THE ENGLISH SALVAGE LAW LLOYDS OPEN FORM

Archie Bishop
Consultant
Holman Fenwick & Willan of Marlow House
Lloyds Avenue, London EC3N 3AL, England.

The programme for the conference suggests a difference between the American and
English law of salvage. In practice, whilst there may have been some differences in
the past, current salvage law is much the same, for the laws of both are based on the
1989 Salvage Convention. A convention which, as I understand it, has the force of
the law in the USA and, as a result of the Merchant Shipping Act 1995, is an integral
part of English law.
The paper of my colleague, Jim Shirley, addresses American law of salvage which, no
doubt, will deal in detail with many parts of the Salvage Convention. I will, therefore,
restrict myself to certain essential elements of the Convention which have affected
contractual salvage and in particular Lloyds Open Form of Salvage Agreement (LOF).
Before I begin we need first to distinguish between common law salvage and
contractual salvage.
By common law salvage I mean a salvage service performed by someone without a
contract who relies on the law of salvage to ensure he is paid for his services. It is an
important arm of the law which encourages people to go to the assistance of others in
difficulty at sea, notwithstanding the lack of a contract. Claims for a common law
salvage in the absence of agreement, are generally dealt with by the courts of the land
in accordance with the salvage law that prevails. In practice the number of salvage
cases bought before the American courts or the English Admiralty court, are very far
and between.
By contractual salvage, I mean a salvage service rendered by someone under the
terms of a contract which
(i) preserves the principals of salvage law as set out in the Salvage Convention
and


(ii) contractually obliges the contractor to salvage the property in danger, even
though this may prove, at the end of the day, unprofitable.
Contractual salvage does not, for the purposes of this paper, include work and labour
of contracts based on tariff rates which are outside the principals of salvage law as set
out in the Salvage Convention and do not limit the contractors reward by the need for
success or by the value of the property salved. The distinction is important for, as I
understand it, much work in the United States is done on these terms.
There are a number of standard forms of salvage contracts in use today which are
within the definition that I have given of contractual salvage. They include the
Japanese form, Beijing form, Moscow form, Turkish form, German form and US
form, but these contracts are generally only used by vessels and salvors who are in the
waters or who are nationals of, the particular countries concerned. The only
international standard form of salvage agreement in use is Lloyds Standard Form of
Salvage Agreement or Lloyds Open Form (LOF) and it is on this contract that I will
focus.
Firstly a little history which is always helpful in understanding the reasons for the
development and interpretation of a contract. LOF first came into use over a 100
years ago in the early 1890s. At that time a number of salvage services were being
rendered to ships in the Black Sea and Dardanelles and the London underwriting
market became concerned as to the manner in which cases were being resolved by the
courts in that country. They therefore entered into an arrangement with a number of
salvors who operated in the Dardanelles whereby any salvage services rendered
would, in the absence of an amicable agreement, be determined by way of arbitration
in London in accordance with the principals of English law. The arrangement was
successful and resulted in LOF being standardised and available for use on a
worldwide basis. The first printed form was in 1908. It, and its successors, have
proved to be a popular contract for it is:-

1. a form of contract which was easily understood and known to be fair to
salvors, seafarers owners and underwriters alike;



2. a contract which can be agreed without hesitation or negotiation thereby
enabling necessary salvage work to start immediately;

3. a contract with an administrative system and rules of conduct under which the
assessment of the salvage award and all disputes could safely be left to be
resolved after a successful operation had been completed;

4. a contract which avoids the arrest of ships and their consequent detention by
ensuring that security was given promptly at the conclusion of the salvage
services.
Since first established in 1908 the contract has been regularly revised and adapted to
meet the requirements of ship owners, cargo owners, their insurers and salvage
contractors. The current version, LOF 2000, is the 11
th


edition since the forms
conception.
A regular review is undertaken by the Lloyds Form Working Party which meets
annually. The Working Party is formed from representatives of all users of the
contract, ship owners, hull and cargo insurers, third party insurers and the
practitioners who represent the various parties at arbitrations. It is chaired by the
appointed Appeal Arbitrator on the Panel of Arbitrators who are appointed by Lloyds,
and administered by the Salvage & Guarantees branch of Lloyds itself. The Working
Party monitors, from its own experience, the effectiveness of the contract and from
time to time makes such amendments to the contract as it feels is necessary to keep
pace with changing trends and developments. In short the contract is adapted so that
it always fits exactly with what its users wants. As a result it has at times been
prepared to move ahead of existing current law. Examples of this are
1. The 1980 version (LOF 80) provided that contractors could limit their liability
in accordance with the 1976 Limitation Convention, notwithstanding that, at
that time, the Convention did not then have the force of law.
2. LOF 80 also broke, for the first time, the centuries old salvage principal of no
cure no pay by providing that if the salvage services involved a laden tanker,
the salvor, even if unsuccessful, would at least recover the very minimum of


