In the following article, Mr. Ian MacLean, Partner, Master Mariner & Deputy Head of Office at Hill Dickinson answers key questions with regards to the Ever Given:(a) why did the court find SMIT were entitled to salvage remuneration? (b) a rare opportunity to see contemporaneous owner / salvor correspondence; and (c) what litigation risk lessons are there?
Following the grounding of Ever Given in the Suez canal and its re-floating, the court was asked to consider as a “preliminary issue”, the nature of the legal relationship between those providing services to free the vessel and the owners of the vessel. The judgement is here.
The purpose of asking the court to rule on a preliminary issue, (which may be a question of law or fact), is to save costs and the court’s resources as it may permit the parties to reach a settlement or shorten the main trial. This is because the finding of the court on a preliminary issue may result in certain arguments no longer being relevant, or some evidence lacking relevance thereby shortening the main trial.
In this case, the owners of the vessel argued that there was a binding contract between the two parties and that this contract governed the payment to be made by the owners to those providing the services to re-float the vessel. The claimants who were providing the services argued there was no agreed contract and that as such, they were entitled, as a matter of English law, to salvage under the International Convention on Salvage 1989 and/or at common law. The court, having heard the evidence, held that no contract was concluded between the parties, and the claimants were entitled to salvage.
The judgement, running to 63 pages consists of a 23-page judgement, paras 1 to 102 followed by an appendix of 42 pages of evidence, paras A.1 – A.161. This appendix offers a rare window into the negotiations and correspondence between an owner and salvor during the first hours and days of a casualty where owners wish to secure the re-floating of a vessel by way of a services contract rather than a salvage agreement. For those not familiar with this negotiation process, the appendix is well worth a read to gain an insight into this process.
We should bear in mind that this judgment is a “first instance” judgment and may be subject to appeal.
On 23 March 2021, while part of the morning northbound convoy in the Suez Canal, Ever Given ran aground, blocking the canal at one of its narrowest points.
SMIT and others (the claimants in this case) assisted in re-floating the vessel. This was achieved at about 13:05 UTC on Monday 29 March. The vessel then proceeded to the Great Bitter Lake, safely anchoring there by about 17:00 UTC that day.
It was common ground between the parties that SMIT assisted in the re-floating, though the actual extent of the assistance has yet to be determined, with the vessel arguing that the contribution was very limited. SMIT brought a claim for salvage under the terms of the International Convention on Salvage 1989 and/or at common law. The vessel argued that the parties had concluded a contract for services, (which as we will see below would mean there was no claim in salvage), on 26 March.
Before looking at the findings of the court and the exchange of correspondence between ship interests and salvors to understand why the court came to the findings that it did, we look at the underlying law, namely: (a) jurisdiction agreements; (b) the ingredients of a binding contract; (c) what at law, amounts to salvage services; (d) Lloyd’s Open Form Salvage Agreement (LOF); (e) how the value of salvage services are determined; (f) rewards to salvors for protecting the environment and the SCOPIC clause; (g) alternatives to “common law” salvage and LOF; and (h) allocation of risk.
You may be forgiven for asking why a dispute between salvors based in the Netherlands, Italy, and Egypt on one side, and a vessel registered in Panama on the other, were seeking a ruling from the Admiralty Division of the High Court in London in the context of services provided in Egypt to a vessel managed by a company in Hong Kong and covered by a Japanese hull and machinery insurer.
The answer is that providing there is no applicable law the seizes jurisdiction, parties are free to settle their disputes according to the law and jurisdiction that they agree to. Indeed, many collisions where the flags of the vessels, the nationality of the owners and the location of the collision have no connection with the courts of England and Wales, are heard before those courts. Many commercial contracts including charter parties and bills of lading opt for English law jurisdiction at the time of executing the contract. In 2021/2022, nearly half the litigants in the court were from outside of the jurisdiction with 75 countries represented.
