Admiralty Law Part 13

Pursuant to the earlier topic of Introduction to Maritime Law in Malaysia, published on 22 February 2021, in the coming series the basis and elements of Admiralty Law will be explored.

The concept of salvage

1. 1989 Salvage Convention

   The 1989 Salvage Convention has the force of law under s.224 of the Merchant Shipping Act 1995 (MSA 1995). It is the starting reference point for the current English law of salvage. Consequently, earlier pre- existing salvage case-law needs to be assessed under the 1989 Salvage Convention. Where the Convention is unclear or silent, pre-existing English law can be used to clarify the unclear or silent points.
   The 1989 Salvage Convention applies in all cases where salvage matters are brought before an English court or an arbitration panel seated in England. It applies irrespective of the flag of the ship involved or the area of the sea in which the salvage operation was undertaken.
   The Convention applies to ‘navigable waters or in any other waters whatsoever’.

   However, the UK has reduced the geographical scope of application by excluding, through a permissible reservation, salvage operations that take place in UK inland waters where all vessels involved are vessels of inland navigation, and excluding salvage in inland waters where no ships are involved. The definition of inland waters provided within the same section excludes waters ‘within the ebb and flow’ of the spring tide and any docks connected with such waters. This brings the application of salvage law closer to what it was under pre-existing English law which did not cover salvage operations that took place in non-tidal waters. However, the reduction in the Convention’s scope concerns only the UK’s internal waters.

   Ships, craft and other structures capable of navigation, as well as other property not permanently and intentionally attached to the shore, can be the objects of salvage. Freight ‘at risk’ – in other words not yet paid or payable – is also subject to salvage. Pipelines and jetties are excluded from the operation of the salvage regime because they are permanently and intentionally attached to the shore. By contrast, cargo adrift or sunken can be the subject of salvage.

   Drilling platforms, whether floating, fixed or mobile, are expressly excluded from the application of the 1989 Salvage Convention when they are on location and engaged in their specific operation of drilling.

   However, while underway these structures are subject to salvage law. For an operation to fall under the definition of salvage the relevant property must be in ‘danger’. The 1989 Salvage Convention does not define the term ‘danger’. Under pre-existing English law the requirement was one of ‘real danger’, reasonably apprehended, and this also appears to be accepted as the correct interpretation under the Convention. The danger does not need to be present at the time of the sustained damage, provided that it is reasonably expected that it will arise before self-help can remedy the situation. Thus, a ship immobilised by engine failure is generally in danger, even if the weather is calm or it is anchored, unless it is possible to effect repairs within a reasonable time. Whether the vessel is in danger or not is to be decided objectively by the judge or arbitrator. The master’s opinion is not conclusive in this respect, even if they are the person who will request or accept an offer for salvage assistance.

   The salvor is under a duty to perform the salvage operation with due care and in doing so to minimise environmental damage and to seek assistance from other salvors if necessary. If the salvor fails to fulfil these duties it may receive a reduced reward or no reward at all.

   Under English law the salvor is also liable for damages caused to the property salvaged if negligent. The owners of the property in danger are under an obligation to cooperate fully with the salvor, to prevent or minimise environmental damage and to accept redelivery at a place of safety (Art.8(1)).

   The 1989 Salvage Convention is unclear on what the consequences are if the owners of the property or the master do not fulfil these obligations. Is the salvor entitled to a salvage reward or some compensation if the owner of the property fails to provide information of the cargo’s nature and as a result the vessel and the cargo are lost? Similar questions can be posed in respect of the environmental duties of the salvor and the owner or master. The 1989 Salvage Convention is clear that if there is no property salved then no salvage reward can be due (Art.12 and Art.13(3)). Thus, the only available remedies to the salvor would arguably be either breach of the salvage contract, if there is one, or the breach of the statutory duties under Art.8. However, the Convention does not specify such remedies.

