Cargo Security for Salvage

(Sea Venture Volume 20)

As from 1^st January 1995 the 1989 Salvage Convention (the "Convention") was incorporated into English law¹. The most common form of salvage contract is Lloyd’s Standard Form of Salvage Agreement ("LOF"). This contract provides for arbitration in London and is governed by English law. The most recent version of this contract, LOF 2000, was discussed in "Sea Venture" Vol.19. A copy of LOF 2000, together with the Lloyd’s Standard Salvage and Arbitration Clauses ("LSSA") and Procedural Rules (which are deemed incorporated), was included with that publication.²

Among other things, the Convention provides that cargo interests have a liability to salvors to pay for their proportion of any salvage reward even in the absence of any contractual relationship with the salvors. This is because Article 6.2 of the Convention provides the Master and shipowner with authority to bind cargo to a salvage contract. Therefore, by the Master or shipowner signing LOF, cargo is bound³ to London Arbitration governed by English law.

However, this provision, coupled with the salvor’s power to keep the salved property at the place of termination of the salvage service until security is provided (Clause 4.8 of LSSA) can create difficulties for the shipowner. This article discusses these difficulties.

The relevant provisions of Clause 4 of LSSA are:

Clause 4.7: The salvors "shall have a maritime lien on the property salved" until security is provided

Clause 4.8: Absent the consent (which "shall not be unreasonably withheld") of the salvors, "until security has been provided the property salved shall not …be removed from the place at which it has been" redelivered on termination of the salvage services and

Clause 4.9: The salvors "shall not arrest or detain the property salved unless:-

(i) salvage is not provided within 21 days…

(ii) they have reason to believe that the removal of the property salved is contemplated contrary to Clause 4.8. or,

(iii) any attempt is made to remove the property salved contrary to Clause 4.8. "

The difficulty for the shipowner can arise if a proportion of cargo interests have not provided, or are unable to provide security to salvors. The effect of clauses 4.8 and 4.9 can prevent the shipowner resuming the voyage if all cargo interests have not provided salvage security. The shipowner is under an obligation to cargo interests that have provided security to carry their cargo to the contractual destination with due dispatch. However, this obligation is in direct conflict with the shipowner’s obligation, and the salvors rights under English law, to keep salved property (cargo) for which no security has been provided ("unsecured cargo") at the place of termination of the salvage services until security is provided.

In such circumstances, how can the shipowner avoid being in breach of the contract of carriage for the cargo for which security has been provided ("secured cargo") while, at the same time, fulfilling the obligations owed to the salvors?

Agreements to Allow Resumption of the Voyage

1.

Provided the salvor consents, Clause 4.8 allows for the salved property to be removed from the place of termination of the salvage services on condition that "temporary security" is provided "pending completion of the voyage", and that the salvors lien shall remain in force. An agreement to accept such security would allow time during the voyage for unsecured cargo interests to arrange for the provision of salvage security. If they have not done so, the salvors are faced with exercising their lien on that cargo at the discharge port. From a practical perspective, this may be unattractive to salvors. Further, the extent to which the salvors lien could be enforced at the contractual port of discharge may be doubtful.

 

2.

A common form of temporary security is the Salvage Guarantee Form ("ISU 2"). This is an undertaking by the shipowner to pay to the salvors on demand such sum or sums, together with interest and costs, which are either agreed between the salvors and unsecured cargo interests or which are awarded in respect of the unsecured cargo pursuant to arbitration. In consideration of acceptance, the vessel is allowed both to resume her voyage and discharge the unsecured cargo at its contractual discharge port(s). The salvor undertakes to continue to seek salvage security from the unsecured cargo interests during the voyage but in the event that security is not provided prior to discharge, the shipowner is obliged, at its cost, to provide potentially substantial security on behalf of such cargo interests. A breach of this undertaking exposes the shipowner to the arrest by salvors of the carrying vessel or any sister vessel for security for any remaining unsecured cargo.

Any unsecured cargo interests that are aware of the commitment made by the shipowner may have little or no incentive to substitute their own security unless the cargo is urgently needed at the contractual port of discharge. If they decline to provide security, it is the shipowner who is faced with the need to preserve a lien on the cargo by detaining the cargo in a suitable storage facility at its risk and expense. There is the added risk that the cargo may ultimately realise a sum less than the amount of that cargo interest’s proportion of salvage if the right of sale has to be exercised.

Finally, the shipowner is potentially exposed to an argument by those cargo interests that in providing security where there is no legal obligation to do so the shipowner has acted as a volunteer and is not entitled to enforce any rights against the cargo. In circumstances where unsecured cargo has potentially placed the shipowner in breach in relation to secured cargo for failing to proceed with due dispatch this argument is extremely unattractive, but its success will turn on the law of the place of discharge.

 

 

 

 

 

Express Terms of Bill of Lading

3.

