Ship Salvage and General Average

Ship Salvage and General Average

In shipping business, maritime law was developed to reward people for rescuing cargoes and ships from peril at sea. Salvor is the person who rescue cargoes and/or ships. Maritime doctrine of salvage was developed to award a percentage of value of cargoes and/or ships saved to the persons providing such help. When you provide generous salvage awards that encourages people to invest in the necessary ships, equipment and training needed to rescue other ships from peril. On the other hand, over-generous awards would defeat the purpose of salvage by discouraging mariners from accepting such help.

Under maritime law, salvage is a traditional admiralty law doctrine in which mariners who voluntarily and successfully save another ship from peril are granted an award for their services. Award is stated as a percentage of the value of the ship as saved. Theory behind the law of salvage is to encourage ship owners and mariners to provide assistance to ships in danger. Person who performs an act of salvage under maritime law is called salvor.

Salvage Award is payable when the following criteria are met:

  1. Ship is in marine peril. Peril may be an immediate one like fire on the ship, flooding, storm or nearby rocks or peril could be something more remote like loss of power near land or before nightfall. The key is that the ship is at risk of damage or loss if the ship remains in the situation at issue.
  2. Action to save the ship is voluntary. Salvage is a reward, so the doctrine of salvage does not apply if the rescuer is acting under a duty like the crew of the ship in peril or a person acting under contract.
  3. Salvage action must be successful. Salvage award is only earned if the rescue efforts are successful. Rescue service is provided on a “No Cure, No Pay” basis. No matter how much effort salvor puts forth, if those efforts do not result in rescue of the ship, no reward is payable.
  4. Salvor must have clean hands. Salvor will not receive an award if the salvor was responsible for putting the ship in peril in the first place or if the salvor acts improperly during the rescue.

In maritime law, f court determines that an act of salvage satisfying the criteria above has been accomplished, court has wide discretion to grant salvage award and determine the amount of the award. Factors that the court would consider in determining the amount of the award are set out in the Salvage Convention 1989. Salvage Convention 1989 entered into force for the United States on 14 July 1996. Factors are consistent with prior general maritime law and include the following:

  1. Salved value of the ship and other property
  2. Skill and efforts of the salvors in preventing or minimizing damage to the environment
  3. Measure of success obtained by the salvor
  4. Nature and degree of the danger
  5. Skill and efforts of the salvors in salving the ship other property and life
  6. Time used and expenses and losses incurred by the salvors
  7. Risk of liability and other risks run by the salvors or their equipment
  8. Promptness of the services rendered
  9. Availability and use of ships or other equipment intended for salvage operations
  10. State of readiness and efficiency of the salvors’ equipment and value

In maritime law, salvor get an award or an increased award if salvor prevent pollution from ship. Traditionally, salvage awards were based solely on the value of the ship or maritime property saved by the salvor. Even if the salvor prevent a great amount of environmental harm, those good deeds would not factor into the compensation for the salvor. Salvage Convention changed that traditional approach and allow for Special Compensation. Special Compensation represents an additional payment covering a percentage of the salvor’s costs. Salvor must still successfully save the ship to get a salvage award. If the salvor prevents pollution, but does not save the ship, salvor may receive a payment of quantum meruit which is equitable compensation, but not a salvage award. On the other hand, if salvor is negligent and fails to prevent or minimize harm to the environment, salvor could be denied Special Compensation. Court could view salvor’s negligence as a negative factor reflecting on the skill and success of the salvor, and reduce the salvage award. Salvor may get an award for saving lives, but only if ship or cargo is also saved. Under maritime salvage law, salvage awards were based solely on the value of property (i.e. ship and/or cargo) saved. Hence, person who save lives, but not property, might get profound thanks from the rescued seafarers, but would not get a salvage award. Risks of that policy are obvious, rescuer coming on the scene of a maritime disaster could be financially rewarded for saving the ship, but not for pulling people out of the water. If two independent rescue ships arrive on the scene of a sinking ship, the one that keeps the ship afloat would win a salvage award, but the one that actually rescues the seafarers from the water would not.  To remedy the obvious injustice of such a situation, courts would sometimes grant an equitable share in a salvage award to those who rescue persons in a salvage situation. Salvage Convention codified that judicial trend by providing that a person who saves life in connection with a maritime accident giving rise to a salvage award is entitled to a fair share of the payment awarded to the salvor for salving the ship or other property or preventing or minimizing damage to the environment. The principle was further codified in United States law. However, Salvage Convention did not change the fundamental point that saving only lives does not itself give rise to a salvage award. Maritime law does not require persons to pay a salvage award for the rescue of their lives. That is why, without a ship or cargo saved, there is no property to pay for the saving of lives.

