Special Compensation, LOF & SCOPIC

The 1910 Brussels Convention on Salvage contained no express provision regarding the right of a salvor to the compensation, for steps taken by him to prevent or minimise the damage due oil pollution. There was no consideration at all for such efforts. In fact, there was no mention of any kind about environment.

It had been based on the traditional principle of no cure no pay. Thus, in olden times, the reward for successful salvage was large, for failure it was nothing. If the ship in danger did not reach safety and sank, salvor did not get anything, even though, a fortune had been spent by the salvor. A salvage remuneration was traditionally claimed against the salved fund. The upper limit of the award was the salved value of the property salvaged. Property included ship, cargo and freight.

Each interest was to contribute in proportion to the respective salved values. The fear for the salvors was obvious. The salvors thought several times, about attempting to salve a ship, where the risk of failure was great and the cost likely to be incurred, was great. Salvor would consider the size of ship and the cost of cargo in it, as the major factors.

By 1890, very commonly, the complaints were made by Masters pointing to the undue demands made by salvors. Invariably, the Master was compelled to sign a contract for payment of heavy lump sum amount. Around this time, a thought of change had triggered. In January 1908, the first LOF came out. Several versions have come out since then. Without going to the intricacies of these LOFs, let us focus on to the matter and objectives of newer versions in general.

LOF is a standard form of contract for a proposed marine salvage operation. It is called “open” because LOF does not specify a fixed sum as the consideration in return of the service. The consideration is an essential constituent of any contract. The “reward” would be determined later. Lloyd’s Open Form helps to ensure quality, integrity and experience in salvaging. Moreover, there is due transparency and fairness to all the parties involved in a salvage situation. The format encourages salvors to make the necessary investment. 

In the earlier phase, a significant number of salvage claims had been resolved by arbitration, either by the Committee of Lloyd’s or by an arbitrator appointed by the Committee. Now, most LOF cases are settled by a common agreement between the salvor and the shipowner, cargo interests and their insurers after the task is completed. If agreement cannot be reached by negotiation, then the case is referred to arbitration through the Lloyd’s Salvage Arbitration Branch. If any of the party is not satisfied with the decision, there is provision for appeal (legislation). 

The Lloyd’s Open Form of 1980, made provision to guarantee a reward provided that the salvor had exercised due diligence in attempting to save the marine environment from pollution. This innovation proved very successful, and the marine people were deeply impressed. A few years later the 1989 Salvage Convention came into being, adopting this new LOF idea.

The solution devised in the 1980’s was a kind of environmental salvage.  Meaning of salvage has not changed much through the passage of time. The services and assistance has been the same,   viz. services to the ship and cargo, and the liability to reward still lies with those who would be benefitted by salvage of ship and cargo. Subsequent to the coming in picture of 1989 Convention, the marine insurers provide cover for awards to be paid under Article 14 (special compensation).

It substantially altered two basic principles upon which both voluntary and contract salvage has been based. These principles being:

  1. ‘No cure no pay’ principle, which meant the remuneration, was possible only if success was there.
  2. Salvage award cannot exceed the amount of the salved property. This, because the fund would be constructed from salved property.

When determining the salvage award, the value of the ship, its cargo and freight at risk and other factors stated in Article 13 are taken into account. Article 13 tried to maintain old traditions. Effect of most factors was quite like what was provided by Article 8 of the older Convention. The factor added is the environmental consideration. Article 13(b) lists the skill and efforts of the salvors in preventing or minimising damage to the environment as one of the criteria for fixing the reward.

The safety net gives salvors an incentive to extend salvage work. The underwriters therefore would want to know if a ship would be accepted as a constructive total loss. This, to a considerable extent, reduces the control of Club and the ship-owners.

As stated in 14(1), ‘Salvor is entitled to special compensation from the owner of that vessel at least equivalent to his expenses, which are defined in Article 14(3) provided of course,

  1. Vessel or her cargo threatens damage to the environment.
  2. Reward under article 13 is less than ‘Special Compensation’ assessable in accordance with Article 14.

Also 14(2) goes on to state, ‘if the salvor has prevented or minimised damage to the environment, the special compensation payable by the owner to the salvor may be increased upto a maximum of 30% of the expenses incurred by the salvor. However, the tribunal, if it deems it fair and just to do so and bearing in mind the 10 criteria set out in Article 13(1), may increase such special compensation further but in no event shall the total increase be more than 100% of expenses incurred by the salvor.