In this case the jurisdiction agreement between the parties effectively gave the court power to determine (a) whether a contract for the services had been agreed, (in which case the assessment of payment for the services would be based on that contract), or whether there was a common law salvage/International Convention on Salvage 1989 based assistance, (in which case an assessment for services would be based on salvage criteria – see below); (b) the remuneration due to the salvors if the services were in the nature of salvage; and, (c) any other disputes arising from the services.
The ingredients of a binding contract
A contract is a legally enforceable agreement which may range from the purchase of a kilo of Egyptian potatoes from a greengrocer where nothing is recorded in writing, to a multi billion-pound construction of a nuclear power station with multiple detailed written provisions.
However, for there to be a contract, there must be the following: (a) an offer; (b) acceptance; (c) consideration, (d) the intention to create legal terms; and (e) certainty of terms.
Usually, consideration would be the provision of goods and services on one side and payment on the other. The court has said:
The basic requirements of a contract are that: (i) the parties have reached an agreement, which (ii) is intended to be legally binding, (iii) is supported by consideration, and (iv) is sufficiently certain and complete to be enforceable… In general, the agreement necessary for a contract is reached either by the parties signing a document containing agreed terms or by one party making an offer which the other accepts. Acceptance may be by words or conduct.”
So, for a contract to exist, there does not need to be a signed final document. Indeed, many charter parties are based on an exchange of emails with no final signed document. Contracts can be implied from the conduct of the parties. Offers can be made and accepted by behaviour, (but not based on silence).
The law in this judgement is dealt with in 12 paragraphs, commencing a P.29. Addressing the issue of the intention of the parties to be “bound”, the court found:
An intention to be bound cannot be found where it is not the only reasonable connotation of the parties’ exchanges and conduct, taken as a whole. Exchanges and conduct not consistent only with an intention to be bound are ambiguous, and a contract can only be found in and constructed from unambiguous communication.
Finally, and expressed colloquially, it is insufficient for parties to “agree to agree” on the terms and conditions, the parties must “agree” on what it is that they have agreed upon. The law does not recognise in such a context, a “contract to enter into a contract.”
What at law is required for there to be salvage services?
The court quoted from the practitioner text, Brice on Maritime Law of Salvage, 5th Ed.:
In English law a right to salvage arises when a person, acting as a volunteer (that is without any pre-existing contractual or other duty so to act) preserves or contributes to preserving at sea any vessel, cargo, freight or other recognized object of salvage from danger.
It is well settled law that, “…at sea…” includes tidal river or canal waters, so therefore the Suez Canal falls within the definition.
Key here is the word “volunteer”. If the owners and salvors had concluded a legally binding contract, then the salvors were not volunteers and could not claim a salvage reward, they could only seek payment based on the terms of the agreed contract. As we shall see below, this could make a significant difference.
An example of the “volunteer” point could arise in the employment of harbour tugs. Consider a tug that is assisting a vessel into a lock and while that vessel has forward momentum, the engine fails and the tug acts to prevent her ramming the forward lock gate. If the contract with the tug has as a condition of its service that the vessel’s engine will be always fully available, there may be an argument that at the moment the engine fails, the tug is acting outside of the contract, it becomes a volunteer and therefore entitled to salvage remuneration for the services provided.
The International Convention on Salvage 1989, (the Convention), to which the UK is a contracting party and consequently is part of English domestic law, reflects Brice’s definition, expanding the assistance part of the definition slightly to:
Salvage operation means any act or activity undertaken to assist a vessel or any other property in danger in navigable waters or in any other waters whatsoever.
With respect to danger, the court has held that there must be danger or the apprehension of danger. In this context, it would be sufficient that the vessel would not have come free without the provided services.
Lloyds Open Form Salvage Agreement (LOF)
LOF is probably the most common of the salvage agreements. Simply put, an LOF can be agreed, at its most basic, by way of a short VHF conversation meaning that salvage assistance is expeditiously provided where (a) the obligations of property interests to provide security at the termination of services are known; and (b) the method by which an independent arbitrator will determine the salvage remuneration is pre-defined. The intention is that when a vessel is in danger, as no negotiations of terms are required, an LOF can be swiftly agreed.
