general average and salvage charges

Law column

Rights of Recovery under a Marine Policy for Sue and Labour, General Average Expense and Salvage Charges in the event of a CTL

Paul Apostolis

With the recent spate of typhoons affecting shipping in East Asia and in the aftermath of the Indian Ocean tsunami, it is pertinent, in the law column of this edition of Seaview, to review an assured's right to claim for a CTL in the event of a grounding and in addition, any salvage expenses incurred, as sue and labour expenses. 

As a general principle, an insured may recover from the underwriter under a marine policy for any extraordinary expenditure which he has necessarily incurred to preserve the property from an insured peril. 

Such expenditure may fall under one of three headings which are to be found at sections 64 to 66 inclusive of the Marine Insurance Act 1906 ("MIA").  These are :

1.         sue and labour expenses; or

2.         general average expenses; or

3.         salvage charges recoverable independent of contract under maritime law.

The Facts

We set out below a hypothetical set of facts against which to apply the law so as to ascertain whether a claim for salvage and towage expenditure incurred prior to a CTL being declared, falls to be reimbursed as a sue and labour expense, a general average expense or salvage charge.

A barge is insured under a policy of marine insurance on ITC hulls /IVC - hulls or similar terms which are subject to English law and jurisdiction.  She is driven ashore by a typhoon in a remote location.  She is salved under the terms of a salvage agreement entered into between the barge owners and the salvors.  Although initial surveys indicate that she is not a CTL, after refloating and towage to a port of refuge, she is found to be severely damaged prompting her owners and hull underwriters to declare a CTL. At the time of the grounding, she did not have any cargo on board. 

The Issues

The issues then become:

1.         whether the expenses incurred in refloating the barge and those incurred in towing her to a place of safety for repairs together with all incidental expenses incurred in both operations, are to be treated as sue and labour charges or as salvage charges in the assessment of a constructive total loss; and

2.         whether these expenses should be treated as part of the computation of the CTL or whether the assured can claim these in addition, as sue and labour costs.

Relevant Statutory Provisions

Section 64(2) of the MIA provides:

"Expenses incurred by or on behalf of the assured for the safety or preservation of the subject matter insured (other than general average and salvage charges as distinguished above) are called particular charges". 

Section 65(2) of the MIA states that:

"Salvage charges means the charges recoverable under maritime law by a salvor independently of contract (our emphasis). They do not include the expenses of services in the nature of salvage rendered by the assured or his agents or any person employed or hired by them for the purpose of averting a peril insured against.  Such expenses, where properly incurred, may be recovered as particular charges or as a general average loss, according to the circumstances under which they were incurred".

Section 78(1) provides:

"Where the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or that the subject - matter may have been warranted free from particular average, either wholly or under a certain percentage".

Section 78(2) of the MIA provides that:

"General average losses and contributions and salvage charges, as defined by this Act, are not recoverable under the suing and labouring clause".

Distinguishing Sue and Labour from General Average and Charges

If a vessel without cargo on board and not subject to charter commitments (i.e. not involved in a common venture) strands in a position of peril and her master or owners engage a contractor or tug to assist to refloat the vessel for a fixed lump sum or a fixed hourly or daily rate (whether or not on a "no cure - no pay" basis), the amount payable to the contractor is recoverable from the insurers of the ship as a sue and labour charge.

If the ship had cargo on board at the time of stranding or if she was time chartered so that there was a common venture, then the same expenses to be paid to the contractor would be recoverable from the insurers of the ship as a general average expense.

Central to both of these scenarios, is that the amount to be paid to the contractor is payable under contractual agreement. 

In contrast, if the services rendered to the stranded vessel are made without a prior contractual agreement and are performed voluntarily, the salvor would have a claim under the general maritime law and in such circumstances, the assured would have a claim under the policy for salvage charges as defined by Section 65(2). 

The principle implied in Section 65(2) was established by the decision of the House of Lords in the case of Aitchison v. Lohre (1879) 4 App. Cas 755. In this case, a vessel encountered severe weather and became disabled.  She was taken in tow by another vessel without any agreement having been made in advance in regard to remuneration for the towing services. The owner subsequently elected to repair the vessel and spent a sum in excess of the insured value of the vessel in doing so. He subsequently claimed from his underwriters, 100% of the sum insured for the cost of repairs and in addition, the ship's proportion of the sum awarded to the salvors by the Admiralty Court. The court held that as the salvage charge was incurred under the general maritime law rather than under a contract, it did not fall within the suing and labouring clause and therefore, the assured was entitled to claim only up to the limit of the policy.

By way of distinction, had the salvage services been agreed in advance subject to a fixed lump sum or a fixed daily or hourly rate or indeed under the terms of a Lloyds Open Form of Salvage Agreement, then these expenses incurred in salving the vessel would have been construed as suing and labouring expenses and the assured would have been able to claim these in addition to the sum insured under the policy.

Measure of Indemnity

In the factual matrix which we have outlined above, the assured would be within his legal rights to claim the costs of the contractual salvage agreement, the towage fees (if she is to be towed somewhere other than the place of redelivery) and the other removal expenses as particular charges under the sue and labour provisions of the policy.  As such, under the provisions of section 78(1) of the MIA and clauses 13(2) and 13(6) of ITCH, these expenses would be payable in addition to the total loss of the vessel.

