Judgments -- Semco Salvage & Marine Pte. Ltd. v. Lancer Navigation  continued

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    In a compressed form, which does less than justice to the reasoning, the opinions on this issue expressed by successive tribunals have been as follows. Much of the long and careful award of Mr. Stone Q.C. was concerned with a traditional salvage reward under article 13. This need not be described here. When he came to the "special compensation" the arbitrator stressed the need for encouragement. A professional salvor who had done his best but had in the event failed to avert damage to the environment would not be encouraged to stay in the business or try again if he merely received his expenditure even if that took account of idle time. To arrive at a "rate" which it is "fair" it is necessary to have in mind as a broad classification the type of work done; the scale of the job; whether the towage was to a large or small vessel, whether or not there were crew and machinery to assist, but not to the risks experienced and the benefit conferred. It must be a rate which makes some contribution to future investment; but this must be tempered by the fact that there will be further encouragement in the event of success. It is of great assistance in assessing a fair rate to know the actual cost and basic market rates, but a fair rate is none of these rates or a straight mathematical computation of those rates.

    The arbitrator's opinion is exemplified by the figures set out in the award. As an example one may take the figures for the tug Salvenus. The basic daily cost averaged over a full year including overheads was $ 1,990. On a basis of 50 per cent. utilisation the figure was $ 3980 per day. A further uplift of 50 per cent. reflecting a minimum actual service performed increased the figure to $ 5970. Finally, a figure was shown of $ 7000 per day for a tug of that size engaged in a straightforward commercial ocean towage of a vessel of a similar size without taking into account specialist or extraordinary services. From these figures the arbitrator built upwards to a fair rate of $ 16000 per day. Applying a similar approach to the other vessels and to personnel and equipment the arbitrator arrived at a figure for "expenses" under article 14.3 of $ 3,623,180, equivalent in Singapore Dollars to S$ 5,967,671. After adding out- of-pocket expenses the total allowed under article 14.3 was S$ 7,658,117.

    Since in the present case the salvage resulted in benefit to the environment the arbitrator was required to apply the strange formula for enhancement of the "expenses" contained in article 14.2. The difficulties caused by this formula, the outcome of an unresolved conflict between the states and interests taking part in the drafting of the Convention, will no doubt have to be resolved before long, but they do not arise on this appeal and need not be addressed now. It is enough to record that the arbitrator applied an increment of 65 per cent. The resulting figure was S$ 12,635,893, which exceeded the salvage awarded under article 13 by S$ 3,135,893. This was the special compensation, which now remains in dispute.

    The Appeal Arbitrator disagreed with Mr. Stone in several respects. First, and of great significance in financial terms, he concluded that the award of traditional salvage under article 13 was too low, by S$ 1,250,000. Secondly, on the award of special compensation under Article 14 he took a different line from Mr. Stone, as follows:

     1. Although the definition of expenses may be broad, it is still a definition of expenses. It does not support the finding of a fair rate at such a level as by itself to lead to an encouraging profit for the salvors, still less anything which would be regarded as akin to salvage remuneration. The addition of an increment under article 14.2 could all too easily lead to a figure which went well beyond compensation and became salvage remuneration by the back door.

     2. The travaux preparatoires were inconsistent with a construction of article 14.3 as providing a rate which was encouraging, even before the addition of any increment under article 14.2.

     3. A rate which reflected idle time and the availability of vessels but which did not take into account the criteria of paragraphs (h), (i) and (j) of article 13.1 would be too low.

     4. The type and scope of the job would be a relevant factor in assessing the fair rate, if only because it would be reflected in the cost to the salvors of undertaking the services.

     5. The ability in certain cases to obtain an award of special compensation is an additional incentive, but it is a fall-back or safety net. It is only awarded when it is greater than any award recoverable for salvage. It follows that in any case where the services are substantial the salvage award ought to be more, and where possible significantly more, than what would be awarded by way of special compensation, unless the amount which can be awarded for salvage is constrained by the value of the salved fund.

