IG’s Salvage Committee releases salvage service report

The International Group’s Salvage Committee has published a report which provides a review into Delays in the Contracting of Salvage services in Marine Casualties.

The report follows the decline over several years into the use of Lloyd’s Open Form (LOF) – a standard form contract that provides a regime for determining the amount of remuneration to be awarded to salvors for their services to a vessel in distress after the event. This had given rise to a concern within the IG that the declining use of LOF might signal an increasing threat to the safety of life, the environment and property at sea as a result of delays in the engagement of emergency salvage services whilst alternative contracts are explored and negotiated.

IG commissioned Hugh Shaw (former UK SOSREP) to conduct an independent, review investigating the possible direct and root causes for delays, and what changes could be made to minimize the risk.

Shaw observed that the prompt engagement of emergency responders to a marine casualty was paramount in minimizing risk to life, the environment and property.

The first LOF contract was published in 1908. It enshrined the principle of ‘no cure no pay’, enabling parties to agree on the immediate provision of salvage services to a vessel in distress without the risk of its situation deteriorating while terms were negotiated. In 1998, the Special P&I Clause (SCOPIC) was agreed to provide a safety net for salvors in circumstances where there was ultimately no salved fund or it was insufficient to cover their expenses.

Shaw said that there was a common acceptance that in the era of modern communication one of the principal reasons for the decline of the LOF contract was that it was possible for owners and/or their insurers to contract salvage services on terms they perceived to be more financially attractive.

The impact of the decline in using LOF was potentially far reaching. Existentially the salvage industry had questioned whether, in the long term, there would be the capability to respond swiftly and adequately to a marine casualty where there was a risk to life, property and/or the environment without the enhanced awards that LOF contracts provide for.

There was a growing concern that the declining use of LOF contracts also signalled an increasing threat to the safety of life and the environment. The threat was that of owners (or their insurers) delaying the contracting of salvage services to a vessel in peril as alternative options to an LOF contract were explored and negotiated.

Shortly after accepting and commencing this commission, Lloyd’s announced that it was considering whether to close its Salvage Arbitration Branch (LSAB) and leave the future administration of its LOF in the balance. That generated a significant pushback. Lloyd’s made a further announcement, recognizing the international maritime community’s support of LSAB and LOF, and stating that it was “determined to increase the use of the form and highlight the benefits that its use can bring.”

Lloyd’s was yet to provide detail on any future change or amendments, the Review decided to continue to seek feedback on its current usage and to seek views on alternatives, or options, should it not be available in the future.

Questionnaires were issued to more than 300 individuals and were completed by 120. However, although still represented, it was disappointing to note that the response from some regional H&M underwriter/broker markets and shipowners / managers, was lower than had been hoped.

It was found that delays were occurring and were on the increase. More than 80% of stakeholders felt that ‘avoidable delays’ in the contracting and engagement of salvage services might lead to the escalation of a situation to a point where significant damage, loss and/or danger to life might occur.

There appeared to be no single cause, or single party, responsible for such delays.

In the past it was generally accepted that, in an emergency and where there was a risk of danger to life and/or the environment, then the prompt selection of a post-reward contract such as LOF was in the interests of all the parties and that such a contract would lead to significant time savings.

Pre-award contracts, such as BIMCO TOWCON/TOWHIRE, would generally be the contract of choice for dealing with a vessel in no imminent danger and where there was no immediate threat to the crew or the environment.

In cases where uncertainty existed, prudent Masters, shipowners or their insurers, would err on the side of caution and opt for the contract they considered provided greater flexibility with little or no delay: this was likely to be the LOF, or an equivalent standard national form. Today, noted Shaw, things were a lot less clear.

The response to the survey confirmed that financial considerations significantly influenced the choice of contract, or salvage services provided. Shaw believed that this had an impact on delays – if not at the onset of the incident, then later on if the situation deteriorated.

In a corporate world many of the parties, including some shipowners and their insurers, sought to have greater certainty over costs. As a consequence, delays were more likely to occur at the onset of the incident as these parties endeavoured to minimize their financial exposure. Alternatively, delays might occur later on where changes occurred but, where a contract had been agreed with tight constraints around the salvage plan, said Shaw.

More than 54% of stakeholders considered that financial considerations were a very significant contributor to delays. An additional 32% felt that it was an important contributor.

Shaw said that he was “disappointed to hear reports that a ‘blame culture’ still exists in some organisations and that some underwriters felt that they would be blamed, with possible retribution, for making the wrong, or a more costly, decision regarding their choice of a salvage agreement.”

There was little doubt that the selection of a post-reward contract was favoured when a situation seemed likely to deteriorate. There was also recognition that such a contract could also lead to significant time savings.

“Surprisingly, nearly 50% may not have considered their risk of exposure to civil or criminal liability where there has been a failure of the parties to enter into a salvage contract promptly” said Shaw.

Several stakeholders felt that a post award contract, such as the LOF, could be used for all incidents. Equally, a number had a view that, if properly managed, commercial contracts could also meet all scenarios. However, the majority felt that each case should be considered on its own merits which should, but not always, lead to the most appropriate form of contract.

Shaw noted that it was clear from his findings that cultural differences, or different markets, might have a different approach. “Many respondents referred to the practices of the Scandinavian market and the ‘pro-active’ approach taken by their Hull & Machinery and P&I underwriters. There is evidence that, in some cases, salvors have been mobilized to incidents where no contract has been agreed. Whilst this may mitigate against delay, the risks need to be fully understood and such an ‘agreement’ also requires a great deal of trust between the parties”.

From the feedback Shaw received, he concluded that LOF was almost always considered. However, he thought that it was also dismissed ‘almost immediately’ by some parties – and, at times, without regard to the casualty or the potential of the situation deteriorating.

