Is Lloyd’s Open Form on borrowed time?
In a message to stakeholders on 23 April 2021, Lloyd’s announced that it was considering whether to close its Salvage Arbitration Branch (LSAB), a move which if confirmed would leave the future of the administration of its Standard Form of Salvage Agreement and the ultimate survival of the Lloyd’s Open Form (LOF) in the balance.
What is LOF and why is the Salvage Arbitration Branch important?
LOF is the world’s longest established, most trusted and most widely used international emergency salvage contract. Where utilised, it provides a clear and simple ‘no cure – no pay’ agreement between the principal property interests (ship, bunker, and cargo owners) and the salvage contractors to determine the amount of remuneration the salvors should be awarded for providing casualty services in respect of incidents including fires, main engine breakdowns, alisions, collisions, and groundings such as the highly publicised incident involving the Ever Given containership in the Suez Canal in March 2021. The LOF framework seeks to promote fairness to all parties in the process, minimise losses to the ship, bunker, and cargo interests, and limit environmental damage.
The fundamental obligation under LOF is that it the contracted salvor will utilise its best endeavours to:
- Salve the property at sea
- Take it to a defined place of safety
- Prevent or minimise damage to the environment during the process.
Each of the parties bound to the agreement contribute to the salvage award in amounts proportionate to salved values. The agreement is subject to English law and arbitration, and any award, appeal award and reasons, are liable to be published by the Council of Lloyd’s on the Lloyd’s website.
International familiarity with LOF and its standard terms - which can be agreed quickly in the event of an emergency when there is little or no time to negotiate contracts - has contributed to its continued use and success since its initial consideration within the Lloyd’s and international markets in the 1890s. Lloyd’s state that the parties reach an agreement as to the appropriate level of reward in over 75% of LOF cases. In the remaining unresolved cases, a LOF Arbitrator is appointed by Lloyd’s to determine the level of the award.
The LSAB provides crucial administrative support to how the LOF operates including:
- Updating all parties of ongoing developments of the casualty, including circulation of daily situational reports.
- Circulation of a salvors’ security demand and collection of security.
- Access to the panel of maritime arbitrators.
- Applications to the Special Casualty Representatives (SCR) panel and the role of the SCRs in attending/reporting on any casualty.
- Distribution of statistics, awards and appeals.
- Liaison with and management of SCOPIC.
Closing the LSAB could have a significant impact upon the reputation and usage of LOF in the future, with potentially wide ranging ramifications on the shipping and marine insurance markets.
Why is Lloyd’s considering the issue?
It is understood that Lloyd’s no longer considers the LSAB to be ‘core’ to its business. Indeed, Lloyd’s own official LOF statistics record that LOF usage has been in consistent decline since 2017, a trend which has been developing since the 1980s, and the total salvage awards paid under the system in 2018 were just US$3.46 million, the lowest ever recorded.
However, the Lloyd’s statistics only cover LOF usage recorded by International Salvage Union (ISU) members, and some of the largest salvor users of the LOF have recently left the ISU meaning that the apparent decline in LOF usage may not tell the complete picture.
The International Group, the LMA, the SCR panel, LOF Arbitrators and the SCOPIC Committee (amongst others) have been invited to provide feedback to Lloyd’s on the proposal by today (7 May 2021). It is our understanding that without exception the responses are likely to lobby Lloyd’s to continue to administer LOF as a service of paramount importance to the marine and shipping industry, considering the alternative is for various interests to seek to establish their own ‘no cure, no pay’ contact and award system.
The Lloyd’s consultation in relation to the role and future of the LSAB will also invariably lead to discussion as to the position of Lloyd’s in relation to support of the LOF contract going forward. The LOF contract has been utilised internationally by the global marine market since its earliest days. Any revisions and updates have been put in to place after much discussion and drafting by way of consensus between the users of the system. This includes the insurance market, salvors, the P&I clubs, and the maritime solicitors and bar.
The LOF system is predicated upon a fast, transparent, and certain set of contractual terms and supporting procedural rules. The LSSA clauses are drafted to operate on the basis that the LOF is administered by the LSAB, and include a number of very substantial and legally important issues such as the fact that LSAB, at the request of an interested party, appoints the LOF arbitrator from the panel of LOF arbitrators (to include applications for emergency measures/orders).
The proposal in relation to the role of the LSAB could therefore have far ranging implications way beyond the initially limited role of the consultation.
After Lloyd’s has collated the feedback received, there will be a further consideration period to allow for discussion with those who have responded before any final decision is taken. However, the implications of the closure of LSAB and the potential impact on LOF and the wider international maritime community, in relation to salvage in particular, are far from certain. We will provide further updates and analysis as this discussion continues.