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The future of Lloyd’s Form, from the salvors’ perspective

ITS CONFERENCE, SINGAPORE, MAY 2008

Joop Timmermans, International Salvage Union

Introduction

Over the past 40 years the “top 20” spills worldwide resulted in the loss of some three million tonnes of crude oil into the sea. In recent decades, three major tanker spills made headlines around the world: the Exxon Valdez, the Erika and the Prestige. They involved the combined loss of around 120,000 tonnes of oil and cost billions in clean-up and compensation.

Every year members of the International Salvage Union (ISU) recover around three times that amount of oil from tankers in distress and requiring salvage assistance. The ISU introduced its Annual Pollution Prevention Survey in 1994. Since then ISU salvors have recovered over 13 million tonnes of oils, chemicals and other pollutants – from over 2,700 casualties. This includes 10 million tonnes of oil.

They intervened promptly and effectively, saving shipowners and liability insurers billions of dollars. They also prevented further deterioration of the shipping industry’s public and political image.

Many of these operations involved responses to major marine casualties. Looking back over some 30 years, our statistics show that just over half of all salvage operations were performed under LOF. There can be no doubt that Lloyd’s Form is still the world’s preferred salvage contract, whenever the threat of property loss and environmental damage is acute and there is no time to lose. LOF continues to play a vital role in 2008, the contract’s centenary year.

LOF’s importance

The fact that LOF remains fresh, fit and relevant after a century of use is testament to the skilful way in which this contract has been revised and updated over the years. Changing needs have been taken into account. There are many benefits associated with LOF, including the fact that no prior discussion of terms and conditions is necessary. Commercial issues are dealt with after services are completed. By that stage the value of recovered property is known, together with the time expended on the salvage and out-of-pockets incurred by the salvor.

LOF was designed from the outset to avoid commercial haggling. It is a unique emergency response contract concentrating on a single goal: a successful outcome that avoids loss and pollution. With LOF agreed there is nothing, at the contractual level, to delay the mobilisation of the salvor, his personnel and equipment. Freedom from delay can make the difference between success or failure and, possibly, can avert a pollution catastrophe.

LOF 2000 is a streamlined document. It is simple, straightforward and easy to understand. There are just seven boxes to be completed by the parties. Once LOF is agreed, the salvor can intervene and use his “best endeavours” to prevent pollution and recover property.

There have been major improvements in the shipping industry’s safety and environmental record in recent years. Yet casualties continue to occur, despite the best efforts of shipowners and regulators. This is due largely to the impossibility of totally eradicating all risks associated with natural perils, human error and mechanical failure. Each vessel is a potential casualty that can threaten life, property and the environment in adverse circumstances.

This is why LOF is more important now than at any time in its long history. Zero tolerance of marine pollution has a firm hold on public and political opinion. LOF respects this priority. It is the contract that offers the best hope of recovering property and protecting the environment.

Confidence in LOF

Lloyd’s administers LOF. It ensures that the level of the salvor’s reward matches the scale of services provided, the risks to the casualty and the degree of success achieved. These factors are assessed by applying criteria set out in Article 13 of The Salvage Convention, 1989. These criteria take account of the risks to property, salved value, time spent on services, the salvor’s expenses, the skills applied in rendering service and risks to the environment.

The Lloyd’s Arbitrator is responsible for arriving at a Salvage Award that accurately reflects the scale and complexity of the services provided. Under this impartial system, Salvage Awards are modest when services are provided on a modest scale. Equally, Lloyd’s Arbitrators recognise the salvor’s achievements when prompt, decisive action prevents substantial property loss and environmental damage.

It is important for this system not only to be impartial but to be perceived as such by shipowners and insurers. They must have confidence in LOF and the ability to achieve an appropriate outcome. This is the key to LOF. Indeed, it is why LOF was devised in the first place a century ago. It is unfortunate that some interests in the maritime industry have developed the mistaken view that LOF is prohibitively expensive. This is a misconception. It takes no account of Lloyd’s administration of LOF and the inherent fairness of the arbitration system. Significantly, it also fails to appreciate what is at stake, with costs possibly running into millions and, possibly, billions.

ISU members, for their part, understand the importance of fair treatment. They have agreed that the salvor’s financial expectations should accurately reflect the level of service provided. An ISU Resolution states that salvage security demands should be realistic, as should settlement/Award expectations.

