UK: Is The Salvage Industry In Terminal Decline? LOF v Commercial Contracts

Last Updated: 5 December 2017
Article by Martin Hall

Most Read Contributor in UK, November 2017

In May this year I gave a presentation at the Clyde's Marine Conference in Singapore titled "Is the Salvage Industry in Terminal Decline?" (as reported in Lloyd's List).1 In July, Lloyd's List published a further article headed "Who Killed LOF?"2

Following this theme, in September at the IUMI conference in Tokyo, David Lawrence, the Lloyd's Controller of Agency (responsible for the administration of LOF), stated "While not necessarily at the peak of fitness, LOF still does have a pulse."3

David Lawrence highlighted the number of LOFs agreed during the year to date, which was 45 (now around 50). However, crucially, he also pointed out that there has been a rise in side agreements to cap the salvage awards (so called "hybrid" LOFs), which he thought represented "more than 50%" of cases.

As Jeremy Russell QC (the current LOF Appeal Arbitrator) said at a conference in March this year, as reported in Tradewinds, "People look for ways to avoid LOF contract with a cap or wreck-removal contract or a towing contract."

So, why is that?

One major perception is that LOF has simply become too expensive.

Salvage Award Data

To test this assumption, I have analysed whether there has been a general increase in the level of awards over the last seven years and have sought to identify trends in salvage awards under LOF to see where the reality lies.

Lloyd's Salvage Arbitration Branch publishes statistics for LOF usage on their website going back to 1990, and the website is updated to cover more recent years. In considering these statistics we have to take into account that these figures are based on awards; a good proportion of cases settle – around 70% on average.

To make this easier I have extrapolated the statistics into separate graphs:

LOF v COMMERCIAL CONTRACTS

The first thing that will be noticed is that since 1990 the trend in terms of new LOFs has shown a marked decline.

So why the drop in the number of LOF cases? The most obvious reason is simply a lack of casualties. Safety at sea has improved over the years, also compounded by periods of reduced trade. However, there is also increasing pressure from the insurance market to steer away from LOF where possible.

LOF v COMMERCIAL CONTRACTS

This graph shows the peak in total salved values in recent years before the shipping recession. It also shows much higher values in the early 1990's. However, it has to be remembered that there were more LOFs then and more awards.

Apart from a low start to the 1990s this starkly demonstrates the extraordinary years of 2007 and 2009 both of which it has to be said were followed by sharp drops in levels of awards. None more so than in 2010, which coincided with the impact following the economic downturn in 2008. Whilst values recovered in 2011, the overall trend is very erratic. The award figures for 2007 and 2009 show that 6 or 7 "mega" awards dominated the figures (including "APL PANAMA" and "OCEAN CROWN", the 2 biggest awards ever).

One factor that clearly had an impact on the level of salvage awards in recent years was the enormous increase in vessel values leading up to September 2008. We also saw a substantial increase in bunker prices and inflated charter rates for, for example, bulk carriers. In addition, salvage tugs and supply vessels were earning well over US$100,000 per day in pure commercial work. How times have changed!

LOF v COMMERCIAL CONTRACTS

This graph, showing the levels of award expressed as a percentage of salved values, probably gives us the best indication of whether awards have in fact increased over the whole 26 years and not just looking at 2007 and 2009 in isolation.

Obviously, the much higher the fund the more likely the award will be more generous. Likewise, the higher the expenditure and greater cost of investment in salvage equipment involved in rendering salvage services, the greater the award.

Of course, recent adverse developments in the market have had an impact: the boom times are over, vessel values have dropped considerably (although picking up again) and commercial rates for towage operations and the offshore supply industry have significantly dropped with many tugs and supply vessels laid up. Such market conditions will inevitably see awards reducing as a whole.

Having said that, whilst there are substantial peaks and troughs, generally the trend is upwards over the whole period in terms of awards expressed as a percentage of values.