his expenses plus an uplift of 15%. This was done to encourage salvors to run
to the assistance of seriously damaged tankers which were threatening damage
to the environment. It was the pre-cursor to Article 14 of the Salvage
Convention of 1989 which provided for special compensation whenever there
was a threat of damage to the environment.
3. Although the Salvage Convention was passed in 1989 it took time for it to be
enacted by participating nations and did not come into force until 1995.
Appreciating that maritime nations wanted to change the law but that
legislation putting it into effect would take time, LOF90 incorporated the
Salvage Convention which included the very important new provision for
Special Compensation under Article 14.
4. As a result of LOF90, there were a substantial number of Article 14 (Special
Compensation) claims in the ensuing years. Unfortunately experience proved
that the interpretation of Article 14 was not as easy as originally hoped.
Whilst the overall concept was thought to be good by all sides of the industry,
the difficulties of interpreting the precise meaning of Article 14 of the
Convention was defeating its very purpose, namely to encourage salvors to
proceed to the assistance of seriously damaged ships of low value which
threatened damage to the environment.

To correct the situation, all sides of the industry got together and developed a
new concept, the SCOPIC Clause (Special Compensation P&I Clause), which
was specifically designed to replace the Article 14 provision of the Salvage
Convention and make the assessment of the amount due to the contractor that
much easier. When LOF was revised, LOF2000 specifically made provision
for the use of the SCOPIC clause should the contracting parties so wish.
These are all examples of how Lloyds form has continuously been adapted to meet the
needs of all sides of the maritime industry and illustrates the benefits of having an
internationally renowned standard form of salvage contract.


Administration
Now let me tell you a little bit of the administration of LOF. As mentioned earlier the
contract was originally designed by Lloyds of London who set up an administrative
system to manage it. It was so successful that it continues to this day.
The Salvage & Guarantees Branch of Lloyds in London deal with all claims under
Lloyds Open Form. They are advised of new contracts as and when they occur and
arrange for security to be provided from the various contributing interests as and
when the services are concluded. They appoint a single arbitrator from a panel of six
arbitrators (including the appeal arbitrator) to oversee each individual case. If the
parties are able to reach an amicable settlement as to an appropriate figure for the
services rendered, they can at any time conclude matters but if not, the arbitrator will
adopt a hands on approach and ensures the case is progressed to arbitration as quickly
as possible.
The Lloyds Panel of Arbitrators are all from the Admiralty Bar in London. Without
exception they all have considerable experience in admiralty law, particularly salvage
cases. Each case is heard by a single arbitrator. If a party is unhappy with his award
he can appeal to an appeal arbitrator. The appeal arbitrator hears all appeals and thus
in effect controls and standardises the market by lifting, lowering or maintaining
awards of arbitrators.
Once the final award has been made, and if it is necessary, Lloyds will enforce the
security provided at the beginning of the case.
To facilitate the hands on approach of the arbitrators and to smooth the whole
arbitration process, every LOF contract is subject to the Lloyds Standard Salvage &
Arbitration clauses (LSSA clauses) which set out the administrative function of
Lloyds giving those functions legal effect, and procedural rules which govern the way
in which arbitrators handle the case and give essential guidance and uniformity to the
arbitrating procedures.
Awards
So much for the administration but what about the salvage award. How is it assessed?


In the absence of amicable agreement between the parties the award is assessed by an
arbitrator in accordance with English law which, as previously mentioned, is in
accordance with the Salvage Convention of 1989. In short the same law as applies in
the United States of America.
Article 13 of the Salvage Convention provides

Criteria for fixing the award

1. The reward shall be fixed with a view to encouraging salvage operations,
taking into account the following criteria without regard to the order in which
they are presented below:-

(a) the salved value of the vessel and other property;
(b) the skill and efforts of the salvors in preventing or minimising damage
to the environment;
(c) the measure of success obtained by the salvor;
(d) the nature and degree of danger;
(e) the skill and efforts of the salvors in salving the vessel, other property
and life;
(f) the time used and expenses and losses incurred by the salvors;
(g) the risk of liability and other risks run by the salvors or their
equipment;
(h) the promptness of the services rendered;
(i) the availability and use of vessels or other equipment intended for
salvage operations;
(j) the state of readiness and efficiency of the salvor's equipment and the
value thereof.

2. Payment of a reward fixed in accordance with paragraph 1 shall be made by
all of the vessel and other property interests in proportion to their respective
salved values.

3. The rewards, exclusive of any interest and recoverable legal costs that may be
payable thereon, shall not exceed the value of the vessel and other property.