There are many types of salvage situations. Simplest salvage situation could involve small sailing boat running out of gas or running aground on a sandbar, being assisted by a local towboat company or even another yacht. Complex salvage situation could involve large bulk carrier catching fire and losing engines in the middle of the ocean or going aground in bad weather, requiring the services of salvage experts with very specialized and expensive equipment.

Ship Salvage Process:

Most salvage situations share common features. When ship master realize that ship is in marine peril, master gives distress call, communicate with ashore or Coast Guard for assistance. If able, master of the distressed ship will authorize the salvor to start the rescue. If master of the distressed ship is not able to authorize, salvor will begin salvage operation. If salvage effort is successful, ship is saved, salvor will communicate with ship owner (or insurance company), in order to negotiate a salvage award. If salvor and ship owner are able to agree on an award, matter ends there. If salvor and ship owner are not able to agree, then salvor will seek some security for the salvage claim and matter will be referred to court or arbitration. If salvor and ship owner do not agree on some other form of security, then salvor may assert a maritime lien against the ship for salvage and have the ship arrested to secure the lien. The upmost crucial step in resolving the salvage dispute will be to figure out the total value of ship and/or cargo saved by the salvor. Figuring out the total value of ship and/or cargo might be easy in some cases. But, it could be challenging in the case of some commercial ships. Usually, salvor and ship owner agree to a joint valuation survey that will assess value of the ship, cargo carried and fuel on board. Survey results will serve as the basis for computing the actual amount of any salvage award. If salvage effort is not successful or salvor decides that the amount of effort required outweighs the potential salvage award, salvor may decide at some point to abandon the salvage effort. Then, ship owner must decide whether to try and engage another salvor or to enter into a guaranteed pay contract. Generally, seafarers of a ship cannot participate in a salvage award for the rescue of seafarers’ own ship, even if seafarers exert heroic efforts to save the ship. Seafarers have a pre-existing duty to exercise their best efforts to save and preserve the ship on which they serve and therefore the actions of seafarers are not truly voluntary as required for the efforts to constitute salvage.

When ship’s master gives the order to abandon ship or ship’s master actually abandons ship without an order, pre-existing duty of seafarers to continue to preserve the ship ends. If seafarers go back on board or refuses to abandon the ship and instead stays on board and contributes to saving the ship, then seafarer will be entitled to a share of the salvage award.

Standard Salvage Form: Lloyd’s Open Form (LOF)

When maritime peril occurs, managing salvor operation can be challenging for the ship’s master, ship owner, cargo interests and others involved. In order to facilitate rapid engagement of a salvor, maritime industry developed a simple form commonly known as Lloyd’s Open Form (LOF). Lloyd’s Open Form (LOF) has become something of an industry standard for salvage efforts involving internationally trading commercial ships. In bold letters at the very start of the Lloyd’s Open Form is a declaration that it is a No Cure, No Pay agreement. If the salvor is not successful in the salvage, salvor gets nothing. On the other hand, heart of the Lloyd’s Open Form is an agreement that any dispute over the award payable in the event of a successful salvage will be referred to arbitration under English law under the Lloyd’s Standard Salvage and Arbitration Clauses and the Lloyd’s Procedural Rules.

In addition to the arbitration provisions, Lloyd’s Open Form also states the agreement of the parties:

  • Agreed place of safety where the ship is to be taken
  • Whether the parties agree on standard Special Compensation for oil pollution compensation terms (SCOPIC Clause)
  • Duties of the ship owners to allow the use of ship equipment
  • Provide information to the salvor and to cooperate in the salvage
  • Right of either party to terminate the agreement

Generally, commercial salvors have Standard Open Form Salvage Agreement which is similar to Lloyd’s Open Form. Commercial salvors’ form is tailored as appropriate to the location and type of salvage services provided.

