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Rule 42 Salvage

The Association shall cover liability for special compensation awarded to a salvor,

a pursuant to Article 14 of the International Convention on Salvage 1989; or

b pursuant to Article 14 of the International Convention on Salvage 1989, as incorporated into Lloyd’s Open Form of Salvage Agreement or into any other salvage contract approved by the Association; or

c pursuant to Special Compensation P&I Clubs Clause (SCOPIC) as incorporated into Lloyd’s Open Form of Salvage Agreement or any other ’No cure – No pay’ salvage contract approved by the Association.

 

Guidance

For further commentary see Chapter 14.3 of the Gard Guidance on Maritime Claims and Insurance. 

(A) ...liability...to a salvor... (Rule 42)
Traditionally, a person who voluntarily saves the property of others at sea is entitled at law to claim a salvage award from the owners of that property. The salvage award is based, inter alia, on the post-salvage value of the property saved, (which normally includes the ship, cargo, containers, bunkers and freight at risk), the degree of danger involved, the degree of skill applied and a number of other factors. The salvage award is payable by the owners and/or the insurers of the salved property in accordance with the proportion that the value of the particular property bears to the total value saved. The Ship’s proportion of such salvage award is insured under the Ship’s Hull Policy but the Association also has an active interest in relation to life salvage1 and liability claims that include a salvage element, e.g. claims that may be brought by cargo interests against the Member for reimbursement of their contribution to a salvage award,2 or to situations where the Ship is unable to recover cargo interests‘ proportion of the salvage payment or award because of a breach by the Ship of the contract of carriage.3 Finally, the Association has been increasingly involved with salvage operations ever since the entry into force of the1989 Salvage Convention which introduced the concept of environmental salvage (Art. 14) and the introduction of SCOPIC in 1999. 

Salvage has historically been based on the principle of ’no cure-no pay’ and the salvor has been required to bear in full the economic risk that is involved in rendering the salvage services. If the salvor failed to save any property, or if the property saved had no residual value, he received no compensation for the costs and losses that had been incurred by him in making the attempt. However, in the late 1970’s4 it was recognised that salvors ought to be encouraged if the prospects of an award based on the value of property salved were small or non-existent, to, nevertheless, undertake salvage services in order to prevent or reduce environmental damage. Therefore, provisions were incorporated into the Lloyd’s Open Form Salvage Agreement of 1980 that were intended to compensate the salvor for costs and expenses incurred by him in such circumstances, and this principle was subsequently developed in the 1989 Salvage Convention, article 14 of which introduced the concept of the ’special compensation’. Such special compensation is payable only if, and to the extent that, it exceeds the traditional salvage award based on the salved value of the property saved that is payable by the owners/insurers of the salved property. 

The method by which such special compensation was assessed proved in some cases to be very expensive and time-consuming, and one such case was taken all the way up to the highest court in England.5 Furthermore, hull and other property underwriters argued that it was more logical and natural for such liability to be covered under P&I insurance since the liability for environmental damage caused by the escape of oil or any other substance from the ship that had not been prevented or minimised by such salvage services would normally be covered by P&I insurers. Consequently, hull, property and P&I insurers6 developed the concept of the Special Compensation P&I Club Clause (SCOPIC) as an alternative method of calculating the compensation that was payable to salvors in such circumstances. SCOPIC may be included in the LOF or any other form of salvage agreement and can be invoked by the salvor at any time during the salvage services. However, unlike the ’special compensation’ which is payable under Article 14 of the 1989 Salvage Convention, SCOPIC provides for a tariff-based assessment and remuneration of the costs and expenses that are incurred by the salvor when undertaking the salvage operation. 

Whilst the concept of the special compensation and SCOPIC has done much to encourage salvors to take prompt action to protect the environment, the fundamental principle remains that salvage awards are still based primarily on the post-casualty values of the salved property and are payable by the owners/ insurers of such property. However, much of the risk of failure that had been borne by salvors in relation to such traditional salvage operations has now been transferred to shipowners and their P&I insurers. Therefore, Rule 42 is intended to make P&I cover available for claims that are made by salvors against shipowner Members for ’special compensation’. Rule 42.a provides cover for ’special compensation’ claims that are made pursuant to Article 14 of the Salvage Convention 1989, Rule 42.b for such claims when made pursuant to article 14 of the Convention as incorporated into a salvage contract, and Rule 42.c for such claims when made pursuant to the SCOPIC clause.

