Circular No. 9/99 - Amendment to Lloyd's Open Form of Salvage Agreement (LOF): Special Compensation P&I Clause (SCOPIC)



JULY 12, 1999









Dear Member:





In 1989, an international conference agreed a new Salvage Convention which made a profound change to the nature of salvage. The previous Convention of 1910 had been based on the traditional principle of 'no cure no pay.' Liability for salvage awards was covered pro-rata by hull and cargo underwriters in proportion to the respective salved values and P&I clubs were not involved. The fear under the old Convention was that salvors might think twice about attempting to salve a ship where the risk of failure was great and the costs likely to be incurred also great.


The intention of the Salvage Convention 1989 was to encourage salvors to act in all such cases involving a threat to the environment. Under the 1989 Convention the main salvage award is still based on 'no cure no pay', but the award will take into account 'the skill and efforts of the salvors in preventing or minimizing damage to the environment', as well as the traditional factors of salved value, danger, out-of-pocket expenses, success, time and skill. This basic 'no cure no pay' award is dealt with under Article 13. The Salvage Convention also introduces a safety net where the salvor has worked on a ship or cargo which threatens damage to the environment, and has failed to earn under Article 13 an award sufficient to cover his costs.


In such circumstances, he is entitled to special compensation under Article 14, based upon the cost of personnel and equipment used and out-of-pocket expenses incurred to the extent that they exceed any Article 13 award. In addition, if he has prevented or minimized environmental damage, the Article 14 award is subject to an uplift of 30% - 100%. Hull and cargo underwriters continue to pay Article 13 awards, even if these are increased because of environmental factors, but P&I Clubs cover Article 14 awards.


The Convention entered into force in1996 but had already been introduced into LOF 1990 and LOF 1995. Most contractual salvages have thus been governed by it for some time. There have been a number of problems about the working of Article 13 and 14, some of which have concerned shipowners and P&I Clubs and others have concerned salvors.


The Clubs have been worried that the safety net gives salvors an incentive to extend salvage work as long as possible. This in turn allows property underwriters to delay the decision as to whether a ship will be accepted as a constructive total loss with little that the Club or the shipowner can do to control events.


Salvors have been concerned that Article 14 only applies if there is a threat to the environment (which has to be proved) and that Article 14 is not relevant outside coastal or inland waters or areas adjacent thereto. Accordingly, there is a geographical restriction. Salvors are also concerned by a decision of the English courts (the "Nagasaki Spirit") that the rates for equipment and personnel cannot include any element of profit. Profit is limited to one uplift which only applies if damage to the environment is minimized or prevented. All these issues have led to arbitrations involving Article 14 being long and expensive, costs generally being for the account of shipowners and Clubs.


Negotiations took place initially between salvors and Clubs but subsequently included property underwriters with a view to agreeing a simplified framework for special compensation which would promote fast response to casualties but reduce the potential for legal disputes.


As a result of these discussions, the SCOPIC clause has been developed as an alternative to Article 14 for dealing with special compensation (Paragraph 1 of the SCOPIC Clause). The intention is that for a trial period of two years the SCOPIC Clause will be incorporated by reference into LOFs signed between members of the International Salvage Union (ISU) and owners entered in an International Group Club, and that the Clubs will recommend members to contract on these terms. If the trial period shows that the scheme works well, then LOF will be formally amended.


The main changes contained in the SCOPIC Clause are as follows:


i The contractor has the option of invoking the special provisions of the SCOPIC Clause at any time of his choosing, regardless of the circumstances. He does not have to prove environmental threat and no geographical restriction applies (Paragraph 2). The assessment of the SCOPIC remuneration commences from the time of such notice. Prior to such invocation, salvage is undertaken on a "no cure no pay" basis without any safety net. Under the current Article 14 provisions, calculation of special compensation commences from the start of the salvage operation.


ii The shipowner must provide security in an amount of $3 million within two working days of the contractor invoking the SCOPIC remuneration provisions. If at any time thereafter the shipowner thinks that this is too much, or the contractor thinks it is too little, each shall be entitled to require the other to reduce or increase the security. If the shipowner does not provide security within two working days the contractor can withdraw from the provisions of the SCOPIC Clause and revert to his rights under Article 14 (Paragraph 3).


iii SCOPIC remuneration is based on time and materials, plus an uplift in all cases of 25%. The Clubs have reached agreement with the ISU on rates for tugs, personnel and equipment (Appendix A). These are rates which are 'profitable' for salvors. Charges for portable equipment are to be capped at 1.875 times the replacement cost of the equipment inclusive of the 25% uplift. If the contractor has to contract in for equipment and the price exceeds the applicable tariff rates then the contractor is entitled to the contracted-in price plus an uplift of 10% on the tariff rates, or the tariff rate plus 25%, whichever is the greater. It is impossible to tell whether these SCOPIC rates are higher or lower than the Article 14 rates because, since the decision in the "Nagasaki Spirit," Article 14 rates depend on how much a tug is used in any particular year.