   The obligation of the owners of property to accept redelivery, when the property is at a place of safety, is also problematic. The 1989 Salvage Convention does not define what a place of safety is. One could suggest a definition, e.g. a place of physical safety can be a place where the property can stay without being under immediate threat of the elements of nature even if it cannot be repaired and returned into service. Under pre-existing English law an interpretation requiring that the place of safety does not only need to be physically safe but also to have appropriate facilities to put the vessel back into service is the correct one. The problem of whether the meaning of the specific term should be interpreted under pre-existing English law or by seeking an international definition, and what this would be, remains unresolved.

   Under pre-existing English law the essential elements for the claim of salvage reward are: danger, voluntary services, and success in bringing the property to safety, or contribution to meritorious services.

   The element of danger is expressly preserved in the 1989 Salvage Convention and case-law has confirmed that the interpretation of the term has not changed by the Convention.

   The requirement of voluntary services is dealt with in two parts of the Convention:

   1. Salvors working under public authorities are entitled to a salvage award (Art.5(2)) but the issue whether salvage authorities are entitled to a salvage reward is left to the law of the state where the authority is located (Art.5(3)).
   2. The issue of salvage by entities already contractually engaged to work or assist the ship is dealt with under Art.17, which requires that the services provided exceed those contractually agreed before the occurrence of the danger.

   The combination of these two articles resembles very closely the position of English salvage law before the Convention. The third element, the issue of success, is, in the Convention, translated to services that have a ‘useful result’. Whether this is to be interpreted as reflecting only the need to save property or, in addition, improving the situation of the endangered property is not decided, but certainly the term is broad enough to be interpreted consistently with the pre-existing English law which favours the latter arrangement.

   Time bar

   The time bar under Art.23(1) of the 1989 Salvage Convention is two years. The limitation period starts when the salvage operations are terminated. The Salvage Convention permits, however, contractually agreed limits. Time bars do not normally provide problems in salvage cases. However in a case where salvage of objects from a wreck has taken place over a long period of time a question on time limitation had arisen. Mr. Justice Teare held in R (Knight) v Secretary of State for Transport that determining when the salvage operations ended with respect to a wreck was a matter of fact to be determined and did not require the removal of all the objects of the wreck from the sea bed before salvage was terminated.

2. Assessment of salvage award and special compensation

   Two ways of rewarding a salvor are provided for under the 1989 Salvage Convention. The first way corresponds to the customary salvage award. This is awarded when the salvage operations have a useful result. The criteria for the calculation of the salvage award are detailed under Art.13. The criteria employed include:

   1. the value of the salved property
   2. the skills of the salvors in minimising environmental damage
   3. the nature and extent of danger, the measure of success and the general skills of the salvors as evidenced in the response time
   4. the risks undertaken
   5. the availability of vessels
   6. the promptness and length of the salvage service.

   The various criteria listed under Art.13 are not in a hierarchical order and can only be considered as indicators for the adjudicators of the salvage reward. Thus, it cannot be said a priori which of these criteria is the most determinative of the amount of the reward. As a result, judges and arbitrators have significant discretion in determining the amount awarded. What is certain is that if there is no valuable property salved there will be no such reward.

   There is no equivalent list of criteria under pre-existing English law, and especially the criterion taking into account the threat of environmental damage was not considered before the Convention as being eligible for the calculation of the salvage reward.

   The salvage reward is payable by the owners of the property salved and in proportion to the value of the salved property. Thus, for example, if the ship’s salved value is £8,000,000, the salved cargo’s value is £90,000,000, the bunkers cost £1,000,000 and the freight at risk another £1,000,000, then a salvage reward of £100,000 under Art.13 will be payable as follows: the owner of the ship will pay £8,000, the cargo owner £90,000, the owner of the bunkers £1,000 and the party benefiting from the unpaid freight for the salved cargo another £1,000.

   The amount awarded must take into account the value of the salved property but cannot be out of proportion to the services rendered. This means that for the same services a higher reward will be awarded to the salvor of a more expensive ship and cargo. The second part restricts, to an extent, the possibility of providing very high salvage awards without taking into account the type of the actual services rendered. Overall, the reward criteria give significant discretion to the courts and arbitrators.