(B) ...special compensation awarded…pursuant to Article 14... (Rule 42.a)
Article 14 of the International Convention on Salvage 1989 entitles a salvor to special compensation, irrespective of whether the ship, bunkers or cargo are salved, where it can be demonstrated that the salvor intentionally ”carried out salvage operations in respect of a vessel which by itself or its cargo threatened damage to the environment”.7 An environmental threat in this context is defined as a threatof ”substantial physical damage to human health or to marine life or resources in coastal or inland waters or areas adjacent thereto, caused by pollution, contamination, fire, explosion or similar major incidents”.8 

The ’special compensation‘ is intended to compensate the salvor for the out of pocket ’expenses‘ that he has incurred in rendering the services, e.g. the cost of hiring personnel, vessels and equipment, and to allow him to recover a ’fair rate’ for his own vessels, men and equipment that have been reasonably used. If the salvor can demonstrate that the services that he has rendered did prevent or minimise damage to the environment, he may, at the discretion of the tribunal that is determining the salvage award,9 receive an additional award of up to 30 per cent of his expenses, which may also, in exceptional circumstances, be increased up to 100 per cent of those expenses. The factors that are taken into account when assessing the level of special compensation include the potential risk of damage to the environment that existed when the salvage services were being rendered, the degree of success, the skill with which the services were carried out, and the risks that were undertaken by the salvor. 

However, if the salvors have succeeded in salving property that has a residual value, they are then entitled to receive a salvage award that is calculated with reference to the salved value of such property. That award is payable by the owners of the ship and cargo and any other salved property in accordance with the proportion that the value of the particular property bears to the total of the value saved, and payment will normally be made (subject to any deductible) by the insurers of the hull and cargo. In such circumstances, special compensation, and consequently, P&I cover under Rule 42, is available only for the difference, if any, between the amount of any such salvage award and the total amount assessed as special compensation. 

(C) …Lloyd’s Standard Form of Salvage Agreement…or any other salvage contract approved by the Association… (Rule 42.b)
Cover is available under Rule 42.b where the International Convention on Salvage 1989 does not apply by force of law, but is adopted by agreement into a salvage contract, e.g. in a Lloyd’s Open Form of Salvage Agreement (LOF).10 

Cover is also available where Article 14 of the 1989 Convention is incorporated into salvage contracts other than LOF provided that the terms of such a contract, or similar terms, have been approved by the Association. 

(D) ...the Special Compensation P&I Club Clause (SCOPIC)... (Rule 42.c)
The Special Compensation P&I Club Clause (SCOPIC) was introduced in 1999 and is intended to be used in conjunction with LOF salvage contracts. However, the clause was developed, drafted and agreed in response to the specific concern that was expressed by salvors when engaged in salvage operations and, therefore, it is not suitable for use in the context of other response activities, such as pollution clean-up. The clause has subsequently been revised in 2000 (SCOPIC 2000), 2007 (SCOPIC 2007), 2011 (SCOPIC 2011) and 2014 (SCOPIC 2014) mainly to take account of increased tariff rates. Parties need to consider when concluding a LOF salvage agreement, whether or not to include the SCOPIC clause since, if it is included, the salvor is entitled to invoke it unilaterally at any time during the salvage operation and regardless of the circumstances. 

SCOPIC provides a fixed tariff11 for the use that is made by the salvor of his salvage vessel’s equipment and his manpower as from the time that SCOPIC is invoked. Furthermore, the salvor is entitled to an increased tariff of 25 per cent for most types of expenses. In this way, SCOPIC provides the salvor with a financial ’safety net‘ and the encouragement to render services although the prospect of earning a traditional salvage award is low or non-existent. 

