lof versus fixed contracts: when does salvage become wreck

LOF versus fixed contracts: when does salvage become wreck removal?16 June 2021 • 14:00-14:45 BST

#salvage Tug&SalvageInternational

INCORPORATING TUG TECHNOLOGY & BUSINESS

ITS Salvage Webinar Week

Part of

15-17 June 2021

Presentation documents:Page 2: Roger Evans, International Salvage Union (ISU)Page 11: Stephen Roberts, Managers of London P&I ClubPage 23: Daniel Dettor, Resolve Marine

‘LOF v Fixed Contracts:when does salvage becomewreck removal’

Roger Evans FNI – ISU Secretary General16 June 2021

ITS Salvage Webinar - June 2021

§ The role of the Property insurers§ The role of the P&I Clubs§ The future of LOF without Lloyd’s ?

ITS Salvage Webinar 2021

‘LOF v Fixed Contracts’:When does salvage become wreck removal?

Emergency Response• LOF designed for the benefit of the property insurers it is NOT a salvors contract!• Article 13.1 of the International Convention on Salvage 1989 states…’the [salvors]

reward shall be fixed with a view to encouraging salvage operations’...but noted thatthe award must not be out of proportion to the services actually rendered.

• The salvage award, exclusive of interest and recoverable legal costs, shall not exceedthe salved value of vessel and property!

• Under LOF the payment of the award (Art.13) shall be made by vessel and cargoinsurers in proportion to respective salved values of the final salved fund

Wreck Removal• Hull & Machinery insurers involvement is nil after paying Shipowners insurance claim

of for vessel CTL

ITS Salvage Webinar 2021The Role of the Property insurers in salvage and wreck

removal

General LiabilitiesLegal/contractual liabilities for damage to cargo, personal injury/death of ship’s crewEmergency Response

• Article 14 - Special Compensation (statutory provision) UK Law 1995 Shipping Act

• SCOPIC Clause introduced in LOF2000 to replace Article 14

• Under LOF with SCOPIC Clause invoked

• Pay initial Security of payment of $3M

• Pay the final SCOPIC ClaimWreck Removal• Cover the vessel’s legal and contractual liabilities for the pollution and wreck removal

ITS Salvage Webinar 2021The Role of the P&I Clubs in Salvage and Wreck Removal

ITS Salvage Webinar 2021Salvage contracting!

‘UPSTREAM’ Emergency Response [ER] £££? Wreck Removal £££?

CLIENT

§ Lloyds Open Form 2020

§ LOF with SCOPIC clause invoked

H&M

P&I

§ Daily Hire(BIMCO ‘WRECKHIRE’) P&I

§ Daily Hire + bonus§ Salvage Company Service Contract§ BIMCO TOWHIRE /TOWCON

Owner/H&M

§ Lumpsum(BIMCO ‘WRECKSTAGE’/‘WRECKFIXED’)§ INTERIM /CARETAKER CONTRACT!

P&I

P&I

SALVORS

SUB-CONTRACTOR

§ ISU Sub-Contract (Award sharing)(Salvor)

§ Tugs / Support Vessels(SUPPLYTIME, TOWHIRE, SALVHIRE)

§ Tugs / Support VesselsSUPPLYTIME, TOWHIRE, SALVHIRE

§ Charter Barges(BARGEHIRE)

§ Charter lightering tonnage § Charter Sheerlegs

§ General Service Contracts:(Agency / Stevedoring / Fabrication Etc)

§ Service Contract(Agency, Fabrication, scrapping / disposal)

‘DOWNSTREAM’

§ The Council of Lloyd’s last month proposed to cease it’ssupport for the Lloyds Salvage Arbitration Branch [LSAB]which manage and maintain the LOF and associatedprocesses

§ Should this move go ahead that would mean the imminentremoval of;§ LOF§ SCOPIC clause used for special compensation§ SCR panel§ Lloyd’s Panel of Arbitrators§ Provision & collection of Salvage Security§ Upkeep of the LSAC processes

§ LOF 2020 and it’s predecessors are the most effective,recognised and frequently used ER salvage contract that isapproved world–wide !

ITS Salvage Webinar 2021The future of LOF without Lloyd’s?

§ Lord Donaldson extensive report ‘Safer Ships Cleaner Seas’ 1994 clearly stated thatUK Government should ‘seek to persuade Shipowners and masters to make fullestuse of Lloyd’s Open Form contract through insurers, the Chamber of Shipping and theIMO”

§ Main users of LOF are Shipowners and Salvors!§ Lloyd’s and the market appear to want to revamp the LOF to suit their future

business model without forethought to the effects on the casualty management, theother stakeholders, Government Authorities, the salvage industry and critically thepotential increase in threats to the environment from pollution!

§ The shipping industry needs to have a standard protocol, to avoid contractingdelays, that is approved by all the main stakeholders, not just the insurance market,to allow salvors world-wide to deal effectively and quickly with all sizes of marineincidents.

