Opinion - Lloyd's Open Form
Posted on 3rd March 2020 at 11:53
What do the amendments to LOF really mean? Was there an opportunity to do more? In this article our Jim Allsworth considers what the recent amendments to LOF have really achieved and whether there was a missed opportunity to do more. Jim gives his view on how LOF works in practical terms and what might be done to improve it for all.
In the last 30 years or so we have seen a dramatic drop in LOF salvage cases from around 200 per year to nearer 50, although casualty numbers have remained relatively stable. C Solutions are fortunate that we continue to handle a large share of these on behalf of Owners, Insurers and Salvors. We therefore see LOF and other forms of salvage contract from all sides.
In the new Lloyd’s Open Form (LOF 2020) I see some sensible changes to the wording but I do not see anything that will make a material difference to the industry. There is a new rule that makes it mandatory to advise Lloyd’s if there is a side agreement – something that is becoming a lot more common. The old Lloyd’s Standard Salvage and Arbitration (LSSA) Clauses and Procedural Rules have been amalgamated into a single document, the Lloyd's Salvage Arbitration Clauses (LSAC). There are well thought out amendments in relation to low value cargo and termination and of course some “clarity” in relation to delay as a risk, but I wonder whether there was an opportunity for a real shake up. I wonder if we could have done something that would make LOF more popular, something that would seek to reduce the desire to seek to contract salvage services on alternative terms with the risks that the resulting delay in negotiations pose?
Let’s face it, Salvors like LOF whereas Property Underwriters generally don’t. Liability Underwriters like it, as long as SCOPIC is not invoked. All Underwriters will, I believe, accept that it is by far the best contract for the “right case” (substantial risk and danger) but will argue it is abused by salvors or simply unnecessary when used in the more simple cases where a salvage contract is “not warranted”. This is on the grounds that it is simply too expensive for this “type of case” and bears no relationship to the commercial cost of the operation. It is exactly “this type of case” where commercial salvage contracts are preferred and/or side agreements to the LOF sought.
Having been involved in many cases involving commercial salvage contracts and side agreements, we see both sides of the argument.
Arguably the most significant change to LOF in the past 20 years is the SCOPIC clause. It is both the best change to have been made to LOF and the worst! It has resolved the complicated issue of Article 14 very well indeed but has also put a commercial value on salvage. It is certainly the precursor and base line to the now ever more popular commercial salvage agreement.
Commercial salvage agreements (and LOF side letters) are of course fine, it is a commercial world and it is a supply and demand industry, but there are three major problems. The first is that there will be a time when the delay incurred by seeking to negotiate commercial terms will result in a serious pollution incident or an avoidable wreck removal. What looked relatively simple on day one can very quickly turn into a major incident, and of course, on the other hand what looked bad on day one may not be as bad as everyone thought.
The second serious issue is funding the operation. Commercial salvage contracts can get very expensive, very quickly. Ship Owners who have been encouraged to progress with a commercial route rather than a LOF have, at times, been surprised when their Underwriters only pay the Hull share and expect the Ship Owners to fund cargo’s proportion up front and seek to recover it in GA several months, or years, down the line.
The third issue is to remember that, love them or hate them, Professional Salvors are a necessity. Care is needed not to limit the income (and more importantly cash available for R&D and training) for the professional international salvage companies; our industry needs them.
LOF side agreements go some way to alleviate the first two of these problems but is that the answer? Could the standard unamended LOF have been designed to be more popular? I think so. I think there was an opportunity that LOF 2020 may have missed and it is a very simple solution; it is to recognise the elephant in the room - “that type of case” - and accept more commerciality in the current LOF system when dealing with them.
In my view the industry would not be served well by an alternative to LOF; it does not need a LOF “lite” but it does need to recognise the type of cases that LOF “lite” migh specifically have been drafted to serve.
Everyone knows (or thinks they know) a “real salvage” case when they see one. We also all know a “LOF lite” case when we see one - the type of case where we are currently seeing a push for commercial salvage agreements or LOF side agreements; the type of case where some Underwriters already have pre-existing terms with certain Salvors. This is the type of case that is the elephant in the room. We all know about it, we just don’t talk about it.
Why can’t we as an industry as a whole get together - the Property Underwriters, the Salvors and the Liability Underwriters - just as we did to draft SCOPIC, to solve the Article 14 issue, talk about the elephant in the room and perhaps agree that this type of case, these simpler “LOF lite” cases, should be compensated under the current LOF system closer to (but not at) a more commercial basis with encouraging, investment worthy and stonking great awards on the “real” salvage cases.
In my opinion that is the way to encourage fast response salvage operations, prevent potentially disastrous delays, solve uninsured funding issues for the Ship Owner, properly fund emergency ready international salvage companies and protect the long-term future of both the salvage and the shipping industry.
If you would like any specific advice on the changes to the LOF system or to discuss any issues raised in this article please contact Jim Allsworth.:
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