Fair Contracting in Casualty Response

The last three decades have seen a significant reduction in marine casualties which is to be welcomed by all. Better ships; better inspection and port state control; the SOLAS convention; improved operational practices, liability concerns – both civil as well as criminal – and better crew training have all played their part. Nevertheless casualties will continue to happen, largely because the human element is still the most important factor in maritime incidents. U.S. Coast Guard research shows that the root causes of more than 75 percent of casualties are human factors.

In today’s highly regulated world, when there is a casualty, cooperation between all those involved in the response effort, is essential for success. Many different organizations have their part to play and may have differing perspectives, but they should share the same objective. At the heart of any salvage response is the marine salvor that must use “best efforts” to salve the vessel. In this regard, Salvors should really be described as “loss mitigation partners” because prevention, or reduction, of loss is the salvors’ primary goal.

Recent years have seen major changes in the salvage industry. It is no longer normal practice for salvage operators to place salvage-specific vessels at strategic locations, waiting for their service to be called upon. The days of having a salvage tug “on-station” are over. The ownership of salvage companies has changed as well. Family owned firms used to dominate the industry. Today more salvage service providers are in public ownership or are subsidiaries of large international industrial groups. Planning for investment also remains difficult because of the fluctuations in income, which is the norm in the industry. 

However, marine salvage remains a vibrant sector and the members of the International Salvage Union (ISU), the global trade association for the industry, stand ready around the world to intervene and provide a response to a casualty situation. The latest statistics from the ISU show that the total number of services recorded in 2015 was 212. It is the second highest total since 1999 – there were also 249 services in 2014. 

Gross revenues for ISU members in 2015 from all activities were reported to be $775 million in 2014, which was a slight decrease from the previous year. The number of operators has increased and in some parts of the world, such as Southeast Asia, it could be said there is over-capacity of salvage service providers. With shipping rates depressed and a low oil price making offshore assets readily available, for spot services, salvors are increasingly willing to work on commercial terms and day rates rather than using traditional contracts in an effort to keep their equipment and personnel working. 

The traditional salvage contract is the 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 the payment or “award” 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, taking account of the circumstances in which the service was provided. LOF has been in use in various editions for more than 100 years. However, it is used considerably less today than in the past. 

While a good year as related to overall services provided, 2014 saw the lowest annual number of LOF cases on record – just 37. Revenue from Lloyd’s Open Form (LOF) cases was $83 million in 2015, not coincidentally the lowest in more than a decade. At the same time, revenue from operations conducted under contracts other than LOF was the second highest ever recorded at $98 million and shows a gently rising trend. By comparison, a typical year in the early 1980s might have seen more than 200 LOFs. Salvors know that the days of more than 100 LOFs per year are long gone but the ISU believes that, in many situations, the LOF remains the best emergency response contract available today and has great benefits for both the owner and the salvor. 

It is a simple contract with pro-forma clauses and it enables rapid intervention without the delay of “up front” time consuming negotiations. Speed is nearly always critical in any response to an evolving casualty situation. And nearly all the commercial risk of the operation rests with the salvor. 

Since 1999, LOF has included the possibility of the incorporation of the so-called SCOPIC Clause (Special Compensation P&I Club Clause). This clause can be added to any LOF and then invoked by the salvor according to the circumstances. It allows for the salvor to be paid on a time and material basis if the chances of successfully salving the vessel are slim or if the salved values (hull and cargo) 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 percent of LOFs are settled amicably indicates that the model works. Those that are not settled are handled by an established arbitration process. While the arbitration process has at times been considered slow, efforts are being made by Lloyds of London, the International Group of P&I clubs and involved organizations like the ISU, to streamline and speedup the process.

There is speculation in the industry about the reasons for the decline in the use of LOF. Some observers 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 favors the salvor; while others are of the opinion that improved communications and management practice means that decisions 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. The reasons may vary, but the fact remains that the use of the LOF is on the decline.

ISU is working with Lloyd’s to support the LOF and to try to improve understanding of its benefits. ISU has also made clear the importance of the appropriate use of LOF – and other contracts. As President of the ISU, I am on record as saying that for all parties it is important to use the right contract in the right circumstances. ISU will encourage its members in this regard and will not tolerate bad practice or abuse of the LOF by its members. Equally, ISU expects other parties – the owners and their insurers – to be fair to salvors: to contract in a transparent way that is in the best interests of all parties.

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 nor in the long term best 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 will most certainly 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. 

(As published in the October 2016 edition of Marine News)