June 26, 2019

RENOS: A problem solved or created?

The Supreme Court recently handed down the much anticipated judgment in the long saga of the total loss case RENOS.

Two issues were before the court to decide.  The first issue concerned whether or not all costs incurred in salvage were to be considered as part of the total loss or simply those incurred after the notice of abandonment was served. The second issue was whether those costs incurred as part of SCOPIC correctly fell within salvage costs to be included in a CTL calculation.

In relation to the first issue, the insurers put forward an elaborate argument that the costs of salvage prior to the notice of abandonment being served were already "sunk" and that it was a matter for the assured to elect between abandoning the ship to the insurer or incurring future costs in conclusion of the salvage services.  Under this hypothesis, should the ship be abandoned the salvage services incurred up to that point can have provided no benefit to the insurers as they have not prevented the insurers facing a loss.  The insurers sought to rely upon a very narrow construction of s.60 of the Marine Insurance Act in support of this argument.

As expected by many commentators, the Court was unpersuaded by that argument.  The Court helpfully set out at some length the limited authority on this issue which makes Lord Sumption's judgment (unsurprisingly) an interesting and informative read.  Constructive Total Loss is not its own subset of loss, it is simply a partial loss which is financially equivalent to a total loss and may be treated as partial or total at the discretion of the assured.

As the Court stated:

"The costs of repairing the damage was in no way "adeemed" because part of it had already been incurred at the time when the notice of abandonment was given and action brought on the policy"

The second issue is one that has been of interest to many since the drafting of the SCOPIC (Special Compensation P&I Clause) following the difficulties which arose out of the introduction of environmental duties and compensation under the 1989 Salvage Convention. The Court was asked to determine whether those costs incurred as part of SCOPIC correctly fell within salvage costs to be included in a CTL calculation. When considering this issue it is important to understand the purpose of that clause: SCOPIC introduced a tariff based system of remuneration for salvage services where salvors had conferred a benefit on the environment but the result for property interests was limited; thus their Article 13 remuneration would be limited or non-existent.  Drafted in an era where environmental concerns and climate change were only starting to become mainstream concerns, SCOPIC is very much of its time. 

In practice, the clause has been used by some salvors as an 'insurance' in those cases where the values of the property constrain their remuneration under Article 13 but the services they provide are complex and costly.  Even commercial insurers have been turning to versions of the SCOPIC clause when engaging salvage services on commercial tariff rates in place of an LOF / Art 13 type remuneration.

The effect of the reforms in the 1989 Salvage Convention and the subsequent introduction of the SCOPIC clause is that environmental concerns and costs can no longer be easily (or perhaps at all) divorced from the costs of salving distressed property. The criteria for assessment of a salvage award under Art 13 expressly includes "the skill and efforts of the salvors in preventing or minimizing damage to the environment" and the salvors are under an obligation "to exercise due care to prevent or minimize damage to the environment". Under LOF the obligation upon the salvors is to exercise the more onerous duty of "best endeavours" to protect the environment. In modern salvage it is a rare occasion where salvors are not required to remove pollutants (such as bunkers) from a ship before the authorities allow them to go on and remove the vessel and her cargo from the danger.  It often appears that there is more political sensitivity from coastal authorities regarding potential bunker spills than in relation to the prospect of a wreck on their pristine shores.

The RENOS judgment should correctly be viewed against this backdrop.  The Court determined that SCOPIC costs should not be included in the calculation because they were based on the salvors' Article 8(1)(b) obligations to minimise environmental damage for the property owners; a liability that they would be obliged to meet.

Some rather unfortunate reasoning was given in support of this conclusion in that the Court asked a hypothetical question about the use of an oil boom where two separate agreements were entered into, one for minimising environmental damage and one for salvage.  Counsel for the Claimants accepted that the boom costs would not have entered into the calculation for CTL purposes.  It could be argued that this conclusion is based on a naivety about the real world in which salvors operate.  It is entirely probable that the hypothetical boom would have been required by the authorities and that without its presence, no services would have been permitted or (increasingly) licenced, thus making anti-pollution measures an integral part of the overall services.  The reality is that it is usually impossible to separate environmental costs from salvage costs in such a broad brush and rudimentary way. Furthermore, Clause 10 of SCOPIC states that the duties and liabilities of the  salvors "shall remain the same as under the Main Agreement, namely to use his best endeavours to salve the vessel and property thereon and in so doing to prevent or minimise damage to the environment."

Notwithstanding this, Lord Sumption stated:

"The two heads of expenditure [protection of property and prevention of pollution] have quite different purposes, only one of which is related to the reinstatement of the vessel. If they were truly indivisible, this might not matter. But the whole scheme of SCOPIC clause depends on their being separately identifiable, and the very fact that one is for hull underwriter's account and the other for P&I Insurers shows they cannot be indivisible."

And:

"The fact that a prudent uninsured owner might have contracted with the same contractors for both the protection of the property and the prevention of environmental pollution does not show that both are part of the cost of repairing the damage. Neither does the fact that the charges under both heads are secured on the ship. The two heads of expenditure have quite different purposes, only one of which is related to the reinstatement of the vessel."

However, it is not clear whether their Lordships were referred to Clause 14 of SCOPIC (there is no reference to it in the judgment) but it deals with the interaction between anti-pollution measures and salvage operations in the clearest terms as follows:

"14. Pollution Prevention

The assessment of SCOPIC remuneration shall include the prevention of pollution as well as the removal of pollution in the immediate vicinity of the vessel insofar as this is necessary for the proper execution of the salvage but not otherwise." (emphasis added)

So under Clause 14, if costs relating to the prevention or removal of pollution have been allowed as a SCOPIC expense, by definition they can only have been so allowed if they were necessary for the completion of the salvage operation, a factor that seems to run contrary to the line of argument accepted by the Court.

These issues aside, it appears that much of the reasoning adopted by their Lordships was based on the practical need for a simplified accounting exercise to take place, much like when SCOPIC itself replaced Article 14.  Whilst this might not actually reflect the practical or contractual reality, it has the potential to be a positive decision for both owners and insurers to the extent that it does at least provide certainty in very general terms as to exactly what can and cannot be claimed as part of a CTL calculation.

Perhaps an unintended consequence of the decision is that it may very well modify the way in which SCOPIC is used. Salvors may come under increasing pressure not to invoke SCOPIC, or to move onto commercial terms sooner if a CTL becomes a relevant consideration. If a move onto commercial terms is made sooner and those commercial terms clearly relate to the cost of non-pollution salvage services (which are regularly conducted under SCOPIC) the question arises whether those costs may then become relevant once again for the purpose of the CTL calculation? Likewise, where a 25% discount on the Art 13 award is triggered due to the award having exceeded the SCOPIC costs, is that discount now to be disregarded for CTL purposes?

Furthermore, given the line of reasoning adopted in the judgment, it is possible to envisage cases where it might be argued that all or part of an Art 13 award should be disregarded for CTL calculation purposes where it can be shown that work related to anti-pollution measures. It is not difficult to imagine such an argument arising, for example, where an Art 13 award reflected a large amount of clearly identified out of pocket expenses incurred by the salvor in relation to anti-pollution measures.

Perhaps in closing it is worth mentioning one of the most notable features of the Renos case; that none of the work actually carried out by the salvors under SCOPIC related to anti-pollution measures. It remains to be seen whether Knowles J (the High Court Judge to whom the matter has now been remitted to determine whether the vessel is a CTL) is able to reflect this in his findings whilst also complying with the judgment of the Supreme Court.