   The second way of rewarding salvors concerns the special compensation of Art.14. This arrangement was the primary reason for developing the 1989 Salvage Convention and was initiated after the Torrey Canyon accident when it was realised that salvors would be reluctant to engage with the salvage of a stricken tanker if the prospects were that ship and cargo would be likely lost to the sea.

   Such a situation would promise zero reward to salvors. This posed a major problem to coastal states, shipowners and oil traders because the environmental impact of such an accident would not be mitigated early enough and by the highly skilled salvage industry, and this would lead to increased environmental damage and liabilities.
   The Art.14 special compensation is payable when the salvor assists a vessel which threatens damage to the environment. Damage to the environment is defined as:

   “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”.

   This definition is restrictive in several ways:

   1. Damage to the environment is only covered in coastal or inland waters and adjacent areas. Therefore, it is arguable that any damage occurring away from the coastal areas, presumably within the Exclusive Economic Zone (EEZ) but certainly on the high seas, does not come under this definition, with the consequence that the relevant incentives are not available to salvors in circumstances where the oil spill or other type of pollution occurs far from the coast.
   2. It requires ‘substantial’ physical damage, a term which is not clear. Presumably, the ‘substantial’ nature of the damage will depend not only on the extent of the damage but also on the importance and rarity of the marine life and resources affected.
   3. It requires a link with major incidents, indicating that where physical damage to the environment is substantial but the incident is not a major one the environmental damage will probably not be covered by the definition.

   A salvor who assists a vessel that threats environmental damage and who fails to earn enough money under Art.13 is entitled to their expenses under Art.14. Further, where the salvor has had some success in their efforts they are entitled to an increase that may double their expenses. The drafting of Art.14(2) is particularly confusing because it suggests an uplift of up to 30 per cent but not exceeding 100 per cent. The unclear drafting represents a late compromise made during the final negotiations on the Convention.

   The special compensation is only payable to the extent that it exceeds the Art.13 reward. Only the shipowner is liable for the payment of the special compensation.

   The definition of the salvor expenses has led to two significant problems under English law.

   The first concerns the calculation of expenses under Art.14(3) and particularly the use of ‘a fair rate for equipment and personnel actually and reasonably used in the salvage operation’ in order to calculate other than out-of-pocket expenses. The House of Lords’ decision in The Nagasaki Spirit, where it was decided that the term ‘fair rate’ referred to expenditure and did not include an element of profit, has resolved the legal issue by adopting an impractical arrangement.

   The second unclear point regarding Art.14 is whether special compensation is payable only during the period in which the threat of environmental damage is present or whether it is to be calculated until the redelivery of the property to its owners. In The Nagasaki Spirit the House of Lords favoured the latter solution. If the salvor is negligent in their efforts of preventing or minimising damage, they may be deprived of special compensation (Art.14(5)).

3. Salvage agreements under the 1989 Salvage Convention

   The right to a salvage reward arises independently of whether there is a salvage contract agreed or not. However, appropriately drafted salvage contracts can significantly clarify the duties of the parties during the salvage operation, including provisions for the place of redelivery, the conditions under which salvage can be terminated, the dispute resolution forum and the law of the contract. The 1989 Salvage Convention permits the contractual exclusion of most of its provisions.
   However, the rights granted to courts to review salvage contracts under Art.7, as well as the environmental obligations imposed on the salvor and the owner of the salved property under Art.8, cannot be contracted out.The 1989 Salvage Convention also provides for the authority of the master to bind their employer to a salvage contract and for the authority of the master and the shipowner to bind owners of property on board to a salvage contract. These arrangements have significantly improved the salvors’ position because, under pre-existing English law, the master had to become an agent of necessity in order to bind the property owners to the salvage contract. This was unsatisfactory because for the agency of necessity to come into existence the inability to communicate with the cargo owners is a prerequisite. This, in the case of a container ship with thousands of containers, would be the cause of delay and is likely to result in a situation where some cargo owners will and some will not provide authority to sign a salvage contract. While the liability for salvage under the 1989 Salvage Convention would be in existence the contract would be exempting or altering parts of the Convention for the ship and some of the cargo, but not for all cargo. This is not a reasonable position for a salvor to be in and affects their entitlement for security and prospects of payment. Thus, the Convention’s resolution of the issue has been a major benefit for the salvors.