Are Salvage And Other Recovery Expenses To Be Considered Within the Computation  of a Constructive Total Loss

The next issue to consider is whether the assured is entitled to include the salvage and recovery expenses within the computation of a constructive total loss and thereafter, claim against the underwriters for a CTL and in addition, the salvage expenses as sue and labour expenses.

Two issues arise for consideration:

(1)        The timing of the Notice of Abandonment and whether the notice should have been served on the underwriters prior to the salvage operation taking place;

(2)        Whether the cost of repairs as defined by Section 60(2)(ii) of the MIA for assessing whether a vessel is a constructive total loss, will include salvage expenses incurred by the owners prior to serving the notice of abandonment on the underwriters.

            (1)       Time when notice of abandonment should be given

A shipowner is not entitled to abandon his property simply on receiving notice of a casualty. He must wait until he has sufficient information of the extent of the casualty and the nature of the damage to the vessel to enable him to make a decision on whether to elect to claim for a constructive total loss.

The basis for this statement of the law is to be found in section 60(1) of the Marine Insurance Act 1906 which stipulates that there is a constructive total loss where the subject matter of the insurance is "reasonably abandoned' in circumstances defined in that section. The assured is not compelled to abandon his interest in the ship. Rather, section 61 of the MIA confers an election on the assured as to the nature of the claim which he wishes to make under the policy of insurance.

Once the assured has sufficient information to make his decision, he must not delay in declaring a CTL and notifying the underwriters by serving a notice of abandonment. If the assured omits to abandon at the time when he knows the true nature and extent of the casualty, the right to abandon will be lost.

As to whether a notice of abandonment can be validly served after a vessel has been salved, it seems settled under English practice that an assured may tender notice of abandonment after salvage services and other expenses have been incurred provided that the delay in serving the notice of abandonment until after the salvage service have been concluded, was necessary to enable the assured to form a decision as to whether the true nature and extent of the casualty justify abandonment. This is a question of fact to be determined in each case.

            (2)        Are Salvage Expenses Incurred Prior to the Notice of Abandonment Included Within the Cost of Repairs

This issue has not been settled in English law.

A constructive total loss is proved if the costs of repair and other incidental expenses would exceed the insured value of the vessel. Section 60(2)(ii) of the MIA explains how the estimated cost of repairs are calculated.

This section provides:

          (2)         In particular, there is a constructive total loss - ...

(ii)        in the case of damage to a ship, where she is so damaged by a peril insured against that the costs of repairing the damage would exceed the value of the ship when repaired.

In estimating the costs of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired;... (our emphasis).

The issue is to determine whether the event (from which the timing is taken to assess whether a salvage service is in the "future" for the purposes of section 60(2)(ii) of the Act) is the casualty or the tendering of the notice of abandonment.

In the English case of Hall v Hayman [1912] 2 K.B. at page 5 Counsel for the plaintiff conceded that the relevant date under the MIA was the date of giving notice of abandonment. Mr Justice Bray interpreted the provisions of section 60(2)(ii) literally and accepted counsel's submission that the costs of an unsuccessful attempt to refloat a stranded vessel were to be disallowed as a cost of repair because the attempt to salve the vessel had been made before notice of abandonment was tendered on the underwriters.

Note however that in practice, expenses incurred before the notice of abandonment are usually taken into account when assessing a constructive total loss and furthermore, there is a school of thought that suggests that these expenses ought to be so considered.

The authoritative text on the law of marine insurance and average, Arnold (16th edition) supports the proposition that all expenditure required to put the vessel in order from the time of the casualty should be taken into account within the cost of repair. The rational for this view is that some expenses, such as survey fees and salvage operations, have to be undertaken on occasions before the assured is in a position to know whether the vessel is worth repairing.

Arnold argues that the Marine Insurance Act does not specify from what event or time the salvage operations are 'future". On principle, the author argues that the relevant date is the date of the casualty and not the date of the notice of abandonment. Arnold considers that the decision in Hall v. Hayman is not case authority on this point.

Furthermore, a CTL as defined in section 60(1) of the Marine Insurance Act, is made expressly subject to any provisions in the policy. Institute Time Clauses - Hulls 1/10/83 provides for a constructive total loss in clause 19. Clause 19 does not specifically exclude salvage operations and expenditure incurred prior to the notice of abandonment from being considered as a relevant cost of repair in ascertaining whether the vessel is a CTL.

To conclude therefore whilst the Marine Insurance Act makes reference to "future" salvage operations, it does not specify the event from which future events are assessed.

Although there is English case authority to the effect that the event is the date of giving notice of abandonment to the underwriters, Arnold, argues that these are not decisions on this issue of law that form a binding precedent and accordingly the issue remains undecided under the English law.

In practice, the expense of a salvage operation is usually taken into consideration when calculating the costs of repairs to determine whether there is a CTL, irrespective of whether the expenditure was incurred before the notice of abandonment was given.

Conclusion

To conclude, the assured can include salvage expenses incurred prior to the notice of abandonment both as a cost of repair to assess whether there is a CTL and in addition, as a sue and labour expense under the provisions of ITC hulls or IVC hulls provided that the salvage services were provided under a contract.

(Paul Apostolis : Partner of Richards Butler)