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03 August 2021 | 5-minute read
In a move welcomed across the maritime industry, Lloyd’s has confirmed that the Lloyd’s Salvage Arbitration Branch (LSAB) will now remain open, subject to a review on funding and a push for its greater use.
Following a rather short consultation period, stakeholders from across the insurance, salvage ship-owning world provided unanimous resistance to its mooted closure, despite a decline in the use of the Lloyd’s Open Form (LOF) salvage contract, which had prompted the review by Lloyd’s.
The consultation brought to the fore an acknowledgment that while use of LOF had previously declined to a lower plateau in recent years, it remained vital as the only recognised salvage contract that can be used without prior negotiation and also required the use of “best endeavours”, thereby ensuring the greatest possible protection against pollution and environmental damage in the event of a serious maritime casualty.
From its genesis in the 1870s, to the first formal contract in 1908 and numerous subsequent revisions, culminating in the LOF 2020 version, the contract has remained an ideal way to address the perils that can face a ship, and its cargo, at the most critical times. Its formation to address concerns over the practices of salvors is as valid today as it has ever been and the move by Lloyd’s to reform but maintain the LSAB should be welcomed, particularly by environmental campaigners.
The LOF contract includes a provision known as SCOPIC (so critical that that the US embedded it in OPA), which includes a predetermined mechanism for providing equipment and services in order to avert or minimize pollution immediately. In contrast, other salvage contracts would need to be negotiated after a casualty has occurred, thereby causing delay that increases the likelihood of environmental damage.
This must also come as a relief to insurers, for whom the LOF is the contract suited to the most serious of casualties, helping to save property that would otherwise have become a total loss. While insurers have understandably raised objections to the cost of LOF, which is normally significantly more than under other salvage contracts, this does have to be balanced against savings due to best endeavours, enabled speed of action and the certainty of the contract, with its reliance on International Law providing protection from unsupported and unsubstantiated salvage demands. It can only be speculated as to the extent of salvage costs had the Ever Given been salved under an LOF contract, but it would undoubtedly fall very far below the eye-watering sums demanded.
So, the threat to the LSAB has been relieved, for now, and with the consultation inevitably came a review of the way it, and LOF, function. Periodic reviews are to be welcomed and while the cries to save the process were admirable, heartwarming and effective, there remain issues with the processes, which, had they been addressed previously, may have prevented any thought of a planned closure. The cost of LOF will remain an issue that is unlikely to be fully resolved due to the criteria for awards to be “encouraging”. This is of course a variable that is difficult to define in the art of setting awards but was intended to be used to enhance the skills and equipment of the salvor. Now that operating methods have changed, should this be reviewed too? In an age of transparency, when all others who support the salvage process have to justify every part of their own expenditure there must surely be justification in a mechanism that scrutinises this far more closely. The saving of the LSAB was somewhat conditional of a review on funding and necessary reform, and we should be conscious that this may otherwise only be a temporary stay of execution.
A major decline in the number of LOF contracts would test the future of the branch, and the contract, but it should be recognised that this in part reflects the reduction in the number of casualties worldwide, which should be celebrated along with the way salvors and shipowners have learned from previous casualties and contributed to this result. When something has been a success throughout its long life it is wise to continue with its support as, if lost, the LSAB and LOF would soon be missed as the maritime sector clearly articulated. At its heart is the notion that there are costs to doing business and LOF is one. Its value has been restated in the sector feedback and perhaps the wider question is what would be the cost of not using it?
Philip Norwood
Senior Executive,Technical Underwriting