The Ocean Crown

DMC/SandT/11/18

England

The Owner of the Vessel “The Ocean Crown” and others v Five Oceans Salvage Consultants Ltd, “The Ocean Crown”

English High Court: Queen’s Bench Division (Admiralty Court): Gross J: [2009] EWHC 3040 (Admlty), [2010] 1 Lloyd’s Rep 468: 26 November 2009

Tim Brenton QC, instructed by Holman Fenwick Willan and Hill Dickinson, for the Appellant Ship and Cargo interests

Timothy Hill QC (instructed by Clyde & Co) for the Respondent Salvors

SALVAGE: ASSESSMENT OF REMUNERATION: WHETHER RISK OF FUTURE ECONOMIC DOWNTURN SHOULD BE CONSIDERED IN APPLYING PRINCIPLE OF ENCOURAGEMENT: SCOPE OF THE PRINCIPLE IN THE AMERIQUE

Summary

The Admiralty Court held that, in assessing the remuneration that should be awarded to a salvor, and in particular in applying the principle of encouragement, the risk of future economic downturn was not a factor that should be considered. Further, the principle in The Amerique [see below] is applicable to all types of salvage cases, whether complex or simple. As the Lloyd’s Salvage Appeal Arbitrator had erred in both respects, the appeal was allowed, and the case was remitted back to him for reconsideration.

This note has been contributed by Ken To-ching Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and Barrister-at-law in Hong Kong.

Background

The vessel, M.V. Ocean Crown (the “Vessel”) was a geared bulk carrier. In August 2007, when it was in the course of a voyage from Chile to India, it ran aground on an uncharted rock in the Canal Darwin in Chile.

On 7 August 2007, the owners of the Vessel and Five Oceans Salvage Consultants Ltd (the “Contractors”) entered into a Lloyd’s Open Form (LOF) standard form of salvage agreement. The Contractors agreed to exercise their best endeavours to salve the Vessel and the cargo on board, and the Contractors’ remuneration would be determined by arbitration in London.

The Contractors engaged sub-contractors to perform most of the salvage services, and this cost about US$18 million (without taking into account financing costs).

The salvage operation was successful. It lasted for some 66 days until the redelivery of the Vessel on 11 October 2007, or some 107 days until the redelivery of the transhipped cargo on 24 November 2007.

Subsequently, arbitration ensued between the Ship and Cargo Interests (the Appellants in the High Court) and the Contractors before Ms Bucknall QC (the “Arbitrator”) to determine the remuneration for the latter’s salvage services. It was common ground that the casualty was immobilised until assisted by a professional salvor, and a lengthy period of immobilisation was itself a serious risk for the Vessel and the cargo on board. The Arbitrator found that the physical risks to the casualty were serious. There were risks of further damage to the hull and flooding of the holds, and the casualty might have become unsalveable in the future. The Contractors was awarded US$34.5 million as salvage remuneration, plus interests and costs.

The Contractors appealed to Lloyd’s Salvage Appeal Arbitrator, Mr John Reeder QC (the “Appeal Arbitrator”). In applying the principle of “encouragement”, the Appeal Arbitrator considered various factors, such as encouraging the salvors to respond to casualties, and to invest in personnel, craft and equipment. He also considered that ‘encouraging’ awards should provide the professional salvor with a cushion in difficult times, for example, when the rates of hire for the lightening vessels and hull values were high, or when the economic climate made it difficult to for salvors to obtain loans and credit.

In dealing with high value funds, the Appeal Arbitrator cited the principle in The Amerique (1874) LR 6 PC 468, i.e. that the value of the property salved would be considered in estimating the remuneration, but it must not be allowed to raise the quantum to an amount altogether out of proportion to the services actually rendered. He considered the principle to have full force and effect in cases where the salvage services were straightforward, but its significance decreased in complex cases. While fairness to all parties required a sense of proportion to be maintained for the award, a liberal assessment of damages should be allowed so as to recognise and encourage the hard work of the salvors. The present case involved complex and comprehensive salvage services; the principle in The Amerique “does not apply in terms”, and general considerations of proportionality and balance were to be applied.

The Appeal Arbitrator increased the award to US$40.75 million.

The Ship and Cargo interests appealed to the Admiralty Court, and leave was given for the following issues:

(i) In assessing salvage remuneration payable pursuant to a LOF salvage agreement in the standard form, whether it is correct to take into account, as an enhancing feature, the possibility that the salvor may experience difficult economic conditions in the future;

(ii) If the answer to (i) is Yes, whether it is permissible to take into account the actual economic conditions experienced between the date of termination of services and the date of the award; and

(iii) Whether the principle in The Amerique is applicable to all types of salvage cases, including complex and comprehensive cases, or whether, as the appeal arbitrator found, a different principle applies in such cases.

Judgment

Gross J allowed the appeal.

With respect to Issues (i) and (ii), the Court held that the risk of future economic downturn should not be a specific factor serving to enhance salvage remuneration. It was not mentioned in the list of factors in Article 13 of the London Salvage Convention 1989, which embodied the principle of encouragement. The criteria listed therein concerned only factors prevailing at the time of the salvage operation, but not factors that would take place in the future, like the economic factor advocated by the Contractors.

Further, it was difficult to determine the risk of future economic downturn without evidence of likely economic situations. It would also require consideration of post-termination events. This would go against the general law of salvage which adopted the date of termination of service as the cut-off point for calculating remuneration.

In the present case, there were certain passages in the Appeal Award which could be read to suggest that the risk of future economic downturn did not affect the Appeal Arbitrator’s assessment of remuneration. However, that being a factor listed as having been considered, the Appeal Arbitrator had taken into account an irrelevant consideration. The Court should not speculate whether that factor actually made any difference to the Appeal Arbitrator’s assessment. Fairness required that appeal be allowed on Issues (i) and (ii).

With respect to Issue (iii), the Court reviewed a number of authorities, including The Amerique, The Glengyle [1898] P 97, and The Queen Elizabeth (1949) 82 Ll L Rep 803. The legal principle to be derived from these cases was that in assessing salvage remuneration, “some real effect” should be given to the very high value of the salved property beyond simply recognising it as furnishing a sufficient fund out of which to reward the salvors. However, under the principle in The Amerique, the award should not be out of proportion to the services actually rendered. This was because it was just as easy to salve a vessel laden with very valuable goods as a vessel of similar size but loaded with goods of little value. The principle in The Amerique was applicable to all cases, whether straightforward, or involving high dangers or complex services.

Thus, the Appeal Arbitrator was clearly wrong in saying that the principle in The Amerique “does not apply in terms” in complex cases. Although he had also considered “general considerations of proportionality and balance”, it would be wrong to speculate whether the Appeal Arbitrator would have arrived at the same award if he had followed the principle in The Amerique. The Appeal on Issue 3 was thus allowed.

The case was remitted to the Appeal Arbitrator for reconsideration.