RENOS: A problem solved or created?

Clyde & Co’s Martin Hall and David Handley have written on the UK Supreme Court’s recent judgment on the total loss case Renos (IMN May 24th 2018 and elsewhere).

Two issues were before the court to decide.

The first issue concerned whether or not all costs incurred in salvage were to be considered as part of the total loss or simply those incurred after the notice of abandonment was served.

The second issue was whether those costs incurred as part of Special Compensation P&I Clause (SCOPIC) correctly fell within salvage costs to be included in a CTL calculation.

In relation to the first issue, the insurers argued that the costs of salvage prior to the notice of abandonment being served were already “sunk” and that it was a matter for the assured to elect between abandoning the ship to the insurer or incurring future costs in conclusion of the salvage services.  Under this hypothesis, should the ship be abandoned the salvage services incurred up to that point can have provided no benefit to the insurers as they have not prevented the insurers facing a loss. Ckyde said that the insurers sought to rely upon a very narrow construction of s.60 of the Marine Insurance Act in support of this argument.

The Court was unpersuaded by that argument.  The Court set out at some length the limited authority on this issue. Constructive Total Loss is not its own subset of loss; it is simply a partial loss which is financially equivalent to a total loss and may be treated as partial or total at the discretion of the assured.

As the Court stated:

“The costs of repairing the damage was in no way “adeemed” because part of it had already been incurred at the time when the notice of abandonment was given and action brought on the policy”.

The second issue was one of interest to many since the drafting of the SCOPIC, following the difficulties which arose out of the introduction of environmental duties and compensation under the 1989 Salvage Convention. The Court was asked to determine whether those costs incurred as part of SCOPIC correctly fell within salvage costs to be included in a CTL calculation. SCOPIC introduced a tariff-based system of remuneration for salvage services where salvors had conferred a benefit on the environment but the result for property interests was limited; thus their Article 13 remuneration would be limited or non-existent. Clyde said that “drafted in an era where environmental concerns and climate change were only starting to become mainstream concerns, SCOPIC is very much of its time”.

In practice, the clause had been used by some salvors as an ‘insurance’ in those cases where the values of the property constrained their remuneration under Article 13, but the services they provided were complex and costly.  Clyde noted that even commercial insurers had been turning to versions of the SCOPIC clause when engaging salvage services on commercial tariff rates in place of an LOF / Art 13 type remuneration.

The effect of the reforms in the 1989 Salvage Convention and the subsequent introduction of the SCOPIC clause was that environmental concerns and costs could no longer be easily (or perhaps at all) divorced from the costs of salving distressed property.

The criteria for assessment of a salvage award under Art 13 expressly included “the skill and efforts of the salvors in preventing or minimizing damage to the environment” and the salvors were under an obligation “to exercise due care to prevent or minimize damage to the environment”.

Under LOF the obligation upon the salvors was to exercise the more onerous duty of “best endeavours” to protect the environment.

Clyde noted that in modern salvage it was a rare occasion where salvors were not required to remove pollutants (such as bunkers) from a ship before the authorities would allow them to go on and remove the vessel and her cargo from the danger.

“It often appears that there is more political sensitivity from coastal authorities regarding potential bunker spills than in relation to the prospect of a wreck on their pristine shores”, said Clyde, adding that  the RENOS judgment should correctly be viewed against this backdrop.

The Court determined that SCOPIC costs should not be included in the calculation because they were based on the salvors’ Article 8(1)(b) obligations to minimize environmental damage for the property owners; a liability that they would be obliged to meet.

However, Clyde felt that “some rather unfortunate reasoning” was given in support of this conclusion in that the Court asked a hypothetical question about the use of an oil boom where two separate agreements were entered into, one for minimizing environmental damage and one for salvage. Counsel for the Claimants accepted that the boom costs would not have entered into the calculation for CTL purposes.

Clyde said that “it could be argued that this conclusion is based on a naivety about the real world in which salvors operate”, asserting that it was entirely probable that the hypothetical boom would have been required by the authorities and that, without its presence, no services would have been permitted or (increasingly) licensed, thus making anti-pollution measures an integral part of the overall services.

“The reality is that it is usually impossible to separate environmental costs from salvage costs in such a broad brush and rudimentary way”, said Clyde. Notwithstanding this, Lord Sumption stated:

“The two heads of expenditure [protection of property and prevention of pollution] have quite different purposes, only one of which is related to the reinstatement of the vessel. If they were truly indivisible, this might not matter. But the whole scheme of SCOPIC clause depends on their being separately identifiable, and the very fact that one is for hull underwriter’s account and the other for P&I Insurers shows they cannot be indivisible.”

He further stated:

“The fact that a prudent uninsured owner might have contracted with the same contractors for both the protection of the property and the prevention of environmental pollution does not show that both are part of the cost of repairing the damage. Neither does the fact that the charges under both heads are secured on the ship. The two heads of expenditure have quite different purposes, only one of which is related to the reinstatement of the vessel.”

Clyde observed that there was no reference to Clause 14 of SCOPIC in the judgment and it was not clear whether their Lordships were referred to it.

“14. Pollution Prevention: The assessment of SCOPIC remuneration shall include the prevention of pollution as well as the removal of pollution in the immediate vicinity of the vessel insofar as this is necessary for the proper execution of the salvage but not otherwise.”

Clyde noted that under Clause 14, if costs relating to the prevention or removal of pollution have been allowed as a SCOPIC expense, by definition they can only have been so allowed if they were necessary for the completion of the salvage operation, a factor that seems to run contrary to the line of argument accepted by the Court.

Clyde said that it appeared that much of the reasoning adopted by their Lordships was based on the practical need for a simplified accounting exercise to take place, much like when SCOPIC itself replaced Article 14.  “Whilst this might not actually reflect the practical or contractual reality, it has the potential to be a positive decision for both owners and insurers to the extent that it does at least provide certainty in very general terms as to exactly what can and cannot be claimed as part of a CTL calculation”, the authors said.

They also noted that a possible unintended consequence of the decision was that it might modify the way in which SCOPIC was used. Salvors might come under increasing pressure not to invoke SCOPIC, or to move onto commercial terms sooner if a CTL became a relevant consideration.

“If a move onto commercial terms is made sooner and those commercial terms clearly relate to the cost of non-pollution salvage services (which are regularly conducted under SCOPIC) the question arises whether those costs may then become relevant once again for the purpose of the CTL calculation”, said Clyde.

Given the line of reasoning adopted in the judgment, Clyde said that it was possible to envisage cases where it might be argued that all or part of an Art 13 award should be disregarded for CTL calculation purposes where it can be shown that work related to anti-pollution measures. “It is not difficult to imagine such an argument arising, for example, where an Art 13 award reflected a large amount of clearly identified out of pocket expenses incurred by the salvor in relation to anti-pollution measures”.

Clyde also observed that one of the most notable features of the Renos case was that none of the work carried out by the salvors under SCOPIC related to anti-pollution measures.

“It remains to be seen whether Knowles J (the High Court Judge to whom the matter has now been remitted to determine whether the vessel is a CTL) is able to reflect this in his findings whilst also complying with the judgment of the Supreme Court”, concluded the authors.