    Applying these and other considerations the appeal arbitrator concluded that the total amount awarded by Mr. Stone was much too high. He then performed three assessments, on each of which he differed from Mr. Stone. The first was to reconsider the salvage award, which he regarded to be insufficiently encouraging; and he increased it to S$ 10,750,000. Your Lordships are not troubled with this question. Secondly, he arrived at his own figures for the expenses under article 14.3. For example, in respect of the Salvenus he awarded a rate of S$ 7,500 per day, as against the arbitrator's figure of $ 16,000. Finally, as to the increment under article 14.2 he agreed with the arbitrator's basic approach. On the figures for expenses under article 14.3, the appeal arbitrator would have regarded the arbitrator's uplift of 65 per cent. as too much. But on the appeal arbitrator's own approach to expenses this increment seemed fair and reasonable. The result was to increase the grand total under article 14.3 of S$ 5,216,404 to S$ 8,607,067. This was less than the salvage award, so that no special compensation was payable.

    On appeal to Clarke J. [1995] 2 Lloyd's Rep. 44 four principal questions were discussed, two relating to salvage and two to special compensation under article 14. As to the latter, the learned judge broadly accepted the arguments which the owners were later to repeat before this House, and accordingly upheld the general principles which the appeal arbitrator had sought to apply. But the learned judge did not agree with the way in which the appeal arbitrator had arrived at the figures which he had substituted for those of the arbitrator. As to salvage under article 13, the judge concluded that the Appeal Arbitrator was entitled in principle to differ from the award of the arbitrator, and that he was also entitled to cross-check between the amounts which he proposed to grant as salvage and as special compensation; but that since the figures for the latter were wrongly assessed the Appeal Arbitrator's salvage award might thereby have been distorted. He therefore remitted the matter to the Appeal Arbitrator to reconsider the quantification of salvage.

    In the Court of Appeal a majority (Staughton and Swinton Thomas L.JJ.) agreed with Clarke J. As Staughton L.J. put it [1996] 1 Lloyd's Rep. 449, 455:

     ". . . a fair rate . . . means a rate of expense, which is to be comprehensive of indirect or overhead expenses and take into account the additional cost of having resources instantly available. Remuneration or uplift or profits is to be provided, if at all, under article 14.2. Beyond that, what is a fair rate is a matter of judgment for the tribunals(s) of fact."

Evans L.J. took a different view, which I describe at a later stage. In the result the appeal on this aspect of the dispute was dismissed, since it was accepted that on the view of the majority no award of special compensation would ensue. Semco now appeal.

    My Lords, leaving aside for the moment the interpretation preferred by Evans L.J., the rival contentions on the meaning of "fair rate," as summarised in the parties' Agreed Statement of Facts and Issues, were as follows:

     "(i) is it a fair rate of remuneration having regard to the circumstances of the case, including the type of craft actually used and the type of work required (but in general terms) and a rate which acts as an incentive to the salvor (i.e. normally including a profit element but without amounting to a salvage reward or anything like it), as Semco contend;


     "(ii) does it mean a fair rate of expense which is to be comprehensive of indirect or overhead expenses and to include the additional cost of having resources instantly available, as the shipowners contend."

    My Lords, whichever alternative your Lordships prefer will not leave the parties and arbitrators in salvage disputes with any precise guidance on how to arrive at the special compensation. The fact is, however, that the assessment of salvage has never been an exact science, and the embellishment added by article 14.3 is well known to have been an uneasy compromise. At all events, although the possibilities are not exhausted by the two alternatives quoted they are, in my view, more plausible than any others. On the choice between them, although weight has rightly been given to the history of the Convention I prefer to begin with its words, read in the general context of the new regime. As to the words themselves, I feel little doubt that they support the narrower interpretation. The concept of "expenses" permeates the first three paragraphs of article 14. In its ordinary meaning this word denotes amounts either disbursed or borne, not earned as profits. Again, the computation prescribed by article 14.3 requires the fair rate to be added to the "out- of-pocket" expenses, as clear an instance as one could find of a quantification which contains no element of profit; and it surely cannot have been intended that the "salvors' expenses" should contain two disparate elements. It is moreover highly significant that article 14.2 twice makes use of the expression "expenses incurred" by the salvor, for in ordinary speech the salvor would not "incur" something which yields him a profit. The idea of an award of expenses as a recompense, not a source of profit, is further reinforced by the general description of the recovery as "compensation", which normally has a flavour of reimbursement. I acknowledge that this word has long been used to denote the amount recoverable as conventional salvage: see for example Abbott on Merchant Ships 5th ed. (1827) at p. 610. Nevertheless it is significant that a clear distinction is drawn in paragraphs 1 and 4 of article 14 between compensation and reward, and the same contrast appears in article 1(e), quoted above.

