The Ever Given: a lens for Lloyd’s Open Form salvage

Elliot Wright

 When the Ever Given blocked the Suez Canal earlier this year, it came to global attention. The ramifications on international trade were not immediately evident, given that their extent depended on the success of the attempts to rescue the vessel. This event introduced many to the world of marine salvage, which usually operates behind the scenes for the consumers who take advantage of international shipping.

There will be a plethora of legal claims arising from the delays and damages caused by this event. Indeed, these cases may operate in the background of shipping law for some years, given the multiplicitous claimants and the potential for extensive delays.[2] Some of the broader legal issues raised are set out below, but the questions raised in the realm of marine salvage are particularly fascinating. This article will use this as a lens to explore some aspects of marine salvage holistically before examining the Lloyd’s Open Form (LOF) in more detail. In particular, the issues with LOF which have led to its declining use will be considered, before turning to some of the responses to these concerns.

 

What legal concerns arise from the blocking of the SuezCanal?

The ramifications of this event are still emerging, with effects around the world given the nature of international trade: delayed vessels may be travelling to or from different parts of the world; parties to claims under charter parties may be from various jurisdictions; and the companies shipping goods will be shipping them to a third country. The relevance of various states raises questions of jurisdiction and applicable law. English courts’ jurisdiction is determined under the Civil ProcedureRules, differing on whether the party a claim is brought against has a presence in the jurisdiction or whether service-out is required. The applicable law varies between contract and tort, being decided under the Rome I and Rome regimes respectively, which are both part of UK law post-Brexit as retained EU law.[3] Of course other states may also have jurisdiction. For instance, the Egyptian authorities authorised seizure of the Ever Given by the Suez Canal Authority (SCA)whilst claims initially valued at US$900m were settled. This was reduced first to US$600m and then to US$550m, before ultimately being settled for an undisclosed sum,[4]leading to the Ever Given being released in early July. Reportedly, this included the purchase of a new tugboat for the SCA.[5]

Beyond this however, the rescue operation itself may well lead to claims, especially as it is reported to have been made under  LOF.[6] This is a standard form contract for marine salvage under which the salvage award is determined after the event. This is done in the majority of cases by agreement,[7]but failing this it is by arbitration.

 

Marine Salvage

Liability for various parties for salvage costs can be assigned by common law and by contract. The ‘common law’ position is that salvage rewards are borne by the property owners in proportion to the value of the property at risk. This originally judicially-developed position now has a statutory basis.[8] However, under some standard contracts this cost is directly borne by the ship owner, for instance under BIMCO forms of salvage contract. The ship owner can then, with exceptions, bring a claim in general average against the cargo owners for their share of this expenditure. A general average is a restitution-like claim against parties to the “maritime adventure” who benefit from salvage efforts,[9] and is often contractually set out. Any party which bears some of this liability is likely to wish to pass the cost on to their insurers. Hull & Machinery(H&M) insurers generally bear the burden of the ship’s share, but some also cover the cargo’s share, sparing the ship owner the pain of collecting security.In container trade, such security collection can make the vessel operator’s job difficult, as they must interact with a great number of cargo interests and potentially comply with the rules of various jurisdictions. For a vessel like the EverGiven, which could theoretically carry 20,124 twenty-foot containers,[10]this may prove taxing given the multiplicity of cargo owners.

EVERGREEN’s standard form bill of lading features a jurisdiction agreement, [11]which, counter-intuitively, would make enforcement more difficult if it were not for the collection of security interests before delivery of cargo.[12] This is because security usually answers to a High Court judgment, but a jurisdiction agreement means the Brussels and Lugano regimes would no longer apply.[13]Further, bills of lading are excluded from the Hague Convention. For this reason, enforcement would be fragmented and costly, both in terms of labour and money, were it not for the security mechanism. The salvor’s award still falls to be determined under the LOF though, in order to set against these securities.  

