22 Jun 2009

Salvage arbitration

by Michael Underdown

There are different ways of ensuring that the salvage reward can be determined after the salvage.

Salvage arbitration is a less well known and specialised area of arbitration. Salvage is the saving of life or the preservation of a ship, cargo or certain other property from peril at sea.

Like most other aspects of maritime law, salvage has a long history although particularly since the development of a salvage industry at the end of the nineteenth century, there have been some fundamental changes. In the first place, most salvage operations are now performed under salvage contracts. Secondly, salvage is now regulated by the International Convention on Salvage 1989, which entered into force in Australia by virtue of Part VII of the Navigation Act 1912. Thirdly, there is now an overriding interest in preventing oil pollution.

However, one feature of salvage that still remains is the salvage reward, the amount of which may be the subject of arbitration or occasionally be modified by the courts pursuant to Article 7 of the Convention.

Nowadays, when a salvor goes to the aid of a ship in distress, this is usually as a result of a contract between the salvor and the ship's owner or the ship's master. If the ship is in danger of breaking up, there is little time or room for negotiation, or to wait for a ship owner on the other side of the world to decide whether to accept the offer. This led to the development of the Lloyd's Standard Form of Salvage Agreement, the latest version of which was introduced in 2000 and is commonly known as LOF 2000. What LOF 2000 does is delay the issue of the amount of reward until after the rescue to be resolved at arbitration in London. By deferring this crucial decision until later, the salvage operation can begin much faster and with greater prospect of success.

In cases where LOF 2000 is used, the master of the ship in distress signs a very basic contract "for and on behalf of the property", acknowledging that the salvor's "remuneration and/or special compensation (for preventing pollution) shall be determined in London in the manner prescribed by Lloyd's Standard Salvage and Arbitration Clauses and Lloyd's Procedural Rules". It is possible for the master to specify the currency of any arbitral award or salvage security required to be provided to the salvor upon successful completion of the salvage operation. The security can be by way of a guarantee and the International Salvage Union has produced a Salvage Guarantee Form I.S.U. 1 for this purpose.

LOF 2000 is administered by Lloyd's Salvage Arbitration Branch, using a panel of London maritime arbitrators (usually Queen's Counsel). In certain circumstances, the arbitrator may order a fixed cost arbitration on documents alone and limiting the recoverable costs. This procedure is more generally followed where the amount of security demanded is below US$1 million. There is nothing particularly novel about the procedure, except that there is an in-built appeal mechanism to an appeal arbitrator. Australian courts are not bound by the awards of Lloyd's salvage arbitrators, but their decisions are highly persuasive.

Article 13(1) of the Convention specifies the criteria to be taken into account in fixing the salvage reward:

  • the salved value of the ship and other property
  • the skill and efforts of the salvor to prevent or minimise pollution
  • the degree of success of the salvage operation
  • the degree of danger involved
  • the skill and efforts of the salvor in salving life, the ship and other property
  • duration and expense of the salvage operation and the cost incurred by the salvor
  • risk of liability
  • promptness of the salvage operation
  • availability of vessels and equipment for the salvage operation
  • state of readiness of the salvor's equipment

Most argument revolves around the more subjective of these criteria, such as the degree of danger involved. In United Salvage Pty Ltd v Louis Dreyfus Armateurs SNC [2007] FCAFC 115, the Full Court of the Federal Court of Australia rejected an appeal from the salvors in finding that Article 13(1)(d) "imposes a high threshold requirement to satisfy the notion of danger. A real risk not a remote possibility is required…". Another more fundamental dispute is sometimes about whether there was a contract for salvage at all, or whether it was simply a towage contract.

Lest it be thought that all salvage operations are carried out using LOF 2000, while this is by far and away the most common contract used, of the 4,987 salvage operations undertaken by International Salvage Union members between 1978-2004, only 2,644 were on the basis of LOF 2000 (other forms of salvage contract include the Turkish, Moscow, Beijing and Japanese forms). Discounting the fact that there is not always disagreement about the salvage reward (as happens sometimes in the case of commercial fishing vessels), this still leaves a large number of cases where arbitration in London under Lloyd's procedures was not determined in advance. There is no fundamental reason why Australian maritime arbitrators and Australian law should not be considered when entering into a non-LOF 2000 salvage contract.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.