Challenges to LOF’s future

International Salvage Union salvors are committed to the commercial business of salvage. The services of casualty response and pollution prevention, however, are increasingly exposed to political pressure. This is the product of extreme concern over environmental threats, especially those involving large, laden tankers.

Yet, in one important sense, LOF’s central characteristic has remained unchanged since 1908. It is a no cure – no pay contract. In the traditional manner, the salvor is rewarded in relation to the salved value of property recovered.

In recent decades, however, governments have become increasingly reluctant to rely entirely on the no cure – no pay contract for salvage and, more particularly, pollution prevention services. As a commercial contractor, of course, the salvor may decide not to intervene if he judges the financial risks unacceptable under all-or-nothing, no cure – no pay.

Governments now recognise that, in the modern context, the salvor needs an additional incentive. The full rigour of no cure – no pay needs to be moderated when there is a high risk of failure and/or little salved value. As a result, “safety nets” of various types have been introduced. They are designed to protect the salvor from financial loss and encourage him to respond to all pollution threats, not just those casualties holding out the prospect of a satisfactory Salvage Award.

LOF 2000 incorporated a new remuneration system for the one-in-five cases where a satisfactory, property-based Salvage Award is unlikely to materialise. This system is known as SCOPIC. It rewards the salvor on the basis of pre-agreed rates for salvage tugs and other craft, portable salvage equipment and salvage personnel.

Despite such innovations, the salvage industry’s long-term viability remains uncertain. Higher ship operating standards and advanced technology have reduced casualty numbers and, in turn, the demand for salvage services. The salvage industry now functions in a low workload environment. Today, the casualty-related income of the global salvage industry barely reaches USD 100 million per year. At such low income levels, it would take the ISU’s entire membership worldwide over 10 years to collectively earn the equivalent of the cost of a single major spill such as the Prestige. There can be no doubt that emergency services for saving ships and preventing pollution must continue. The central question is: how to fund these vital services in the longer term, against a background of low workload?

Any long-term solution must recognise, in some way, the true scale of the environmental benefit conferred by salvors. Pollution prevention is more important than ever. It is this that holds the key to the continuity of salvage and pollution prevention services in future years. In the ISU’s view, it makes sense to place a much greater value on spill prevention services, under a dual system of Salvage Awards for recovering property and Environmental Salvage Awards for preventing pollution.

LOF: looking to the future

There is now a strong case for introducing a new LOF that takes full account of society’s zero tolerance of marine pollution. This is a challenge that must be faced if LOF is to continue to function effectively in future years.

The ISU has proposed that Environmental Salvage Awards be introduced through a new LOF. Given goodwill on all sides, it may be possible to reach agreement in this area within a three-year timeframe, so allowing the adoption of “LOF 2010”. There is also a need to revise The Salvage Convention, 1989, but this is a longer term goal. Nevertheless, the ISU has already proposed that the Comité Maritime International (CMI) begin drafting a new convention.

Certainly, the introduction of a new LOF will take less time. The members of the Lloyd’s Salvage Group have an important advantage, as they are building on a century of experience in the use of LOF. They can work with confidence as the maritime industry has been very effective in devising agreements concerned with the environment. Outstanding examples include the tanker shipping/oil industry “TOVALOP” and “CRISTAL” arrangements, together with the more recent “STOPIA” and “TOPIA”. These systems were devised to self-regulate the balance of responsibility for spill compensation between shipowners and oil receivers.

LOF, whilst a commercial contract, also performs important functions in delivering environmental protection through salvage. In 1990, for example, a new LOF gave immediate effect to the Article 14 Special Compensation system introduced by The Salvage Convention, adopted in the preceding year. The new LOF gave immediate effect to the wishes of International Maritime Organization member governments. It avoided years of waiting for the Convention’s entry into force conditions to be fulfilled.

LOF was also used to introduce the industry’s more effective successor to Article 14: SCOPIC remuneration. SCOPIC is the latest form of safety net, protecting the salvor from potentially heavy loss when responding to a casualty. In the same way, LOF 2010 could introduce a system of Environmental Salvage Awards many years before such a change could take effect via a new Salvage Convention.

Pollution prevention services benefit the marine environment, coastal communities and governments. These benefits would grow under a system of Environmental Salvage Awards. There would be greater protection against spills and, consequently, a further overall reduction in pollution. A greater salvage presence would benefit both shipowners and insurers. More commitment to salvage is money well spent. It means fewer large pollution events and lower total claims costs.