Determining the value of salvage services
Article 13 of the Convention sets out the criteria that should be considered when fixing an award, (which, exclusive of any interest and recoverable legal costs, shall not exceed the salved value of the vessel and other property). They are, in no order of importance:
(a) the salved value of the vessel and other property; (b) the skill and efforts of the salvors in preventing or minimizing damage to the environment; (c) the measure of success obtained by the salvor; (d) the nature and degree of the danger; (e) the skill and efforts of the salvors in salving the vessel, other property and life; (f) the time used and expenses and losses incurred by the salvors; (g) the risk of liability and other risks run by the salvors or their equipment; (h) the promptness of the services rendered; (i) the availability and use of vessels or other equipment intended for salvage operations; and, (j) the state of readiness and efficiency of the salvor’s equipment and the value thereof.
There is one further consideration, and that is the fact that the Convention provides that the reward shall be fixed with a view to encouraging salvage operations. The court has said that:
The salvor is of course entitled to an encouraging award. It must have regard to his general expertise, his investment, his readiness to respond, his unsuccessful ventures and so on. Equally he can pray in aid the value added by the specific service, the skill and work involved, the risks run and so on.
The “encouragement” element will therefore provide an uplift above what may be a reasonable commercial rate for the same services. As a matter of public policy, we require salvors to invest in equipment and be ready to assist at short notice. This provides more than a hint as to why salvors claimed that there was no binding contract with Ever Given, and that their remuneration should be for salvage services and therefore be based on the provisions of the Convention.
Protection of the environment and the Special Compensation P&I Clause (SCOPIC)
The cap on the salvor’s remuneration is the value of the salved property. Historically, there was no encouragement for salvors to use their skill and expertise in protecting the environment, where it was likely that the cost of doing so would be greater than the property they saved.
In addition, all property (cargo, bunkers, the vessel etc.) contribute to the salvage award, (likely the hull & machinery and cargo insurers), but only the vessel itself has liability for pollution, so it is the vessel’s P&I cover that contributes to the cost of protecting against pollution. The question then was if you had a disabled oil tanker, close to the coastline that was inevitably going to sink, how does the industry encourage the salvors to tow it away from the coastline before it finally founders, when they would receive no salvage remuneration for their services.
This was addressed by the Convention in Article 14, where the vessel, (or in reality its P&I cover), would pay for the work done by the salvor in protecting the environment. However, as cases made their way before the Lloyds Form Arbitrator and onto appeal, it became clear that Article 14 was cumbersome in the way that it operated in practice leaving the parties dissatisfied with its application and the legal costs of dealing with it.
As a result, discussions were held between the International Salvage Union, the International Group of P&I Clubs and representatives of H&M and cargo insurers the result of which was SCOPIC, or sometimes referred to as the SCOPIC Clause. This is a “bolt on” to LOF. While a detailed discussion is beyond this article, an important facet of SCOPIC is the methodology for calculating the salvor’s remuneration in protecting the environment.
Daily tariff rates are set for equipment, personnel, tugs etc. that the salvor provides. A naval architect will be worth X USD per say and a tug with a specific BHP Y USD per day. The salvor is then entitled to a 25% uplift on those rates in addition to an uplift on any out-of-pocket expenses, (say the chartering in of a tug not owned by the salvors).
So, given Salvors are not seeking an Article 14 or SCOPIC reward, why is this relevant to the grounding of Ever Given?
The answer is that since the introduction of the SCOPIC tariff, it has been possible where the immediate threat of a loss of the vessel is not present, for owners to negotiate an assistance deal based on SCOPIC rates, plus say an additional success uplift, avoiding the likely greater expense of an LOF award. By knowing at the time of negotiating a contract, that an industry fixed rate is being applied to say the cost of a naval architect who is preparing longitudinal strength and stability calculations, the parties can quickly move on from the cost of deployed equipment and personal to other issues such as a success uplift, making a tariff-based assistance a possibility in lieu of salvage, where it may not have been possible before the introduction of the SCOPIC tariff. There are however challenges, especially as we will see in the context of allocation of risk.
