UK: Shipping Update - The New LOF 2011 Key Changes To The Salvage Contract

On 9 May 2011, Lloyd's launched the much anticipated LOF 2011.

Whilst there have only been minor amendments to the Form itself, with the changes being confined to the "Important Notices" located on the reverse side of the contract, there have also been changes to the accompanying LSSA Clauses. These are primarily designed to bring the Form into the modern age and increase its overall use and popularity, which has been in decline over recent years. This decline has been due, not least, to concerns from property underwriters that LOF awards levels were too high. As such, the contract was not fulfilling one of its most important objectives, that it is considered to be fair to salvors, property owners and underwriters alike.

We detail below the key changes to the LOF and the LSSA Clauses, which have implications for property owners/insurers alike.

LOF 2011 – Important Notices No. 3 - Awards

"The Council of Lloyd's is entitled to make available the Award, Appeal Award and Reasons on (the website) subject to the conditions set out in Clause 12 of the LSSA Clauses."

Salvage awards made pursuant to the new LOF 2011 will now be available to be viewed on the Lloyd's website, although access will only be available through subscription to the appropriate area of the website.

Arbitration awards are traditionally private and confidential to the parties involved and historically LOF awards have been no different. Commercial organisations tend to favour arbitration clauses because proceedings, and any information disclosed therein, are kept private. This ensures that sensitive commercial information does not become public and available to potential competitors.

For example, it is certainly the case that in salvage arbitrations, salvors can be required to disclose accounting information and operating costs which may be of particular interest to other salvors. As such there is provision, within the revised LSSA clauses, which enables any party to apply to the LOF Arbitrator/Appeal Arbitrator for an order deferring or withholding publication but they would have to demonstrate good reason.

The intention of this rather significant change is to make the system more transparent and open to proper Market scrutiny. It is hoped that making awards and the accompanying reasons available will bring a greater understanding to the way salvage awards are assessed, with the result that the support of LOF and its overall usage will increase.

LOF 2011 – Important Notices No. 4 – Notification to Lloyd's

"The Contractors shall within 14 days of their engagement to render services under this agreement notify the Council of Lloyd's of their engagement and forward the original agreement or a true copy thereof to the Council as soon as possible. The Council will not charge for such notification."

Historically salvors have not been required to notify Lloyd's in the event they have performed salvage services under a Lloyd's Form contract. Many cases would be settled without the requirement to involve Lloyd's Salvage Arbitration Branch with, for example, the collection of salvage security or the appointment of an Arbitrator. As a consequence it has become increasing difficult to properly assess the overall use of the Form. Since Lloyd's Agency is obliged to assist with the administration of the Form, it needs to ensure its capability in this regard is in line with requirements/usage.

LSSA Clauses - Security for Arbitrator's and Appeal Arbitrator's Fees

Under Clauses 6.6 and 10.8 the Arbitrator and Appeal Arbitrator respectively will be entitled to request security for their fees and expenses from one or more of the parties to the LOF contract. The LOF panel of Arbitrators have become increasingly concerned at the potential for non payment of their fees and their exposure in this regard. Previously any party requesting the appointment would be required to give an undertaking in respect of the Arbitrator's appointment fee only.

Property underwriters should note the request for security can be made to any party to the LOF contract, salvors, shipowners, cargo or container interests, whichever the Arbitrator deems appropriate.

LSSA Clauses – Availability of Awards/Appeal Awards – Clause 12

Clause 12 simply provides the conditions determining the availability of LOF salvage awards/appeal awards on the Lloyd's Agency website. These will ordinarily be available to be viewed 21 days after the award or appeal award has been formally published to the parties to the contract unless there has been an application to the Arbitrator, by any party, requesting that the award is kept private and confidential under Clause 12.1.

Any application under Clause 12.1 must be made within 21 days from the date the award/appeal award is formally published to the parties and, thereafter, the reasons for the request to defer or withhold publication on the website must be provided to the Arbitrator/Appeal Arbitrator within a further 21 days.

Finally, subject to any application to defer or withhold publication, Clause 12.3 provides that any awards which are the subject of an appeal will only appear on the website 21 days after the appeal has been formally published to the parties to the contract. If an appeal is withdrawn the award will appear within 21 days after notice of the withdrawal is received by Lloyd's.