iv Salvage services will continue to be assessed in accordance with Article 13, even if the contractor invokes the SCOPIC Clause. SCOPIC remuneration will be payable only to the extent that it exceeds the total Article 13 award (Paragraph 6). If the contractor invokes the SCOPIC Clause and the Article 13 award is greater than the SCOPIC remuneration, then the Article 13 award will be discounted by 25% of the difference between it and the amount of the SCOPIC remuneration that would have been assessed had the SCOPIC provisions been invoked on the first day of the services (Paragraph 7). If there is no potential Article 13 award then the undisputed amount of SCOPIC remuneration is to be paid by the shipowner within one month of the presentation of the claim. If there is a claim for an Article 13 award then 75% of the amount by which the assessed SCOPIC remuneration exceeds the total Article 13 security will be paid by the shipowner within one month (Paragraph 8).

v. The contractor can terminate the services if he reasonably anticipates that the total cost of past and future services will exceed the value of the property capable of being salved plus his SCOPIC remuneration. Shipowners can terminate the SCOPIC agreement subject to 5 days' notice (Paragraph 9).


vi. The shipowner has the right to send on board a Special Casualty Representative (SCR) (Paragraph 11) and hull and cargo underwriters each have the right to send on board one special hull and special cargo representative (Paragraph 12). The SCR will be selected from a panel appointed by a committee made up of three representatives from the International Group, three representatives from ISU, three representatives from the International Union of Marine Insurers (IUMI) and three representatives from the International Chamber of Shipping (ICS). The salvage master is to send daily reports to Lloyd's and the shipowner until the SCR arrives on site, and after that only to the SCR. The SCR can disagree with the daily salvage report and prepare a dissenting report. If the SCR gives a dissenting report, then the initial payment by the shipowner will be based only on what the SCR considers the appropriate equipment or procedures until any dispute is resolved (Appendix B).


vii. A non-binding Code of Practice has been agreed between the ISU and the International Group. The Clubs have confirmed that although they expect to provide security for SCOPIC it is not automatic. The Clubs will not refuse to give security solely because contractors cannot obtain security in any other way. The Clubs confirm that they will be willing to consider the provision of security to a port authority to permit a ship to enter a port of refuge and will not refuse to give such security solely because contractors cannot obtain such security in any other way.


The advantages for shipowners/Clubs in the new SCOPIC provisions are as follows:


1. There should be little need for arbitrations in future on special compensation awards. The problem areas (environmental threat, geographical restriction, tug rates, and uplift) have all been settled.


2. Shipowners/Clubs have much more control over, or at least knowledge of, what happens during salvage.


3. A shipowner's right to terminate under Paragraph 9 of SCOPIC is clearer than the right under Clause 4 of LOF.


4. The uplift is capped at 25%.


The disadvantages for shipowners/Clubs are as follows:


1. The salvors may recover more for agreed tug rates than they would under the "Nagasaki Spirit" decision, but this is not certain because of different utilization factors.


2. Shipowners/Clubs have given up the environmental threat and geographical restriction defenses.


The advantages for salvors are as follows:


1. It is no longer necessary for salvors to prove environmental threat and to overcome any geographical restriction defense.


2. Salvors will be paid profitable tug rates.


3. Cash flow problems will be eased.


4. Security is more certain.


The disadvantages for salvors are:


2. Salvors can never recover more than a 25% uplift.


3. There is a risk that the owner terminates.


The new proposals have been endorsed by the Boards of all the Clubs in the International Group for a trial period of two years (although some with more enthusiasm than others), and they have also been endorsed by the ISU, and UK property underwriters. Overseas property underwriters have been kept advised and have not objected.


The following documents are attached:


S SCOPIC Clause - final draft 2.24.99 (Appendix I)


S Service tariffs (Appendix II)


S SCR provisions (Appendix III)


S Special Representatives (Appendix IV)


S Code of Practice between ISU and International Group of P&I Clubs (Appendix V)


S Code of Practice between London Property Underwriters and International Group of P&I Clubs (Appendix VI)


It is recommended that SCOPIC be incorporated into all LOF contracts signed from August 1, 1999, in the following words: "It is suggested that the SCOPIC Clause is incorporated into this contract."


Members are invited to submit the name of anyone who might be put forward for consideration for membership of the SCR Panel. In the meantime, if Members require any further elaboration of the matters contained in this Circular, the Managers will be pleased to respond.



Yours faithfully,





Joseph E.M. Hughes, Chairman & CEO

Shipowners Claims Bureau, Inc., Managers for