Alternatives to LOF agreements and common law salvage
So, what could be used as a contractual basis for assistance in saving a vessel and delivering her to a safe place where there isn’t a common law salvage, or a salvage agreement?
The convenient answer lies within the wreck removal industry where there are a few pre-printed forms, namely the WRECKHIRE, the WRECKSTAGE and the WRECKFIXED. These contracts have a similar structure to pre-printed charter parties, with the first part a set of boxes for entering information such as the names of the parties, the agreed remuneration, when it will be paid etc., the second part a set of pre-printed terms and then inevitably further riders or additional clauses.
Like charter parties, frequently some the pre-printed terms will be deleted, amended or replaced, with riders added as the negotiations evolve. In addition, appendices will include equipment deployed, tariff rates and recovery plans. Ever Given was by no stretch of the imagination a wreck, but the terms of the WRECKHIRE lends itself, with some negotiation, to a re-floating operation in place of LOF, though not, as we shall see, without some difficulties.
Allocation of risk
As mentioned in this previous article:
- A contract will set out the goods and/or services to be provided by the party on one side and the price or other consideration to be paid by the party on the other side. However, a contract is much more than this. The contract will also allocate risk. It has been said by the court that a contract of carriage is a division of responsibilities, liabilities, rights and immunities. A contract will, insofar as it is reasonably possible, anticipate what may go wrong and determine which party will bear financial liability for that “wrong” occurring. By way of example, if there is a delay in discharging a vessel under a voyage charter, once the pre-agreed lay days have expired, the vessel will go on demurrage and the charterer will pay a daily rate for each day the vessel is delayed. It is the charterer who has contractually agreed to bear the risk of that delay.
There is a further consideration, and that whether a contracting party will want to offset a risk by taking out insurance to cover that risk. A party may well be willing to take on a greater proportion of the risk of things going “wrong”, but it may wish to insure against this and in turn require a greater fee to cover that additional risk.
On 23 March the owners determined that they wanted to avoid liability for salvage, (A.6). While the cost of salvage is one reason, another is the fact may be that salvage security would have to be obtained from all cargo interests, a disruptive process, poorly understood by many cargo interests and that has the potential to be commercially damaging.
Contact was made with SMIT where owners offered to pay SCOPIC rates plus a 15% uplift, (A.8). The flow of technical information required by SMIT commenced and resources were mobilized. Owners agreed to SMIT dispatching a team to assist.
Early on the morning of 24 March, SMIT said that in their view, the LOF option was the best way forward, (A.24), although they acknowledged that discussions were ongoing. A little later however, SMIT proposed commercial terms based on the SCOPIC tariff with uplifts, using the WRECKHIRE template along with a reservation of switching to LOF if cargo lightering / dredging was required, (A.35).
There was a further exchange about whether tugs engaged in scouring, (using their propellors to displace sand from the side of the vessel), would count as dredging. SMIT advised that this would not be the case and said that they would clarify this by way of incorporation in the WRECKHIRE. This provides a hint as to the difficulties faced in drafting an assistance contract under time pressure.
During 25 March, drafts of a WRECKHIRE were exchanged. By evening time, owners were considering SMIT’s detailed three page commercial proposal, (P. 13 and A.63), – a WRECKHIRE as amended with ten additional clauses as riders and an 11 page draft salvage plan. Owners replied to SMIT shortly after that they would revert on SMIT’s commercial proposals, (A.64). While this was ongoing, SMIT were chartering in tugs to assist with the operation.
On the morning of 26 March, owners made a counteroffer to SMIT and noted that, “The remaining contract, clauses, etc. can be mutually discussed before both parties final signature.” (A.71).
There were further exchanges relating to the charter hire of a tug and the allocation of risk under that charter. This resulted in exchanges between SMIT and the owners which resulted in a agreement to pay a higher charter rate for the tug’s hire.
