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SCOPIC and the SCR

Li Jianping, Executive Committee member, International Salvage Union

The practice of marine salvage – commercial operators going to the aid of vessels in distress in the expectation of a reward for helping to save life and property goes back centuries. The principle of “no cure – no pay” has always been at the heart of salvage: a reward is only given if property of enough value is salved.

However, the transportation of oil and other pollutants increased significantly in the second half of the C20th and the potential for damage to the environment from oil spills associated with marine casualties increased at the same time. It began a firm shift in salvage priorities from property to the environment.

Famous cases like the Torrey Canyon off the UK in 1967 and the Amoco Cadiz off France in 1978 demonstrated 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. It deterred salvors from offering service to these types of casualty because the likelihood was that “no cure” would be achieved and which meant there would be “no pay” – despite the cost of the services. Following the Torrey Canyon, 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 to encourage salvors to go to the assistance of casualties that might not be “worthwhile” under “no cure, no pay” the 1989 Salvage Convention introduced in its Article 14, a new concept – Special Compensation.

Article 14 was designed to apply whenever salvors went to the assistance of ships that threatened damage to the environment within coastal waters. In such circumstances Article 14 enabled the salvor to at least recover their expenses with the possibility of further “uplift” if environmental damage was prevented.  However, such assessment 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 was well–intentioned but in practice it turned out to be cumbersome, contentious and expensive to operate and had the unintended consequence of discouraging salvors from attending casualties where there was the threat of environmental damage. 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. They were unhappy with the way in which the new provisions involved them in salvage for the first time.

Article 14 claims began soon after but the Salvage Convention only came into force in 1996.

In 1997, in response to the concerns with Article 14, the shipping industry, ISU and the International Group of P&I Clubs began discussions to address the difficulties with Article 14. And 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 that the assessment of Special Compensation under Article 14 caused.

SCOPIC is a large 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

The SCOPIC regime is complicated and not always well-understood. One common misconception is that it is part of every Lloyd’s Open Form (LOF) salvage contract. It is not. It is an optional addendum which is only included into a LOF if the parties specifically record on the contract that SCOPIC is incorporated. If SCOPIC is not incorporated then the Salvage Convention’s Article 14 will apply, if relevant.

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

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”.

It was recognised that a balance needed to be introduced to prevent salvors from invoking the SCOPIC Clause in every case. First, there is a mechanism to give a discount 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. Both measures discourage a salvor from invoking the clause unless there is a real need for its protection.

SCOPIC remuneration that a salvor receives for a service is paid by the shipowner or his P&I insurer but only the sum 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. For the first few years the rates remained the same but at the outset of 2006 there was an agreed 10% increase in the rates for human resources while equipment rates were unchanged. In mid-2007 there was a further 10% increase in SCOPIC personnel rates and, furthermore, tug rates increased by 25% and other equipment rates were raised by 10%.

A third increase in rates was introduced in January 2011 – 10% on tugs, equipment and personnel. At the same time, a “cap” was introduced on equipment rates paid on the salvors’ own equipment. This was to avoid the situation where, during a period of prolonged use, the total of the daily rates for using the equipment might end up being more than the purchase cost of the equipment.

To avoid continuation of piecemeal increases in the SCOPIC rates, and prolonged negotiations each time an increase in rates was reviewed, 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). Therefore, the fourth increase in SCOPIC rates (based on this new provision) took effect from 01 January 2014 at 6.78% on all items. The next increase will be effective from 1st January 2017 and will be around 2%.

Under 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 the uplift averaged out in practice at 26%. To keep matters simple it was therefore agreed that in SCOPIC such an uplift should be 25% of the tariff rate remuneration – it seems to be accepted by parties that in some circumstances this may be a “generous” bonus and in others less so.

Given this seemingly favourable framework, what is to stop salvors invoking SCOPIC in every case? It would seem they have nothing to lose by doing so. There is a mechanism. If the traditional salvage award is higher than the assessed SCOPIC remuneration then not only is no SCOPIC award payable but the traditional property based award is reduced by 25% of the difference between it and the SCOPIC remuneration.

So, for example, in a case where SCOPIC has been invoked and the assessed SCOPIC remuneration is $1 million and the property based salvage award was $1.5 million then no SCOPIC money would be paid and the Article 13 award would be reduced to $1.35 million (25% x $0.5 million = $125,000).

Salvors must consider carefully the potential salved values; the risk of the job and threat to the environment before incorporating SCOPIC. This mechanism has been effective in preventing the salvors from over-using SCOPIC. Since 1999 there have been 1473 LOF cases. SCOPIC was incorporated in 468 cases (some 31%) and invoked in 332 cases – it is less than 25% of LOF cases.

The shipowner may not escape 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 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 has been tightened. SCRs are now to be 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.”

Critically the SCR must act in the interests of all parties, 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 comforted and may keep a tally of costs as they build up. The SCR should send a concluding report at the end of the job.

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 will report back to Lloyd’s and other stakeholders during 2017.

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”.