It is important to stress that whilst the salvors may be getting a greater percentage of salved values, this does not necessarily mean they are getting more money. The International Salvage Union (ISU) latest statistics demonstrate a substantial reduction in income, not only from LOF but overall. They also show, interestingly, an increase in recent years in non-LOF salvage work even though the revenue for such work is also down. ISU figures show total revenue for the salvage industry last year of US$380 million, compared with US$717 million in 2015, a drop of nearly 50%.

So what are the reasons for the increasing trend in awards as a percentage of values?

Possible reasons may include:-

  1. Larger investment in salvage equipment
  2. Bigger and more complex salvage cases
  3. More dangerous cargoes
  4. More difficult/dangerous environmental considerations
  5. More third party interference
  6. More stringent conditions imposed
  7. Greater potential liabilities to salvors (civil and criminal).
  8. Less LOF cases.
  9. Increased operating costs.
  10. Reduced salved values.

Although values and awards declined sharply in 2010, the one thing that has not gone down is operating costs, apart from bunker prices. This, of course, puts more pressure on the salvage industry. Such is the state of the salvage industry, particularly for those with salvage tugs on station, that companies are quoting unusually low rates for towage jobs, as well as variations of, or alternatives to, LOF.

So, ironically, market conditions have had the effect that the insurance industry was striving for when it was concerned in recent years that salvage awards had increased. However, a further effect is that with awards inevitably coming down due to market forces, but with operating costs generally not having reduced, we have already seen, and will continue to see, less salvage tugs on station.

What is clear is that unless and until anyone comes up with a better solution, and with governments applying austerity measures, LOF remains the primary means to maintain the salvage industry. Ultimately, the insurance market subsidises the salvage industry and, as a result, as that subsidy reduces in monetary terms due to, for example, less LOFs combined with reduced values, the greater the pressure on arbitrators to increase the percentage of awards to values.

As Jeremy Russell and David Lawrence have both alluded to, more LOFs are being entered into with caps, or commercial terms. This is a sign of things to come.

Why is this – apart from the perception that LOF is more expensive?

Insurers are more sophisticated, some with in-house expertise.

  1. Insurers are more assertive in their approach to the types of salvage contracts to be used.
  2. P&I Clubs, with the use of SCOPIC, are more involved in salvage.
  3. There are more experts available – brokers, consultant salvage masters (who have left salvage companies and now joined or formed their own consultancy firms), aside from lawyers.
  4. Communications are easier and quicker.
  5. Market forces - salvors are more desperate given lack of work.
  6. Cut-throat competition – what I have previously described as a "race to the bottom".
  7. Drive towards pre-arranged commercial contracts or tariff rates.

LOF v Commercial Contracts

So what are the pros and cons of entering into a clean LOF rather than some sort of hybrid version that reflects more commercial terms or capped salvage awards, or indeed a pure commercial salvage type of contract such as Towhire, Towcon, Wreckhire or Wreckfixed?

Why LOF?

Pros:

  • No cure – no pay.
  • Quick to agree – no need to hesitate in emergency.
  • Approved (in principle) by the insurance industry.
  • Salvors take over funding.
  • Salvor's responsibility – best endeavours. Higher standard.
  • Pro-rata ship/cargo/bunkers.
  • Well established system of determining the level of award by experienced arbitrators.
  • Well established group of practitioners – over 70% of cases settle.
  • FCAP regime to reduce legal costs.
  • Designed to sustain a viable salvage industry – subsidised by the insurance industry.

Cons:

  • Thought to be too expensive.
  • Ultimate award unknown – problems of reserving (although security).
  • Too salvor biased – although matter of public policy.

Why commercial contracts?

Pros:

  • Owners/insurers have more say over operation and cost - more control.
  • Takes advantage of cut-throat competition to reduce cost.
  • Owners/insurers can choose the salvor – maybe by tendering.
  • Pre-existing contracts/tariff rates may be used.
  • Bimco towage/wreck removal forms industry approved – but not "hybrid" LOFs.