It is not unusual that the bill of lading will provide the carrier with the right to discharge the goods or any part thereof from the vessel for any purpose before or after sailing from the port of loading. However, it is questionable whether a clause in such broad terms will entitle the shipowner to discharge the cargo ashore pending the provision of salvage security. This is so even if the purpose of doing so was to enable the vessel to sail without the unsecured cargo on board and with the shipowner recognising an obligation to on carry the discharged cargo as soon as security had been provided. Whether or not the express terms of the bill of lading provide such a right, the shipowner would continue to act as baillee for the cargo ashore. Additionally the cost and disruption of chartering substitute tonnage, or diverting its own vessels, to perform the on carriage of this cargo may be commercially unattractive or create disproportionate costs.

 

Implied terms of Bill of Lading

4.

It is arguable that a term should be implied in the bill of lading to the effect that if salvage services are rendered on terms that cargo interests are obliged to provide reasonable security, they will do so promptly. In this respect, and although LOF 2000 does not itself oblige a party to provide salvage security, Article 22 of the Convention does require this. A cargo owner not providing security reasonably promptly would be in breach of its obligations to salvors under English law. If the result of that breach was to bring the entire voyage to a standstill, it is arguable that unsecured cargo interests would be in repudiatory breach of contract. The shipowner would then have the option of treating that particular contract of carriage as at an end enabling the shipowner lawfully to discharge that cargo and leave it behind with no obligation to on carry. However, depending on the practicalities of discharging such unsecured cargo, the shipowner might have no alternative but to reject the repudiatory breach and claim, instead, an indemnity from that cargo interest at the discharge port. This may be unattractive.

Even if such a term can be implied in the contract of carriage, the shipowner is under a duty to mitigate its losses. If the vessel was prevented from sailing by the failure of a small proportion in value of cargo to provide security, the shipowner’s practical options are (a) to discharge that cargo, or (b) to put up security to allow the voyage to resume. In contrast, if the unsecured cargo represented a substantial proportion in both value and quantity of the cargo the shipowner’s remedies are probably restricted to those discussed under paragraphs 1 and 2 above with the associated problems and risk.

 

Defence to Claims for Delay

5.

To the extent that ship and cargo are involved in a common maritime adventure, the failure of unsecured cargo to provide security arguably may excuse the shipowner’s breach of the obligation of due dispatch owed to secured cargo. However, the concept of a common adventure probably has no force outside general average and, in any event, it is probably a pre-condition to such an argument that the salvor actually arrests the unsecured cargo so as to prevent performance of the voyage. Further though, as with any implied term permitting discharge, the shipowner is under a duty to mitigate.

 

Arbitration

6.

Clause 4.8 requires the salvor to act reasonably in granting consent to allow the removal of salved property from the place of termination of the salvage services. The clause further refers to "temporary security pending completion of the voyage". In the event that there is a dispute as to the reasonableness of "temporary security", the LSSA contemplate an application to the salvage arbitrator. However, this is likely to involve delay and is also likely to be unsuccessful if the security does not overcome salvors concerns in relation to the exercise of their lien, or provision of security on behalf of unsecured cargo at the discharge port.

 

Summary

Therefore, none of the potential remedies available to a shipowner prevented by unsecured cargo from resuming the contractual voyage are satisfactory. Unless the cargo interests have insurance cover or can provide security acceptable to the Council of Lloyds’, the shipowner is faced with committing itself to provide security on behalf of the unsecured cargo, or with relying on either express or implied terms of the bills of lading. To improve the shipowner’s position, it is advisable that a shipowner’s bill of lading terms incorporate an express obligation on cargo promptly to provide salvage security in accordance with Article 22 of the Convention, in breach of which the shipowner can discharge that cargo without any requirement to on carry. However, even such an express remedy may itself be fettered by the practicalities of discharging cargo. The best and most practical remedy is to ensure timely notice to all cargo of an incident causing the ship and cargo to be bound by an LOF contract, coupled with a regular dialogue with cargo interests and underwriters so that security can be offered promptly when the salvors quantify their security demand. This should ensure that the value of any unsecured cargo and, therefore risk to the shipowner, is kept to a minimum.

 

¹ Merchant Shipping Act 1995, Section 224 and Schedule 11
² A detailed explanation of developments in salvage can be found in a Steamship website article: "Salvage - LOF 90 to SCOPIC".
³ In theory an allegation of undue influence or inequitability of terms under Article 7 of the Convention is available to cargo to challenge the authority of the Master or shipowner to sign the LOF Salvage Contract and bind cargo. Further, the existence of danger may be challenged by cargo, in which case there is no salvage operation pursuant to which the Master or shipowner has authority to sign LOF on behalf of cargo.
⁴ The current requirements are a bank guarantee or insured corporate letter of undertaking.