However, the invocation of SCOPIC does not rule out the prospect of earning a traditional salvage award under Article 13 of the 1989 Convention. There is an important linkage between the traditional form of salvage award and the remuneration that is payable under SCOPIC, which may have a fundamental bearing on the Association’s liability pursuant to Rule 42.c:

  • If the salvor has invoked SCOPIC, but the Article 13 award nevertheless exceeds the assessed SCOPIC remuneration (including the 25 per cent mark-up), the shipowner Member has no liability to pay SCOPIC remuneration and, consequently, the Association has no liability to reimburse him pursuant to Rule 42.c. Furthermore, the Article 13 award that is payable by the insurers of the property that has been salved in such circumstances will be discounted by 25 per cent of the difference between that award and the amount of SCOPIC remuneration that would have been earned by the salvor had he invoked SCOPIC on the first day of the salvage operation. This is intended to discourage salvors from invoking SCOPIC in circumstances where it is inapplicable.
  • If the salvor has invoked SCOPIC and the Article 13 award is less than the assessed SCOPIC remuneration (including the 25 per cent mark-up), cover is available under Rule 42.c for the amount by which the SCOPIC remuneration exceeds the Article 13 award. In other words, cover is available under Rule 42.c for the full SCOPIC remuneration only in circumstances where there is no Article 13 award, i.e. there are no salved property values on which a traditional salvage award can be based. 

Therefore, the Association faces its biggest exposure when, in the case of complex and dangerous salvage operations that require significant pollution prevention or mitigation measures to be taken, the salvor has invoked SCOPIC on the first day and committed very expensive resources for a long period of time, and the salvage operation fails in the sense that no property is salved and no traditional salvage award can be made.12 

The shipowner is obliged, pursuant to SCOPIC, to provide security to the salvor within two working days after the salvor has invoked the SCOPIC clause. The amount of security is initially USD 3 million, inclusive of interest and costs but can be subsequently increased or reduced upon the request of either party. Pursuant to the Code of Practice that has been agreed between the International Group of P&I Clubs and the International Salvage Union, salvors have agreed to accept such security in the form of a letter of undertaking from the P&I club in which the vessel is entered, which club will not refuse to provide such security except in cases where the member concerned is in breach of the club’s rules.

Finally, SCOPIC entitles the owners of the property to which salvage services are being rendered to appoint a Special Casualty Representative (SCR) to monitor the measures that are being taken by the salvor and the resources that are being utilised in the operation. The SCR also has the important responsibility to monitor the expenses that are being claimed by the salvor pursuant to SCOPIC and to assess whether they were reasonably incurred having regard to the nature and dangers of the operation.

 

 

1 See Rule 33.
2 See Rule 34.1.a.
3 See Rule 41.
4 This was highlighted in the case of the oil tanker AMOCO CADIZ off the coast of Brittany, France in 1978.
5 The NAGASAKI SPIRIT collision with the OCEAN BLESSING (1997) 1 Lloyd’s Reports 323.
6 See the Guidance to Rule 38 concerning cover for pollution liability.
7 Article 14.1 of the Convention.
8 Article 1 (d) of the Convention.
9 This is usually an arbitrator appointed pursuant to Lloyd’s Open Form.
10 Recent editions of LOF incorporate the International Convention on Salvage 1989 and provide that disputes between salvors and owners of salved property are to be resolved pursuant to English law and London arbitration. The recent LOF 2011 does not make any fundamental changes to the existing LOF regime but provides that all agreements to use the LOF form are to be reported to Lloyd’s and that details of LOF awards are now to be made publicly available on the Lloyd’s website. The accompanying Lloyd’s Standard Salvage and Arbitration Clauses (LSSA) firstly, enables the salvor to claim security not only for the amount of the award itself but also for the arbitrator’s fees and costs and secondly, in the case of container ships, to give notice of the salvage operation to the cargo insurers rather than to the cargo owners themselves, thereby minimising the need for multiple individual notices. The terms of LOF 1980, 1990, 1995, 2000 and 2011 are approved by the Association and therefore, these contracts do not need to be submitted to the Association for approval.
11 Pursuant to SCOPIC 2007 the tariff rates have been increased for LOF Agreements entered into after 1 July 2007. Rates for tugs and other craft have increased by 25 per cent, rates for salvor’s own portable salvage equipment by 15 per cent, and rates for personnel have increased by 5 per cent (following an earlier increase of 10 per cent introduced with effect from 1 January 2006).
12 Where the Ship has no residual value, it is likely to be accepted by the hull underwriters as a constructive total loss and, as such, will become a wreck. In such a case, and where the Member has a legal liability to mark, secure, raise and/or remove the wreck, cover is available under Rule 40 for such liability, as well as for any ensuing costs and expenses related thereto.

 

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