In The “RENOS” [2018] EWCA Civ 230, the Court of Appeal ruled that SCOPIC expenditure could be included in ascertaining whether a casualty was a constructive total loss.  The author considers that conclusion against the historical background to and purpose of the SCOPIC clause, suggesting that it cannot have been intended by the authors of either SCOPIC or the Marine Insurance Act 1906, and that it may weaken the support of the London market for the Lloyd’s Open Form Salvage Contract.

Insurance

Most if not all commercial vessels will carry insurance to cover against the risks of (amongst others) damage to the ship itself (hull and machinery, or “H&M” cover) and to the environment (protecting and indemnity, or “P&I” cover).  H&M cover will typically provide for an indemnity against physical damage to the vessel caused by marine perils, as well as the cost of measures taken to avert or minimise a loss, once a marine peril is at least imminent (so-called “sue and labour” expenses).  P&I insurance covers against certain classes of liability to which shipowners are commonly exposed. The two most relevant for present purposes are liability for pollution and for wreck removal.

Salvage

Where a ship is in the grip of a marine peril and beyond self-help, she is often referred to as a “casualty”.  Her owner may choose to engage a third party to assist.  Such third parties are known as “salvors”, whether or not salvage is in fact their profession. 

Salvors may be engaged upon terms akin to towage contracts, i.e., providing for a daily rate of remuneration which is payable whether or not the salvage effort succeeds. Alternatively, no remuneration may be fixed.  In the latter case, a salvage award will only be payable if and to the extent that the salvage effort is successful. This is sometime referred to as the “no cure, no pay” principle. It applies whether or not the salvage service was rendered voluntarily or pursuant to the terms of a contract.  We are concerned in this case only with this latter form of arrangement, i.e., not with the one in which remuneration is fixed in advance.

“No cure, no pay” has a long history, and was part of the English law of salvage well before the earliest international conventions.  It was enshrined in the Brussels Convention on Salvage 1910; it was also the bedrock of the world’s oldest standard form of salvage agreement: the Lloyd’s Open Form (“LOF”).

The “no cure, no pay” principle had benefits from the shipowner’s (and hull underwriter’s) point of view.  If the salvage effort was unsuccessful, nothing needed to be paid to the salvor.  And even if it succeeded, the amount payable to the salvor could not exceed the “salved fund”: the total value of the property salved as at the termination of the salvage services, i.e., the casualty (including her stores and fuel) and any cargo (taking into account any damage to them).

The corollary to the “no cure, no pay” principle was this: where a salved fund was more than adequate to reward a salvor for his efforts, he could expect a handsome reward.  Just how handsome would depend upon various factors, such as:

• The size (in monetary terms) of the salved fund;
• The difficulty and duration of the salvage services;
• The nature and severity of the dangers which the salved fund had faced;
• The level of out of pocket expenditure incurred by the salvor in rendering the services; and
• The professional status of the salvor and his investment in salvage (if any).  This factor reflected the benefit to shipowners (and their hull underwriters) in general of the existence of a professional class of salvors.

As is consistent with the cover extended to sue and labour expenses, hull and machinery insurance generally covered shipowners against any liability incurred in salvage.

Salvage and the Environment

Historically, the law of salvage took no account of the environment: a salvage award was not increased merely because the salvage had prevented pollution.  If a salvor removed the bunkers from a stranded casualty, he might well have prevented a serious incident.  But he could expect no reward beyond the value (if any) of the bunkers removed, if he was otherwise unsuccessful in salving the casualty.  That was so, even though the pollution incident averted might have cost very large sums to clean up.

However, in the 1960s and 1970s there were a number of high profile casualties involving very large crude carriers, such as the Torrey Canyon, wrecked off the coast of Cornwall in 1967; and the Amoco Cadiz, wrecked off the Brittany coast in 1978.

A consensus developed that the framework of the law of salvage required overhaul.  A number of factors lay behind that consensus.  They included:

• The reality that the salvage industry was the industry sector best placed and most suitable to intervene in marine casualties threatening serious pollution incidents.
• The fact that the “no cure, no pay” principle was at least capable of operating as a disincentive for professional salvors to intervene in those cases which most urgently required intervention if pollution was to be averted, e.g., a badly damaged ship (which, even if salved, might have a low or no salved value), presenting a difficult and thus expensive challenge to the salvor in removing pollutants which might themselves already be contaminated with seawater (and thus be of low or no value), particularly where the chances of any sort of “cure” were perceived to be low.
• The perceived iniquity that where salvage services were effective in minimising pollution, nothing was paid by one of the parties which derived the greatest benefit of the services, namely the ship’s P&I insurers.