Cons:

  • No ultimate cap on costs, potentially never ending.
  • Due care – lower standard than best endeavours.
  • Fixed price contracts – not fixed price!
  • Not limited by value.
  • Not no cure – no pay.
  • Knock for knock regime – salvors not responsible for loss/damage to ship.
  • Time required to enter contract – not for emergencies.
  • Delay can have unintended consequences.
  • Termination issues.
  • Pre-existing contracts/tariffs – can be an issue if the "preferred" salvor not near the casualty or doesn't have suitable equipment etc.
  • Is the right salvor in the right place?
  • Funding – insurers not normally able or willing to fund in advance the costs (issues with co-insurers, cargo etc).
  • Owners have to pay in first instance.

Hybrid LOFs

Capped LOFs are becoming more common on the basis that the insurance industry can keep the benefits of LOF but also keep the cost down to a capped award figure. Salvors are being forced to use them more due to intense competition.

But care needs to be taken – such a capped LOF could prejudice P&I Club cover. The P&I industry has already issued warnings about this. The reason for P&I concern is that where the SCOPIC clause is invoked and the SCOPIC claim exceeds the ultimate salvage award, then the Club will be liable for the difference between the salvage award and the SCOPIC claim. If the salvage award has been capped, this may result in increased SCOPIC exposure for the P&I Club. Caution should also be exercised in relation to side agreements that may seek to cap or regulate the amount of the Article 13 salvage award against all or some parties to the LOF:

  • Collateral agreements are not necessarily binding on cargo/bunkers, particularly if not deemed to be reasonable and/or there is no urgency – owners' authority to bind cargo or any other party to the LOF is governed by Article 6 of the Salvage Convention 1989.
  • If the side agreement is designed only to benefit one party to the LOF and not any other party, it could be in breach of Clause L of LOF, which voids any LOF signed under any form of inducement, and/or
  • Could be deemed fraudulent, particularly if not disclosed to the other parties.

Conclusion

There is no doubt that LOF remains the best all-purpose salvage contract around – particularly in emergencies. We do not want to go back to the days when we saw casualties and environmental disasters similar to "Amoco Cadiz" in 1978 that occurred over haggling about contracts. LOF will not therefore disappear, but the trend towards hybrid LOFs or commercial salvage terms is likely to increase, due to pressure from the insurance industry and also salvors' desperate attempts to secure business.

Despite the range of difficulties that it faces, the salvage industry does retain one significant advantage; the insurance industry is not really in a position or indeed willing (except in rare cases) to (A) arrange salvage operations in their own name, (B) fund salvage operations or (C) take the risk. Also, the insurance industry has to be careful that they do not negotiate terms that could lead to potential civil or criminal liability to be imposed on the insurers themselves, for example in the event of loss of life or pollution.

However, the salvage industry (in particular the ISU) needs to move with the times and to meet the challenges presented by market conditions and the insurance industry. In particular they could help to develop a standardised hybrid or more commercial tariff-based LOF, to run side by side with the 'clean' LOF, and which can be used for the less urgent cases to cap or control costs. Such a hybrid LOF - that may, for example, incorporate a success bonus - has the potential to address the concerns and issues currently surrounding the negotiation of commercial contracts. It could establish a level playing field, more transparency and enable salvors to avoid excessive focus simply on tariff rates.

Certainly such a standard form of hybrid LOF could result in lower returns for salvors on the less urgent salvage cases, but that is happening now anyway. It should, however, mean higher returns, with contractual benefits for all sides, on cases for which LOF is currently felt to be less suitable.

A standardised version 2 of LOF for the less urgent cases, based more on commercial terms or capped awards, could mean that LOF would once again become the salvage contract of first choice in the vast majority of cases – the only choice to be made by the parties being whether it will be LOF1 or LOF2 that is more suitable.

Footnotes

1 Lloyd's List Maritime Intelligence 26 May 2017

2 Lloyd's List Maritime Intelligence 05 Jul 2017

3 Lloyd's List Daily Briefing 20 Sept 2017

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions