The shared responsibility of shipowners, salvors and insurers to work together in marine casualty response
By John Witte, President International Salvage Union
Marine casualty is traumatic. It might present danger to life; the environment may be threatened and property is at risk – both cargo and the vessel. Handling a casualty situation well can mean the difference between life and death and also between a modest or a very great loss. There has been a trend in the last two decades towards a reduction in casualties which is to be welcomed. SOLAS, improved operational practices and training; better ships; better inspection and port state control have all played their part. But casualties can and will continue to happen, not least because the human element is still the most important factor in maritime incidents. US Coastguard research shows that the root cause of more than 75% of casualties are human factors.
Marine salvors, most of them members of the International Salvage Union, the global trade association for the industry, stand ready around the world to intervene and provide services to casualties. The latest statistics form the ISU show that the total number of services recorded in 2015 was 212. It is the second highest since 1999 – there were 249 services in 2014.
Effective cooperation from all those involved in casualty response is essential for success. Many different organisations have their part to play and may have differing interests but they should share the same objective. Central to the mission is the salvor who must use “best endeavours” to salve the vessel. Today we like to describe salvors as “loss mitigation partners”. Prevention, or reduction, of loss is the salvors’ goal.
However in recent years we have seen significant shifts in the nature of the salvage industry. It is no longer common for salvage operators to place salvage-specific vessels at strategic locations, waiting for their services to be called upon. And the ownership of salvage companies has changed, as well. Family owned firms used to dominate, today more are in public ownership or are units of large international industrial groups. Regardless of the ownership model, planning for investment remains difficult because of the fluctuations in income that are common in the industry.
Gross revenues for ISU members in 2015 from all activities fell, for example, to US$ 717million from US$ 775 million in 2014. The number of operators has increased and in some parts of the world, such as South East Asia, there is over capacity of supply of salvage services. It means that, at a time of depressed shipping rates and with a low oil price making assets more usually employed in the offshore sector readily available, salvors are increasingly willing to work on commercial terms and day rates rather than using traditional contracts. The ISU statistics show a significant drop in all “dry” salvage revenues to US$ 181 from US$ 327 in 2014. That is offset to some extent by a corresponding rise in income from wreck removal activity – often driven by the increasingly stringent requirements of the the coastal state authorities.
The traditional salvage contract is the venerable Lloyd’s Open Form (LOF). It is a “no-cure, no pay” contract under which the parties do not negotiate a price for the job but agree to settle once the job is done, with the salvor entitled to a payment based on the value of the property (ship and cargo) saved from peril. LOF has been in use in various editions for more than 100 years. However it is used considerably less than today than in the past.
2014 saw the lowest annual number of LOF cases on record – 37 – and this may be reflected in the 2015 ISU statistics. Revenue from Lloyd’s Open Form (LOF) cases at US$ 83 million in 2015 is the lowest in more than a decade. At the same time, revenue from operations conducted under contracts other than LOF was the second highest at US$ 98 million and shows a gently rising trend.
Revenue from LOF cases has fallen to below 50% of the total of all “dry” salvage revenue for the first time – 46% in 2015 (55% in 2014). Similarly, the number of LOF cases as a percentage of all “dry” salvage cases is the lowest at 16% in 2015 (23% in 2014). It reflects the increasing trend to use other commercial contracts and terms in place of LOF.
In the early 1980s there were more than 250 LOFs each year, today that number is more like 50. Salvors know that the days of more than 100 LOFs per year are long gone but ISU believes that in many situations it remains the best emergency response contract and has great benefits.
Chief among the benefits is that it is very simple with pro-forma clauses and enables rapid intervention without the delay of “up front” negotiations. Speed is nearly always critical in the response to an evolving casualty situation. And nearly all the commercial risk of the operation rests with the salvor.
Since 1999 LOF has always included the possibility of the so called SCOPIC Clause (Special Compensation P&I Club Clause). This can be incorporated into any LOF and then invoked by the salvor according to the circumstances. It allows for the salvor to be paid on a time and materials basis if the chances of successfully salving the vessel are slim or the salved values are likely to be low. In this way salvors are still encouraged to assist in cases in which the “no cure, no pay” principle might otherwise discourage them.
The fact that some 75 % of LOFs are settled amicably surely indicates that the model works. Those that are not settled are concluded by a respected process of arbitration in which an experienced arbitrator assesses a fair award based in the values involved and the circumstances of the job. The ISU statistics show that the average value salved in LOF cases has remained reasonably consistent at US$ 19 million in 2015. The figure has stayed within the US$ 15 – 25 million band since 2010. Average LOF revenue for the salvor expressed as a percentage of average LOF salved value was 13%.
The reasons for the decline in the use of LOF are much debated. Commentators tend to think that it is due to lack of understanding of the contract by some insurance underwriters and owners; a perception that it is too expensive and favours the salvor; that improved communications and management practice means that decision that were once taken by the master of the distressed vessel are now taken ashore where the owners and insurers intervene to determine the way assistance is provided – often by seeking to negotiate commercial terms with contractors.
ISU is working with Lloyd’s to support the contract and to try to improve understanding of its benefits.
On of the key requirements is for all parties to use the right contract for the right situation. There have been concerns over past years about the reputation of the salvage industry. There has been a suspicion that some salvors have not been playing fairly with owners, insurers and, indeed, with other salvors. ISU is resolute that it will not tolerate unethical practice and will use its code of conduct to tackle abuses.
Equally, ISU expects other parties – the owners and their insurers to be fair to salvors: to contract in a sensible way that is in the best interest of all parties. In the same way that LOF should not be used in some circumstances and therefore should not be offered by the salvor in those circumstances it is not fair or right that insurers might try to exploit commercial pressures to encourage a salvor to use terms that are not best for the operation at hand or in the long term interests of the shipping industry. Because, put simply, if salvors are not able to make a decent return for their efforts and investments then provision of professional salvage services may well be eroded. And there should be no doubt that, in most cases, it is only the commercial salvors who stand between a casualty and a catastrophe.
Trust and transparency need to improve. ISU has made efforts over the past three years to build its relations with the property insurers, principally through contact with the International Union of Marine Insurance (IUMI) and the International Group of P&I Clubs. Using the right contract in the right situation is very important and owners, insurers and salvors are committed to improving their understanding of each others’ needs and preferences. ISU believes it is the key to improving trust on both sides.