Salvage Contracts and Arbitrating Claims

Luca George Antony*

Introduction to the law of salvage

From the time of the Romans, it has been founded that the act of salving marine property from peril would entitle the salvor to a reward.[1]Evolved through codification by various jurisdictions and decisions of the chancery courts, the law of salvage recognizes a salvors right to compensation for voluntary, and successful, salvage of maritime property in peril.[2] Being a dangerous activity to begin with, and there being a dire need for salvage operations, the scope of compensation is not limited to equitable reimbursement but extends on considerations of public policy and reward for risk.[3]Following are the four essentials to an operation of salvage:

Salved property must be ‘maritime property’

Primarily, maritime property consists of vessel, cargo and freight.[4] Any part which belonged to a vessel like, furniture, cargo, flotsam, jetsam, ligan, wreck or derelict, will also constitute maritime property.[5] The 1989 convention further extends ‘maritime’ property to include any property not permanently and intentionally attached to the shoreline.

Which is in danger

A maritime property ought to be in peril to require salvage.[6]A peril may include stranding, grounding, collision, dragging anchor, shifting of cargo, damage to hull which may be caused by loss of steering or power, rough weather, fires and explosion, etc. A peril need not be absolute, or even immediate, but, of such a nature, to possibly expose it to destruction, if salvage services are not rendered.[7]

Salvage should be undertaken voluntarily

A pre-existing duty to render assistance to a vessel, which now finds itself in distress, would preclude a claim for salvage reward.[8]Such a pre-existing duty may exist in the form of a contract, except those entered for salvage in face of the peril; duty of the captain and crew of the vessel, or an official governmental duty to assist vessels in distress.[9]

Salvage must be successful

Salvage reward is paid out of the property so salvaged.[10] In all its stages of evolution, the law of salvage envisaged compensation only in cases where the salvage yielded a useful result.[11] It is out of this principle that the concept of ‘no cure no pay’ originated.

Introduction to contract salvage

The historical understanding that a salvor who successfully saved a vessel was entitled to part of the saved property has undergone massive changes. Modern salvage is predominantly carried out on the basis of a salvage contract that clearly defines the rights and obligations of a salvor and salvee, basing itself on historical principles of salvage.[12]

A salvage contract is usually entered into with a professional salvor, by the master of the vessel in distress, or more often, the vessel’s administration on land. Since time is of the essence, a standard form salvage contract is employed, which enables the parties to come to terms swiftly. The most prevalently used form is the Lloyd’s Open Form Salvage Contract,[13] which is based on the principle of ‘no cure, no pay’, and includes the Lloyd’s Salvage Arbitration Clause to determine the award and settle any differences arising.

Arbitration clause in salvage contracts

Arbitration in salvage contracts differs from the norm, mostly because of the peculiar nature of a contract for salvage.  While the law of salvage has come to be deeply rooted in common law, and principles of contract, it still manifests principles established at its inception. Salvors are not ‘recompensed’ but ‘rewarded’ for the risks undertaken by them. The possible rush in which salvage terms come to be agreed upon bring up considerations of validity and fairness to both parties. Also, owing to the nature of the operation undertaken by salvors, and payment only upon successful salvage, duty of care, and liability for negligence, is another heated subject. More recently, minimizing the impact on the environment, and strict liability for failing to do so, has further revolutionized this operation.

LOFs and LSAC

The LOF ‘no cure, no pay’ is sometimes referred to as a glorified arbitration agreement, under which, salvage reward is decided by an independent arbitrator on the basis of the law of salvage.[14]The LOF is a brief and straightforward document which is ideal in times of distress, when there is little time to undertake long negotiations between concerned parties. Security is provided by the owners of the vessel and/or the cargo interests and, an arbitrator is empowered to finally decide the amount of the salvage reward.

The arbitration clause and effect

On agreeing to govern the salvage by way of the LOF, parties agree that ‘the contractor’s remuneration and/or special compensation shall be governed by arbitration in London in the manner prescribed by Lloyd’s Salvage Arbitration Clauses…. any differences arising out of the agreement or the operations thereunder shall be referred to arbitration in the same way.’.[15]

The arbitration agreement itself is governed by the law of the seat and the English Arbitration Act, 1996. Accordingly, it is maintained that the parties intend to refer all matters arising out of or in relation to the agreement, exclusively to the arbitrator.[16] Any proceeding commenced in court ought to be stayed unless the court is satisfied that the arbitration agreement is null, void, inoperative, or incapable of being performed.[17] Where the balance of interest lied in favour of continuing arbitration, the court dismissed an interlocutory injunction by a cargo interest claiming that the LOF was signed without their authority.[18]

Parties (Owner and cargo interests)

In a pure salvage operation, the ship owner and cargo interests are severally liable for the portion of their interest salved.[19] The salvor cannot proceed against the ship owner for remuneration arising out of the salving of cargo.[20]