 

Lloyd’s Open Form

As salvage, like general average, is a restitution-based claim, the ship-owner will not incur costs if there is no cure. However, when a vessel is in need of salvage, time is of the essence, and so parties may not have the luxury of negotiating the costs if cure is effected. The LOF provides for the cost of salvage to be determined after the fact, allowing the rescue to proceed apace, but with some guides as to the likely value of an award. The LOF also responded to environmental concerns by displacing ‘no cure no pay’ in the case of laden oil tankers. This exception provided for a top-up award for preventing pollution,[14]though it has since been removed. The purpose of this was to remove the disincentive for salvors to assist vessels posing a threat of pollution given the obligation to minimise such damage. This area has been the subject of extensive development since, to remedy concerns with aspects of these early environmental salvage efforts.[15]

The ex post facto award determination is carried out through arbitration under the terms of the Lloyd’s Salvage Arbitration Clauses(LSAC) that are incorporated into the LOF Contract.[16] If dovetailed with Lloyd’s insurance policies, this provides for ease of enforcement too given the security held. Otherwise, this can be an issue in such cases where the ship in question may be one of the owner’s only substantial assets. Arbitration offers a number of advantages generally, including greater control of dispute resolution procedure and expertise of the arbitrator in such technical and legally complex matters. Confidentiality, which is often considered an advantage of arbitration with the others listed,[17]is not left to the common law implied term[18]but instead the position is reversed. Awards are publishable under Clause 13LSAC unless the parties agree otherwise. There is also appeal to another arbitrator provided for, as well as the courts’ general jurisdiction to hear appeals on law under s.69 of the Arbitration Act 1996. Often, such rights to appeal are contractually excluded,[19]so it is notable that they appear here. The s.69 appeal on law plays perhaps only an occasional role however, given that most disputes under LOF relate to quantification of the award.

However, whilst LOF has a number of advantages, there were some aspects which meant it was not preferable in certain contexts, and further issues which developed led to its declining use.

 

Issues with LOF

The benefit of a quickly formed contract under LOF must be balanced with the inherent uncertainty as to the salvage award. This is compounded by the fact these awards are generally significantly above the commercial hire rates. While this increase can be justified by the fact the salvor takes on the risk if rescue is not possible, it can lead to a sense that awards are excessive. Further, whilst arbitration can be an attractive dispute resolution mechanism, it is quite expensive where only quantification of the award needs to be addressed. This is especially so where there can be substantial delays in receiving judgment, anecdotally even for simple cases. As such, large salvage companies fell out of love with the LOF given this expense, delay and uncertainty, as it is difficult to run such a company on uncertain future payments.

Another concern arises from the adaptation of the LOF’s treatment of environmental concerns in response to the Salvage Convention 1989.Article 14 of this convention provides for an uplift responding to expenses incurred avoiding pollution and environmental damage, and is only available where the vessel or its cargo posed such a threat by itself. This development was in line with the preventative intentions of the LOF with respect to pollution, but whilst well-meaning this was a flawed balancing of interests. It exacerbated the above issues, requiring greater expense and delay through the need for expert environmental reports to be adduced in evidence, even to determine if this was a recoverable head.[20]Further, the value of this part of the award was not simply determinable following the decision in The Nagasaki Spirit.[21]It was held that it was not the readily available commercial rate which was recoverable but the indirect or overhead expenses. These are not readily identifiable by the party needing salvage, nor necessarily even by the salvor.

This latter issue led to conferences between theInternational Salvage Union, the International Group of Protection &Indemnity (P&I) Clubs and property insurers. Discussions ultimately led to theSpecial Compensation P&I Clause (SCOPIC) in 1999, which acts as a supplemental clause to the LOF to provide preferable terms, addressing this concern.

 

SCOPIC

This applies where incorporated into the LOF and invoked by the salvor, and provides a practical solution to concerns about Art 14. Rather than applying a ‘fair rate’ it includes tariffs for the salvage operation, and provides for a 25% uplift to make sure there is no disincentive to salvage where there are environmental concerns. Further, this is the sole liability of the shipowner like the other environment-related awards, so creates the same safety net with regard to the disincentive of pollution under ‘no cure no pay’.

