Calling LOF: Are you alive and well?

Simon Tatham questions why recent years have seen a decline in the use of LOFs.

When I took my first job as an Admiralty or ‘wet’ solicitor in the City in 1980, we acted for Selco (as it was then known) as well as one or two smaller but regular LOF salvors. Salvage arbitrations were a monthly occurrence. As today, they were pushed through the system at remarkable speed, salvors seldom having to wait more than a year for their awards, with cases capable of settlement being disposed of yet faster.

We had a managing clerk camped almost full time in a hotel in Singapore, before English solicitors were permitted to practise there, taking evidence. He used to send, when sober, the salvage masters’ statements back to the office in neat manuscript, for typing. Some of these were very lengthy, covering complex three- or four-week refloating operations, and these statements were the main evidence relied upon in the arbitration.

These were the days when salvors operated more independently, less accountably, less under the scrutiny of coastal authorities and before the days of SCRs, daily reports and the other more open-book communications that one sees today and which are, in my view, welcome developments. We used to turn up with our document bundles and with counsel before the Lloyd’s arbitrators, who to me appeared to be venerable gentlemen with idiosyncratic habits. The Appeal Arbitrator, the late and greatly respected Gerald Darling QC, smoked a pipe and had the habit of talking so softly through clenched teeth that if the birds were singing in the gardens of the Inns of Court in London, as they often were, those seated like myself at the far end of the long table simply could not hear what he was saying.

One or two others were well known for having a tendency to drop off to sleep in the afternoon, causing much suppressed hilarity among us youngsters, as counsel making his submissions would clear his throat rather loudly and pretend not to have noticed while then continuing “… and, yes Sir, as I was saying…”.

The job was one that one learned, on one’s feet, from practice and experience, as with the law of salvage. The main salvage text books relied upon today, Kennedy and Brice, had yet to be published. Among my colleagues today at TugAdvise who recall those times, we can probably count among us more than a thousand salvage cases. The remarkable point is that each case is different and each has its – often fascinating – nautical features.

At the time of writing, as with many readers, I am looking forward to attending ITS 2014 in Hamburg. When I first attended the conference in 1994, which was held that year in Southampton, a major topic for discussion was salvage, and in particular salvage under Lloyd’s Open Form (LOF). Some 140 LOFs were being signed annually at that time and no cure-no, pay salvage awards formed a major part of the ISU companies’ revenue, making a significant contribution to the bottom line. Times have changed, however, and in past few years the number of LOFs has barely exceeded 50.  So what explains the decline in the usage?

Firstly, it is clear that no competing contract has gained acceptance at LOF’s expense. In fact, apart from the Japanese Form, which remains well-used locally, national variants, such as found in France or Norway, have fallen into disuse, while the notorious Turkish Form (where the arbitrator takes a percentage of the award) is a rarity. When one speaks to the leading hull underwriters, they will all say that if a case has to be dealt with on salvage terms, LOF is still the preferred contract. It is flexible and responds to the needs of a wide range of cases, and is also constantly under review: for example, the current proposal to formalise the attendance of a property casualty representative on site to protect the interests of the salved parties.

No, there is nothing intrinsically wrong with LOF. Put quite simply, the principal reasons for the lower uptake are modern communications, falling ship casualties and increased competition between tug and salvage operators. Combined with this, today’s underwriters are smarter, and able to move more quickly to secure daily or fixed rate terms whenever they can. Shipowners and ship’s masters are risk-averse, and more inclined to regard salvage as something unknown and therefore best avoided, although in some cases, where cargo values are much higher than hull values, savvy owners will still opt for LOF, as this will force cargo to contribute directly to the cost of the salvage operation, avoiding a more laborious recovery of a contribution in General Average.

One third of LOFs today are signed with SCOPIC invoked. This is a fairly sure sign that values are going to be low and, as the cost of the operation will then fall principally on to P&I, hull underwriters are less likely to discourage agreement. Notwithstanding these developments, the ISU companies’ collective income from salvage has not greatly declined: around US$175m over both of the past two years of complete statistics. However, this is greatly exceeded now by wreck removal revenues.

So, to conclude, LOF is in rude health, and operating well when needed. It is just not needed so often.

Simon Tatham is a partner of Tatham Macinnes LLP and a founding member of its new service, TugAdvise.com. He has 30 years’ experience in shipping law. He will present his paper, LOF in 2014, at ITS 2014 in Hamburg at 9.40am on Wednesday 18th June.