However, in LOFs salvages, the master of the ship can either enter into the contract on behalf of all cargo interests,[21] with the owner providing full security for the reward, or, the cargo interests can form part of the agreement and provide their portion of the security.[22] In case it is the former, parties to arbitration may be the salvor and the ship owner, and the LSAC rules safeguards finality of any such award by providing that it would be final and binding on all parties concerned, whether represented in arbitration or not.[23] The cargo interests would be bound by the award and the owner may move against them for restitution for discharging their liability or have maintain a lien over their cargo till payment.[24]

Security

One peculiar feature of LOF arbitration is that security for fulfillment of a possible award is a compulsory step. On termination of the salvage operation, the salvor is entitled to demand security from the owners.[25] This right will arise on the successful salvage of the property.[26] Until security is provided, the salvor will have a maritime lien on the property that has been salved.[27]

The salvors are not entitled to arrest or detain the property unless the owners have failed to provide the security within 21 days from termination of the services. Also, the security demanded should not be unreasonable or excessive.[28] An owner may either file for an injunction restraining the salvor from arresting the property for the excessive demand or request the arbitrator to reduce any such excessive security demand.[29] Under the rules, the arbitrator has absolute discretion to order the salvor to pay part or whole of the security which has been demanded unreasonably and award costs.[30]

Award

The LOF does not provide the manner of deciding the quantum of reward, leaving it to the discretion of the arbitrator. In the TojuMaru, Lord Diplock very accurately opined that a salvor is entitled to reasonable remuneration for work and labour, but ‘reasonable remuneration’ is not assessed on the ordinary common law contractual basis for contracts for work and labour.[31]

An arbitrator first proceeds to decide upon the value of the salved property, guided by the principle that the salvage reward can never be more than the salved property.[32] In earlier times, the salvor would be awarded even half of the total salved property value.[33] That is no longer the case, with salvage rewards seldom crossing 2-5% of the total salved value. The value of the salved property is determined on the termination of the salvage services.[34] At this point, the arbitrator will also have to ascertain the condition of the vessel, costs of repairs, or whether the vessel is to be valued for its scrap.

Before assessing the quantum of the reward, the arbitrator also needs to ascertain whether the salvage is eligible to a salvage reward. One part of determining this eligibility is ascertaining whether the essentials are fulfilled. Accordingly, if the ‘salved property’ was not in peril as to require assistance, no ‘salvage’ has been conducted and the ‘salvor’ would not be entitled to any reward. This shall also be the result if salvage services were not rendered voluntarily or it cannot be concluded that the salvage was successful.

Vitiating factors like mistake, non-disclosure, misrepresentation and undue influence will render any salvage contract void. The arbitrator will decide upon vitiating factor on principles of equity and in a fair and just manner.[35] In doing so, the arbitrator will have the power of annulling or modifying unequitable terms or the salvage contract itself.[36]

Upon dealing with preliminary matters, the arbitrator will proceed to assessment of the reward to be award. Through the years, judges and arbitrators have settled on certain criteria which are now the following, laid down by Article 13 of the Salvage Convention:[37]

  • the salved value of the vessel and other property;
  • the skill and efforts of the salvors in preventing or minimizing damage to the environment;
  • the measure of success obtained by the salvor;
  • the nature and degree of the danger;
  • the skill and efforts of the salvors in the salving of the vessel, other property and life;
  • the time used and expenses and losses incurred by the salvors;
  • the risk of liability and other risks run by the salvors or their equipment;
  • the availability and use of vessels or other equipment intended for salvage operations;
  • the state of readiness and efficiency of the salvor’s equipment and the value thereof.

The consideration of public policy of encouraging salvage services historically pushes arbitrators to making awards on a generous scale.[38] Out of the set criteria, arbitrators tend to give more weight to the danger to the property salved, nature and skill of the services provided, whether the salvor is a professional salvor, policy of encouraging salvage services and more recently, minimization of environmental damage.

Appeal

Any party may appeal from an Award by giving written Notice of Appeal to the Council provided such notice is received by the Council no later than 21 days after the date on which the Award was published by the Council.[39] The appeal is heard by another arbitrator of similar qualification.

Conclusion

Salvage contracts regulate only the manner of deciding rights and duties, continuing to abide by century old principles of the law of salvage. Arbitration is an ideal mechanism to decide upon quantum of reward and any dispute thereto, as every matter is to be judged by applying various criteria and, in a practicable and business rational manner. The public policy of encouraging salvage operations is paramount and so is a procedure which brings about reasonable expectations of both parties. To these ends, LSAC arbitration, backed by over than a century of experience, is an ideal forum. It provides a flexible format to apply principles of salvage law. But it is not all blossoms, its hyper local by way of it being conducted in London makes it often impracticable and expensive. Further internationalization is a possibility if the network of qualified arbitrators is expanded to another countries. This would ensure that LOFs remain relevant as against national standard form salvage contracts.

