UK: The New Lloyd’s Open Form 2011

Last Updated: 9 June 2011
Article by David McInnes and Tomas Ling

The New Lloyd's Open Form 2011

A new edition of the Lloyd's Standard Form of Salvage Agreement, better known as the Lloyds Open Form ("LOF"), has recently been published. It will be known as LOF 2011. A new edition of the accompanying Lloyd's Standard Salvage and Arbitration Clauses ("LSSA") has also been released. The LOF has been in existence for over a century and the form has little competition as the preferred means by which the terms of salvage operations are agreed. The form has always been based around two fundamental principles.

Fundamental Principles of the LOF Form

The first is that of "no cure no pay", meaning that the salvor is only to receive payment in the event that the salvage operation is a success. The second is that the level of payment is to be decided after the event by an arbitrator to reflect the value of what is salved and awards can be correspondingly high. The policy behind these principles is on the one hand to compensate salvors who may go to considerable danger in attempting a salvage operation and on the other hand to ensure that the salvage business is a profitable one and that it be encouraged. This article takes a look at the changes to the LOF 2011 and to the accompanying LSSA.

Changes introduced by LOF 2011

The changes made to the LOF itself are two. Firstly, the details of LOF awards are to be made available on the Lloyd's website (LOF clause 3), although only by subscription. This provision alters the traditional confidentiality that parties to an LOF arbitration had enjoyed. The Council of Lloyd's justifies this change as part of a general policy of transparency and it is accompanied by a new procedure for appointment to the LOF Panel of Arbitrators, also designed to enhance transparency. Lloyd's is also making appeals publically available. The procedure through which parties to an arbitration may object to the publication of the award is to be governed by the new clause 12 of the LSSA. Secondly, Lloyd's now requires that all agreements to use the LOF be reported to Lloyd's (LOF clause 4). Lloyd's justifies this new requirement as a result of the increasing use of the form, a increase which it is keen to monitor. The remaining changes are to the LSSA.

Changes to the LSSA

The security that a salvor may obtain from the owners of a salvaged vessel often becomes an issue in salvage operations. Although the central mechanisms by which the salvor is able to obtain security remain unchanged, the new edition of the LSSA does alter the general security procedure in two ways.

The first applies to the security that an arbitrator may obtain. Lloyd's reports that arbitrators are increasingly concerned about their exposure to unpaid fees. Under the LOF, security for the award due to the salvor should be provided directly to the Council of Lloyd's. This also provides security for the arbitrator's fees. Lloyd's reports that owners are frequently failing to do this. A change to the LSSA clauses entitles the salvor to demand security for fees incurred or reasonably anticipated to be occurred. This new power is provided by clause 6.6 of the LSSA clauses and an identical power is provided to appeal arbitrators by clause 10.8 of the LSSA.

Lloyd's reports concern regarding the means by which security is obtained in cases involving container ships, which may carry cargo owned by hundreds and even thousands of different owners. The new clause 13 of the LSSA allows notice of the salvage operation to be provided to the insurers of the property rather than the owners themselves, the logic being that one insurer is likely to act for a number of owners so many fewer notices will need to be sent out.

According to Lloyd's, "... it is often the case that ... the salvors are able to reach an amicable settlement with the 'represented' cargo interests, but are left with no option but to obtain an award against the remaining interests, thereby incurring costs associated with utilizing the full arbitration process". The new clause 14 of the LSSA allows the salvors to apply to the arbitrator to bind a minority of cargo owners, where a majority (representing 75% by value of the salved cargo) agree. Finally in this context, the new clause 15 of the LSSA allows the arbitrator to agree to an application by the salvors to excuse liability for salvage from owners of cargo valued below an agreed rate. This aims to avoid circumstances where the cost of proceedings in relation to certain owners is out of proportion to their potential contribution to any award.

Comment

It might be that the only controversy that the new LOF and the LSSA clauses stir up is not through what they include but what they omit. Salvors had been arguing for the inclusion of a new clause that would compensate them more generously for their efforts to avoid oil spills and other environmental damage. The efforts of salvors were apparently defeated by the interests of the P&I clubs, who ultimately fund the salvage process. The clubs were adamant that the existing Special Compensation P&I Club clause (Scopic) was adequate. It is perhaps not surprising that the century old LOF has resisted calls for radical change.

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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