In the 1980s, that consensus led to two distinct (though related) developments: the publication, in 1980, of a new edition of the LOF (“LOF 1980”); and the International Convention on Salvage 1989 (“the 1989 Salvage Convention”).

LOF 1980

LOF 1980 contained for the first time in the history of the LOF form an exception to the principle of “no cure, no pay”.  The exception only operated where the casualty was a laden oil tanker; in such cases the contractor assumed the obligation – in addition to the traditional obligation that he use his best endeavours to salve the property at risk – to exercise his best endeavours to prevent the escape of oil from the casualty.

In applicable cases, the salvor was entitled – as a top-up, or “safety net” to the conventional salvage award, if any – to be paid up to 115% of his reasonably incurred expenses.  The “safety net” applied only if and to the extent that the conventional salvage award did not itself cover that amount.  The “safety net” payment was the responsibility of the shipowner alone: no part of it could be recovered from the cargo owner.  In practice, it was covered by the shipowner’s P&I Club – as the owner’s pollution liability insurer – rather than by hull underwriters.  That was so, even though some or potentially all the salvors’ expenses had been incurred in attempting to salve the casualty and her cargo, rather than in a direct attempt to prevent the escape of oil from the casualty.

At the same time, LOF 1980 also introduced the concept of an “enhanced award”, by which the conventional salvage award could be “enhanced” where the salvor had also prevented pollution.  Like the “safety net”, the “enhanced award” operated only where the casualty was a laden oil tanker.

In terms of the allocation of insurance risk as between hull (and, indeed, cargo) underwriters and P&I insurers, the “enhanced award” marked something of a shift.  For the first time, property insurers would have to pay something – how much exactly is, practically speaking, near-impossible to determine – towards efforts made to protect the wider environment.  That area had historically been covered by P&I insurers.

The 1989 Salvage Convention

The 1989 Salvage Convention came into force in July 1996, though several of its key provisions had already been incorporated in the 1990 and 1995 editions of the LOF contract.  The Convention fundamentally revised salvage law.  Its most important provisions, both generally and for present purposes, are Articles 13 and 14.

Article 13

Article 13 sets out the factors to be taken into account in assessing a conventional salvage award (now known as an “Article 13 award”).  For the first time in the history of the general law of salvage, one of those factors (indeed, the second listed: Art. 13.1(b)) was “the skill and efforts of the salvors in preventing or minimising damage to the environment”.

Art. 13(1)(b) provided the basis for remunerating the salvor for the express obligation, introduced by the 1990 and continued in subsequent editions of the LOF contract, that he exercise his best endeavours not just to salve the property in danger, but “while performing the salvage services[,] to prevent or minimise damage to the environment” – a somewhat wider duty than that provided for in LOF 1980.

An Article 13 award is payable by all of the property interests in proportion to their respective salved values (Article 13.2), thus embedding the shift already noted above.

Article 14 – Special Compensation

Article 14 contained a further innovation for the law of salvage: “special compensation” payable for preventing or minimising damage to the environment – also known as an “Article 14 award”.  Like the LOF 1980 “safety net”, “special compensation”:

• Is payable only if and to the extent that it exceeded the Article 13 award.
• Is calculated on the basis of the expenses incurred by the salvor, though the notion of “expenses” was widened to include “a fair rate for equipment and personnel”.
• Provides for an uplift on the salvor’s expenses.  The Article 14 uplift is more generous: it can be as much as 100% of the expenses incurred.
• Is the sole liability of the shipowner and, in practice, has been paid by P&I insurers.  Again, that is so, even though some or potentially all the salvors’ expenses may have been incurred in attempting to salve the casualty and her cargo, rather than in a direct attempt to prevent or minimise damage to the environment.

Unlike the LOF 1980 “safety net”, an Article 14 was available – but available only – in any case in which the vessel “by itself or its cargo threatened damage to the environment” (Art. 14.1) and the salvage operations “prevented or minimised damage to the environment” (Art. 14.2).