    This purely textual account of the text must now be measured against the aims of the Convention. For Semco Mr. Brice Q.C. emphasises that the explicit purpose of the new salvage regime is, in the words of the Preamble, to provide "adequate incentives" to keep themselves in readiness to protect the environment, and contends that a level of compensation which will furnish in cases where the efforts fail without the salvor's fault no more than direct and standby costs is not adequate for this purpose. My Lords, as to the purpose of the Convention this is plainly right, but the careful submissions of counsel have not persuaded me that this "teleological" method (as he described it) enables profitability to be written into expenses. I say this for two reasons.

    In the first place I do not accept that salvors need a profit element as a further incentive. Under the former regime the undertaking of salvage services was a stark gamble. No cure -no pay. This is no longer so, since even if traditional salvage yields little or nothing under article 13 the salvor will, in the event of success in protecting the environment be awarded a multiple not only of his direct costs but also the indirect standby costs, yielding a profit. Moreover, even if there is no environmental benefit he is assured of an indemnity against his outlays and receives at least some contribution to his standing costs. Lack of success no longer means "No pay," and the provision of this safety net does suffice, in my opinion, to fulfil the purposes of the new scheme.

    Secondly, although Mr. Brice disclaimed any intention to revive the method adopted by the arbitrator, which was to treat article 14 as creating a salvage regime parallel to that of article 13, the argument for Semco was in essence the same. The omission from article 14.3 of paragraphs (a) to (g) of article 13.1 shows that expenses are not to be calculated on the same generous scale as an award for a successful salvage. If such considerations enter the assessment of special compensation at all, this is through the uplift under article 14.2. As Clarke J. said [1995] 2 Lloyd's Rep. 44, 51:

     "the effect of the reference to matters such as promptness, availability, state of readiness and efficiency . . . is not to transfer the concept of expense into something which goes beyond what could fairly be regarded as a type of expense. If that had been intended it could readily have been done by plain language."

    Furthermore, and in my view decisively, the promoters of the Convention did not choose, as they might have done, to create an entirely new and distinct category of environmental salvage, which would finance the owners of vessels and gear to keep them in readiness simply for the purpose of preventing damage to the environment. Paragraphs 1, 2 and 3 of article 14 all make it clear that the right to special compensation depends on the performance of "salvage operations" which, as already seen, are defined by article 1(a) as operations to assist a vessel in distress. Thus, although article 14 is undoubtedly concerned to encourage professional salvors to keep vessels readily available, this is still for the purposes of a salvage, for which the primary incentive remains a traditional salvage award. The only structural change in the scheme is that the incentive is now made more attractive by the possibility of obtaining new financial recognition for conferring a new type of incidental benefit. Important as it is, the remedy under article 14 is subordinate to the reward under article 13, and its functions should not be confused by giving it a character too closely akin to salvage.

    My Lords, the materials on which these opinions are founded are confined to the instruments themselves, without the recourse to the travaux preparatoires, permissible where the meaning of an international agreement is found to be unclear: see Fothergill v. Monarch Airlines Ltd. [1981] A.C. 251. Nevertheless, reference was made to them in argument without objection, and they are a useful means of testing the tentative opinions already formed. Some caution is however required. The documentary antecedents of the Convention are incomplete, and there is nothing before the House to indicate the origins of the new safety-net provisions in L.O.F. 1980. This is understandable, since that Form is neither the document sued upon, nor incorporated into it. Nevertheless, it is plain from Professor Selvig's report that the first draft of the Convention was influenced by L.O.F. 1980, and a full account of L.O.F. 1990 cannot be given without knowing the history of its predecessor.

    Subject to these reservations, I find in the travaux preparatoires strong reinforcement for the Owners' interpretation of article 14. In particular:

     1. It is made quite clear throughout that the new remedy is linked to salvage and does not stand on its own.

     2. The report of Professor Selvig records that the International Salvage Union proposed an amendment which would extend the salvor's expenses to:

      "a) the use and availability of vessels and other equipment intended for salvage operations and their standing costs;

      b) the time expended by the salvor and the out of pocket expenses reasonably incurred by the salvor in the services;

      c) the state of readiness of the salvors' vessels and equipment intended for salvage operations;

      d) the level of investment and professionalism of the salvor."

