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SCOPIC and the SCR in the international context

4th International Diving, Salvage and Ocean Engineering Technical Forum

[CDSCA Conference], Xiamen, 04 November 2017

Cliff Chow, Hong Kong Salvage and Towage, representing the International Salvage Union

To understand SCOPIC and the role of the SCR it is necessary to look back at the evolution of the salvage business. It is the business of commercial operators – and, in some cases, state funded organisations – providing services to casualty vessels with the expectation of being paid a reward for helping to save life and property. It is a practice that has taken place for centuries around the world wherever there is seaborne trade. One of the core principles of salvage law is the concept of “no cure – no pay”: a reward is only given if property of enough value is salved. The reward is proportional to the value of the property saved. And, as the societal context has evolved, so, too, has the practice and legal framework of marine salvage.

In the second half of the twentieth century, patterns of trade began to change and the transportation of crude oil, and other pollutants, from producer countries to consumer countries increased significantly. And it led to an increase in the risk, and reality, of increased damage to the environment from oil spills associated with marine casualties. This started to change the traditional order of priorities in a marine salvage case. Saving life naturally remained the key priority but protecting the environment gradually became more important than saving property.

This change was catalysed by notorious tanker casualties in the 1960s and 70s such as the Torrey Canyon off the UK and the Amoco Cadiz off France and which led to serious oil pollution demonstrating all too clearly the risks.

The salvage of such tankers was usually expensive to carry out and the residual value low, making many salvage operations uneconomic. Governments were also reluctant to offer a place of refuge to damaged vessels. The regime did not encourage commercial salvors to offer services to these types of casualty because the likelihood was that “no cure” would be achieved and therefore there would be “no pay” and the slavor would have to bear the cost of the services unrewarded.

After the Torrey Canyon incident, great progress was made by the international community to improve the safety of shipping and counter pollution through conventions such as SOLAS and MARPOL. And the compensation regime of the International Tanker Operators Pollution Fund (ITOPF) and the International Oil Pollution Compensation Funds (IOPC Funds) were initiated.  

Separately, and somewhat later, measures were put in place to encourage salvors to go to the assistance of casualties that might not be an economic prospect under “no cure, no pay” arrangements but which nevertheless posed and environmental threat. It was the the 1989 Salvage Convention and it included, under its Article 14, a new concept – Special Compensation.

Article 14 was designed to apply when salvors went to the assistance of ships that threatened damage to the environment within coastal waters. Article 14 enabled the salvor to recover their expenses for the job regardless of the outcome and with the possibility of further “uplift” if environmental damage was actually prevented. However, the compensation was only to be paid to the extent that it exceeded the traditional property-based salvage award. In short, it was a safety net to ensure that the salvor did not lose money in attempting a salvage.

The Salvage Convention was incorporated into the most commonly used salvage contract, Lloyd’s Open Form (LOF), in its 1990 edition. Article 14 claims began soon after but the Salvage Convention only came into force in 1996.

The industry agreed that Article 14 was a good idea but it turned out to be difficult to operate in practice. Traditional salvage awards, covered by the Salvage Convention’s Article 13, were paid by property underwriters (ship and cargo) but under Article 14 it was the liability insurers, the P&I Clubs, who were to pay compensation and they were unhappy with the way in which the new provisions involved them in salvage for the first time.

In 1997, in response to the issues with Article 14, the shipping industry, the ISU and the International Group of P&I Clubs began discussions to address the difficulties. The result was that in 1999 the SCOPIC clause – the “Special Compensation P and I Club” Clause was created. It was designed to have the same effect as Article 14 but to avoid the legal problems caused by the assessment of Special Compensation under Article 14.

SCOPIC is a substantial clause consisting of 16 sub-clauses, three Appendices and two Codes of Conduct. The Clause became available in LOF contracts in August 1999. A panel of Shipowners’ Casualty Representatives was formed. This term later changed to Special Casualty Representative and the role will be addressed later in this paper

SCOPIC is complicated and not always easily understood. From the outset we need to recognise that it not a part of every LOF salvage contract. It is an optional addendum which is only included in a LOF if the parties specifically record on the LOF contract that SCOPIC is incorporated. If SCOPIC is not incorporated then the Salvage Convention’s Article 14 will automatically apply, if relevant. If the parties do incorporate SCOPIC, its financial provisions will only apply if the salvor invokes the clause in writing. This can be done at any time and in any circumstances. The idea behind giving this power to the salvor is to avoid the difficulty of trying to codify the variables around the definition of a “threat of damage to the environment”.

If SCOPIC is incorporated, then it replaces Article 14 which no longer applies. This is a crucial point for the salvor because if SCOPIC is included but not invoked (or is later terminated), the salvor will not be covered by either Article 14 or SCOPIC.

