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LOF and defence of the marine environment

ISU’S ASSOCIATE MEMBERS’ DAY: APRIL 2008

Arnold Witte, President, International Salvage Union

The salvor’s reward was first linked to salved value in the days of Classical Greece. Salvage divers received a proportion of the actual value of cargo, as recovered. As the system evolved, the saving of the ship itself became part of the remuneration.

This fundamental principle still applies in 2008, Lloyd’s Form’s centenary year. In a Lloyd’s Form salvage, the value of recovered property is, in effect, an absolute cap on the salvor’s reward. Even when the salvor succeeds in preventing this pollution happening! Even when the threatened Coastal State and coastal community is only worried about pollution, the salvor’s reward must be focused on property only.

I do not quarrel with the evolution from property to environmental protection. I do, however, have great difficulty with the international pervasive attitude that ships, owners, and their underwriters are the bad guys. No industry has done more to protect the environment than our industry. With more than 95% of the world’s international commerce moving by ship, we have demonstrated a commitment to environmental success which should be apparent to all. Unfortunately, the size of ships and the romance surrounding an incident is a media delight. It is interesting to note, that while 95% of international commerce moves by ship, 95% of the pollution that poisons our rivers and oceans is land based. Somehow, the facts have been grossly distorted.

The modern realities of environmental concern are still not recognised in the salvor’s legal obligations. As set out in Lloyd’s Form and the Salvage Convention, the salvor’s prime obligation is to save property. Only when engaged in saving property is he obliged to protect the environment.

But Coastal States, port authorities and others have a very different perspective. Their first priority is to prevent coastal pollution.

In short, the salvor’s legal obligations no longer reflect what almost always happens in reality. And much the same can be said for the current salvage remuneration system. With its almost exclusive focus on property recovery, this system ignores the fact that the cost of failing to prevent pollution can run into billions! We believe it is time to review together a set of outmoded legal obligations. We must place our priorities in the correct order. The system must somehow reflect the fact that the primary goal of most salvage operations is to prevent pollution. This obviously affects the way salvage is done. Property recovery is still important, but it is often a secondary issue.

We must bring the salvor’s legal obligations and remuneration into the 21st Century. The ISU believes that the benefits of spill prevention through salvage deserve much greater recognition in the modern world. We want to retain Salvage Awards for property recovery but introduce Environmental Salvage Awards for spill prevention and mitigation.

Salvage teams recovered over 14 million tonnes of pollutants, from around 3,000 casualties, in the 1994-2007 period. That includes over 11 million tonnes of cargo oil. That’s over 20 times the amount of oil lost in shipping accidents over the same period.

We believe a remuneration system should be based on a more equitable sharing of responsibility for salvage costs between property underwriters and the liability insurers. We also believe the focus on environmental salvage will, at the end of the day, be financially rewarding to all.

We know that the introduction of Environmental Salvage Awards would further improve the salvage industry. This means more spills would be prevented. And that means a reduction in P&I Clubs’ pollution claims costs.

The potential for savings is very considerable. In 2004-05 alone, the International Group Clubs paid out over 300 million dollars in pollution related claims. On that basis, pollution related claims costs over the next decade could amount to more than three billion dollars! Clearly, any prospect of reducing this huge burden deserves serious consideration. After all, P&I Clubs are insurance mutuals. They act in the mutual interest of their shipowner members. The ISU maintains that an investment in Environmental Salvage Awards would be outweighed by the reduction in pollution claims costs. And we also believe that this claim should be put to the test by a trials period for Environmental Salvage Awards. The key point here is that the Environmental Salvage Award is the ONLY INITIATIVE ON THE TABLE OFFERING THE HOPE OF SOME MEASURE OF CONTROL OVER ESCALATING POLLUTION CLAIMS COSTS!

This is a time for fresh thinking and open minds. We ask the Clubs not to dismiss Environmental Salvage Awards out of hand. It is wrong to suggest that Article 13 Salvage Awards and SCOPIC should suffice. Article 13 leaves the Arbitrator no freedom to properly reward the salvor who confers environmental benefit. SCOPIC does not provide the incentive to promote environmental solutions. SCOPIC is NOT a reward system. It exists solely to shield the salvor from heavy losses in highly unfavourable circumstances.

The ISU maintains that the Clubs would save money by funding Environmental Salvage Awards. And we are happy to see this claim put to the test. The test might involve a trials period of several years. This should allow enough time to measure costs and financial benefits.

We are confident that our position will be confirmed by trial and experience. There are several reasons for this high level of confidence. Firstly, the cost of pollution claims will almost certainly continue to increase. Secondly, just about everything that can be done has been done – from the regulatory standpoint – to prevent accidents. We are now left with factors that cannot be eradicated (natural perils and human error). Thirdly, salvage is a commercial endeavour. Payment for environmental salvage services, inevitably, will have a positive influence on commitment to the salvage business, the deployment of assets and future levels of investment. Fourthly, salvors’ expectations are REASONABLE. Fears that there would be huge increases in salvage costs are groundless. Arbitrators would apply specific criteria when arriving at an Environmental Salvage Award. Additional costs should apply ONLY when significant pollution damage is avoided. Salvors are looking for a mutually acceptable solution. We are NOT chasing a Treasure Chest! In fact, we would expect the level of Environmental Salvage Awards to be pretty much on par with property-based, Article 13 Awards.

