LOF – claims by dispossessed salvors

30th September 2020

In February 1977 a vessel in ballast, Unique Mariner, ran aground in Indonesian waters not far from Singapore.  The master was advised by ship’s agents that a tug would be sourced. A professional salvor’s tug turned up from Singapore and the master mistakenly thinking that it was the tug procured by the agents, signed Lloyd’s Open Form (LOF).

When he discovered his mistake he dismissed the salvage contractors. The contractors proceeded with a claim in arbitration for damages under the LOF for the award they would have earned if they had been allowed to continue and so the owners applied to court for ruling that the LOF was not binding upon them. They failed.

The salvors, Selco Salvage as they were then known, were entitled to damages in a sum equal to the award they might have been expected to earn.

In July 2018 LOF was agreed between the owners of the laden, 2012-built geared handymax bulker Sam Lion and Five Oceans Salvage very shortly after it had struck rocks arriving at Ceuta, North Africa, for bunkering. It had then anchored locally. It had damage to its port side double bottom tanks 2-5, the cofferdam below the engine room, and the duct keel, and two gas oil tanks in way of the engine room were also tidal.

The contractors engaged two local Spanish tugs, and mobilised a salvage team of six to site, who boarded the following afternoon and set about engaging local divers to inspect and carry out temporary repairs. A damage plan was then prepared and a preliminary salvage plan drawn up which was presented for approval to the harbour master, who needed to clear it with his superiors in Madrid.

The plan at that early stage was that the vessel, following temporary repairs, should proceed on its voyage to Dakar for discharge. Meanwhile the vessel’s pumps were coping with the ingress and the authorities brought the vessel alongside a berth.

Hull underwriters with equal speed despatched a senior staff member to site. He took the view that the contractor’s services being provided under LOF could be dispensed with and divers engaged directly to patch and so on. At around midnight the contract was unilaterally terminated.

Five Oceans had been engaged for just over two days and had run up out of pocket expenditure of a little over US$75,000, which included all the local charges incurred in respect of the ship. In March 2019 on a salved value found by the Lloyd’s arbitrator to be in the order of US$14m, they were awarded US$218,000, plus interest. Legal costs were resolved without the need for a further order.

The same arbitrator then had to determine whether the contract had been prematurely and unlawfully terminated and, if so, what the amount of damages should be.

LOF is a no cure, no pay English law contract that encapsulates the international Salvage Convention of 1989 and which requires that the salvors use their best endeavours to salve the vessel and related property and take it to a place agreed or, if no place is agreed, to a place of safety (where the services are therefore deemed to end – Clause H). It contains no express termination rights very simply because at the outset neither party might know how the operation will evolve. In that process, under Clause F and Article 8 of the Convention, the owners are obliged to co-operate fully with the salvors. The supporting clauses to LOF also contain an ‘overriding objective’: that it is operated in good faith, in a reasonably businesslike manner and ensuring that the reasonable expectations of all parties are met.

The arbitrator, considering these provisions and applying principles established in the Unique Mariner incident, decided that it was an implied term of the contract that the owners would not act in such a way as to prevent the contractors from performing their services so long as they were willing and able to do so, and that included an obligation not to dismiss or supersede the contractors. The owners were in repudiatory breach of that term and of Clause F and the salvors were entitled, as dispossessed salvors, to damages equivalent to what they should have been entitled to earn.

Specifically, the arbitrator found that although the vessel was physically safe, its damage was serious, it was still immobilised pending assistance and had no reasonable prospect of being allowed to proceed to Dakar on temporary repairs only. Transhipping the cargo for onward shipment to Dakar would not have been feasible. A 24-day operation would have been required, bringing the casualty to Cadiz as a place of safety where transhipment and repairs could take place. As such, Ceuta was not a safe place.

Had that entire operation been allowed to continue and taking into account likely expenses of more than US$500,000, the hypothetical global award was assessed at US$1,550,000. The net amount, after deduction of the award above for the work that was actually carried out, assessed as damages due to the salvors was US$875,000.

This was upheld on appeal in August last year.

There are important lessons to be learned for underwriters and salvors alike.

Under LOF the contractors are bound to go on until the job is finished (to achieve a safe condition in a safe place). To make the contract work, the corresponding obligation of owners is not to prevent them from doing so.

It is not always easy to assess whether a vessel is in such a condition, as was the case here, but it is not sufficient for underwriters to say that whatever remaining work needs to be done can be done by non-professional salvors; equally that much of the work may be of a routine nature or might be carried out by specialised subcontractors employed by the salvors (as is so often the case). That makes it no less of a salvage nature.

Indeed, Article 1 of the Convention does not attempt to define salvage other than in the broadest terms as any act or activity to assist a vessel or property in danger in navigable waters.

Termination can be tricky. Each case is dependent on its facts. Any early assessment of the risks attending a casualty, however, which might include unpredictable harbour masters or weather as well as commercially awkward decisions of Class (if involved), is fraught with problems.

Where LOF is employed salvors have the burden of resolving these issues. And there are many cases where owners bitterly regret, in hindsight, termination of salvage services forcing owners, with or without the support of underwriters, not only to actively resolve ongoing problems themselves, but also pay for it up front. Even if some of those costs can eventually be thrown on to cargo in GA, it is often easier to see a salvage operation through with cargo having to pay their share up front. Moreover, if a salvor seeks to terminate prematurely, owners are not obliged to accept that. Additionally, where salvors wrongly seek to string services out after safety is achieved, they have had their knuckles regularly rapped by an arbitrator.

For better or worse, the system works and a balance is achieved.

Clause H, the subject of debate above, benefits both sides. I say this as a lawyer who has worked for both sides, for many years. For sure, there will be cases where underwriters regret the engagement of salvors on LOF terms, where a commercial tow might have been available, for example. The reducing number of LOF however proves that underwriters are, by and large, getting what they want and that includes jobs on commercial terms that would otherwise easily justify a salvage award.

Finally, it is a credit to colleagues in the legal world here in London that such a complex and regrettable dispute was resolved in little over one year.

Simon Tatham is a partner at Tatham & Co and founder member of the www.tugadvise.com service. He has more than 30 years’ experience of shipping law.

Reproduced with kind permission of International Tug & OSV magazine.