VIII. Salvage Arbitration
Many
salvage contracts include a provision under which disputes regarding to
the salvor's compensation will be submitted to binding arbitration. The
most widespread of these is Lloyd's Open Form Salvage Agreement ("LOF")
which is used worldwide. The LOF provides for the provision of salvage
services on a "no cure-no pay" basis. Most of the agreement is taken up
with detailed provisions for arbitration of the salvage award at
Lloyd's of London under English law. The concept of a standard form of
salvage agreement calling for London arbitration has been in use since
the 1890's when England not only had the world's largest navy and
merchant marine but controlled much of the world's trade. Originally,
the motiviation was to protect vessel owners and their insurers, both
usually English, from exorbitant salvage awards in what was viewed as
the backwaters of the world. However, the system of knowledgeable arbitrators deciding salvage cases
on written submissions and affidavits worked so well that it not only
survived the decline and fall of the British Empire but it became the
standard forum for resolving salvage disputes involving professional
salvors and vessels of every nation. Indeed, the use of arbitration as
the preferred method of resolving salvage disputes became so widespread
that reported salvage cases became few and far between.
With the large increase in numbers of professional salvors serving
recreational vessels, it is not surprising that they would adopt and
use the LOF given its status as the world standard. However, the
expansion of the recreational vessel population has brought new
insurance carriers into the maritime market: carriers who were
uncomfortable with the unfamiliar concepts of salvage and arbitration;
carriers who were even more uncomfortable with having their interests
decided in London at what they viewed as great expense by English
barristers and solicitors. The situation was exacerbated by some
salvors who used the threat of compelling London arbitration as a club
in settlement negotiations. Threatened with increasing numbers of
London arbitration, some carriers have challenged the enforceabiltiy of
the London arbitration clause which is the heart of the LOF.
To the great surprise of many admiralty counsel, the challenge to the
enforceability of London arbitration under the LOF has met with some
success. The attack came from an unsuspected quarter. In the
recreational boating context, the LOF at issue was almost always an
agreement between two U.S. citizens involving services to be provided
to a U.S. vessel in U.S. waters. Thus, the argument was successfully
made that under the provisions of the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, the court could neither compel
arbitration in London under the LOF nor enforce an arbitration award
should one be entered. Without the provision for enforcing binding
London arbitration, the LOF is useless to a salvor.
The core of the argument is that the statute, implementing the
Convention, provides that when an arbitration agreement or award arises
from a relationship that is entirely between citizens of the United
States, the agreement or award is deemed not to fall within the
convention (and thus foreign arbitration can be neither enforced nor
compelled) unless the relationship involves property located abroad,
envisages performance abroad, envisages enforcement abroad or has some
other reasonable relationship with a foreign state. Despite arguments
that an agreement between U.S. citizens to arbitrate at Lloyd's clearly
assumes both performance and enforcement abroad, some courts have found
that arbitration in London under the LOF can be neither compelled nor
enforced. This has been the case even when the vessel insurer signed a
separate letter of undertaking incorporating the LOF and promising to
pay the arbitration award.
These decisions have potentially sounded the death
knell for use of the LOF by salvors of recreational vessels in the
United States. However, the identical issue has recently been litigated
in the District Court of New York, where both the decisions in Brier
and Reinholts were criticized.
The
court notes that both decisions were determined by magistrate judges,
who "gave too little recognition to the content of the LOF's and the
precise language of Secition 202" of the Convention.60 In the Jones
suit both parties were U.S. citizens, the vessel was located in the
United States, and the only connection with a foreign forum was the
LOF. The court held that in selecting the LOF the intent of the
contract was the use of English law and the enforcement of the salvage
award in Great Britain. Therefore, the court determined that the
salvage contract did not violate the convention, because it clearly
"envisaged enforcement abroad".
Whether the insurance companies will enjoy any long
term benefit remains to be seen. Certainly, there will be more
litigation with regard to salvage awards. Both the Society of Marine
Arbitrators of New York and the Maritime Arbitration Board of Miami are
scrambling to put panels of salvage experienced arbitrators into place
to fill the potential void left by the demise of the LOF. Boat Owners
Association of the U.S. has established an arbitration system to deal
with such cases and incorporated a term calling for binding local
arbitration in their salvage agreements.
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