In order to ensure its efficacy, the insurers, who are not party to the salvage agreement itself, have undertaken to follow a number of codes of practice. These include providing prompt advice in cases of salvage to allow parties to manage, split and mitigate costs.

This has met with a great deal of success, to the point that its position has been clarified in the York-Antwerp Rules. While it remedies some uncertainty in cases of environment-related awards however, it cannot prevent the delay and uncertainty inherent in the rest of the LOF.

 

Concluding remarks – relevance to the Ever Given

The nature of the Ever Given’s stranding meant there were not environmental concerns, but the LOF still has complications. While its selection remedies complications highlighted above, such as the jurisdiction of the courts and the applicable law, it introduces complexities of its own. For this reason, it has been considered by some to be a dead form, and Lloyd’s considered closing their Salvage Arbitration Branch, putting the LOF’s future  in the balance.[22]As such its use is perhaps surprising, but given the nature of such disputes the wisdom of its selection, if indeed it is under LOF, will not be seen for some time, if at all, given the parties could settle instead, or simply opt for an unpublished award.

 

 

My thanks go to James M. Turner QC of Quadrant Chambers for discussing theseissues with me and for reading a draft copy of this piece, as well as directingme to his writings on the topic.

[2]See Okpabi v Royal Dutch Shell [2021] UKSC 3, [2021] 1 WLR 1294, whichtook six-years simply to settle a preliminary jurisdictional matter.

[3]The Law Applicable to Contractual Obligations and Non-Contractual Obligations(Amendment etc.) (EU Exit) Regulations 2019.

[4]https://www.reuters.com/world/ever-given-container-ship-set-leave-suez-canal-2021-07-07/.

[5]https://qz.com/2029512/egypt-accepts-an-agreement-to-release-the-ever-given/.

[6]https://www.lloydsloadinglist.com/freight-directory/news/Suez-Canal-remains-blocked-despite-efforts-to-re-float-grounded-%E2%80%98Ever-Given%E2%80%99/78733.htm#.YPRDquhKjnY,although the ship owner has denied this.

[7]Reportedly agreement is reached in 75% of cases: https://kennedyslaw.com/thought-leadership/article/is-lloyds-open-form-on-borrowed-time/.

[8]S.224(1) of the Merchant Shipping Act 1995, giving effect to Art. 13.2 of theSalvage Convention 1989.

[9]See the Kluwer Arbitration Blog post by James Turner and Nichola Warrender: http://arbitrationblog.kluwerarbitration.com/2021/06/10/shipping-casualties-and-arbitration-reflections-on-the-ever-given/.

[10]ibid, this is its capacity in TEU (Twenty-foot Equivalent Units).

[11]https://web.archive.org/web/20210325060852/https://www.evergreen-line.com/static/html/EGLV_BLClause2020.pdf;ibid.

[12]ibid, Clause 27.

[13]Although these are not of application to cases brought in the UK since 1/1/21.

[14]The Renos – A Trojan Horse in the LOF Citadel?’ James M. Turner QC, Lloyd’sBusiness & Trade Law, Volume 18, Issue 7, 3.

[15]ibid, see esp. Art. 14 of the Salvage Convention 1989.

[16]https://assets.lloyds.com/assets/pdf-lloyds-open-form-lof-lof-2020/1/pdf-lloyds-open-form-lof-LOF-2020.pdf,see I.

[17]Gary Born, International Commercial Arbitration (2nd Edn,Kluwer Law International, 2014), p.87.

[18]Ali Shipping Corporation v Shipyard Trogir, [1999] 1 WLR 314, p.327C-D.

[19]op cit, n.7.

[20]op cit, n.10.

[21][1997] 1 Lloyd’s Rep 323.

[22]See discussion here: https://kennedyslaw.com/thought-leadership/article/is-lloyds-open-form-on-borrowed-time/;Lloyd’s has since (21/7/21) confirmed they will not close LSAB.