The sub-committee rejected this proposal, and it is significant that whilst items a), b), and c), are broadly reflected in the ultimate text there is no counterpart to item d).

     "3. In Mr. Bent Nielsen's commentary on the draft Convention as it stood at the end of the Montreal conference, which so far as concerned article 14.1 and 3. was almost identical to the form ultimately approved, there is nothing to suggest that the members of C.M.I. intended that the words of the draft might entitle the salvor to a profits guarantee. On the contrary, the author noted in relation to the predecessor of article 14.3: 'The reference to the criteria set out in [article 13.1 (h), (i) and (j)] is important, in particular because it is thereby made clear that due account shall be taken of the salvor's standing costs, overheads, etc., when determining what is a fair rate in the particular case.'

     "4. L.O.F. 1980, which was undoubtedly one of the inspirations of the Convention, made use of the simpler formula '. . . the Contractor shall nevertheless be awarded . . . his reasonably incurred expenses.' It is even clearer here that the salvor was not intended to make a profit; and there is nothing in the documentary materials to suggest that the later expansion of the wording was meant to produce a wholly different result."

    Such preliminary documents as are available thus support the narrower construction which I propose. Two other matters call for mention. First, your Lordships were pressed with a submission that the meaning given to article 14.3 by the judge and the Court of Appeal would be unworkable in practice. I cannot accept this, for it seems to me that the ascertainment of the fair rate must necessarily be performed with a fairly broad brush, albeit not so broad as the fixing of the reward under article 13, and the uplift under article 14.2. Quite sufficient information for such purposes could be derived from the salvor's books, as indeed became clear when reference to materials from that source was made in the course of argument.

    Secondly, Miss Selvaratnam addressed the House on certain authorities concerning the assessment of a fair rate of hire or other remuneration for services performed in the absence, or outside the terms, of a binding contract. These decisions would indeed have been germane if the purpose of article 14.3 had been to give the salvor a reward, not directly defined by the contract, but generally referable to a fair rate of remuneration. In the present case however I have concluded for the reasons given that article 14.3 is not concerned with remuneration, but with a more restricted basis of recovery, and the authorities cited therefore do not assist.

    These authorities do however point the way to an alternative argument for Semco, which did not form part of their submissions in the Court of Appeal and which was first proposed in the dissenting judgment of Evans L.J. It is best seen in the following passages from the judgment [1996] 1 Lloyd's Rep. 449, 457, 459:

     "In summary, I would hold that the judge was wrong to exclude altogether a possible 'profit' element and that Mr. Stone erred in assessing the 'fair rate' as if it were a form of remuneration or reward. Broadly speaking, in my judgment Mr. Willmer was correct to have regard to commercial, or where relevant, market factors as well as to the salvor's costs. . . .

     "I would hold that 'fair' means 'fair to both parties' and that 'a fair rate' for services provided in fact should be established by reference to what I would call the commercial value of those services, disregarding the special considerations which lead to the equivalent of enhanced rates for salvage services when the reward for a successful salvage is assessed. . . .

     "If the intended meaning was 'a commercial rate for the particular service, taking account of market rates when those may apply', then the chosen formula 'a fair rate' comes close to expressing it, in a context where a straightforward reference to market rates was not possible, as both parties agree."

    My Lords, the difficulty which I find with this interpretation is two-fold. First, the proposition gives no weight to the context which, for the reasons already given, point directly away from anything resembling the kind of remuneration which the salvor could expect, if not exactly in the open market, at least in some approximation to it. There are elements in such remuneration which the safety net was not in my opinion meant to embrace. Secondly, I believe that the Lord Justice attached undue importance to the word "rate", which was understood as reflecting a notional periodical payment, to be multiplied-up to a figure forming part of the expenses. It would, I can see, be only a short step from this to look for a periodical basis of payment which could only be ascertained by reference to the market for vessels or equipment of this kind. For my part however I believe the word "rate" has sent the enquiry in the wrong direction. Whatever its ordinary meaning I believe that in the context of article 14 it simply denotes an amount attributable to the equipment and personnel used, just as the expenses include an amount attributable to out-of-pockets. This view is wholly consistent with the French language version of the Convention, where we find in article 14.4 the words ". . . les debours raisonnablement engagés par l'assistant dans les opérations d'assistance ainsi qu'une somme équitable pour le matériel et le personnel . . ." We were informed that the Spanish version of the text is to similar effect. I believe that if there had been an opportunity to deploy before the Lord Justice the arguments which your Lordships have heard he might well have come to a different conclusion. At all events, I must respectfully dissent from it.