We should not forget that the property underwriters are also central to this debate. After all, they currently pay ALL salvage costs, often including an environmental element! At present, the Clubs pay only SCOPIC costs. We are grateful for the SCOPIC evolution. It does not, however, contribute to pollution innovation and focus. It does just the opposite – time and materials rather than risk – reward.

Naturally, vested interests tend to divide us. Yet there is also a very powerful common interest. The one thing that binds us together, of course, is the desire to prevent this happening. A ship aground and spilling oil.

I believe all insurers will gain if they join us in trialling Environmental Salvage Awards. By working together, we can reduce environmental damage and claims costs, in return for a relatively modest investment in Environmental Salvage Awards.

Coastal States and coastal communities are under direct threat from pollution. As such, they are the ultimate beneficiaries of environmental salvage.

Coastal States should understand the fragility of the marine salvage industry. Most salvors now belong to large corporations that provide many other marine services such as port towage. Many of these alternative activities are favoured, as they are free of the uncertainties and high risks that tend to surround salvage. These alternatives are more in keeping with modern business thinking and shareholder expectations. A large corporation might be tempted to turn away from salvage, in the wake of one or two poor years. It might prefer to focus on more reliable business sectors.

Any further contraction or redirection into other business sectors could produce significant gaps in salvage cover. As for the unbelievers, I would propose a hard look at the consolidation seen in the salvage industry over the past three years.

To turn to the future, the ISU believes that a new Lloyd’s Form is now the best way forward. The contract’s current edition is LOF 2000. We want to make an immediate start, with our industry partners on drafting an LOF 2010 edition. This new contract would include traditional Salvage Awards for property recovery, but with the addition of Environmental Salvage Awards for pollution prevention. A trials period could be built into the contract. And an understanding that the new remuneration system would be reviewed after, say, four years. Any necessary adjustments could be made in a subsequent contract edition.

So, how would it all work? Well, at present Salvage Awards are based on the Arbitrator’s consideration of 10 criteria. Only one is concerned with the environment. We are proposing the removal of this criterion, Article 13.1(b), from consideration in relation to property-based Awards. We must develop an entirely separate set of criteria, for use in arriving at Environmental Salvage Awards.

This would be straightforward for Arbitrators. Armed with suitable criteria, they would have no difficulty in setting Environmental Salvage Awards. After all, as a matter of routine they assess what MIGHT HAVE HAPPENED to property, had salvors not intervened. There is no reason why, on the same basis, they should not assess the likely consequences for the environment.

Various factors may be taken into account when assessing an Environmental Salvage Award. They include the tonnage of pollutants on board the casualty, the potential for damage (taking account of factors such as toxicity and persistence), the risk of release and the character of the natural environment and economic assets under threat. And there are also various options for financial assessment. Perhaps by reference to a fund based on an amount per tonne? Perhaps relating to the degree of polluting potential? Possibly using the IMO’s existing pollutant classifications? Arbitrators, of course, could refer to the liability limits of existing IMO Conventions, such as CLC and HNS.

Within this new regime, is there a place for SCOPIC? On the face of it, the answer appears to be “yes”. SCOPIC is a safety net. And it is applicable only in a minority of situations. It is the very nature of these situations that makes the case for SCOPIC’s preservation. It is in the public interest that the salvor responds to all casualties capable of causing pollution, even when a satisfactory Salvage Award might not be achieved.

So, in conclusion, we now want to explore these complex issues with our industry partners. We believe we can demonstrate that significant benefits will flow from the changes we have proposed. Less pollution! Reduced pollution claims costs! More equitable sharing of salvage costs. And encouragement for the salvor. If the shipping and insurance industries do not seize this opportunity, they will pay far more in compensation and clean-up costs over the next decade. I believe, however, that they will welcome the chance to reduce that very heavy burden.

The professional salvor is the most experienced, qualified attendee at any marine casualty. If he is expected to address the environmental success of a casualty, and he is required to do so, should he not be compensated from a portion of the demonstrated financial savings resulting from his efforts? We must somehow extract our industry from the time and material, astronomical, and often fruitless response efforts from which our industry is currently suffering. The road is a long one. It will involve the combined efforts of owners, the underwriting community, government interests, as well as the salvage community, environmental responders and the education of the public. The salvage community believes the utilization of the time proven risk reward system of LOF, as a partial solution to the enormous ever increasing and often wasteful current response to environmental issues attendant to marine casualties, is a very positive step in the right direction. The proof is in the pudding. If a reconstructed LOF, rewarding the salvor for a portion of the financial benefit he has conferred upon an owner and his underwriter does not come to pass, the form will fall into disuse and disappear.

It is time we explore together a more positive and directed pollution response which will result in greater success at less cost.