In light of a recent series of large-scale maritime casualties, the need for effective and clear contractual frameworks for salvage operations has never been more critical. Unsurprisingly, despite its reduced usage in recent years, the Lloyd's Open Form (LOF) remains the premier emergency response contract for managing large and complex incidents, providing a robust mechanism for addressing immediate threats to property and the environment.
On 1 June 2024, the Lloyd's Salvage Arbitration Branch published the latest edition of the LOF, consisting of significant revisions aimed at enhancing efficiency and applicability in modern salvage scenarios.
Following the release of the LOF 2024, the London Market has drafted (in collaboration with the International Chamber of Shipping) a London Market LOF default clause (Market Clause 2024) for insertion into hull and machinery policies. The stated aim is, with its proposed introduction in January 2025, to promote the use of LOF.
This article summarises the significant changes to the LOF and offers our commentary on the Market Clause 2024.
LOF 2024 and Lloyd's Salvage Arbitration Clauses 2024 – an overview
The 2024 update to the LOF introduces significant simplifications and modernisations to streamline the arbitral process and reduce costs. Key changes include the introduction of a Fast-Track Documents Only (FTDO) procedure for claims where security is up to US$10 million, new requirements for Environmental, Social & Governance (ESG) data collection, and revised arbitrator powers and representation clauses.
What you need to know
Important Notice No. 4
The previous LOF wording "The Council will not charge for such notification" has been deleted. A LOF management fee (applicable as of 1 January 2023) has now been introduced for the Lloyd's Salvage Arbitration Branch, calculated at 0.025% of the total salved value (minimum £1,000 and maximum £10,000).
Important Notice No. 5 - Settlement, Salved Value and ESG Data Disclosure
The Contractors and/or Owners of the salved property are now required to disclose the following information to the Council of Lloyds:
- Confidential Settlement Data
Details to include:
- Amount and currency of settlement;
- Apportionment among ship, cargo, freight, bunkers, stores, and other salved property; and
- Date of settlement with the last remaining party.
To be provided within 60 days of a settlement concluded with any or all of the parties.
- Salved Values Data
Details to include:
- Amount and currency of property salved; and
- If the Contractors cannot agree or confirm salved values, an
estimate should be provided, to be updated when such information
becomes available.
To be provided within 60 days of termination of the services.
- ESG Data
Details to include:
- Amount of salved bunkers;
- Amount of salved hydrocarbons;
- Amount of salved hazardous cargo;
- Amount of salved containers; and
- Potential social impact.
To be provided within 60 days of termination of the services.
The information disclosed pursuant to Important Notice No. 5 will be anonymised by the Council of Lloyd's for online publication on an annual basis.
Clause 6 - Arbitrator's Powers
Unlike previous versions of the LOF, meetings can now be conducted by video conference without the parties' prior agreement.
Clause 7 - Representation of Parties
The updated clause 7 has removed the requirement for an ordinarily UK-based representative or agent, allowing more flexibility in representation.
Clause 8 and 9 – Arbitration Procedure and FTDO Procedure
The FTDO replaces the Fixed Costs Arbitration Procedure (FCAP) and applies where the security demand is up to and including US$10 million with the objective of speeding up the process to an award and limiting costs.
The word limit for Claim and Defence Submissions (where there is a single Respondent Interest) in a FTDO arbitration has been increased from 4,000 words (as under the FCAP procedure) to 6,000 words.
The respective parties will provide the Arbitrator with a bundle which comprises of the documents and statements upon which it intends to rely on and limited to the following sizes:
- Contractors: 100 pages.
- Respondents: 75 pages (each).
The following cost caps apply under the FTDO procedure:
- Arbitrator: £30,000.
- Lloyd's: £2,000 (excluding management fee).
- Successful Party: £75,000.
Clause 11 - Appeals and Cross Appeals
Clause 11 now contains a procedure for FTDO appeals, which
largely reflects the previous FCAP procedure.