As can be seen from Article 13, the assessment of the salvage award is not a
mathematical calculation but an informed judgment made after weighing in the
balance the above mentioned 10 criteria. Each case has to be assessed in accordance
with its own merits. However, you will see that there is a limit as to the amount of
any award. Subject to Article 14, to which we will come to in a minute, the award
should never exceed the value of the property salved. Thus, if no property is salved
there is no reward and even when the property is salved, the reward cannot exceed its
value even if the expenses of rendering a salvage service were more. This is, a very


heavy burden on the salvor and a strong incentive to salvage as much value as
possible, something which is of benefit to the property owner.
At this point it may help if I were to provide you with a few statistics which have
emerged from LOF cases in recent years.
Firstly, in recent times Lloyds are notified of about 130 LOF contracts each year.
There are undoubtedly a number of other LOF contracts of which Lloyds are not
notified because the parties have reached an early amicable settlement but there are no
statistics to show how many.
Of the cases notified approximately 70% are subsequently settled before the
arbitration process has been completed.
Of the cases which are arbitrated approximately 20% are appealed.
The average award in relation to salved value in recent years has ranged between 12
and 14% of the salved value. But please note there is a danger of this statistic being
misinterpreted. In cases where the salved value is very low and the salvors expense
high, a high percentage of the salved value can be awarded. In contrast where the
value is high and the service very short, the award can be of very low. The lesson to
be learnt from this is is, that no-one should apply the average salvage award to an
individual case.
Finally, the average case is usually concluded assuming there is no appeal
between 6 and 9 months of the termination of the services.
Special Compensation
As mentioned earlier, to encourage the salvor to proceed to the assistance of ships
which are seriously damaged and of low value, the Salvage Convention provided in
Article 14 that whenever there was a threat of damage to the environment, the salvor
should receive as a minimum:-
a) His expenses even if unsuccessful
and


b) Plus, if successful in minimising or preventing damage to the environment, an
uplift of those expenses of up to 100%.
As mentioned earlier, the provisions of Article 14 made the assessment or
quantification of special compensation, a difficult and complex exercise. To replace
it, industry devised the SCOPIC clause which, when incorporated into the contract,
replaces Article 14 by another mechanism based on tariff rates thereby making the
overall assessment almost a mathematical process. SCOPIC was only introduced in
1999 but has since proved to be very popular with all sides of the industry. Today,
whilst optional, almost every LOF contract is endorsed so as to incorporate its
provisions. Like its predecessor, Article 14 special compensation, SCOPIC provides
a safety net of a minimum payment which encourages the salvor to proceed to the
assistance of ships which are seriously damaged and of low value.
Whilst incorporated in almost every LOF contract, its provisions are only invoked in
about 20% of those cases.

Statistics show that the SCOPIC clause is incorporated in most LOF contracts that are
agreed today but it would seem its provisions are only invoked and come into effect,
in about 20% of those cases. When it is invoked the minimum payment due under the
contract can easily be calculated mathematically making subsequent disputes few and
far between. To date there have been about 45 cases in which the SCOPIC clause has
been invoked. Whilst some of those cases are still current, in only 2 cases has it been
necessary to proceed to arbitration. The clause therefore seems to be achieving its
objective of encouraging the salvage industry to proceed to seriously damage ships
which have low value, secure in the knowledge that they will receive a minimum
payment of a scale which is acceptable to them.
In conclusion, LOF has stood the test of time and today is the most favoured
international salvage contract. Not just by salvors but also ship owners and their
underwriters. It is known by almost every seafarer and ship owner and frequently
used by salvage contractors who operate internationally, including those based in the
USA. However, it would seem it is not a popular contract in the coastal waters of the
USA where the work and labour contract based on fixed tariffs appears to be
preferred. The reasons, I suspect, are cash flow and certainly, important


considerations for any commercial concern. Much of this has been overcome by the
introduction of the SCOPIC clause but there are many other advantages that LOF has
over most work and labour contracts and it may be useful to conclude by setting them
out.
1. LOF is a contract which can be agreed within minutes of any casualty without
the negotiation of rates or haggling as to terms, thereby permitting work to
commence without any delay.
2. It imposes on the contractor an obligation to use his best endeavours to
salvage ship and cargo (even though the contract may ultimately prove to be
unremunerative) which continues until the property is in a position and
condition of safety.
3. It reinforces the obligation of the contractor and a ship owner under the
Salvage Convention that the contractor shall use his best endeavours to
prevent or minimise damage to the environment.
4. The ultimate remuneration under the contract includes consideration of all
work undertaken to salve the ship, even that which was not envisaged at the
commencement of the contract, thus obviating the need to survey.
5. Subject to the special compensation or SCOPIC provisions, it is a no cure no
pay contract whereby the ultimate award cannot exceed the salved value.
6. Unlike most work labour and tariff based contracts the ultimate award is
apportioned pro rata to value between ship, cargo and other salved interest.
7. There is an established and proven mechanism for the provision of security
and arbitration in the event of dispute.
Whilst it depends on the precise terms of each contract, the above elements are
generally not applicable to work and labour tariff contracts.
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