LSSA Clauses – Special Provisions – Container Vessels

Clauses 13, 14 and 15 in LOF 2011 apply only to casualties involving laden containers and are entirely new. They are designed to make the handling of multi-cargo, multi party cases more streamlined, efficient and cost effective. We deal with these below:

Clause 13 – Notice to the Guarantors

Lloyd's Open Form provides for English Law and jurisdiction and if any party wishes to be heard or to adduce evidence in the Arbitration proceedings they are required, under Clause 7 of the LSSA Clauses, to appoint an agent or representatives ordinarily resident in the United Kingdom. Where a party fails to appoint a representative in the United Kingdom, salvors are required under the Arbitration Act 1996, to keep those salved interests advised of the Arbitral process, and, in particular of any orders or directions made by the Arbitrator/Appeal Arbitrator. This has been commonly referred to as a Clause 7 notice and, in cases involving container vessels, often salvors will have to send many hundreds of notices, which can be a costly and lengthy exercise.

Since the contract is made between the salvors and the owners of the salved property, rather than with the insurers of the salved property, Clause 7 notices are ordinarily sent to the owners of the salved property on the assumption that they will forward these notices on to their insurers or the guarantors. Unfortunately many notices are not onforwarded, possibly due to a lack of understanding of the process or language difficulties, and insurers or guarantors may, in these circumstances, find that a salvage award has been made without their knowledge, and their opportunity to defend the salvage claim or appoint representatives to protect their interests, has been lost.

The new Clause 13 enables salvors to send their notices to the guarantors (often the insurers of the cargo but not in every case), who will have the ultimate liability to pay any award in the event of non-payment by the owners/insurers of the salved property. The guarantors will then have the opportunity to consider the merits of being represented in the process. It is also hoped that this will reduce the number of notices required to be sent and thereby reduce the overall costs given that often guarantors may be involved for many different interests.


By way of an aside, when considering the merits of appointing representatives to defend a salvage claim, it is worth noting that when an LOF contract is agreed the requirement for salvage services is admitted. As such unless there is a dispute relating to the agreement to contract on LOF terms, the Arbitration process is usually confined to determining the amount payable to the salvors having regard to the benefit conferred and the salvage services performed. Such assessment is undertaken by reference to the criteria laid down in Article 13(1) of the International Salvage Convention 1989. This raises the question as to whether there is any merit in defending a salvage claim, given that the right to a salvage payment is admitted.

It is important that salvors are not given a free rein in impressing on the Arbitrator/Appeal Arbitrator the importance of their intervention. When defending a salvage claim, the intention therefore is to make submissions which will have a reducing effect on the ultimate salvage award and thus reduce property underwriters liability for salvage.

Clause 14 – Settlements involving laden container vessels

This new Clause provides that, in circumstances where 75% of the salved fund (by value) reaches an amicable settlement with the salvors, subject to the Arbitrator's consent these settlements can be visited upon unrepresented interests.

It can often be the case, in multi bill of lading container matters, that salvors are able to reach an amicable settlement with represented interests only to find that they have to proceed to Arbitration in any event against the remaining unrepresented interests. Ordinarily salvors are not able to make a claim against any salvage security they hold unless they have a formal settlement agreement or an arbitration award. Having to proceed to Arbitration only serves to increase the salvors overall costs, which would only be recoverable against those interests who remain unrepresented. This may leave them under-secured and ultimately delays the completion of the matter. It is hoped that Clause 14 will assist salvors in this regard and the process generally.

Clause 15 – Low Value Cargo

"Subject to the express approval of the Arbitrator, any salved cargo with a value below an agreed figure may be omitted from the salved fund and excused from liability for salvage where the cost of including such cargo in the process is likely to be disproportionate to its liability for salvage."

The new Clause 15 is slightly controversial. Low value cargo can be excluded from the salved fund or the requirement to pay the award if it can be shown that the costs of including them would be disproportionate to the salvage recovered. The point at which the value is high/low enough is subject to the Arbitrator's discretion in each case. It is difficult to see where the "cut off" (as to what constitutes a high or low value) would be and we anticipate there will be some debate on this in the future.

Key to property underwriters is that this Clause will not lead to salvors being out of pocket and any award/appeal award will simply be apportioned against the remaining fund. As such only the higher value salved interests bear the burden. This may be particularly problematic in circumstances where there is significant low value cargo on a containership, much of which is often uninsured.

In addition the Clause does not indicate when the question of the low value must be determined. Will it be at the security collection stage, when there may well be less resistance or opposition to any application by other salved property, or at a later date, after costs and expenses have been incurred against these low value interests in collection and notification, which are then visited on the higher value insured property?

Of course, it is the case that casualties involving laden container vessels will usually involve a declaration of General Average and, as such, contributions in salvage will be readjusted at a later date, subject to the 1974 or 1994 York-Antwerp Rules. It may be that those drafting this clause also had this in mind when considering its merits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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