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Section 4 Special compensation to salvors

7.4.1 General

7.4.1.1 General comments on salvage remuneration

It is in the interest of the shipping community to support and encourage the salvage of ships in distress. This is achieved by the successful salvor being adequately remunerated. Remuneration depends on the terms of the contract under which the salvage is undertaken.

7.4.1.2 Salvage contracts

Salvage contracts belong to the category of contracts that should be approved by the Club through application of Rule 10 Section 2. Salvage is usually undertaken on the basis of Lloyd’s Standard Form of Salvage Agreement known as the “Lloyd’s Open Form” (“LOF”) in its latest form. That contract is considered approved and does not need to be submitted to the Club.

7.4.1.3 Lloyd’s Open Form

The main principle of remuneration under LOF is “no cure, no pay”. The salvor assumes the economic risk of the salvage operation. If the salvor fails, no compensation from the property interests is payable; for a successful salvage the salvor is entitled to a salvage award from the salved property interests.

Assessment of the salvage award is usually subject to negotiation. Should amicable negotiations fail, the award is decided through arbitration in London before an arbitrator instructed by the Council of Lloyd’s.

Several factors will be taken into account when assessing an award. They are:

(a) the salved value of the vessel and other property such as the cargo, containers, bunkers and freight at risk.

(b) the skill and effort of the salvors in preventing or minimising damage to the environment;

(c) the measure of success obtained by the salvor;

(d) the nature and degree of danger;

(e) the skill and effort of the salvors in salving the vessel, other property and life;

(f) the time used and expenses and losses incurred by the salvors;

(g) the risk of liability and other risks taken by the salvors or their equipment;

(h) the promptness of the services rendered;

(i) the availability and use of vessels or other equipment intended for salvage operations;

(j) the state or readiness and efficiency of the salvor’s equipment and the value thereof.

7.4.1.4 Insurance cover of the salvage award

The salvage award is commonly apportioned by an average adjuster on the values salved. The ship’s proportion of salvage is covered under the Hull insurance. Contributions for the salvage of the cargo are paid by the cargo interests, respectively their underwriters. For the other interests salved, such as bunkers and freight at risk, the respective parties concerned are liable to contribute to the salvage award.

7.4.1.5 Refusal of cargo to pay contribution

Where cargo interests have been forced to pay a salvage contribution under a guarantee, they may seek to recover that contribution from the shipowner on the grounds that the casualty resulting in the salvage was caused by the unseaworthiness of the ship in breach of the Member’s obligations under the contract of carriage. In certain jurisdictions, the shipowner can be forced also to pay cargo’s contribution in salvage. The cover for such a loss is described in Rule 4 Section 6. See the comments under 4.6.2.2.

7.4.1.6 Life salvage

For salvage of human lives, see the comments under 3.9.2.

7.4.1.7 Salvage ships

For cover of salvage ships, see the comments under 11.3.2.1.

7.4.2 Salvage awards to avoid environmental damage

7.4.2.1 Effect of “No Cure, No Pay” principle

The traditional principle of “no cure, no pay” may, in the past, have acted as a disincentive for a salvor to become involved in a salvage where the prospects for success were remote, and the potential risks of damage to the environment were large.

7.4.2.2 The International Convention on Salvage of 1989

In 1989, the wording of a new convention was produced. This was called the International Convention on Salvage 1989 and is referred to as the 1989 Salvage Convention. This convention replaced the Salvage Convention of 1910. On 1 July 1996, the new Convention came into force after ratification by 15 states.

7.4.2.3 Special compensation under the 1989 Salvage Convention

The problem of encouraging the salvage of a ship or cargo representing a threat to the environment is addressed in Article 14 of the 1989 Salvage Convention.

If salvage services have been rendered in circumstances where the vessel or cargo threaten to cause environmental damage, the salvor may be awarded special compensation. This is not limited to the salvage of tankers but applies to “any ship or craft or any structure capable of navigation.” It covers all kinds of pollutants including bunkers and hazardous or noxious substances.

The special compensation is payable solely by the shipowner since pollution liabilities fall only on the ship. See the comments under 6.1.3.1.3.

The special compensation will normally be equivalent to the salvor’s cost of providing salvage services (Article 14.1). If the salvor succeeds in preventing or reducing damage to the environment, the salvor is entitled to an increment over and above his expenses of up to 30% of those expenses. The increment may be increased further to a maximum of 100% of the expenses if such an increase is considered “fair and just” in view of the conditions under which the salvage was performed (Article 14.2). It is expected that the increased compensation above 30% will be awarded only in cases where the salvor avoided extensive environmental damage through exceptional performance.