Two things are very important in respect of article 14,

1.  The total special compensation under article 14 is only payable in the event and to the extent that such compensation is greater than any reward recoverable under article 13.

2.   It is payable by the ship owner alone, and the cargo owners do not have to contribute to the special compensation at all. Applicability of the special compensation is made clear through the following flow charts:

Thus, it is now possible that the total amount recoverable by a salvor may exceed the total value of the salved property.

Focusing a little more on the Article 14, it can be seen that ‘expenses’ is defined as ‘the out of pocket expenses reasonably incurred by the salvor in the salvage operation and a ‘fair rate for equipment and personnel, ‘actually and reasonably’ used in the salvage operation, taking into account the criteria set out in Article 13, paragraph 1(h), 1(i) and 1(j)’. This means ‘the promptness of the services rendered, the availability and use of vessels or other equipment intended for salvage operations, the state of readiness and efficiency of the salvor’s equipment and the value thereof’ are the factors considered for finding out the expenses.

In the year 1992 the oil tanker, The Nagasaki Spirit laden with 40,000 tons of crude oil, and the container ship, ‘The Ocean Blessing collided in the northern part of the Malacca Straits. After the collisions some 12,000 tons of crude oil escaped into the sea and both vessels were engulfed in flames. All the crew of ‘The Ocean Blessing perished and only two crew on ‘The Nagasaki Spirit’, had survived. The ships were also under the pirate attack, (probably the main cause of collision). Salvors agreed to salve ‘The Nagasaki Spirit’ under LOF 1990. It included Articles 13 and 14 of the current Convention. The fire was extinguished by salvors. The vessel initially, taken to a specific area fearing pollution & later to a wharf where the cargo was transshipped and the vessel redelivered to her owners.

The underlying meaning of fair rate had come out in great controversy after the salvage operation of a tanker ‘Nagasaki Spirit’. The decision in ‘The Nagasaki Spirit’   showed that it needed some improvement and had to be more assuring as it did not always provide adequate reimbursement to salvors.

The arbitrator while fixing up the award stressed upon the need to encourage environmental salvage. When the appeal was made, the appeal arbitrator increased the amount of award computed by Art 13. As has been stated earlier if the Article 13 award becomes higher than the Article 14 award, the Special Compensation is not available.

An appeal was then made in court with Admiralty Jurisdiction. The judge held that although fair rate would normally include a profit element, the appeal arbitrator was right to reject this. In the court of appeal again the judge agreed with the previous judgment, stating that “fair rate” was not to be a “salvage reward”. Even in the House of Lords, Lord Mustill agreed that “fair rate” meant “fair rate of expenditure” and did not include any element of profit.

The entire salvage industry felt disappointed and let down. Salvage is an expensive business particularly in recent years. The capital and running costs have been difficult for the traditional salvage companies to sustain. Many others too felt that the Convention had been poorly drafted thereby limiting the amount that environmental salvors could be paid to mere “out-of-pocket expenses“, with no allowance for any profit margin.

To resolve the things, the insurance people and the P & I Clubs jointly developed the ‘Scopic Clause’, which is a codicil that may be appended to the LOF and invoked, if the salvor finds statutory payment provisions being inadequate. The first Scopic clause was in 2000, and there have been several iterations since.

This arrangement served the maritime community and its insurers well. A number of these were absorbed into larger enterprises. Compared to the yester years the ships were larger now. Crude oil and its products have been moved around the world by sea in large quantities. The risk that cargo or fuel escaping, from a distressed vessel would damage the environment. Public opinion was already becoming more and more sensitive. Cargo escaping from the wreck of the Torry Canyon off the Scillies caused widespread contamination of sea and foreshore. The Amoco Cadiz laden with 220,000 tons of crude oil stranded on the coast of France, caused pollution on an even larger scale.

At the time when Scopic was agreed, the tariff rates were ‘intended to be generous and profitable’ and are subject to an annual review by the SCR Committee. The Scopic clause can be invoked only at the option of the salvor, and is supplementary to LOF agreements and overrides the Article 14 provisions of the Salvage Convention when invoked. This clause can apply in all circumstances, regardless of whether or not there is a threat of damage to the environment. Scopic is generally only invoked where ‘the casualty has a low value or the risks are too great.

The contractor has the option of invoking the special provisions of the Scopic clause at any time of his commencement, regardless of the circumstances. He does not have to prove an environmental threat and no geographical restriction applies. The assessment of the Scopic remuneration commences from the time of such notice, unlike the remuneration of special compensation under the Article 14,  the assessment of which commences from the start of the salvage operation.