During 28 March, draft versions of the WRECKHIRE with cumulative amendments were exchanged, (A.132 and A.133). The court noted that the Owner’s proposed changes to the WRECKHIRE, “…represented a significantly different bargain to the bargain that SMIT had proffered…” (A.134). This is probably the most crucial of the court’s findings.
A further question then arose about who would be liable for the cargo if it had to be discharged as this was not a liability included within the WRECKHIRE, (A.137). SMIT were clear that they required a “Waiver of Liability.” (A.138), see more on this below. In the evening, SMIT replied with their amendments to the WRECKHIRE wording, but difficulties were appearing.
Owners wanted a warranty that craft employed by SMIT, would be “…manned and equipped with adequate spares and in every way fit to perform the services contemplated and shall comply with its description’…”, SMIT said because of location and time pressure they could do no more than exercise “due diligence” in respect of the contracted in craft, (A.140). SMIT set out their concerns at length and these are reproduced in A.140.
The following morning, without a final agreement on the wording of the WRECKHIRE, the vessel was re-floated. Later that day, SMIT wrote to the owners stating that the counteroffer made by owners was not accepted and that the offer previously made by SMIT was withdrawn. (A.156).
The court found, based on the foregoing, that no contract for services had been concluded.
Managing the Risk
Given the time pressure in a case like this, it may well be worth the representatives of both sides, who should be familiar and well experienced WRECKHIRE negotiators, being in the same location to discuss/consider terms on a face-to-face basis. (There is no suggestion that there was a lack of experience in this case, and certainly it seems that in addition, there were well experienced English law practicing admiralty solicitors in the background for at least some of the time.)
In addition, it would assist for there to be 24/7 contact between those involved in the negotiations and the decision makers of each entity to facilitate swift decision making. (A positive feature of English law is that no Power of Attorney is required for those signing a contract).
Moreover, there should be immediate access to brokers who can offer guidance on the pre-existing coverage in place and the offsetting of risks in the insurance market.
(One client we had who performed wreck removal services brought their insurance director to every meeting where contractual terms were being discussed so he could rapidly investigate market rates for the risks being on-boarded as those contractual terms evolved).
By way of example, a sticking point was the switching to LOF if cargo needed to be discharged, which appears still to have been unresolved based on the appendix to the judgement at the time of re-floating. Under an LOF, the responsibilities of salvors to cargo is well established and cargo are a party to, and bound by, the salvage agreement.
Under the WRECKHIRE things are less certain, and cargo is not a party to the WRECKHIRE, an issue which SMIT raised. (By way of example, the WRECKHIRE will have had a law and jurisdiction clause, probably England. However, cargo would not be bound by that and would be free to commence against SMIT in any location where the courts were willing to accept jurisdiction should loss and damaged be suffered to the cargo during the re-floating, storing and back loading operation, leading to a risk of multiple claims worldwide). Ironing out such issues can be time consuming.
As a final aside, on the vessel side, P&I cover may have been lost, (depending on the term of cover), in respect of cargo once it was discharged under a services contract, requiring a separate cover for the vessel/carrier to have protection from exposure to claims from cargo interests under the contract of carriage.
Above article has been initially published in Mr. McLean’s account on Linkedin and is reproduced with author’s permission. More related topics may be found on Litigation Risk Management Newsletter from Ian MacLean – Hill Dickinson
The advice in the article is in the context of English law and offers only a generic overview. Exceptions and conditions apply to the statements of law which given the space available are very generalized. You should always seek assistance and guidance from the vessel’s P&I Club/your legal advisor based on the fact-specific issue
The views presented are only those of the author and do not necessarily reflect those of SAFETY4SEA and are for information sharing and discussion purposes only.
This is an excellent article that articulates the hideously complicated considerations in such matters that I used to see, as a communicator ‘temping’ in the City decades ago. It brought back many occasions when I asked barristers and underwriters all sorts of my ‘idiot’ questions. By the time that I moved on I think that I had a working knowledge of commercial-mercantile concepts of dealing with such problems. It is good to be reminded of them (many years later) though…