The Appellant's Reply Submissions under the FTDO procedure will
be limited to 2,500 words, whereas under the FCAP procedure the
Appellant was afforded 4,000 words.
Unlike the FCAP procedure, there is no express restriction on oral hearings under the FTDO appeal procedure, suggesting that there is a possibility of oral hearings in FTDO appeals, even if there was no first instance hearing.
The following cost caps apply under the FTDO appeal procedure:
- Arbitrator: £30,000.
- Lloyd's: £1,500 (excluding management fee).
- Successful Party: £50,000.
Clause 14.1 – Special Cargo Provisions
Clause 14.1 provides a framework that allows a settlement between the Contractors and the Owners of at least 75% of the salved cargo to be binding on all remaining cargo interests, subject to the Arbitrator's discretion and the confidential terms of the settlement. The clause has been amended to remove the requirement for cargo owners to be represented in accordance with clause 7 at the time of settlement, allowing the Arbitrator to consider the settlement agreement without this condition. By eliminating the need for formal representation, the Arbitrator can now take into account a wider range of settlement agreements with cargo interests, expediting the determination process and enabling quicker resolutions. Contractors should therefore be able to settle with unrepresented cargo interests more confidently, knowing that the Arbitrator has the power to bind the minority cargo interests to such settlement agreements.
Comment
The introduction of the FTDO procedure is a major change to the arbitration procedure and how claims are conducted. It is note-worthy that the International Salvage Union objected to the changes, particularly the high limit, as there was concern that if there were complicated issues, for example, dangers or allegations of misconduct then the new procedure (and the limitation on costs) would not be appropriate. The Arbitrators will still have the power to exclude the FTDO procedure in appropriate cases so we will have to wait and see how the new LOF procedure is applied.
The new data sharing and ESG requirements reflect a broader industry trend towards transparency and sustainability. Salvage stakeholders should familiarise themselves with these changes to better navigate and utilise the updated LOF framework.
London Market Default Clause 2024
Clause 2 – LOF default position
The default position under the Market Clause 2024 is that where the vessel is in danger and requiring "immediate" salvage services (or put another way, is in "immediate" danger) an LOF can be signed without consulting the lead insurer (although the lead insurer may dispute that decision in due course).
The assured will, therefore, have to make a judgement call as to whether the vessel is in such danger and whether or not the assured should contact the lead insurer. In our view, in most cases the assured will, to be on the safe side, consult with its lead insurer thereby baking in delay, which has already been expressed as a concern by the International Group of P&I Clubs and highlighted in the Independent Review into the Potential Delays in Contracting and Engagement of Salvage Services in Marine Casualties authored by Hugh Shaw dated July 2022.
It should also be noted that this criterion is different to the common law position, which is that only danger is required to constitute salvage at common law, not "immediate" danger. To some extent, therefore, the assured may be better placed in the event of any doubt in allowing the Contractors to carry out the salvage and claim under common law instead of LOF. This will create more uncertainty in terms of jurisdiction.
What exactly qualifies as "immediate" danger is no doubt going to be a source of confusion. For example, while a vessel with an engine breakdown in the middle of the ocean in no immediate danger of running aground may be an obvious candidate to consider alternative solutions, what if the vessel is aground on sand or mud, for example? Would such vessel constitute "immediate" danger? This would depend on many aspects. In the River Scheldt, for example, one or two days of delay over a tidal range could be fatal.
Clause 3 – Any other circumstances
Clause 3.1 provides that when the vessel is not in "immediate" danger or "all the circumstances suggest that another form of contract may be more suitable...", the assured must consult the lead insurer and the procedure under clauses 3.2 – 3.4 would still apply. This qualifies clause 2 so that even where the vessel is in "immediate" danger, if an alternative contract was considered preferable the insurers could argue that LOF should still not be, or have been, signed.