The new Scopic has the following effect as seen from the extract, from its 2020 version:

  • The owners of the vessel shall provide to the Contractor within 2 working days (excluding Saturdays and Sundays and holidays usually observed at Lloyd’s) after receiving written notice from the contractor invoking the Scopic clause, a bank guarantee or P&I Club letter (“the Initial Security”) in a form reasonably satisfactory to the Contractor providing security for his claim for Scopic remuneration in the sum of US$3 million, inclusive of interest and costs. If, at any time after the provision of the Initial Security the owners of the vessel reasonably assess the Scopic remuneration plus interest and costs due hereunder to be less than the security in place, the owners of the vessel shall be entitled to require the Contractor to reduce the security to a reasonable sum and the Contractor shall be obliged to do so once a reasonable sum has been agreed.
  • If at any time after the provision of the Initial Security the Contractor reasonably assesses the Scopic remuneration plus interest and costs due hereunder to be greater than the security in place, the Contractor shall be entitled to require the owners of the vessel to increase the security (“the Increased Security”) to a reasonable sum and the owners of the vessel shall be obliged to do so once a reasonable sum has been agreed. In the absence of agreement, any dispute concerning the proposed Guarantor, the form of the security or the amount of any reduction or increase in the security in place shall be resolved by the Arbitrator.
  • If the owners of the vessel do not provide the Initial Security within the said 2 working days, the Contractor, at his option, and on giving notice to the owners of the vessel, shall be entitled to withdraw from all the provisions of the Scopic clause and revert to his rights under the Main Agreement including Article 14, which shall apply as if the Scopic clause had not existed. Provided that this right of withdrawal may only be exercised if, at the time of giving the said notice of withdrawal the owners of the vessel have still not provided the Initial Security or any alternative security which the owners of the vessel and the Contractor may agree will be sufficient.
  • If the owners of the vessel do not provide the Increased Security within 2 working days of the date upon which the reasonable sum for such Increased Security has been agreed between the Contractor and the owners of the vessel or has otherwise been determined by the Arbitrator, the Contractor, at his option, and on giving notice to the owners of the vessel, shall be entitled to terminate the services under both the Scopic clause and the Main Agreement. The Contractor will in that event be entitled to payment of all Scopic remuneration due up to and including the date of such termination. The assessment of Scopic remuneration shall take into account all monies due under the tariff rates set out in Appendix A hereof, including a reasonable time for demobilisation after the date of such termination.
  • The salvage services under the Main Agreement shall continue to be assessed in accordance with Article 13, even if the Contractor has invoked the Scopic clause. Scopic remuneration as assessed under sub-clause 5 above will be payable only by the owners of the vessel and only to the extent that it exceeds the total Article 13 Award (or, if none, any potential Article 13 Award) payable by all salved interests (including cargo, bunkers, lubricating oil and stores) before currency adjustment and before interest and costs even if the Article 13 Award or any part of it is not recovered.
  • Scopic remuneration shall mean the total of the tariff rates of personnel; tugs and other craft; portable salvage equipment; out of pocket expenses; and bonus due. In addition to the rates set out above and any out of pocket expenses, the Contractor shall be entitled to a standard bonus of 25% of those rates except that if the out of pocket expenses exceed the applicable tariff rates in Appendix “A” the Contractor shall be entitled to a bonus such that he shall receive in total
    (a) The actual cost of such men, tugs, other craft and equipment plus 10% of the cost, or
    (b) The tariff rate for such men, tugs, other craft and equipment plus 25% of the tariff rate whichever is the greater.
  • If the Scopic clause is invoked and the Article 13 Award or settlement (before currency adjustment and before interest and costs) under the Main Agreement is greater than the assessed Scopic remuneration then, notwithstanding the actual date on which the Scopic remuneration provisions were invoked, the said Article 13 Award or settlement shall be discounted by 25% of the difference between the said Article 13 Award or settlement and the amount of Scopic remuneration that would have been assessed had the Scopic remuneration provisions been invoked on the first day of the services.
  • The date for payment of any Scopic remuneration which may be due hereunder will vary according to the circumstances.
    (a) If there is no potential salvage award within the meaning of Article 13 as incorporated into the Main Agreement then, the undisputed amount of Scopic remuneration due hereunder will be paid by the owners of the vessel within 1 month of the presentation of the claim. Interest on sums due will accrue from the date of termination of the services until the date of payment at the US prime rate plus 1%.
    (b) If there is a claim for an Article 13 salvage award as well as a claim for Scopic remuneration, 75% of the amount by which the assessed Scopic remuneration exceeds the total Article 13 security demanded from ship and cargo will be paid by the owners of the vessel within 1 month and any undisputed balance paid when the Article 13 salvage award has been assessed and falls due. Interest will accrue from the date of termination of the services until the date of payment at the US prime rate plus 1%.
  • The owners of the vessel may at any time terminate the obligation to pay Scopic remuneration after the Scopic clause has been invoked under sub-clause 2 hereof provided that the Contractor shall be entitled to at least 5 clear days’ notice of such termination. In the event of such termination the assessment of Scopic remuneration shall take into account all monies due under the tariff rates set out in Appendix A hereof including time for demobilisation to the extent that such time did reasonably exceed the 5 days’ notice of termination.
  • Once this Scopic clause has been invoked the owners of the vessel may at their sole option appoint an SCR to attend the salvage operation. The owner or underwriter cargo on board the vessel may each appoint “Special Representatives” at the sole expense of the appointer to attend the casualty, to observe and report upon the salvage operation. Scopic remuneration shall not be a General Average expense to the extent that it exceeds the Article 13 Award; any liability to pay such Scopic remuneration shall be that of the Shipowner alone.
  • Any dispute arising out of this Scopic clause or the operations there under shall be referred to Arbitration as provided for under the Main Agreement.