Shaw also noted a particular dichotomy, with some insurers offering both P&I and H&M products, where on the one hand members were warned about the risk of jeopardizing their P&I cover if they entered into a side agreement, but on the other hand H&M were using side letters to cap Article 13 awards.

In Shaw’s opinion, side letters or agreements did little to help build trust, openness and transparency between parties. “They may limit costs for some parties and, from my limited knowledge on the subject, they appear to do little to contribute towards a sustainable and competitive salvage industry.”

He did note that some held the opinion that, without the use of side letters, the usage of LOF would decline even further. His own view was that this went against the very principle of LOF and that, in the longer term, it would have a detrimental effect on both the salvage industry and those who would require its services when faced with a significant maritime casualty.

Shaw said that, if parties were looking for greater financial certainty, but also wished to have many of the benefits of the LOF, then perhaps there was a need for the LSAB to see if there was scope to accommodate change to the LOF that would represent an acceptable compromise to all parties.

Over recent years, as LOFs were being entered into with caps, or on commercial terms, there had been various suggestions regarding an “additional form” that could complement the LOF and be used for less urgent cases. One such suggestion mentioned frequently in the Review was the LOF “Light”.

Feedback suggested that initiatives such as LOF “Light” should be further explored/ However there was also concern that, unless integrated into the LOF itself, a future choice between LOF, LOF “Light” or another alternative contract could cause even more delays.

Shaw said that it was “abundantly clear that too much emphasis is placed on the cost and choice of a salvage contract, particularly during the early and critical stage of a casualty, with a view to parties extracting the best possible terms to their advantage”. It appeared on occasion that this is done with little regard or consideration for the casualty itself, he said.

While shipowners and their insurance underwriters understandably continued to seek to reduce their financial exposure when dealing with a casualty, Shaw said that it was “imperative that they fully understand the implications of their choice of contract, understand its benefits and/or limitations, and more importantly understand the consequences for themselves and potentially for others if the salvage services that they have procured do not meet the needs of the casualty within the time available”.

Shipowners/insurance underwriters also needed to understand fully the consequences and risks of a declining salvage industry and the potential impacts on preparedness and the state of readiness of salvage services and equipment in the future. If there were no competitive salvage industry, shipowners might have to arrange salvage services in their own name, fund their own salvage services, or live with the consequences when an accident occurred. This might in turn impact shipowners’ ability to attract insurance cover in the longer term if the risks were perceived to be too high.

One of Shaw’s recommendations was that LSAB conduct a study to assess the development of LOF awards over a minimum of the past two decades in order to analyse the size of awards and address the ‘perceived’ disparity between costs for a case where an incident is dealt with:

  • by means of a pre-award commercial contract
  • a standard LOF contract, and
  • an LOF with a side letter capping Article 13 award.

“I am of the opinion that there needs to be more openness and transparency if the LOF is to have a long-term future and that Lloyd’s need to address this divided opinion” said Shaw.

He also recommended that LSAB “make every effort” to see if either actual settlements/awards, settlement ‘ranges’ or realistic example / case studies could be published with a digital equivalent to the former Lloyd’s Open Form Digest, or equivalent, being considered.

LSAB was advised to ‘relaunch’ LOF to demonstrate that they had addressed industry’s concerns and had criteria that reflected a ‘fair award for the services rendered’ through a process with enhanced transparency that would be “universally acceptable”. Any initiative would also need to demonstrate that there are safeguards in place to prevent any abuse or misuse.

Shaw said that during the course of this Review he had been “extremely impressed by the initiatives being taken by some organizations and individuals to improve the level of preparedness to deal with a marine casualty”. However, he had also been “dismayed to see that not all parties share the same values. Some parties appear to measure the success of an incident not on the fact that there has been no loss of life, or damage to the environment, but on the basis that they have not exceeded their financial targets for the year.”

In a corporate world, some parties, including shipowners and their underwriters/insurers, seek to have greater predictability or certainty over costs and, consequently, delays were more likely to be incurred as they endeavoured to minimize their financial exposure. The level of danger facing the ship, and its crew, might not be immediately clear. By its nature, the response to a maritime incident was complicated and compartmentalized, with a shipowner relying on its property underwriters and liability insurers to advise on the best course of action. On occasions this advice could be conflicting and could result in delays as others were consulted, said Shaw.

Compartmentalisation often led to conflicting goals and, depending upon their relationships, could slow down effective decision making.

“Throughout the Review I have continually read evidence that has referred to a lack of transparency, lack of trust, the need for more openness, a reluctance to engage, a lack of synergy with parties looking after their own interests and there has been little evidence of stakeholders working together with a common goal of reducing, or minimizing the risk to life, the vessel, its cargo and the environment”, said Shaw

He said that it seemed clear that some parties within the industry had lost, or no longer valued, the ability to collaborate and work together. There also appeared to be a lack of accountability. This was to the detriment of all and needed to be addressed urgently, said Shaw.

Shaw also noted that, if LOF was not available as an option in the future, then it would most likely have a detrimental impact on prompt and effective decision-making, leading to a greater risk to life and/or to the environment.

Finally, Shaw observed that the salvage industry was a necessity and was the key first responder when marine casualties arise. The decline in LOF and the general decline of professional salvage contractors were real concerns. “If there is to be a healthy salvage industry going forward, able to respond globally with experienced personnel and suitable resources, key parties to salvage operations need to work together with the common objective of saving life, preserving ships and cargoes and protecting the marine environment, in the knowledge that there is adequate incentive to ensure that the salvors will still be available to provide the services that we all depend upon”, Shaw concluded.

The International Group said that it accepted the report’s findings and commended the recommendations to the global salvage and insurance industry.

The Group also took the opportunity to express its sincere thanks to Hugh Shaw for his dedication to this project.