Article 14 was a well-meaning but flawed attempt at balancing the competing interests at stake.  In practice, its provisions resulted in uncertainty and enormous legal costs:

• In relation to the requirement that damage to the environment should both have been threatened and averted (or minimised): this necessitated expert environmental impact reports.
• On the question of what amounted to a “fair rate”.  In The Nagasaki Spirit [1997] AC 455, the House of Lords decided that “fair rate” referred to indirect or overhead expenses, rather than a (higher but more readily identifiable) commercial rate for the employment of the personnel or equipment in question.  This necessitated very detailed, intrusive and expensive accountancy reports into the salvor’s business operation.  

The resulting dissatisfaction with the Article 14 regime led to discussions between the International Salvage Union (the “ISU”), the International Group of P&I Clubs (the “IG”) and representatives of hull and cargo insurers (the property insurers).  Those discussions culminated in 1999 in a further industry solution: SCOPIC.

SCOPIC

SCOPIC – or the “Special Compensation P&I Clause” – was thus conceived as a solution to the problems experienced in practice with Article 14.  In order to avoid the expense associated with the issues outlined above:

• SCOPIC applies whenever it was incorporated into the LOF salvage contract and invoked by the salvor.  There is no need to demonstrate that any damage to the environment has been threatened or averted.
• In place of the “fair rate” debacle, SCOPIC provides a pre-agreed tariff of rates for different types of vessel, equipment and personnel.
• Accordingly, “the method of assessing Special Compensation under Convention Article 14 … [is] substituted by the method of assessment set out hereinafter”.

SCOPIC leaves the Article 13 regime unaffected (SCOPIC cl. 6(ii)).

Like Article 14 and the LOF 1980 “safety net”, SCOPIC:

• Is payable only to the extent that it exceeds the Article 13 award.
• Is calculated on the basis of the expenses incurred by the salvor, but in place of the Article 14 “fair rate” in respect of the salvor’s own equipment and personnel, the tariff referred to above applies.  (In fact, the same tariff can also apply to some or all of the genuinely “out of pocket” expenses, but that is irrelevant for present purposes).
• Provides for an uplift on the total of the salvor’s expenses and tariff rates.  The standard SCOPIC uplift is 25%.
• Is the sole liability of the shipowner (SCOPIC cl. 14) and, in practice, has been paid by P&I insurers – even though some or potentially all the salvors’ expenses may have been incurred in attempting to salve the casualty and her cargo.

This last characteristic is no coincidence: SCOPIC was intended to cover precisely the same gap as the LOF 1980 “safety net” and Article 14: the gap in environmental protection which existed under the old “no cure, no pay” regime.  That gap, in the absence of Article 14, would have continued, largely unaffected by the introduction of environmental factors into the assessment of the Article 13 award.  

All three of these regimes (the LOF 1980 “safety net”, Article 14 and SCOPIC) thus provide a financial incentive, to those who are best placed to do so, i.e., the professional salvage industry, to intervene and prevent maritime accidents from resulting in environmental catastrophe.

The Codes of Practice

At the time the SCOPIC clause was negotiated by the industry, it was recognised that neither P&I Clubs nor hull and machinery insurers would ordinarily be parties to a salvage contract.  It followed that they would not strictly speaking be bound by, or in a position to enforce the terms of a new clause of this type incorporated into a salvage contract.

To capture the agreements reached, two Codes of Practice were agreed:

• The first was a Code of Practice between the IG, property underwriters and the ISU, concerning who would pay for the “special casualty representative” (“SCR”) (“the SCR Code”).[1]  Against the background that liability and property underwriters required day by day information as to the progress of the salvage operation itself, it was agreed that it would be fair for the SCR’s costs to be split between hull underwriters and P&I insurers.
• The second was a Code of Practice between the ISU and the IG (“the ISU/IG Code”).  It deals with various matters, including:
  • Prompt advice by the salvor to the P&I Club “if they consider that there is a possibility of a Special Compensation claim arising” (cl. 1);

[1] The SCR is intended to function as an independent observer (hull and cargo insurers have the option of appointing their own special representatives, SCOPIC para 12, App. C) and to report to all parties on the progress of the salvage operation. The SCR is in practice appointed whenever SCOPIC is invoked and this may be before the stage where it is clear that there will actually be a SCOPIC award (since the amount of the salved fund for example may well not be clear at that early stage).

