The Future of LOF Part I: The Test of Time

file photo: Rena aground

By MarEx 2015-09-10 21:52:43

By Mark Hoddinott

Those of us who have spent a significant period of our careers within the salvage industry cannot help but have great affection for Lloyd’s Open Form (LOF). It is a unique, simple and highly successful contract that has stood the test of time for over a hundred years. 

The first version of LOF made its appearance in 1908. I have a copy in my office and it is interesting to note that many of the original terms have been retained today. The use of “best endeavours,” for example, and the concept of “no cure – no pay.” The establishment of the reward was made by the salvor naming, within the contract, a lump sum or a percentage of the salved property, and the provision for security was included. There was the provision for arbitration and, of course, there is no mention of the environment.

I believe it is fair to say that LOF has been amended over time to reflect market changes and keep it fit for purpose. It has retained its notable properties in that it can be agreed swiftly with no time lost to contract negotiations; there is an onus on the salvor to use his “best endeavours” and the reward is paid by all property interests in the venture in proportion to their value.

The first major change came with the introduction of LOF 80 following a series of high profile tanker casualties. LOF 80 introduced the first safety net for cases involving laden, or partly laden, tankers and it was the first time the strict principle of “no cure – no pay” was mitigated. It had limited use, however, as according to my research there were only four cases in the following ten years when the safety net was successfully applied. There is little doubt, however, that the concept of the safety net was taken forward into the construction of the 1989 Salvage Convention.

The 1989 Salvage Convention fundamentally changed the dynamics of marine salvage. The following year saw the introduction of LOF 90 which gave effect to Article 14 of the 1989 Salvage Convention. It could not incorporate the Convention entirely as parts of the Convention were in conflict with English law and LOF is an English law contract.

These conflicts were removed with the introduction of the UK 1994 Merchant Shipping (Salvage & Pollution) Act and LOF95 quickly followed which did, indeed, incorporate all aspects of the Salvage Convention.

The Salvage Convention finally entered into force on July 14, 1996. It was greeted warmly by the salvage, shipping and marine insurance industries but, in some aspects, I suggest it has been the catalyst for the decline in the use of LOF and some of the contract’s current unpopularity. 

Special Compensation

According to my research there were a total of 18 Article 14 claims of which seven were appealed.

Article 14 was a safety net designed to allow the salvor to recover his costs, based on a fair rate, with an increment for protecting and minimizing damage to the environment. Its continued use was seriously questioned following the Nagasaki Spirit ruling on the term “fair rate” in respect of personnel and equipment. The salvage and marine liability insurance industries put their heads together and came up with the Special Compensation P&I Club Clause, known as SCOPIC. In was, in my view, an excellent development and has successfully been in common use since 1st August 1999. It has almost replaced Article 14 as the method of special compensation in LOF although Article 14 is still available. To my knowledge there have not been any Article 14 claims since 2001.

LOF2000 incorporated an option to include the SCOPIC Clause as the method of special compensation, however, the option still exists for a salvor not to incorporate SCOPIC and to fall back on Article 14.

Does LOF need reviewing and amending?

LOF is at a crossroads and, in my view, needs to be reviewed if it is to remain the “contract of choice” for emergency response services. As previously stated, it is a fair comment that LOF has been amended to reflect market changes to keep it fit for purpose. I believe that in recent times it has fallen short in a couple of areas, the key one being the important area of protection of the environment. In the current edition of LOF, LOF 2011, the only recognition of the environmental services carried out by the salvor is in Clause B, “Environmental Protection - While performing the salvage services the Contractors shall also use their best endeavors to prevent or minimize damage to the environment.”

LOF’s continued decline is of great concern to salvors and property underwriters, and I believe it not only needs reviewing but also needs to be promoted to the wider shipping and marine insurance industries. The International Salvage Union (ISU) and Lloyd’s have been in discussions regarding an educational program for industry on the benefits of LOF. When agreed it will be a long term commitment on both parties to educate the industry on the benefits of LOF and improve its use.

To be continued…

Mark Hoddinott is General Manager of the International Salvage Union. He spoke at this year’s LOC Asian Marine Casualty Forum.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.