   Note, however, that if there is no danger there are no salvage operations, and thus the authority of the master under Art.6 will not operate. The extent of the master’s authority under Art.6(2) has not yet been interpreted by the courts. However, it appears that after a reasonable contract of salvage is concluded, further modifications agreed between the shipowner and the salvor will not necessarily be binding on the cargo owners. Similarly, it can be argued that where the master breaches the contract of salvage, for example, by unreasonably replacing the salvor, then the cargo owners would probably not be considered in breach of the original salvage contract or bound by the new contract, leaving the shipowner to pay for the contractual breaches.

   One of the most extensively used salvage contract forms globally is the Lloyd’s Open Form (LOF) ‘No cure-no pay’. The LOF has been repeatedly adjusted to accommodate the needs of contemporary salvage in anticipation of developments of national or international law which always took much longer. Thus, the LOF 1980 included the first departure from the ‘No cure-no pay’ principle by entitling the salvor of a stricken tanker who had failed to recover an ordinary salvage reward to recover their costs plus a 15 per cent uplift on top of those costs, but only to the extent that the expenses together with the increment were greater than the ordinary ‘No cure-no pay’ award. The 1990 version of the LOF incorporated the 1989 Salvage Convention six years before it came into force. The LOF 2000 introduced the first attempt to overcome the difficulties of the 1989 Salvage Convention by providing the option to incorporate the special compensation P&I Club’s (SCOPIC) Clause.

   The most recent LOF 2011 contract consists of a short form which incorporates a number of standard sets of clauses, namely the Lloyd’s Standard and Arbitration Clauses (LSSA), the Lloyd’s procedural rules and, when the option is exercised, the SCOPIC Clause. Signing the LOF constitutes an express choice of arbitration as the means of determining the award and resolving disputes related to the salvage contract.

   The LOF contract is subject to English law and Lloyd’s Arbitration. The arbitration process is comparatively informal for the purposes of efficiency and costs savings (Navigator Spirit SA v Five Oceans Salvage SA).

   While performing the contract the salvors should use best endeavours to prevent or minimise damage to the environment. Note that the term ‘best endeavours’ has been argued to be more burdensome than the obligation under Art.8 of the Convention to ‘exercise due care’. Other views are also arguable and ‘best endeavours’ can be taken to mean a subjective measure of care that depends on the particular salvor, while ‘due care’ could reflect the standard of professional care and skill required of professional salvors.

   The LOF 2011 imposes obligations on the owners of the property in danger to allow reasonable use of the machinery on board the ship, to provide all necessary information to the salvors and help in obtaining permission for entry into the designated place of safety. The LOF 2011 further provides that the master has authority to act as agent of the property interests. This is a contractual undertaking by the shipowner and cannot replace the 1989 Salvage Convention’s authority of the master under Art.6(2) However, it can be the basis for a claim for damages against the shipowner if the cargo owners escape salvage liability.

   Where the 2014 SCOPIC Clause is not incorporated, the two types of remuneration under the 1989 Salvage Convention – namely the reward under Art.13 and the special compensation under Art.14 – are available to the salvor.

   However, where the 2014 SCOPIC Clause is incorporated, Art.14 is excluded as a potential remuneration. Thus, from the moment the contract is signed until the salvor decides to invoke, in writing, the SCOPIC Clause, the salvor can only rely on an Art.13 reward. From the moment the 2014 SCOPIC Clause is invoked an alternative way of calculating the salvage reward is available to the salvor.

   The remuneration under the 2014 SCOPIC Clause is based on set tariffs contained in a separate appendix (Appendix A: latest version 2017) to the clause. There is a standard bonus of 25 per cent on top of the tariffs.

