A Proposal for a Small Change in Lloyds Open Form

In February Gard published the results of its review of Lloyds Open Form (LOF). Their review indicated a disturbing reduction in the number of LOF contracts, and noted some other concerns with regard to loss of use of LOF in salvage situations.

Lloyds Open Form is a classic and, in my mind, cherished, example of the core beauty of maritime. It combines a large number of maritime concepts into a simple device that solves a complex problem.

It reminds me of a few of the lines in the song “Wooden Ships” by Crosby, Still, Nash and Young. It is about two boats meeting in the middle of the ocean:

If you smile at me, I will understand
'Cause that is something. Everybody everywhere does in the same language. Say, can I have some of your purple berries? Yes, I've been eating them for six or seven weeks now. Haven't got sick once.
Probably keep us both alive

Initially one may wonder what this random meeting at sea has to do with salvage, but all of it makes more sense knowing that the song is about two boats meeting in the middle of the ocean after the world has destroyed itself in a nuclear war.

In this song, here, in the middle of the ocean, faith, hope and cooperation survive. Lloyds Open Form is based on faith, hope and cooperation. We meet randomly in the ocean, one party in distress, the other able to help and, when help is provided, there is faith that there will be a proper reward.

The gradual loss of this historic device is partially related to continuous improvement in maritime safety which, in turn, results in a loss of experience with LOF, which, in turn, results in a loss of faith and predictability.

It is also related to improvements in communications, where it becomes easier for the home office to stick a spoke in the wheel of rapid local response. In the US, the role of the designated salvor for large commercial vessels has also resulted in a reduction in the use of LOF. However, USCG approved designated salvors are a proper substitute for LOF as far as rapid salvage response is concerned.

Nevertheless, for smaller vessels, and also yachts, LOF (or more accurately No Cure No Pay) remains a very viable option, but has become an option that nobody seems to like anymore.

Instead, we are creating a commercial mess that leaves nobody happy.

Martin & Ottaway continues to be involved in the resolution of No Cure No Pay contracts. Often we are asked to provide an opinion on the veracity of claims made by the salvor or the vessel owner. When these claims arrive at my desk, I am struck by the outlandishness of some of the claims (The waves were 10 feet high, while the weather record on the internet shows it was a calm clear day, etc., and the owner may claim the opposite). Due to the large level of disagreement between salvor and owner salvage statements, the claim award process becomes a litigious mess in the form of “he said” and “she said” arguments.

This is unfortunate. It is also the central reason the maritime community no longer wants to use LOF, since the cost of arbitration or litigation of all this disagreement often becomes larger than the award itself.

It is important to remember that besides the official LOF, which really is a blue ocean contract, there are many places that operate with local versions of No Cure No pay contracts that do not require London Arbitration and English Law. This makes perfect sense, since a New Jersey vessel salvaged by a New Jersey salvor has no use for a contract that requires people in London to determine what happened in New Jersey.   

Meanwhile, any contract approach that abandons No Cure No pay is highly unlikely to be better. As such, a focus on improving the LOF process may well be the best approach and the Gard study provides a lengthy list of recommendations. However, it fails to focus on the central concept of LOF style contracts, which is cooperation. In this regard I propose a simple addition to these contracts:

Upon completion of the salvage, Salvor and Owners will produce a joint statement that will describe the salvage circumstances, events, process, skills, costs, sacrifices, salved value and difficulty of the salvage. This statement will specifically describe areas of agreement and disagreement. The salvage arbitrator(s) will evaluate the veracity of statements made to which there is no agreement, and the salvage award will be significantly adjusted in favor of the party that provides the highest level of truth. Delay in the production of the joint statement by either party will be considered to be a lack of truth by the delaying party. This document will be the only document under consideration by the award committee.

Based on my experience that means the salvor will produce their initial statement, and then owners, or their designated representative, will sit with the salvor to determine what is agreed and what is not. This will quickly remove silly issues related to the height of waves or the risk of sinking and quite possibly can result in a statement that has very little disagreement and may actually result in an agreed award without the need for arbitration.

I have been engaged in the settlement of quite a number of No Cure No Pay style claims that never reached arbitration or litigation, and in most cases the drive to stick to truthful and realistic arguments resulted in mutually satisfactory awards.

Since untrue statements will incur significant penalties under this joint approach, there will be a motivated drive to joint agreement.

It is important to point out that the actual LOF requires London arbitration. In many cases I am aware that London arbitration is the most significant deterring factor in the use of LOF, since a US salvor and a Canadian shipowner may have little interest in spending a good part of their immediate future corresponding with, and attending in London.

Meanwhile, when the ship is sinking, one cannot afford to spend time in arguing about venue. In this regard, in addition to the above paragraph, there can be an additional paragraph that states:

Arbitration will take place in (the choice of the salvor). If this arbitration venue is not acceptable to the owner upon the production of the joint statement, arbitration will occur in London.

This is an additional inducement for both parties to be fair and to cooperate. If the salvor proposes Moscow, they can be pretty sure it will be London if the Owner is not Russian. If the salvage were in Florida and the salvor were to pick, say, Miami there is a chance the Owner may go along. It provides an opportunity for local salvage communities to establish their own fair and reasonable salvage arbitrators, but if the arbitrators become too skewed, the owners can default to London.

The joint statement approach is not dissimilar to the 1999 British Woolf reforms. While it is not entirely clear that the joint expert statement in the Woolf reforms has been a big success, it needs to be remembered that in LOF there are no questions of law, or interpretation of law against facts. Instead, there are only questions of award, where the facts of the claim are the single issue. While LOF operates under English Law, strangely, the Lloyd’s Salvage Arbitration Clauses 2020, which formulate the arbitration of the award, do not specifically refer to the Woolf reforms.

Publication of just joint statements and associated awards (whether arbitrated or not, and whether LOF, or London, or not) will result in a useful database to refine award percentages and standards of truth all over the world. This database will increase predictability for salvors and underwriters alike, provide much needed guidance to arbitrators, and will compel mariners to eat the purple berries.