The special compensation is payable only if and to the extent that it is greater than a salvage award based on normal principles. This provides the salvor with a safety net where the salvage fails and the salvor would not, otherwise, be entitled to an award for the unsuccessful salvage under the “no cure, no pay” principle.

A condition for the increased award is that the operation must have started in order to salvage ship or cargo. No claim for special compensation can be based on the 1989 Salvage Convention for operations that are exclusively aiming to protect the environment. Nor will costs for post salvage clean-up be included in any special compensation to be paid.

7.4.2.4 Cover for the obligation to pay special compensation

The obligation for a Member to pay special compensation is covered under this section.

This requires the Club to scrutinise closely all salvage or salvage attempts undertaken in respect of the entered ship. The Club must be given an opportunity to follow the purpose, performance and result of the salvage activities. The Club may choose to exercise control through its staff, surveyors or other experts. The Club has access to salvage experts ready to attend almost immediately upon notice. It is important that Members immediately inform the Club about any event, which may develop as an obligation to pay special compensation.

Before a Member can be compensated for payments of this nature, an investigation should have been done to see if the payments could be recovered from other parties. If salvage is necessary because of a collision, the payments should be included in the claim against the other ship and be apportioned in line with the collision liability.

In a situation where the total amount of the special compensation as assessed in accordance with either Article 14 of the Salvage Convention or SCOPIC (see the comments under 7.4.2.6) is greater than the salvage award paid by the insurers of the salved property, P&I will cover the difference.

It follows from item (b) of this section that the costs to be compensated are those which are not payable by the parties interested in the salved property.

7.4.2.5 Security

When the entered ship is being salvaged and the salvor has a claim against the Owner pursuant to Article 13 or Article 14 of the Salvage Convention, the salvor has the right to request satisfactory security from the person liable for the payment under Article 21. From the salvor’s point of view and depending on the likely salved value of the property, security is usually seen essential to cover the cost of work and efforts likely to be undertaken since there may be little or no value left in the wreck against which the salvor can exercise his lien.

The request for security is subject to Rule 12 – it is within the Club’s discretion to provide security. Before a decision can be taken, the Club may wish to investigate the circumstances surrounding the casualty to see that it is not subject to any exclusions of cover under these Rules. The extent to which any of the Limitation Conventions might apply to a given set of circumstances should also be considered, although limitation may not necessarily apply if a wreck removal is being requested as a Government order.

7.4.2.6 SCOPIC – Special Compensation P&I Club Clause

As the assessment of special compensation under Article 14 of the 1989 Salvage Convention proved to be cumbersome and uncertain, the International Group of P&I Clubs together with the International Salvage Union, produced an alternative provision, namely “SCOPIC”, to be used for assessing special compensation.

The SCOPIC clause can be contractually agreed as a substitute for Article 14 in LOF Salvage Contracts and can be invoked by the salvor at any time during the salvage operation. In assessing compensation and remuneration of costs incurred by the salvor, SCOPIC refers to a set of pre-determined tariff rates.

The main advantages of SCOPIC are:

  • No risk of damage to the environment is required.
  • No proof of success in preventing damage to the environment is required.
  • A fixed uplift of 25% applies.
  • A firm commitment by the P&I Clubs to provide security within 48 hours after SCOPIC is invoked.
  • Shipowners/P&I Clubs and property interests have the opportunity to appoint representatives to monitor the salvage operation.
  • No geographical restrictions.
  • Fixed rates for tug personnel and equipment.

The SCOPIC clause was introduced as a contractual alternative to Article 14 in 1999.

From the P&I Clubs’ point of view, salvage operations under SCOPIC provide the Clubs with an opportunity to monitor and endorse or object to measures taken by the salvors and an opportunity to terminate their exposure to pay remuneration under the SCOPIC clause through 5-days’ notice, in case the operation is deemed not to lead to a useful result.

One further point to bear in mind is that if a traditional “no cure, no pay” award would exceed the amount payable under SCOPIC, then the “no cure, no pay” award will be discounted by 25% of the difference as if SCOPIC had been invoked on day one of the salvage service.

If a salvage takes place on an unamended Lloyd’s Open Form (LOF), the SCOPIC costs are covered under Rule 7 Section 4. The SCOPIC security of $3 million to be provided to the salvor is discretionary on the Club and subject to Rule 12.