   Thus, the calculation of the SCOPIC reward is simple and easy to make. The standard of conduct required under the SCOPIC Clause is, as under the LOF, to use best endeavours (Clause 10) for salving the property and in doing so to prevent or minimise damage to the environment. The SCOPIC reward does not depend on the existence of any threat of damage to the environment, nor is it restricted to a particular jurisdictional or physical area of the seas. Thus, it is a more general and readily available compensation for salvors in all cases in which they may be worried about the possibility of a satisfactory Art.13 reward.

   The SCOPIC reward is only payable by shipowners and only to the extent it exceeds the Art.13 reward under the 1989 Salvage Convention. A discount to the Art.13 award is imposed if the salvor has unnecessarily invoked the SCOPIC Clause in a situation where the Art.13 reward would have been larger. In such a case the Art.13 reward is reduced by 25 per cent of the difference between the salvage reward and the SCOPIC remuneration.

   Apart from the difference in the way the salvor’s remuneration is calculated, the invocation of the 2014 SCOPIC Clause has several other consequences.

   First, the owners are obliged to put up a bank guarantee or P&I Club security for US$3,000,000 within two working days. This initial security can be adjusted later as needed or by the arbitrator if there is a dispute. If security is not provided the salvor can withdraw from the 2014 SCOPIC Clause and revert to the LOF, including Art.14.

   Second, a Special Casualty Representative (SCR) is appointed. The SCR is a salvage specialist acting as an independent adviser to the shipowner, assessing the efficiency and the reasonableness of the salvage operation undertaken under the SCOPIC agreement and providing the shipowner with daily estimates of the SCOPIC remuneration. The SCR is to be selected from a list of specialists.

   Two other Special Representatives, one for the hull and one for the cargo interests, can also be appointed. Their role is set out in Appendix C. The aim of having the SCR and the Special Representatives is to provide transparency to the salvage operation, thus removing fears that salvors would unnecessarily prolong salvage in order to achieve higher SCOPIC remuneration. However, the control of the salvage operation remains with the salvage master.

   Rights of termination for both parties are also available. In the absence of a salvage contract, the master of the vessel may dismiss the salvors, although a payment for meritorious services will be awarded by the court on principles of what is fair and equitable. The 1989 Salvage Convention is silent on the right to dismiss the salvors but permits the addition of salvors when reasonable.

   The SCOPIC Clause has so far been considered successful, resolving most of the problems arising from the 1989 Salvage Convention. It is a further example of a successful and well-designed intervention by the salvage industry to avoid the difficulties posed by the Convention and to satisfy the needs of the market.

   The existence of a salvage contract means that the parties may recover damages in contract. This applies both ways. Thus where, for example, the property that is the subject of salvage operations becomes damaged due to the salvor’s negligence, damages may be available (The Key Singapore) in addition to the reduction, or complete deprivation, of the award imposed under Art.18 of the Convention.

   Similarly, if the salvor is dismissed by the shipowner, damages for breach of contract will be available to them. The SCOPIC remuneration has been considered as distinct from the no cure-no pay remuneration under Art.13 within the context of marine insurance. Thus, it has been held that the salvage expenditure incurred not for the salvage of the ship but in the reduction of the shipowner’s environmental liability should not be taken into account when constructive total loss is considered under section 60(2)(ii) Marine Insurance Act 1906 (Sveriges Angfartygs Assurans Forening (The Swedish Club) and others v Connect Shipping Inc and another (The Renos)).

   There are two issues of Limitation of liability that need to be stated here:

   1. Claims by the salvors against the shipowner concerning payments for the salvage operations are not subject to limitation of liability. Thus, the shipowner has to pay them in full.
   2. Claims by shipowners against the salvors are subject to limitation of liability, provided they concern claims covered by Art.2 of the 1976 LLMC as amended. The limits are set to those of a 1,500 gross tonnage (grt) vessel.

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This article is written by our Principal Associate, Chakaravarthi