Clause 4 – Arbitration
Clause 4 provides a separate forum to determine any issue under the Market Clause 2024, regardless of the jurisdiction of the policy.
Firstly, in the event of no salvage practitioner being agreed as a sole arbitrator, the President of ARIAS (Insurance and Reinsurance Arbitration Society) shall appoint the arbitrator. However, at the time of writing, there are no salvage practitioners who are ARIAS members.
Secondly, in the event of the default clause being invoked, any issue between the insurers and the assured will be stayed until the salvage claim is determined. This means the assured (and indirectly the Contractors) will not know if the salvage will be paid and if so, when. This will in turn result in further delay well after the salvage claim is determined while the issue is resolved.
Furthermore, it is unclear whether this will result in the insurers not providing salvage security to the Contractors while the issue between the insurers and Contractors is stayed, pending determination under the default clause. Assuming this means the insurers will not provide security, this will leave the vessel exposed to arrest by Contractors.
Comment
The sphere of marine salvage has a number of different stakeholders, all with different, but overlapping, interests. Unsurprisingly, therefore, it would be fair to say that the proposed Market Clause 2024 has been met with mixed reactions.
For the London Market, of course, the Market Clause 2024 aims to minimise instances of so-called "hook up and tow" type services, the likes of which were brought into focus in The Voutakos [2008] EWHC 1581 (Comm). The whole debate around that particular issue has always been a contentious one. Further, it may be said by those outside H&M circles, that the framework of the Market Clause 2024 erodes and/or contradicts the general principle of the assured acting as a prudent uninsured as it expressly requires the assured to consult with the lead insurer in certain circumstances, with the insurers interfering in the assured's right and entitlement to manage their own vessels, and also to protect third parties and their rights that are not the business of the insurers (such as crew, environment, cargo, and P&I insurers). Non-H&M interests will also say that the new wording "bakes in" both delay and confusion as an assured who is not certain of what to do in certain circumstances may automatically seek to consult the lead insurer in every case.
Another concern, given that the Market Clause 2024 is aimed at the London insurance market, will be whether the assured will have direct access to the lead insurer 24/7 and every day of the year or will the assured still have to go through the brokers? If the latter, this could lead to further delays which could prove costly in terms of the worsening of a casualty scenario.
In terms of the potential for delay and confusion, it is also unclear what the position of the P&I Clubs will be in terms of consultation and what happens if the Club's view is different to the lead insurer's view. The potential for conflicting views, especially at a moment when the time available for decision making is short, is not hard to foresee.
In addition to all of the above, there may be an additional and unintended consequence for H&M insurers, in the form of possible exposure to liabilities to third parties and/or nation states. If the lead insurer directs the assured to sign a different type of contract, and an issue arises either due to delays in the decision-making process or engaging the wrong contract or contractor, could the lead insurer could be exposed to civil and/or criminal action from any third party or country? The answer to this is beyond the scope of this article, but it is nevertheless one which decision makers may need to have in mind as this Clause comes into operation.
It will be interesting to see what the take up will be in the New Year with this proposed additional clause to H&M policies issued in London.
Conclusion
The recent updates to the LOF represents significant changes in the maritime salvage sector. These revisions aim to enhance procedural efficiency and transparency, reflecting the industry's evolving needs and challenges.
The Market Clause 2024 is likely to introduce additional challenges for all parties involved and has the potential to cause particular complications to assureds (and their P&I Clubs) looking to agree to promptly sign an LOF agreement.
At Hill Dickinson, we pride ourselves on our extensive experience and expertise across our international network. Our casualty response experts have been actively involved in some of the largest maritime casualties globally, providing robust support and innovative solutions to our clients. Whether dealing with emergency response under common law salvage, an LOF or transitioning to a wreck removal operation, we are well-equipped to assist with all aspects of these complex operations.
If you would like to discuss the recent changes to these forms or any other related matters, please do not hesitate to reach out. We are here to provide the expert guidance and support you need to navigate these critical situations effectively.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.