It was recognised that a mechanism was needed to prevent salvors from invoking the SCOPIC Clause in every LOF case. First, there is a reduction if the traditional salvage award exceeds the SCOPIC costs. Second, the shipowner is given the right to withdraw from SCOPIC at any time with five days notice provided the relevant authorities permit it to do so. It was assumed that the authorities would not agree to termination if there was still a threat of damage to the environment. Together these measures discourage a salvor from invoking the clause unless there is a real need for its protection.

Salvors must consider carefully the potential salved values; the risk of the job and the threat to the environment before incorporating SCOPIC. This mechanism has been effective in preventing salvors from over-using SCOPIC. Since 1999 there have been 1534 LOF cases. SCOPIC was incorporated in 497 cases (some 32.4%) and invoked in 347 cases – it is less than 25% of LOF cases.

SCOPIC remuneration that a salvor receives for a service is paid by the shipowner or their P&I insurer but only the amount that is over and above the traditional salvage award made against salved property under Article 13 of the Salvage Convention. The shipowner or his insurers must pay $3 million in security within two working days of the clause being invoked. This is covered by the ISU 5 Guarantee Form which was revised in late 2014 and is currently under another revision.

The SCOPIC remuneration due to the salvor is assessed by reference to an agreed tariff of daily hire rates for equipment and personnel. SCOPIC rates and remuneration are in US Dollars and the rates apply throughout the world. Over time a series of piecemeal increments were added to the tariff rates. But it was agreed in 2012 between the ISU and the IG that SCOPIC rates would be increased every three years in line with inflation as marked by the US Consumer Prices Index (given that SCOPIC is a US $ contract). The most recent increase was at the start of this year and was some 2%.

Under the Salvage Convention’s Article 14, salvors were entitled to a bonus if they actually prevented damage to the environment. There was some difficulty in establishing the extent of the bonus in individual cases so the SCOPIC concept was simply to provide for a bonus in every case. Under Article 14 this “uplift” averaged out at 26%. It was therefore agreed that in SCOPIC the uplift should be 25% of the tariff rate remuneration and it seems to be accepted by parties that in some circumstances this may be a “generous” bonus and in others less so.

The shipowner may not break from a LOF contract once it is signed but is entitled to terminate the SCOPIC clause on giving five days notice if the authorities permit it. This is unlikely to be allowed if there is actually a threat to the environment. However, the salvor may withdraw from the entire LOF contract if SCOPIC is withdrawn by the owner and the salvage operation is no longer financially viable.

One of the key features of SCOPIC is that the owner will appoint a Special Casualty Representative (SCR) chosen from a panel and who attends the casualty and reports on activity. The salvage master retains full control of the operation but the SCR’s voice is influential.

SCRs are appointed to the panel which is administered by the Lloyd’s Salvage Arbitration Branch. Applicants to join the panel are vetted by the SCR sifting committee consisting of representatives from the IG; the ISU; the International Union of Marine Insurance (IUMI) and the International Chamber of Shipping (ICS). In 2016 the process by which the panel of SCRs is managed was changed. SCRs are now appointed to the panel for three years after which they must re-apply to the panel. They must also demonstrate a degree of physical fitness for the role and must be covered by their own insurance.

The primary role of the SCR is set out in the SCR Guidelines which are a compendium of the various SCR Digests produced since the inception of SCOPIC. The Guidelines are clear that the SCR, like the salvage master, must use his “best endeavours to assist in the salvage of the vessel and the property thereon and in so doing to prevent and minimise damage to the environment.”

The Salvage Master remains in overall charge of the operation and the SCR must act in the overall interests of the salvage operation and represents all salved interests, not just the shipowner. If the SCR does not agree with the salvage master’s daily report, the SCR must send a dissenting report. The presence of the SCR ensures that the owners and their insurers are kept fully informed and may keep a note of costs as they build up. The SCR should send a concluding report at the end of the job.

The Guidance Notes on the role of the SCR are clear that the “success of the SCOPIC and SCR system in limiting litigation is considered in large part to stem from the trust that SCRs have been able to build with all parties through demonstrating that they represent an independent, unbiased viewpoint. That trust will be breached if SCRs are seen or considered to be beholden to any particular party.”

SCOPIC is generally considered to have worked well. There have only been 8 arbitrations involving SCOPIC since its introduction in 1999, and none since 2008.

This detail, and the number of invocations of SCOPIC noted above, suggest SCOPIC is indeed working well. However, as with most contracts, it requires review with time.  Recently a sub group of the SCOPIC Committee was set up to review critical parts of SCOPIC.  This group is still undertaking its work and will report back to Lloyd’s and other stakeholders in due course.

That said, SCOPIC is not perfect and requires cooperative working between parties and their trade association representatives like ISU and the IG to maintain its usefulness. The consensus is that is a good replacement for the Salvage Convention’s Article 14.

Nevertheless it must always be remembered that it is not a form of reward and is only a “safety net” to ensure a minimum payment in difficult cases to soften the demanding salvage principle of “no cure no pay”.