§ We already have the right contract in the LOF! … so the question I put to you is whatdo you expect will happen now and who will provide the right replacement?

ITS Salvage Webinar 2021The future of LOF without Lloyd’s – Conclusions?

Thank you for your attention!

ITS Salvage Webinar 2021The future of LOF without Lloyd’s – Q&A Key Takeaway?

Regarding the three questions for the delegates;1. Do you agree to the proposed Lloyds closure of the LSAB and

withdrawal of support for LOF? …..Y/N2. Do you think you will have a better salvage industry without LOF?

….Y/N3. Would you consider using LOF when no longer supported by Lloyds?

….Y/N

Key takeaway:Lloyds new business model for the future sees little interest in themarine insurance sector, but may regret the knock-on effects this willhave on their more ‘primary’ other market sectors?

LOF vs. Fixed Rate Contracts

June 2021

2 LOF vs. Fixed Rate Contracts

Roadmap

• Compare

• When to use

• Market practice

• Responding to market deviation

LOF and Fixed Rate Contracts

3 LOF vs. Fixed Rate Contracts

LOF

Pros

• Immediate response

• Responds to change in circumstances

Cons

• Considered expensive

Good for:

• Genuine emergency

4 LOF vs. Fixed Rate Contracts

Fixed Terms

Pros

• Greater control retained by paying party

• Select resources

• Pre-negotiate rates

Cons

• Time required for negotiations

• Inflexible to change of circumstances

Good for:

• Non-urgent casualties

5 LOF vs. Fixed Rate Contracts

Casualty not at risk

• Time to consider options without risk of deterioration

Fixed Rate

Casualty at risk

• Immediate response required

LOF

When Fixed Terms/When LOF?

6 LOF vs. Fixed Rate Contracts

If it is so simple…

…why is the use of LOF in decline?

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NEW LOF CASES

7 LOF vs. Fixed Rate Contracts

Case example

Thea II

Humber Estuary, UK, December 2018

MAIB report – August 2020

• BF9-10 with 4-5m sea

• ME failure (1500hrs)

• Vessel aground

• Two tugs attach

• Master seeks vessel managers’ authority to contract tugs

• State pressure to respond

• Vessel managers instructions: Agree LOF under protest (0100hrs or +10 hrs)

8 LOF vs. Fixed Rate Contracts

Thea II - Cause of delay

Reasons (MAIB)

• Poor communication – managers unaware vessel aground

• Attempting to negotiate a fixed rate contract

Vessel managers to Master:

“…do not ask the captain of the tugs for anything and do not sign anything”

“Towage is the worst option always! …all officers have to know. If towage is requested, then you have to ask insurance broker always first!!!”

9 LOF vs. Fixed Rate Contracts

Observations from Thea II

Improved ship-to-shore communication

• Involving shore management introduced:

• Delay

• False sense of safety

Mistrust of LOF

• Consult with brokers

• Further delay

• Opportunity for misunderstanding

Thea II is not an isolated example

10 LOF vs. Fixed Rate Contracts

Why the reluctance to use LOF?

Report commissioned

Consultant

• Independent

• Knowledgeable

Phases

1. Questionnaire

2. One to one

Objectives

• Reasons for resistance

• Recommendations

Target

Restore confidence in LOF

Thank you

Managers

A. Bilbrough & Co. Ltd.

50 Leman Street

London E1 8HQ

T. +44 (0)20 7772 8000

F. +44 (0)20 7772 8200

E. london@londonpandi.com

www.londonpandi.com

LOF vs Fixed Rate Contracts: When does salvage become wreck removal?

ITS Salvage Webinar16 June 2021

Topics

1. The impact of SCOPIC and how it works.

2. Blurred lines: salvage, wreck removal and where to draw the line.

Impact of SCOPIC

• Introduced in 1989 Salvage Convention as Article 14 (Special Compensation)

• Further developed with P&I Clubs and introduced as SCOPIC Clause in LOF 2000.

• Considered a “Safety Net” for owners, P&I and salvors

SCOPIC – How it Works?

• Must be incorporated into LOF to replace Article 14. Salvor must choose whether to invoke.

• Agreed set of tariffs for personnel, craft and equipment plus 25% uplift.

• Salvage security of USD 3 Million• Owners / P&I right to appoint a Special

Casualty Representative (SCR)

SCOPIC – When to Invoke?

• Low salved values?• Consider the P&I Club

(IG vs Fixed Premium)• Why not invoke every

time? • 25% Penalty!

Blurred Lines – Salvage & Wreck Removal

• Salvage Case Evolution• H&M/Owners involved early

• Decide on type of contract• LOF vs LOF/SCOPIC vs Bimco Wreckhire

(fixed contract unlikely at this point)• Salvage cost approaches value

(including cost of repairs)• Division of costs (H&M vs P&I)• CTL declared – now what?• Termination & Caretaking

Thank You