Contract Salvage Vs Salvage Contract

Assistance provided under the terms of a contract at a fixed rate of pay is not salvage, because:

  1. contractor assumes a contractual duty to provide assistance
  2. contractor’s assistance is no longer voluntary
  3. contractor’s service is no longer No Cure, No Pay

Assistance provided under the terms of a contract at a fixed rate of pay is called contract salvage. Because salvage contract may be negotiated at a time when the master of the damaged ship is under great stress and duress, contracts for the provision of salvage services can be susceptible to over-reaching by the marine towing and salvage provider. If the ship owner challenges the price set by a salvage contract, the court or arbitrator will typically look closely at the facts and circumstances of the contract formation and evaluate the price demanded by the salvage company by comparing it to the potential salvage award that would be payable in the absence of a contract. While a court could void a salvage contract if it finds that the assisting party overreached or acted inequitably, most courts apply a rebuttable presumption that a contract for assistance is valid. Court will evaluate the terms, including the price, on the basis of the situation at the time the contract was made, rather than the ultimate ease of the assistance. Sometimes, contrary to presumption, courts or arbitrators may find purported salvage contracts to be invalid, typically because the terms are not clear or because over-reaching on the part of the salvor is obvious.

Under traditional maritime law and Salvage Convention, cost of the salvage award is split among those parties who are benefited by salvage act, in proportion to the respective values of ship and cargo saved. If ship breaks down in storm and is towed to safe port by a salvage tug. Then, shipowner, charterer and shipper may bear some share of the cost of the salvage award. Total value of saved assets includes total value of the ship, value of the cargoes and value of bunkers that is purchased by the charterer. Afterwards, total value would be allocated by percentage to the three parties and that percentage would be applied to the costs of the salvage.

Salvage Claim Time Limit:

Civil action to recover salvage award must be brought within 2 (two) years of the date of the salvage or when assistance was provided.

General Average is allocating the costs of preventing or remedying a marine casualty among the parties benefitted by the efforts. General Average is based on the rule that when property of one interest is sacrificed to benefit all interests involved in a voyage, burden should be shared. Historical General Average example, during the age of sail might be when a merchant ship is fleeing pirates and throws some cargo overboard to lighten the ship and so able to escape. Modern General Average example, when a ship is laboring in a storm and master decides to jettison a row of containers to improve stability and allow the ship to survive the storm. In both cases, owner of the cargo jettisoned should not have to bear the loss alone, but is entitled to compensation from the ship owner and owners of the other cargo, who were benefitted by the sacrifice of the cargo. In modern practice, principles of general average are commonly applied to other loses, including:

  1. salvage
  2. contract salvage
  3. emergency repairs to allow a ship to continue its voyage
  4. ransom payments made to pirates for the release of a ship, cargo, and crew

Determination of General Average Share: York Antwerp Rules

General Average liability is typically determined according to agreed rules and most common is York Antwerp Rules. Usually, ship charter-party or a bill of lading will specify General Average rules and the port at which General Average contribution shares will be calculated. General Average is typically based on the proportionate value of the property affected by the act. In the event of an incident resulting in salvage, emergency repair costs, towage, pirate ransom or similar costs, shipowner (or shipowner’s insurance company) will usually bear the costs at first or be required to post security. When shipowner decides that the matter should be shared under principles of general average, shipowner will declare the incident to be General Average Event. Later on, shipowner gives notice regarding values computed and costs divided among to all parties. Notice will also advise the parties of the proposed rules and port where general average allocation will be done. Furthermore, shipowner may require the other parties to post security to secure their potential obligations.

New Jason Clause and General Average:

Generally, New Jason Clause is found in a bill of lading. New Jason Clause provides that shipowner (carrier) may collect General Average, even if the loss to be apportioned was caused by the ship’s negligence, as long as the loss was not caused by a breach of shipowner’s responsibility to provide a seaworthy ship. New Jason Clause reads as follows: In the event of accident, danger, damage or disaster before or after commencement of the voyage, resulting from any cause whatsoever, whether due to negligence or not, for which, or for the consequence of which, carrier is not responsible, by statute, contract or otherwise, goods, shippers, consignees or owners of the goods shall contribute with carrier in general average to the payment of any sacrifices, losses or expenses of a general average nature that may be made or incurred and shall pay salvage and special charges incurred in respect of the goods. If a salving ship is owned or operated by the carrier, salvage shall be paid for as fully as if the said salving ship or ships belonged to strangers. Such deposit as the carrier or his agents may deem sufficient to cover the estimated contribution of the goods and any salvage and special charges thereon shall, if required, be made by the goods, Shippers, Consignees or owners of the goods to the Carrier before delivery. The name “Jason Clause” comes from a Supreme Court case titled after the name of the ship involved “Jason”. In Jason case, Supreme Court held that an agreement in a bill of lading allowing the shipowner to recover general average contributions for losses is valid, even though caused by the negligent navigation of the ship.