Recent Developments in Salvage

February 2019

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In late 2016, Lloyd’s of London, the custodians of LOF (Lloyd’s Open Form salvage agreement) and SCOPIC (Special Compensation P&I Clause), initiated a review of both SCOPIC and the LOF forms to ensure they remain relevant and viable in the current market. This culminated in the publication of the SCOPIC 2018 form, a revision of the SCOPIC security standard wording and a consolidation of all the guidance documentation provided to SCRs.

SCOPIC 2018

First incorporated into the LOF 2000 form, and with some relatively modest modifications since, the SCOPIC Committee of Lloyd’s came to the conclusion that SCOPIC had worked well for the past eighteen years. As a replacement to Article 14 of the International Convention on Salvage 1989 (Special Compensation), SCOPIC continues to enjoy broad support from all sectors of the industry. However, an inequality was identified related to SCOPIC security and a contractor’s rights to terminate.

Having signed an LOF with SCOPIC incorporated, the salvage contractor may invoke SCOPIC at any time. On doing so, the contractor is entitled to SCOPIC security of US$3,000,000 in the form of a bank guarantee or a P&I Club lettera to be provided within two working days of SCOPIC being invoked. This is the so named ‘Initial Security’. If the owner of the vessel fails to provide the requisite security the contractor has the option to withdraw from SCOPIC and continue the salvage operation under LOF as though SCOPIC had not existed. This is an incentive to the owner to provide security in order to avoid the vagaries of an Article 14 claim by the contractor.

SCOPIC also obliges the owner to increase the initial security if it proves insufficient to cover the contractor’s reasonably projected SCOPIC remuneration1, but SCOPIC does not provide the contractor with any remedy if the owner fails to provide the increased security. The option to withdraw from SCOPIC is no longer available to the contractor because this only applied if initial security at the commencement of the salvage operation was not provided. Similarly the termination provisions of SCOPIC2 provide the contractor with no remedy as no mention is made of an owners failure to meet their security obligations.

With no automatic right to withdraw from or terminate SCOPIC in the event an owner fails to increase security when it is reasonable to do so, the contractor is left in the difficult position of having to prove the owner is in breach of the security provisions and obtain an arbitrators award to terminate SCOPIC. Recognising this problem, SCOPIC 2018 now includes a right of the contractor to terminate both SCOPIC and the main agreement if, having been agreed amicably or determined by an arbitrator, the increased security is not provided within two working days3.

While addressing the question of increased security, focus fell on the termination provisions of the contractor4. Originally designed to give the contractor a right to terminate in a situation in which the contractor is making a loss and had no real prospect of making up that lossb, the termination provision was found to be incomprehensible and of little practical value. As a result the provision was simply dispensed with and, save for the new right of a contractor to terminate SCOPIC in the event Increased Security is not timely provided, the only right to terminate SCOPIC is limited to the owner on giving five days’ notice5.

ISU 5 Salvage Guarantee Form – Voiding Provisions

The ISU 5 Salvage Guarantee Form - so numbered as the fifth of a suite of five standard guarantee forms published by the ISU - is the agreed form to be used when a Club provides its letter of undertaking as SCOPIC security. In the ordinary course of providing security the Club concerned is unlikely to have the opportunity to investigate within the two working day time frame if there is any reason why the Club should not give its security. One possible reason could be the existence of a side-agreement to the LOF salvage contract, (see the Club’s previous note on Side-Agreements).

With the apparent growing use of side-agreements, a provision6 has been added that voids the security in the event the salvage operation is being conducted on terms other than an un-amended LOF with SCOPIC incorporated. The option remains for the Club concerned to re-instate the provisions of the security once it has satisfied itself that any side-agreement, or any other variation of the standard LOF/SCOPIC forms, does not constitute a barrier to providing cover.

Consolidated Guidance Notes on the Role of the Special Casualty Representative (SCR)

On implementation, SCOPIC created an entirely new role in salvage operations, that of the SCR. The role and duties of the SCR are set out comprehensively in SCOPIC7, but it was evident as experience was gained that the role and responsibilities would require further clarification. Over the years SCRs raised a number of questions for the SCOPIC Committee to consider and the Committee’s decisions and guidance were published in the form of digests, of which there were five. Further clarification was provided in two documents, the SCR Guidance Notes and SCR Guidelines. Naturally, there was an element of duplication in these seven documents which has now been entirely superseded by the stand-alone Consolidated Guidance Notes.

The Consolidated Guidance Notes have been designed to be a living document. Although questions to the SCOPIC committee are now less common given the role of the SCR has become well defined and understood, the intention is for the document itself to be amended or added to in the event a circumstance arises that requires guidance from the committee.

The Consolidated Guidance Notes cover all aspects of the position of SCR, from setting out the application process to join the SCR panel, to providing pro-forma documents such as the daily salvage report, cost schedule and the SCR final report8. It addresses technical issues over costs that are allowable in SCOPIC and those excluded, as well as guidance in the production of the final report and the procedure if the SCR has a contrary view on the conduct of the operation.

In providing guidance to the SCR the document acts as a reminder to all parties to a salvage operation of the role of the SCR and the responsibilities of the respective parties. This ranges from what the SCR can expect in terms of co-operation and decision making from the contractor, to limitations on the SCR in respect of non-salvage matters.

The Consolidate Guidance Notes seek to emphasise the independence of the SCR and their primary duty, alongside that of the contractor, to use best endeavours to salvage the vessel and any property on board and to prevent or minimise any damage to the environment. As a result, the document makes a good companion to anybody involved in a casualty where salvage services have been engaged on LOF terms with SCOPIC incorporated and invoked.

LOF 2019(?)

What of the LOF review? The final review of LOF was temporarily suspended pending completion of the SCOPIC review. Now that SCOPIC 2018 has been published the LOF review is anticipated to complete within 2019. As a sneak preview, expect to see a consolidation of the Lloyd’s Standard Salvage and Arbitration Clauses (LSSA) and the Procedural Rules into one document.

For copies of the revised documents discussed above and all documentation related to the LOF and SCOPIC Agreements see Lloyd's Salvage & Arbitration Branch.

 


1 SCOPIC - Clause 3(iii)

2 SCOPIC 2014 - Clause 9(i)

3 SCOPIC 2018 - Clause 4(ii)

4 SCOPIC 2014 - Clause 9(i)

5 ISU5 - Clause 6

7 SCOPIC - Clause 12 & Appendix B

8 SCOPIC - Appendix B, Clause 5(e)

a Pursuant to a Code of Practice between the International Group of P&I Clubs (IG) and the International Salvage Union (ISU), a contractor will accept, if offered, a Club Letter of Undertaking (LOU) in the standard form ISU5. However, this is not automatic and the Club concerned may decline to offer its LOU if it has good reason not to, but the Club will not decline to offer its LOU solely because the contractor has no other means of obtaining security.

b The sole right of a contractor to terminate relates only to a situation in which the predicted cost of the salvage operation to the contractor will exceed the salved value of the property plus SCOPIC remuneration projected to the end of the operation (SCOPIC 2014, Clause 9(1)). 

 

Article by Ian Freeman

Syndicate Manager

Americas Syndicate