Can salvage sub-contracts be set aside for unfairness?

Wednesday 5 December 2012

IT IS rare in practice that provisions of the 1989 International Salvage Convention fall under the judicial spotlight.

Many are familiar with the famous provisions of Article 13 in assessing salvage awards and others are only too happy to forget the infamous Article 14 killed off, in effect, by the incorporation of Scopic within Lloyd’s Open Form.

Less so Article 7, however, which is currently the subject of litigation in New Zealand in the context of the Rena grounding. In that case the salvage, now a separate wreck removal operation, was initially commenced under LOF terms with Scopic invoked. The most suitable tanker available to receive the casualty¹s bunkers was chartered in at short notice by the salvors, Svitzer. It all happened very quickly, as bad weather was expected.

The parties entered into a short-term sub-contract on the Supplytime 2005 form with rates and other terms following for discussion only after the tanker was already under way for the grounding site. Unfortunately for the salvors, many weeks later the price, originally sought for an expected seven-day job, was now running into millions of New Zealand dollars.

No doubt coming under pressure from the P&I Club that was picking up the bill under Scopic together with the usual uplift on expenses, the salvors eventually applied to court seeking an order that the contract be annulled or the price modified pursuant to Article 7. The interesting question, among others in dispute, is whether this provision applies to a sub-contract as opposed to the salvage contract itself.

To turn the clock back, reflecting to an extent old case law on the jurisdiction of the Admiralty Court, the preceding Brussels (Salvage) Convention of 1910 contained a provision that every agreement as to assistance or salvage entered into at the moment and under the influence of danger may, at the request of either party, be annulled or modified by the court, if it considers that the conditions agreed upon are not equitable. It is reasonably clear from this that the convention was intended to apply to salvage contracts only.

However, the provision was subtly changed in the 1989 convention. Article 6 provides that the convention applies, in rather broad terms, to salvage operations. Article 7 then provides that “A contract or any terms thereof” may be annulled or modified by the court if its various tests are met.

In other words, the convention draughtsmen did not specifically restrict the scope of this narrowly to salvage contracts.

Reading these two articles together, does a contract entered into for the purposes of or in the context of a salvage operation fall within the ambit of the convention so as to give a court the power to modify or annul?

If so, then potentially every contract for services entered into between a salvor and a sub-contracting third-party supplier may likewise be caught. Of course, the applicant is still required to show that the contract was entered into under undue influence or influence of danger and the terms are inequitable terms, or that the payment is in an excessive degree too large or too small for the services actually rendered. These are fact dependent and quite high threshold tests.

Nonetheless, this is or should be a concern for the salvage industry and in particular their sub-contractors. Salvors frequently have no choice but to pay exceptional rates to local contractors either because time does not permit haggling or the contractor is the sole provider of essential craft or equipment or simply because the action is taking place in a difficult corner of the world.

Is it desirable that salvage contractors might agree to those terms in the knowledge that the agreement can be revisited in due course? Of course it might cut both ways inasmuch as that same threat might temper the financial ambitions of the less scrupulous suppliers just as it might assist P&I clubs in keeping a lid on runaway Scopic expenditure where not all salvors, conscious of their 25% mark-up on expenses, might go that extra mile to negotiate the best prices.

A final point lest this is not entirely clear. The convention will be applied by the tribunal chosen under the sub-contract, not the LOF arbitrator.

Returning to the litigation in New Zealand, the sub-contractor tanker owners applied to strike out the claim on grounds that the convention was never intended to apply to third party sub-contracts. The judge at first instance decided that there was a triable issue, and so the case goes on.

As it is unlikely that a similar case will crop up, and this is the first on the point since the 1989 convention came into force, the salvage and P&I world is, or should be, looking closely at the outcome.

Simon Tatham

Simon Tatham is a solicitor and partner of Tatham Law and Mike Allen is a consultant with TugAdvise, a specialist legal service advising those concerned in the tug and OSV markets.