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No cure – no pay

The first modern text of the Lloyd’s Standard Form of Salvage Agreement (universally known as Lloyd’s Open Form, or LOF) was adopted in 1892. By 1908 the text had been standardised. Since then LOF has undergone 11 revisions; the current edition is LOF 2011, introduced in January 2011 (see ‘The Origins of Lloyd’s Form’ for a history of LOF).

The LOF contract continues to evolve, to meet changing circumstances and new concerns. Most recently, and since the ratification of the International Convention on Salvage 1989, the priority is given to protection of the marine environment.

LOF is the most widely used “no cure-no pay” salvage contract. In return for salvage services, the salvor receives a proportion of the “salved value” (the value of the ship, its bunkers, cargo and freight at risk). Traditionally, reward depends upon success and the recovery of property. In the past, if there was no recovery, there was no payment, whatever the expense of the operation. This has changed in recent years, to reflect the public interest in prevention of damage to the environment. The salvor can now contract in such a way that he is shielded from loss when responding to high risk or low value casualties.

There are various alternative “national” forms of salvage contract, such as the Japanese Form, Beijing Form, Moscow Form and Turkish Form. LOF, however, remains the internationally preferred contract. Since the year 2000, ISU members have performed around 1,000 LOF operations with a total salved value of just under US$20 billion. A further 2,000 salvage operations were conducted on other terms and some 1,200 wreck removal operations were completed. These figures show an active industry essential to the protection of the environment and mitigating the losses of shipowners and their insurers.

LOF is administered in London by Lloyd’s Salvage Arbitration Branch. The contract is designed to encourage instant action to save ships and cargoes, by avoiding delays that might otherwise arise from protracted commercial negotiations. The resolution of disputes, together with the assessment of the salvage award, is deferred until the salvage task is completed. The parties can get on with the job, safe in the knowledge that, at the end of the day, there will be a fair and just conclusion.
There are around 50-80 LOF cases notified to Lloyd’s each year of which only 25%, on average, are arbitrated. The majority are settled commercially, on an amicable basis, usually with a significant saving in both expense and time. ISU members are expected to be realistic in their security demands and Award/Settlement expectations in cases involving modest and straightforward salvage services.

The salvage award, a proportion of the salved value of the property recovered by the salvor, is fixed by an experienced Arbitrator appointed from a panel of Lloyd’s Salvage Arbitrators. The Arbitrator applies an internationally accepted set of criteria in order to assess the award. The criteria take account of many factors, including: the degree of danger; the value of the property salved; the skill and effort in preventing damage to the environment; the expenses incurred; the level of service provided; and the salvor’s long term investment in tugs and other vessels and equipment which may be required on an infrequent basis.

The LOF 80 (1980) edition of the contract moved beyond the traditional no cure-no pay concept, by providing a “Safety Net” for salvors responding to laden, or partly laden, oil tankers requiring salvage assistance. The “Safety Net” guaranteed that the salvor’s expenses would be paid in the event that the value of the salved property was insufficient to provide for a normal salvage award. In addition, the salvor received an increment of up to a maximum of 15 per cent of his expenses, if he succeeded in preventing or mitigating pollution.

LOF 80 was something of a stop-gap. Article 14 of The Salvage Convention 1989 introduced a new incentive scheme, known as “Special Compensation”. This becomes payable by the shipowner when the salvor has prevented or minimised damage to the environment, and the value of the salved property is insufficient to provide for a normal salvage award. The scope of this incentive was increased, by making it applicable to any vessel and cargo threatening damage to the environment. Furthermore, the potential increment on expenses, to reward success, was increased to a maximum level of 100 per cent. Whereas LOF 80 applied in all waters, however, this Special Compensation was restricted to salvage services in “coastal waters and areas adjacent thereto”. The LOF 90 contract (superseded by LOF 95, LOF 2000 and LOF 2011) gave immediate effect to Article 14.

Special Compensation proved to be a time-consuming scheme and there were difficulties in assessing the amount due under Article 14. As a result, an alternative system for Special Compensation remuneration, known as SCOPIC (Special Compensation P&I Clause), was developed by salvors, P&I Clubs (the shipowners’ liability insurers), underwriters and shipowners. SCOPIC is straightforward. It may be invoked by the salvor at any time (but with financial penalties if SCOPIC is invoked in inappropriate circumstances). There is no requirement to demonstrate the existence of a pollution threat in a particular geographic area. Remuneration is based on pre-agreed tariff rates. SCOPIC took effect in August 1999. The latest edition is SCOPIC 2014. SCOPIC is invoked in around 30% of LOF cases and, since its introduction, only nine SCOPIC cases have gone to arbitration out of a total of 329.