• Prompt advice by P&I Club to salvor as to whether the shipowner is covered for “Special Compensation or SCOPIC Remuneration” liability (cl. 3);
  • The provision and acceptance of security in respect of such liability (cll. 4-7);
  • Termination of the salvage contract under SCOPIC clause 9(ii) (cl. 8); and
  • Exclusion of SCOPIC claims from general average (cl. 9).

The Industry Consensus

Both of the Codes of Practice are agreed not to be legally binding.  Nevertheless they embody and reflect the perception and agreement of the industry – consistent with the history and scheme of remunerating salvors for protecting the environment when a conventional salvage award is unavailable or inadequate – that:

• Article 13 awards, like the LOF 1980 “enhanced awards” before them, would continue to be covered by property insurers; and
• SCOPIC awards, like the LOF 1980 “safety net” and Article 14 before them, would continue to be covered by liability (i.e., P&I) insurers.

The industry consensus has held up well: The “RENOS” apart, the author is aware of only one claim where the P&I insurer has attempted to recoup its payment of SCOPIC remuneration from a property underwriter.

That consensus is clearly reflected in (at least) two other provisions.  The first is Rule VI(c) of the York-Antwerp Rules 2004, which provides that SCOPIC compensation is not allowable in general average.  The second is paragraph 15 of SCOPIC itself, under the heading “General Average”:

“SCOPIC remuneration shall not be a General Average expense to the extent that it exceeds the Article 13 award; any liability to pay such SCOPIC remuneration shall be that of the Shipowner alone and no claim whether direct, indirect, by way of indemnity or recourse or otherwise relating to SCOPIC remuneration in excess of the Article 13 award shall be made in General Average or under the vessel’s Hull and Machinery Policy by the owners of the vessel” [emphasis supplied].

The consensus is also reflected in the Institute Time Clauses (Hulls), which exclude Article 14 special compensation claims and any other claims “similar in substance”, such as SCOPIC claims.

The “RENOS”

The factual background to and other issues in the case have been ably summarised elsewhere.[2]  The issue relevant for present purposes was whether the shipowner’s liability in SCOPIC could be taken into account in assessing whether the casualty was a constructive total loss.  Hamblen LJ addressed this issue at [86]-[94] of his judgment (with which the other members of the Court agreed).

There was no difficulty in identifying the SCOPIC costs: they are set out, alongside the distinct (though notional) Article 13 award in [86].[3]  H&M underwriters argued that the SCOPIC costs could not be taken into account as “costs of repairs” for the purposes of the CTL calculation.  They took two points: that such costs were not a “cost of repair” for the purpose of s. 60(2)(ii) of the Marine insurance Act 1906; and that such a claim was precluded by paragraph 15 of SCOPIC. 

On the first point, underwriters argued that SCOPIC was “conceptually distinct from the Article 13 Award payable to salvors as the reasonable cost of their services in saving the vessel”.  The difficulty with that argument, whatever the background to and purpose of SCOPIC, is that the obligation upon the salvor is precisely the same under SCOPIC as it is under the LOF Contract (of which it forms part): to exercise best endeavours to salve the casualty.  That was not, however, the reason given by Hamblen LJ for rejecting the argument: his reason was that the whole amount due to salvors had to be paid for the owners to recover the vessel, so whether it was salvage or SCOPIC remuneration made no difference.

On the second point, the obvious problem with reliance on paragraph 15 of SCOPIC is that the underwriters were not party to the salvage agreement.  Underwriters sought to escape their privity difficulty by relying on the Contracts (Rights of Third Parties) Act 1999.  Hamblen LJ acknowledged the argument but made no finding on it. He appears simply to have assumed that paragraph 15 could be invoked.  Instead, he rejected underwriters’ argument at [93] on the ground that –

[1] The Article 13 Award will have been payable in respect of the cargo which was successfully salved.  Even if a settlement has been entered into between salvors and cargo interests, the Lloyd’s arbitrator hearing a SCOPIC claim would always need to determine the notional Article 13 Award as SCOPIC is only payable to the extent that it exceeds the Article 13 Award.

