Simple and flexible

Later this month, Lloyd's" which administers the Lloyd's Open Form" will announce important changes to the LOF system in response to recent criticism from some sectors of the hull market. In an era when marine casualties attract more attention than ever, both from the media and local and national authorities, it is worth remembering why awarding an LOF to a professional salvor remains absolutely the right way for a responsible ship owner" and their insurers" to respond to a serious casualty.

The first version of LOF was introduced in 1908, with no fewer than 10 revisions since, and is still the best known and most widely used 'no cure, no pay' maritime salvage contract. The latest version, LOF 2000, involved a welcome simplification of the contract's structure, which now comprises just nine straightforward boxes to be completed and 12 standard clauses, from A to L.

Throughout its 100-year history the basic, and beautifully simple, concept behind the LOF has remained unchanged. This is namely recognition that in situations where a vessel, or indeed any maritime property, finds itself in danger" whether from a main engine breakdown, grounding, explosion or fire, with property and possibly life at risk" time is of the essence in agreeing a contractual basis for emergency assistance. A delay of hours or even minutes can be fatal, making the difference between a vessel that can be salved and one that is likely to become a total loss with potentially catastrophic consequences.

The liabilities associated with marine casualties can be enormous. One of the most high profile casualties in recent years was the grounding of the container ship MSC Napoli at Branscombe, Dorset, in January 2007. This left the owners and their insurers with a bill for salvage, wreck removal and clean up costs likely to exceed E200m (£182.6m).

Rather than extended negotiations on the precise terms under which emergency assistance will be provided, an LOF can be agreed within minutes. If the services are unsuccessful then there is no liability. However, if the salvage services are successful then the salvors are entitled to an award, the quantum of which is agreed at a later date in accordance with tried and tested criteria, including factors such as the value of the salved property, the dangers to which it was exposed, the skill and efforts of the salvors and the avoidance of environmental damage. Failing amicable settlement, the salvors can resort to LOF arbitration in London.

An LOF can be signed where the danger is minimal, perhaps involving a vessel immobilised in open sea and merely requiring a 'rescue tow', or where vessels are in extreme danger having run aground, suffered explosions or fires. It can be used whether the property involved is a small pleasure craft or a very large crude carrier. This is because the contract is flexible and adaptable to all eventualities.

Following the passage of Hurricane Dennis in the Gulf of Mexico in July 2005, BP's flagship oil platform" the $1.5bn (£927m) PDQ Thunderhorse" was discovered with a failure of its ballast systems, leaving her with a 22 degree list. Despite a massive and admirably prompt response from BP, which mobilised a vast array of rescue craft all under the watchful eye of the US Coast Guard, it was eventually to the LOF that it turned.

Recent versions

More recent versions of the LOF contract have contained a mechanism for encouraging salvors to undertake services not only for the commercial reason of salving valuable maritime property, but also to do what they can to protect the environment. However, a valuable VLCC that has suffered a catastrophic explosion and fire, resulting in the loss of nearly all of the value in the ship or cargo, is of virtually no interest to the professional salvor. They can expend huge efforts and costs in attempting to salvage the vessel but there is insufficient value for them to be rewarded properly for their efforts. In practical terms, any salvage response would have to come from the government or military.

Following a string of high-profile tanker casualties in the late 1960s and early 1970s" most famously the Torrey Canyon and Amoco Cadiz" the marine insurance industry recognised the need for an incentive for professional salvors to at least attempt salvage in these circumstances; even if their efforts were unsuccessful, or the value in the property had been largely lost, they would still be paid.

Article 14 of the London Salvage Convention 1989 finally set out a regime for recovery of what is termed 'special compensation'" that is, salvage remuneration payable irrespective of the eventual salved values and linked to the environmental benefits of the salvage operation. But poor drafting in the Convention meant that what was a highly laudable idea ended in controversy. Consequently, the unpopular and uncertain Article 14 regime was replaced in 1999 by the special compensation protection and indemnity clause. SCOPIC effectively provides a bolt-on mechanism to the standard LOF, with special compensation payable (by the P&I underwriters) in accordance with fixed tariff rates, which the salvors will recover in any event" even if the eventual salved values are very low or even zero.

SCOPIC has proved remarkably successful. It can be used in conjunction with the LOF in the early days of casualties that are likely to become wreck removal projects in the longer term. It can be used as an interim anti-pollution or bunker removal contract and can buy the ship owners, and their insurers, valuable time in circumstances where local authorities are demanding action.

In recent years, it has become fashionable to criticise the LOF as being too expensive, biased towards the salvor or involving prohibitive legal costs. So, although most LOF claims are resolved amicably, Lloyd's has seen fit to respond to the commonly heard complaints. Later this month, the current arbitral panel will be dissolved and an enlarged panel of LOF arbitrators announced, together with some subtle changes to the LOF system designed to promote greater consistency in awards.

Whatever changes are in store, the LOF remains a 'best endeavours' contract, meaning the salvor has an obligation to throw all their resources at the problem. It remains the ultimate high-risk high-reward contract and, while not appropriate for every marine casualty, its simplicity and flexibility remains as compelling as ever.