Following are some of the important details extracted from LOF 2011. It is titled Lloyd’s Standard Form of Salvage Agreement. The form is approved and published by the Council of Lloyd’s). ‘No Cure – No Pay’ printed under the title refers to the traditional principle of salvage. On the front page there are 9 boxes with details as follows:

  1. Name of the salvage Contractors.
  2. Property to be salved: The vessel: her cargo freight bunkers stores and any other property thereon but excluding the personal effects or baggage of passengers master or crew.
  3. Agreed place of safety
  4. Agreed currency of any arbitral award and security (if other than United States dollars).
  5. Date of this agreement.
  6. Place of agreement.
  7. Is the Scopic Clause incorporated into this agreement? State alternative:  Yes/No.
  8. Person signing for and on behalf of the Contractors:                   Signature.
  9. Captain or other person signing for and on behalf of the property:          Signature.
  • The Contractors identified in Box 1 hereby agree to use their best endeavours to salve the property specified in Box 2 and to take the property to the place stated in Box 3 or to such other place as may hereafter be agreed. If no place is inserted in Box 3 and in the absence of any subsequent agreement as to the place where the property is to be taken the Contractors shall take the property to a place of safety.
  • While performing the salvage services the Contractors shall also use their best endeavours to prevent or minimise damage to the environment.
  • Unless the word “No” in Box 7 has been deleted this agreement shall be deemed to have been made on the basis that the Scopic Clause is not incorporated and forms no part of this agreement. If the word “No” is deleted in Box 7 this shall not of itself be construed as a notice invoking the Scopic Clause.
  • The Contractors’ services shall be deemed to have been performed when the property is in a safe condition in the place of safety stated in Box 3 or otherwise agreed or determined. 
  • The Contractors’ remuneration and/or special compensation shall be determined by arbitration in London in the manner prescribed by Lloyd’s Standard Salvage and Arbitration Clauses (“the LSSA Clauses”) and Lloyd’s Procedural Rules in force.

Implications of SCOPIC
After the advent of Scopic, there should be little need for arbitrations in future on special compensation awards. The gray areas comprised of environmental threat, geographical restriction, various hire rates, tug rates, uplift, etc are very transparent. The salvor however, may recover more for agreed tug rates than he could have recovered under the non Scopic regime as was applicable during ‘Nagasaki Spirit’ due different utilization factors. Also, shipowners and P&I Clubs cannot give excuse about the environmental threat and geographical restriction for application of Scopic.  Thus, salvors don’t have to prove environmental threat and geographical restriction defence.

The shipowners & thus Clubs have much more control due the transparency. The shipowner is also benefitted by uplift being capped at 25%. The shipowner is quite clear about his right to terminate under paragraph 9 of Scopic now. If we see from the salvors’ perspective, cash flow problems will be eased and security is more certain. Moreover, a salvor has option of rescinding the contract in case the security is not deposited. But, salvor also fears now that the owner may terminate the salvage.

(You may also visit my youtube videos @captsschaudhari.com)
Link: https://www.youtube.com/channel/UCYh54wYJs1URS9X5FBgpRaw/feature

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