“The claim in the present case is for the total loss of the Vessel.  No claim for an indemnity or recourse or otherwise is made relating to SCOPIC remuneration.  Its only relevance is as part of the cost of repair which is to rank for the purpose of determining whether the Vessel is a CTL.  Ranking costs for the purpose of a CTL do not have to be incurred.  They may be future or hypothetical.  No indemnity or recourse is sought in relation to such costs. …”

Commentary

Hamblen LJ’s reasoning is – with respect – not wholly convincing.  Without the SCOPIC claim counting, there would have been no CTL, with the shipowner confined instead to a claim for the cost of repair (in relation to which SCOPIC could not be claimed).  With the SCOPIC claim brought into account, there was a CTL and the whole insured value (typically well in excess of the vessel’s actual value) could be claimed.  It is very difficult – standing back from the tangled thicket of hypothetical CTL componentry – to see this as anything other than an indirect claim relating to SCOPIC remuneration.  If that is right, then then the claim is squarely barred by paragraph 15 of SCOPIC (always assuming – as Hamblen LJ did – that underwriters can invoke it).

Moreover, the result in the case is one that the architects of neither the 1906 Act nor SCOPIC can have intended: 

• In 1906, there would have been no question of a shipowner being liable to pay salvors amounts that – then and now – could not be recovered as salvage remuneration.
• In 1999, whatever the ‘shift’ embodied by Art. 13(1)(b) of the 1989 Salvage Convention, there was no question of hull underwriters’ exposure being affected (other than by way of a potential slight increase in the Article 13 salvage award) by either Article 14 or the SCOPIC replacement of it. 
• The outcome of The “RENOS”, however, shows that hull underwriters may be exposed to a CTL claim which in the past could never have been brought.

Could P&I underwriters recover from their assured (by way of subrogation) “their” share of the CTL payout from the vessel’s owners?  After all, the CTL payout would (in the great majority of cases) comfortably exceed the vessel’s value immediately before the casualty.  Why should the owners “scoop the pool”, leaving the P&I insurer (whose outlay helped them to scoop it) out of pocket? 

That question did not feature in the Court of Appeal’s judgment, but probably it was not argued.  That is (no doubt) because it is very difficult to see that P&I should be able to reach into the payment of an agreed sum for loss or destruction of property in order to recoup its outlay in relation to (in effect) avoided liability for environmental damage.  To that extent, there may be little danger that The “RENOS” will dim the bright line of the industry consensus described above – although the very fact that the oil and water of property and liability insurance do not mix grates with Hamblen LJ’s reasoning.

There is, however, a non-legal aspect to this: it is no secret that LOF is not universally popular in the London insurance market.  The reasons why are beyond the scope of this article (and in some respects disputed).  The relevant point is this: for as long as the decision in The “RENOS” stands, it has obvious potential to reduce market support for the LOF Contract.  That is because a property insurer may feel that it can far better control its exposure by insisting upon daily rate contracts, improving its chances of managing – and thus avoiding – the risk of a back-door CTL if LOF and SCOPIC are used.

The architects of SCOPIC (and, indeed, the 1989 Salvage Convention) sought to protect and support LOF.  As The “RENOS” shows, though, it is hard to contract out of the law of unintended consequences.  SCOPIC, as it now appears, may after all be a Trojan Horse in the LOF citadel.  It will be ironic and tragic if, as those who support LOF would claim, that contributes in turn to the long term decline and disappearance of the salvage industry and, with it, the enhancement in environmental protection which the developments described above were supposed to deliver. 

 

[1] The SCR is intended to function as an independent observer (hull and cargo insurers have the option of appointing their own special representatives, SCOPIC para 12, App. C) and to report to all parties on the progress of the salvage operation. The SCR is in practice appointed whenever SCOPIC is invoked and this may be before the stage where it is clear that there will actually be a SCOPIC award (since the amount of the salved fund for example may well not be clear at that early stage).

[2] For example at http://bit.ly/DTQC_RNS

[3] The Article 13 Award will have been payable in respect of the cargo which was successfully salved.  Even if a settlement has been entered into between salvors and cargo interests, the Lloyd’s arbitrator hearing a SCOPIC claim would always need to determine the notional Article 13 Award as SCOPIC is only payable to the extent that it exceeds the Article 13 Award.