About the Author

Luca George Antony is a 5th year BA.LLB student at Symbiosis Law School, Pune.


[1]Falcke v. Scottish Imperial Insurance Co. (1886) 34 Ch 234; Donald A. Kerr, ‘The Past and Future of ‘No Cure, No Pay’ (1992) 23 JMCLQ 3 at 411-413.

[2]Rhys Clift and Robert Gay, ‘The Shifting Nature of Salvage Law: A View From a Distance’ (2005) 79 Tulane Law Review 1355, 1357-1358; The Unique Mariner (No.1) (1974) 1 Lloyd’s Rep 555; Art. 1, IMO, International Convention on Salvage, 1989.

[3]Kennedy and Rose, The Law of Salvage (6th ed 2002), Chapter 1.

[4]The Gas Float Whitton No. 2. (1897) A.C. 337 at p. 63-64.

[5]The Gas Float Whitton No. 2. (1897) A.C. 337 at p. 343.

[6]The Tramp (2000) 2 Lloyd’s Rep. 363.

[7] The Mount Cynthos (1937) 58 L1.L.R. 18; Watson v. Firemen’s Fund Insurance Co. (1922) 2 KB 355; The National Defender, (1970) 1 Lloyd’s Rep. 40; The Mount Cynthos (1937) 58 L1.L. Rep. 18.

[8]The Glenbeg (1940) 67 L1.L. Rep. 437 at 411.

[9]The Sava Star (1995) 2 Lloyd’s Rep. 134 at 142.

[10]Kennedy & Rose, Law of Salvage (7th Ed. 2009), Chapter 9.

[11]The Owners of the S.S. Melanie v. Owners of the S.S. San Onofre (1925) A.C. 246 at 262.

[12]Gark v. Straits Towing Ltd. (The Belize) (1966) 2 Lloyd’s Rep. 277.

[13]Admiralty Commissioners v. Owners of the Valverda (1938) A.C. 172 at 202.

[14]The Par Mar (1999) 1 Lloyd’s Rep. 338.

[15]Cl. I, Arbitration and the LSA Clauses. Lloyd’s Standard Form of Salvage Agreement ‘No Cure, No Pay’.

[16]Section 9(1), The Arbitration Act, 1996.

[17]Section 9(4), The Arbitration Act, 1996.

[18]IndustrieChimiche Italia Centrale v. Alexander G Tsavliris& Sons Maritime Co. (1990) 1 Lloyd’s Rep 516.

[19]Chinese-Pacific S.A. v. Food Corporation of India (The Winson) (1979) 2 All ER; The Louisa (1863) Br. & L. 59.

[20]The Raisby (1885) 10 P.D. 114.

[21]The Afrika (1880) 5 P.D. 137; IndustrieChimiche Italia Centrale v. Alexander G Tsavliris& Sons Maritime Co. (1990) 1 Lloyd’s Rep 516.

[22]The Wilhem Tell (1892) P. 337.

[23]Rule 8.10, Lloyd’s Salvage Arbitration Clauses 2020.

[24]Rose, General Average: Law and Practice (2nd Ed.) 2005, Chp 3.

[25]Rule 4, Provisions as to security, maritime lien and right to arrest, Lloyd’s Salvage Arbitration Clauses 2020.

[26]The Gertrude (1861) 30 L.J. Adm. 130.

[27]Rule 4.7, Provisions as to security, maritime lien and right to arrest, Lloyd’s Salvage Arbitration Clauses 2020; D.R. Thomas, Maritime Liens (1980), para. 10.

[28]The Tribels (1985) 1 Lloyd’s Rep 129.

[29]Rule 4.4, Provisions as to security, maritime lien and right to arrest, Lloyd’s Salvage Arbitration Clauses 2020.

[30] Southernmost Marine Services, Inc. v. One 250 F. Supp. 2d 1367 (S.D. Fla. 2003).

[31]The TojuMaru (1972) A.C. 242.

[32]Ibid at 33.

[33]The Elliotta(1815) 2 Dods. 75.

[34]The Yolaine (1995) 2 Lloyd’s Rep. 7.

[35]Akerblom v. Price, Potter, Walker & Co. (1881) 7 Q.B.D. 129.

[36]Art. 7, The Salvage Convention 1989.

[37]The Duke of Manchester (1847) 6 Moo. P.C. 90.

[38]Kennedy & Rose, Law of Salvage (7th Ed. 2009), Chapter 16; Art. 13(1), the Salvage Convention 1989.

[39]Rule 11, Lloyd’s Salvage Arbitration Clauses 2020.

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