MFB solicitor Matthew Montgomery and trainee solicitor Freddie Courtney review the benefits and issues with LOF and consider if there are better options
The Lloyd’s Open Form salvage contract (LOF) is based upon the ‘no cure, no pay’ principle under which a salvor is only rewarded for a successful salvage operation. It is the pre-eminent salvage contract having been used by the marine market for over 100 years.
The contract is straightforward, allowing for the swift agreement of contractual terms when a vessel is in distress, with costs to be settled afterwards. If the parties cannot reach an amicable agreement on costs, a salvage tribunal will be constituted and a specialist salvage arbitrator will decide on the salvors’ remuneration.
This is determined by reference to criteria such as the salved value of the vessel and cargo, the nature and degree of the dangers and the promptness of the services rendered.
It is well known that the number of LOF contracts being entered into has declined in recent years. Until 2000, more than 100 LOF contracts were usually signed each year.
However, between 2000 to 2010 the annual figure dropped to around 60 LOFs. Since 2010, the annual number of LOFs has declined to around 40. In 2014, just 37 LOF contracts were agreed.
There is little doubt that technological advances and improved safety cultures have made the seas a safer place. This is likely to be the main factor that has led to a reduction in LOF numbers and should be celebrated.
However, there are other factors at play including a perception in the marine insurance market that the LOF is sometimes wrongly used by shipowners in non-salvage situations. For example, a criticism made by the marine insurance market has been the use of the LOF contract in straight-forward rescue tow situations.
One alternative to the LOF contract, which has seen a rise in recent years, has been to use an LOF with some of the terms amended or with a side-agreement in place. Amendments may include agreeing a cap, which is the maximum possible remuneration the salvors can claim for the salvage operations.
Or applying a tariff formula based on the assets and craft used to complete the salvage services. As the annual number of LOF contracts continues to fall, the salvor is likely to find it harder to reject the terms being proposed.
Another option is to use a different type of contract entirely. Where a distressed vessel needs towage services, then a TowCon or TowHire contract may be the better option.
Alternatively, the WreckHire contract has been used in various casualty situations over recent years. The advantages of these contracts are that a daily rate (or lump sum) is agreed up front. Unlike the LOF, the parties have a clear understanding of how much money will be changing hands from the outset.
This is important for marine insurers who can identify their exposures and reserve accordingly. However, the contracts are detailed and it often takes some time before a final version can be agreed.
Although there are certain situations where an alternative to the LOF may be considered, there are also casualties where an LOF contract is the only appropriate option.
Examples include marine casualties where lives are at risk, where a major fire has broken out or where the structural integrity of the vessel is dangerously compromised.
In circumstances such as these, where time is of the essence, it may be unwise for a shipowner to try and negotiate an alternative contract.
The LOF contract has significant advantages over its competitors. One of those advantages is that, under its terms, the salvor is to exercise ‘best endeavours’ to salve the ship and cargo.
None of the alternative options place such onerous duties on the salvor. LOFs are also flexible contracts, allowing the salvor to adapt to a changing casualty scenario without having to negotiate new contractual terms. This is often crucial in a fast-moving marine casualty.
The LOF is still generally regarded as the best all-round salvage contract, especially in emergencies. Being clear and simple with no room for negotiation, it is the most appropriate contract where emergency salvage services are required.
However, it may not always be the best option. If parties have the luxury of time, it is sensible to consider the alternatives without compromising the safety of the crew, property or the environment.