ISU BRIEFING DOCUMENT
THE FUTURE OF LOF
Building foundations for the next 100 years
1. Lloyd’s Standard Form of Salvage Contract, otherwise known as Lloyd’s Open Form (LOF), celebrates its centenary in 2008. After 100 years of use in marine emergencies around the world, LOF remains the most frequently used form of salvage agreement.
2. The International Salvage Union (ISU) represents the global salvage industry. ISU members are responsible for well over 90 per cent of all salvage activity. In 1978 the ISU began to publish annual salvage statistics. In the 1978-2005 period, ISU members performed 5,135 salvage operations – 2,701 of which were carried out under LOF contracts.
3. LOF’s benefits become clear whenever there is a severe threat to ship, cargo and the environment. Lloyd’s administers the contract. The salvor’s reward is set to match the nature of the services provided, the risks faced by the casualty and successful outcome in accordance with criteria set out in Article 13 of The Salvage Convention, 1989. Awards are modest when the services are provided on a modest scale. Equally, the Lloyd’s Arbitrator will recognise the salvor’s achievement when prompt and decisive intervention prevents substantial property loss and environmental damage.
4. LOF’s origins date back to the 1890s and the efforts of Colonel Sir Henry Hozier, then Secretary to Lloyd’s, to reach an understanding with salvors in the Dardanelles/Black Sea region. This led to the introduction of a new system allowing the Committee of Lloyd’s, or the Committee’s appointed arbitrator, to adjust prices agreed for salvage services if the amounts were subsequently considered inappropriate. In this way, the sum could be increased or reduced.
5. It took almost two decades, however, for the concept of a standard form of salvage contract to take hold. LOF’s first edition was published in January 1908. Under what eventually became known as Lloyd’s Open Form, salvors reported the level of security that they required to Lloyd’s upon the completion of services. Regardless of whether or not an agreement provided for a fixed price, the final remuneration payable was determined by the Committee or its appointed arbitrator (unless, upon reflection, all parties were satisfied that the price agreed was fair).
6. LOF has been revised many times over the past century. This has ensured that the contract remains fresh and fit for purpose. The current edition, LOF 2000, is the tenth since 1908.
7. During discussions leading up to LOF 2000, salvors, P&I Clubs, shipowners and property underwriters sought to avoid the difficulties associated with unwieldy contracts. Consequently, LOF 2000 emerged as a streamlined contract. Lloyd’s Standard Salvage Clauses were published in a separate document for the first time. LOF 2000 contains only those key provisions actually required when responding to an emergency.
THE IMPORTANCE OF LOF
8. LOF is a unique contract. It can be agreed by the Master of a ship on behalf of the owner. The Master and owner of the ship have authority to conclude a LOF agreement on behalf of the owners of all property on board the vessel.
9. The agreement of LOF clears the way for a prompt response by the salvor. For many centuries his primary role was to save property – the ship and its cargo. Today, however, in most salvage operations the salvor’s most important task (beyond saving life) is the prevention of environmental damage.
10. For this very reason, LOF is more important today than at any time in its long history. Zero tolerance of marine pollution now has a firm hold on public and political opinion. LOF’s structure and function, as embodied in LOF 2000, reflects this priority. LOF is agreed, the parties set aside commercial interest and focus entirely on the goal of a successful salvage. In the modern world, of course, a successful salvage tends to be measured in terms of pollution prevention, rather than property recovery.
11. The use of LOF avoids “commercial haggling”. This is of fundamental importance: the avoidance of delays can make the difference between success or failure and, possibly, a pollution catastrophe. LOF gives the salvor the freedom to intervene immediately and use his “best endeavours” to prevent pollution and save property.
12. LOF is the ideal contract when there is an immediate threat to ship, cargo and the environment. The advantages of its use are obvious in an acute emergency, such as a fire or leakage of pollutants into the sea. In other words, LOF is the preferred solution when there is no time to lose.
13. Given these circumstances, it is important that people have confidence in LOF and the system’s ability to deliver a fair outcome.
