically has always been paid by ship and cargo pro rata to their salved value. However, increases in the tonnage of oil carried since the 1960s and the ever increasing size of tankers brought an increased risk of oil pollution.

Casualties such as the Atlantic Empress, Christos Bitas and the Amoco Cadiz, resulted in governments, fearing pollution, refusing casualties a place of refuge for salvage work to be completed. Without a place of refuge, there were occasions when salvors had no alternative but to tow such ships far out into the oceans to be sunk. As the salvors were rewarded on a “no cure, no pay” basis they failed to receive a normal salvage award and sometimes they did not even recover their expenses. They were in practice being discouraged to assist the very ships that society wanted them to salve.

In an attempt to overcome the problem, The Salvage Convention 1989 made changes to existing law relevant to the environment. The first was to add to the criteria for assessing a salvage award an additional factor – “the skill and efforts of the salvor in preventing or minimising damage to the environment”. (Article 13.1 (b)). The second was to introduce a new concept – Special Compensation (Article 14), which was introduced to ameliorate the harshness of the traditional ‘No Cure No Pay’ rule by providing that a salvor would, subject to certain conditions, at least recover his expenses whenever there was a threat of damage to the environment.

Commercial contracts

Beneath the Salvage Convention are a number of different commercial contracts and agreements which salvors and shipowners use for individual cases.
The Lloyd’s Open Form (LOF) is the most widely used “no cure-no pay” salvage contract. It has been in use for over one hundred years and has seen a number of revisions. It has recently been updated with the publication of the 2011 edition. The LOF contract does not require the negotiation of fees for the proposed salvage services. Instead, once the services have been completed the contract provides for the salvor to receive an award based on a number of clearly defined criteria set out in the Convention, (Art. 13), and limited by the salved fund (the salved value of the ship, its cargo and bunkers).

Traditionally, the salvage reward depends upon the successful salvage of the maritime property. If the salvage services were unsuccessful there was no payment, regardless of the expense of the operation. However starting with the introduction of LOF 1980 and its Oil Tanker ‘Safety Net’, and later with the development of the 1989 Salvage Convention and its Special Compensation provisions, there have been changes to reflect the increasing public concern in respect of encouraging the prevention of damage to the environment.

There are also various other forms of salvage agreement , such as the Japanese Form, Hamburg Form, Beijing Form, Moscow Form and Turkish Form. LOF, however, remains the most commonly used form of salvage agreement. LOF is administered in London by the Salvage Arbitration Department of Lloyd’s of London, and it is this department that deals with the salvage company’s salvage security requirements, appointment of an Arbitrator, publication of the LOF Award if there is no negotiated settlement, and collection of the payment due from the various salved interests.

SCOPIC

Although well-intentioned, Article 14 was found to be costly and time consuming in terms of assessing the ‘special compensation’, when applicable, due to the salvor. As a result the International Group of P&I Clubs (representing shipowners’ liability insurers), marine property insurers, shipowners and the ISU developed an alternative method of assessing the Special Compensation due to a salvor. The intention was the same – providing encouragement to salvors to go the aid of a casualty regardless of the risk to the environment, or the values of the vessel and cargo which might mean that a “traditional” salvage award would be too low to cover the salvor’s expenses. This alternative system is known as the SCOPIC Clause – The Special Compensation P and I Club Clause. The clause came into being in 1999 and the current edition is SCOPIC 2011.

SCOPIC is a voluntary addition to the Lloyd’s Open Form contract (see below) which can be incorporated at the time Lloyd’s Form is agreed. By incorporating SCOPIC into the LOF the salvor is deprived of the benefits of Art. 14, but to activate the SCOPIC Clause the salvor must invoke its provisions by giving written notice. If this is not done the salvor will be back in a ‘no cure – no pay’ situation as he will have lost the right to Art 14 Special Compensation, and the SCOPIC Clause will not have come into effect.

SCOPIC is a tariff based compensation mechanism designed to ensure that the salvor recovers, as a minimum, his expenses of providing services to a casualty, plus a fixed bonus, regardless of the degree of success. It does not represent a ‘reward’ for preventing environmental damage, as is the intention of Article 14 of the 1989 Salvage Convention.
There are around 100 LOF cases notified to Lloyd’s each year but only a small proportion go to Arbitration. The majority of cases are settled by negotiation with a significant saving in both expense and time.