In summary, the introduction of a new system of remuneration – Salvage Awards for recovering property and Environmental Salvage Awards for preventing pollution – would deliver many benefits:

· It would reduce the number of spills.

· It would reduce the scale of financial, economic and environmental losses, and cut P&I pollution claims costs.

· It would address high-profile political and public interest concerns.

· It would reinforce the long-term viability of the salvage industry.

· It would contribute to the sustainability of marine emergency services.

· It would mean cleaner oceans and cleaner beaches.

There is the important question of whether the P&I Clubs would be prepared to support the proposals for Environmental Salvage Awards. On the face of it, they certainly should – as the proposed system provides a rare and valuable opportunity to reduce total pollution claims costs. In the ISU’s view, there is scope for achieving significant savings, through the development of environmental salvage. One certain way of sharpening focus on pollution prevention is to introduce a new financial incentive: the Environmental Salvage Award.

During 2004/05 alone, members of the International Group of P&I Clubs paid out over USD 300 million in pollution claims. The Clubs are paying much too much! An investment in Environmental Salvage Awards would help to reduce pollution claims costs. This would benefit Club members and would complement the principles of mutuality. It is surprising that the initial reaction of the Clubs is largely negative, as this appears to conflict with the interests of their shipowner members. Perhaps the best way forward is to introduce the new system for a trial period and then monitor its impact on total pollution claims costs.

The property insurers, responsible for funding Article 13 Salvage Awards, are broadly supportive. They have a direct interest in fostering a strong salvage industry. They also see the proposed new remuneration system as an opportunity to inject greater equality into current arrangements for meeting salvage costs.

Coastal States, of course, are the ultimate beneficiaries of the salvor’s pollution prevention service. They should welcome the revision of current arrangements, to place greater emphasis on protection of the environment.

Enhancing the contract

LOF is a contract promoting response efficiency. Nevertheless, there is always room for improvement. In the area of education and awareness of the contract’s advantages, for example, salvors and their industry partners should do more to promote greater understanding of LOF, its function and benefits.

This is especially important when it comes to perceptions of fairness. For example, it is little understood that most LOF cases are settled amicably. Around 30 per cent go to arbitration in London. Arbitrations are heard by a single Arbitrator, drawn from a small group of highly experienced Salvage Arbitrators appointed by Lloyd’s. Should settlement evade the parties, the commercial issues are resolved by the Arbitrator (or the Appeal Arbitrator, if an appeal is lodged).

Cost-effectiveness is another important issue when it comes to perceptions of the contract. There have been recent innovations in the administration of LOF, with the aim of enhancing the contract’s cost-effectiveness. For example, Lloyd’s has introduced a new “short form” of arbitration. This is a fixed cost procedure for smaller cases where the total security is not more than USD 1 million. The ISU has proposed that the current threshold for the Fixed Cost Arbitration Procedure should double to USD 2 million, in order to encourage greater use of this cost-effective form of arbitration.

The ISU itself has also taken an important initiative. It has developed a LOF website (www.lof-at-isu.com) providing important LOF-related information and material for casualty response training and assistance in actual emergencies. The website was commissioned earlier this year and has some 2,000 shipowners and ship managers as registered users.

The IMO’s role

It can take many years to introduce a new international convention. For example, The Salvage Convention, 1989, replaced The Salvage Convention, 1910! Hopefully, the 1989 Convention will be revised over a shorter timescale, perhaps during the next decade.

The revision of the 1989 Convention would provide a good opportunity to recognise the many industry changes over the past two decades. These include the replacement of Article 14 Special Compensation with the more workable SCOPIC arrangements. The drafting of a new Convention would also provide an opportunity to establish an inter-governmental framework for Environmental Salvage Awards. This might involve the establishment of an International Environmental Salvage Fund, with contributions from the Coastal States who are the ultimate beneficiaries of pollution prevention services.

A revised Salvage Convention could include a new Article 14, providing for Environmental Salvage Awards in parallel with Article 13 Salvage Awards for property recovery. This concept should find ready acceptance amongst the international community, on grounds of its cost-effectiveness. Payments for prevention are always much lower than the costs associated with clean-up and compensation, whenever a spill occurs.