THE CHALLENGES OF LOF
14. The International Salvage Union’s membership is engaged in commercial salvage. The services provided include marine casualty response and pollution prevention. These activities are increasingly exposed to political pressures. This largely reflects the high level of concern over the environmental damage arising from shipping accidents, especially those involving large, laden oil tankers.
15. LOF is a no cure – no pay contract. In the traditional manner, the salvor is rewarded with a share of “salved value” (the value of ship and cargo). This system operates on the principle of natural equity – first established in a marine salvage context over 2,000 years ago, in Classical Greece.
16. In recent decades governments have shown growing reluctance to rely solely on the commercial no cure – no pay contract for salvage and pollution prevention. As a commercial contractor, the salvor has the freedom to decide not to intervene if the financial risks are judged unacceptable under all-or-nothing, no cure – no pay terms. Governments came to recognise that the salvor needs an additional incentive, to moderate the full rigour of the traditional no cure – no pay system, in cases where there is a high risk of failure and/or little salved value. This led to the introduction of “safety nets” in various forms – all designed to protect the salvor from financial loss, and to encourage him to respond to all pollution threats, not just those casualties promising a satisfactory Salvage Award.
17. With this in mind, the more recent LOF editions – beginning with LOF 80 – included safety net mechanisms guaranteeing the salvor his expenses and providing for a degree of uplift on expenses, to reward success in preventing pollution.
18. LOF 2000, the latest edition, went further. It includes a new remuneration system for the one-in-five cases where a satisfactory, property-based Salvage Award is unlikely to materialise. This system, known as the SCOPIC (Special Compensation P&I Club) Clause, rewards the salvor on the basis of pre-agreed tariff rates for salvage tugs and other craft, portable salvage equipment and salvage personnel.
19. Despite such innovations, the long-term viability of the salvage industry remains uncertain. Higher ship standards and advanced technology have reduced casualty numbers and, in turn, the demand for salvage services. 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 accident off the Spanish coast. There can be no doubt that vital emergency services for saving ships and preventing pollution must continue. The central question is: how to fund these services in the longer term?
20. Any long-term solution must recognise, in some way, the environmental benefit of salvage services. Pollution prevention is more important than ever. This holds the key to the continuity of salvage and pollution prevention services in future years. It makes good sense to place a much greater financial value on spill prevention services, within a new system of “parallel remuneration”. Under such a system the salvor would continue to receive a Salvage Award for success in recovering property but, in addition, he would also receive a distinct Environmental Salvage Award for his success in preventing or minimising pollution damage.
LOF: THE NEXT 100 YEARS
21. There is a strong case for a new revision of LOF, to take full account of society’s zero tolerance of marine pollution. This is the obvious first step in preparing Lloyd’s Open Form for the future.
22. The ISU has proposed that Environmental Salvage Awards should be introduced through a new LOF. Given goodwill on all sides, it should be possible to reach agreement in this area within a three-year timeframe, to allow the adoption of “LOF 2010”.
23. Work should also begin on a revision of The Salvage Convention, 1989. The ISU has called on the Comité Maritime International (CMI) to begin drafting a new convention. Inevitably, this will take longer than the introduction of a new LOF – even allowing for the innovation of a dual-track Salvage/Environmental Salvage Awards system.
A NEW EDITION OF LOF
24. The maritime sector has been very effective in devising industry agreements concerned with the environment. It would have taken many years (possibly decades) to introduce these measures through the vehicle of international conventions.
25. Outstanding examples of such agreements include the tanker shipping/oil industry “TOVALOP” and “CRISTAL” arrangements, together with the more recent “STOPIA” and “TOPIA”. In effect, these systems self-regulate the balance of responsibility for spill compensation between shipowners and oil receivers.
26. LOF has performed a somewhat similar role in salvage and spill prevention. In 1990, for example, a new LOF edition gave immediate effect to Article 14 Special Compensation, introduced by The Salvage Convention, 1989. This avoided any delay in giving effect to the wishes of International Maritime Organization member governments. Inclusion of Article 14 within a new LOF avoided years of waiting, until the entry into force conditions of The Salvage Convention were fulfilled.
