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20 years of SCOPIC: the challenges and changes

April 2 2019

Helene Peter-Davies, at MFB Solicitors, takes a look back at the evolution of the SCOPIC clause.

There is little doubt among the salvage fraternity that the SCOPIC Clause, when introduced in 1999, brought a welcomed level of certainty regarding remuneration for salvage services to all stakeholders that previously was not available under the Lloyd’s Open Form (LOF) and article 14 regime. It took away some of the resistance of contractors to provide services where property was in a situation of extreme danger or was of little value and eliminated the rather complex, very costly and somewhat indeterminate remuneration calculations associated with an article 14 award.
From that point, encouragement for the services of professional salvage contractors and a reinvigoration of the use of LOF appears to have gone hand in hand with SCOPIC. In addition, the use of SCOPIC resulted in a greater level of communication, and some would say understanding, between contractors and the insurance markets as the ultimate paying parties.
During the last 20 years, the consideration of the incorporation and invocation of SCOPIC in an LOF salvage matter has become the norm. That is not to say that it is used in cases it should not be, albeit that there are some sceptical views raised within P&I circles from time to time. The question of invocation of SCOPIC continues to be one that is weighed heavily as the financial penalties for the contractors where SCOPIC is invoked unnecessarily can be significant.

The SCOPIC Clause is now in its seventh reincarnation. SCOPIC 2018 was formally published on 1 August 2018 and this form of the clause sees the most significant amendments to the Clause to date. It reflects the need for key changes that have been highlighted through the use of SCOPIC for the last two decades. In particular the changes address provision for increased security including enhanced options to withdraw from the contract, and the role of the authorities.
The main aim of the SCOPIC Clause is, as when drafted, to provide a guaranteed level of payment for salvage services in the event that there is potentially no, or only a small, article 13 award available under the LOF. Essentially providing a safety net for the contractor. The SCOPIC remuneration is calculated from an agreed commercial tariff and is at a level that provides some incentive to a contractor. Remuneration under SCOPIC is available to the contractor in cases where the services are successful and where they are not; in essence, for the relevant cases, it removes the financial risk of “no cure, no pay”.
The guarantee of payment for services delivered under LOF with SCOPIC invoked arises from the security that is required to be placed. Since the original version of SCOPIC, as per sub-clause 3, the shipowners have been required to place initial SCOPIC security in the sum of US$3 million within two working days of SCOPIC being invoked. The security is most usually provided in the form of a P&I Club letter of undertaking issued using the standard ISU 5 wording. The level of security is then able to be reduced or increased as required, either by agreement, or by reference to the LOF arbitrator.
Where the initial security is not provided within the relevant timeframe, under sub-clause 4, the contractors have the option to withdraw from the provisions of SCOPIC and revert to the main agreement including, where applicable, article 14 remuneration. The earlier versions of the SCOPIC Clause had no such option addressing the circumstance where there is a failure by the shipowners to provide increased security (whether agreed or ordered).

Given the nature of SCOPIC as a safety net, it is clear that where SCOPIC expenditure has exceeded the initial security, and no further security is provided, the contractors are placed in a very difficult position – if services are continued in the absence of an adequate level of security there is a real risk that contractors will be left out of pocket for the services performed. Security is clearly fundamental to the operation of the SCOPIC Clause and the ability of the contractor to continue with the LOF where SCOPIC has been invoked.
The fundamental nature of security, and in particular increased security, has now been addressed in the inclusion of an additional provision in sub-clause 4. This new provision provides contractors with the option to terminate services under both the SCOPIC Clause and LOF agreement where increased security is not provided within the relevant period. The provision also confirms contractors right to payment of all SCOPIC remuneration due up to the date of termination including a reasonable time for demobilisation.

This new provision properly reflects sub-clause 3, concerning increased security, as a condition of the overall contract (SCOPIC being an additional clause to LOF) the breach of which being of a repudiatory nature.
It could be said that the change to sub-clause 4 provides a fairer balance for contractors, in providing an express provision. By contrast, shipowners have continued from the original SCOPIC Clause, to benefit from the option to terminate SCOPIC at any time as set out in sub-clause 9.

Not a vacuum
The option to terminate SCOPIC cannot be exercised in a vacuum and the overall circumstances of the casualty situation have to be considered. The role of the authorities within salvage services is a significant factor. Sub-clause 9 requires that in the case of either shipowners or contractors providing notice of termination, demobilisation will be permissible only in circumstances where it is not prevented by the relevant authorities.
The rights of coastal states arise under article 5 and article 9 of the International Convention of Salvage 1989. The application of the convention and the powers of the local authorities in a salvage situation remains a matter of local law.
The adoption of the SCOPIC Clause has come at a time where the number of salvage services per annum, particularly emergency response, has suffered a great decline globally. In turn, the competition to be awarded salvage work has become fierce. While some of this competition is the natural result of this decline, the competition has also been driven by the insurance markets, both H&M and P&I and their need for financial exposure to be limited.
In an emergency response situation, when bidding for work, a contractor must set themselves apart from the competition and ensure that they meet the demands of the owners and their insurers. This has led to the occasional use of what are termed as “side letters” in a way to wrap up those additional requirements.
For LOF salvage, a side letter is a document that supplements and amends the main LOF terms. They can be in many forms, but a great number of side letters are drafted to provide a limit on the article 13 award that would be due from shipowners or other property interests.

So far as freedom of contract is concerned there are no limitations on the rights of parties to contract in whatever way they see fit. However, in the circumstance where the salvage services have been performed on LOF with SCOPIC invoked, and it becomes a SCOPIC case where contribution is required to be made by the P&I insurer, it appears that a side letter limiting article 13 could give rise to an increased contribution from the P&I insurer. Understandably this has raised real concerns in the P&I insurance market.

Under scrutiny
The International Group of P&I insurers have placed this issue under a great deal of scrutiny as it is deemed to potentially create issues of cover for the member relying on such a side letter. It has now led to the amendment of the ISU 5 standard wording for SCOPIC security which was issued in conjunction with SCOPIC 2018 on 1 August 2018. The amendments to ISU 5 require disclosure of a side letter before security is issued, or when a side letter is entered into. This change provides the P&I insurer issuing the security to consider the terms of the side letter and take appropriate action regarding provision of security, including where issued, with the option to void the security in accordance with clause 6 of the terms of the ISU 5.
For the time being the amendments to the ISU 5, in conjunction with the requirement for contractors to disclose the existence of side letters to Lloyd’s Salvage Arbitration Branch, appear to have calmed the waters regarding this rather contentious issue.

In summary, after 20 years, the SCOPIC Clause continues to present a positive option to encourage a contractor’s engagement in salvage services in cases that present particular challenges due to high levels of danger or low value of property. The changes adopted in SCOPIC 2018 reflect the true nature and importance of the terms of the Clause, which should lead to a better understanding of the obligations of the parties at all stages within the performance of the salvage services. And as the changes to SCOPIC and ISU 5 prove, there clearly remains a very active and responsive dialogue between the relevant parties in the salvage world.

2018 Informa plc. This article first appeared in Maritime Risk International, March 2019, pp14-15
https://www.maritime-risk-intl.com/legal-and-regulatory/20-years-of-scopic-the-challenges-and-changes-134070.htm

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