    Finally, whilst the French text is still in mind I would draw attention to the word "indemnité" which appears in article 14 in the same places as "compensation" in the English version. Mr. Brice correctly warned that this may be a "false friend" with indemnity in the English language, since one of its meanings does correspond to a salary or other payment for work done. Nevertheless I think that there is still a flavour of reimbursement for outlays, which accords with the meaning I have already proposed.

    My Lords, I have explored the matter at length in deference to the practical importance of the question, the differences between the opinions expressed, and the thoughtful argument of Mr. Brice. Otherwise I would have been content simply to express my agreement in every respect with the economical and convincing judgment of Clarke J.

    There remains a contingent cross-appeal by the Owners, contingent because the figures are such that it will arise only if Semco prevail on the principal issue under article 14.3, which in my opinion they do not. The question is whether the expenses comprise those incurred during the whole of the salvage operation, or only during the times when a threat to the environment is still in existence. Clarke J. and all members of the Court of Appeal preferred the former opinion. In a spirited argument Mr. Thomas Q.C. supported the latter view, but your Lordships did not think it necessary to invite a response from Mr. Brice. I think the matter plain, and am content to adopt the reasons given by Clarke J. for deciding that it is to the entirety of the operation that the expenses should be referred.

    I therefore propose that the appeal and the cross-appeal should be dismissed, in each case with costs.


My Lords,

    I agree that the appeal and cross-appeal should each be dismissed for the reasons given by my noble and learned friend, Lord Mustill. Since Mr. Brice Q.C., for Semco, described the appeal as a test case of international importance on a point which has not so far been considered elsewhere, I underline what seem to me to be the salient points:

1) ". . . fair rate for equipment and personnel actually and reasonably used in the salvage operation" in article 14.3 means a fair rate of expenditure, and does not include any element of profit. This is clear from the context, and in particular from the reference to "expenses" in article 14.1 and 2, and the definition of "salvors' expenses" in article 14.3. No doubt expenses could have been defined so as to include an element of profit, if very clear language to that effect had been used. But it was not. The profit element is confined to the mark-up under article 14.2, if damage to the environment is minimised or prevented.

2) The first half of article 14.3 covers out-of-pocket expenses. One would expect to find that the second half of the paragraph covered overhead expenses. This is what it does. If confirmation is needed, it is to be found in the reference to sub-paragraphs (h) to (j) of article 13.1, (which are apt to cover overhead expenses) and the omission of sub-paragraphs (a) to (g).

3) Mr. Brice argued that the word "rate" indicated more naturally a rate of remuneration rather than a rate of expenditure. But, as Lord Mustill points out, rate is the appropriate word when attributing or apportioning general overheads to the equipment and personnel actually and reasonably used on the particular salvage operation.

4) Mr. Brice argued that if fair rate means rate of expenditure it would require "a team of accountants" in every salvage arbitration, where the environment has been at risk. Mr. Thomas's answer was that the basic rates in the present case (not a straightforward one) were agreed without difficulty by the two firms of solicitors. In any event accountants are nowadays, as he says, a part of ordinary life.

5) Although the meaning of article 13 is clear enough, and resort to the travaux preparatoires is therefore not strictly justified, I have never known a case where the travaux point so strongly in favour of one party rather than another. The commentaries on the draft documents show conclusively what the salvors' representatives' were seeking to achieve during the international negotiations leading up to the 1989 Convention, and how it was that sub-paragraphs (h) to (j) found their way into that Convention.

6) Mr. Brice made out a strong case that professional salvors of today need encouragement by way of remuneration over and above their expenses if they are going to stay in business. But that is not what they were seeking to achieve during the negotiations. Nor is it what was in fact agreed. I would dismiss the appeal.


My Lords,

    I have had the benefit of reading in draft the speech to be given by my noble and learned friend, Lord Mustill. I agree with it, and for the reasons which he gives I too would dismiss both the appeal and the cross-appeal.


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