27. In a similar way LOF was used to introduce the industry’s more effective successor to Article 14: SCOPIC remuneration. SCOPIC is the latest form of “safety net”. LOF 2000 allows the salvor to invoke SCOPIC at any time.
28. In the same way, a LOF 2010 contract could be used to introduce Environmental Salvage Awards many years before such change could take effect through a new Salvage Convention.
29. The International Salvage Union’s first annual Pollution Prevention Survey was published in 1994. In the 13 years to end-2006 ISU salvors recovered over 13 million tonnes of pollutants from ship casualties, including over 10 million tonnes of oil.
30. The significance of this service is underlined by three catastrophic spills of recent times – the Exxon Valdez, Erika and Prestige – which resulted in the loss of 120,000 tonnes of oil and led to costs running into billions of dollars.
31. Environmental salvage services benefit the marine environment, coastal communities and governments. Inevitably, these benefits would grow under a system of Environmental Salvage Awards. There would be greater salvage protection against spills and a further overall reduction in pollution. A greater salvage presence would benefit both shipowners and insurers. More commitment to salvage is money well spent, as it means fewer large pollution claims.
32. The introduction of “parallel remuneration” – property-based Salvage Awards and Environmental Salvage Awards – would solve several problems at a stroke:
· It would enhance protection against potentially catastrophic spills.
· It would reduce the scale of financial, economic and environmental losses, including P&I pollution claims costs.
· It would address high-profile political and public interest concerns.
· It would contribute to the long-term viability of the salvage industry.
· It would contribute to the sustainability of marine emergency services.
· It would contribute to cleaner oceans and cleaner beaches.
A MORE EFFICIENT LOF
33. LOF is a remarkably efficient contract. Nevertheless, there is still scope for improvement. In the area of education and awareness, for example, salvors and their industry partners should do more to promote a greater understanding of LOF, its function and benefits.
34. It is also important to ensure that Salvage Awards are perceived to be fair, if confidence in the LOF system is to be maintained. Unfortunately, a view has taken hold – in some sectors of the industry – that LOF involves excessive costs. This reflects a misunderstanding of how LOF works.
35. Most LOF cases are settled amicably. Around 30 per cent go to arbitration in London. Arbitrations are heard by a single Arbitrator from a small group of highly experienced Salvage Arbitrators, who are appointed by Lloyd’s. Should a settlement evade the parties, the commercial issues will be resolved by the Arbitrator (or Appeal Arbitrator).
36. The Arbitrator ensures that the Salvage Award matches the scale and complexity of the service provided. This point is at the very heart of the LOF system. Indeed, it was the reason why the contract was devised in the first place a century ago.
37. It should be recognised that, even in a major case with a potential for catastrophic pollution, the salvor’s reward will be minor in relation to the huge costs of clean-up and compensation, had a spill occurred. At the other extreme, a brief, straightforward salvage service will result in an Award reflecting the minor character of the service provided.
38. ISU members have agreed that expectations should accurately reflect the level of service provided. In 2006 ISU members adopted a Resolution emphasising that salvage security demands should be realistic, as should settlement/Award expectations.
39. 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 the 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.
TOWARDS A NEW SALVAGE CONVENTION
40. In May 2007 IMO member governments adopted a new International Convention on Wreck Removal. Eighteen years previously, they adopted The Salvage Convention, 1989.
41. It can take many years to introduce a new convention. By way of 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.
42. Revision of The Salvage Convention, 1989, would provide an opportunity to recognise the dramatic changes seen over the past two decades, including the replacement of Article 14 Special Compensation with the more workable SCOPIC arrangements developed by industry. There would also be an opportunity to establish an inter-governmental framework for Environmental Salvage Awards. For example, this might involve the establishment of an International Environmental Salvage Fund, with contributions from Coastal States – who are the ultimate beneficiaries of the salvors’ spill prevention services.
43. A revised Salvage Convention should include a new Article 14, providing for Environmental Salvage Awards in parallel with the traditional, Article 13 Salvage Awards for property recovery. This concept should be readily accepted by the international community, on grounds of its sheer cost-effectiveness. Payments for prevention are always much lower than the costs associated with clean-up and compensation, whenever a spill occurs.