UK – LOF: In What Circumstances Can It Be Considered An Unreasonable Contract?
Introduction
In 2011, in one of a series of talks I gave to the London insurance market, I discussed whether or not, and if so, in what circumstances it may be possible for a hull insurer to argue that his assured shipowner may have acted unreasonably in signing an LOF in a casualty situation.
This issue is perhaps even more topical now in light of the new LOF Default Clause that the London hull market is intending to offer from the beginning of 2025.
To my knowledge it has never been decided in an English court in what circumstances an LOF agreement may be unreasonable, at least between an assured and his insurer. It was raised once in one of my cases, but the matter never went to Court. It was, I understand, the subject of litigation in two English cases in 2011 but there appears to be no reported judgment.
In the first of this series of five articles, and in order to offer some guidance on this issue, I will consider some authorities dealing with the basis on which a Master or shipowner is able to bind cargo interests to a salvage contract.
Agency of necessity
Prior to the enactment of the 1989 Salvage Convention, the master or owner of a vessel was able to bind a third-party cargo owner to a salvage contract, such as LOF, on the basis that the master or owner was acting as an agent of necessity.
The doctrine of agency of necessity developed in circumstances involving sea transit and recognised that a person may be bound by acts done on his behalf in an emergency.
There must, however, be an emergency and it must be impracticable to obtain proper instructions from the person it is intended to bind in sufficient time.
The person entering into the salvage contract must also act bona fide in the interests of the third party and not simply out of self-interest.
Interestingly, someone who acts from mixed motives may be able to recover if he acts primarily for the third party’s benefit and possibly even if he can show that the third party received a benefit from his acts (see The “Winson” [1982] AC 961- 962).
In The “Pa Mar” [1999] 1 Lloyd’s Rep 338, the master of a vessel in the Red Sea originally agreed an LOF 1990 contract with no specified port of redelivery. This was post the 1989 Salvage Convention, which did away with the concept of agency of necessity. We will come back to this. However, as there was no agreed port of redelivery in the LOF, the salvors and owners subsequently agreed the port of redelivery as Dubai/Colombo as optional ports of destination, later adding a further option, Singapore, the port to which the vessel was eventually towed. The cargo interests complained that this agreement to the named ports of redelivery was unreasonable.
Clarke J held that it did not necessarily follow from the fact that it was prudent to take towage assistance that it was also prudent to take salvage assistance. However, where no towage assistance was available on commercial terms, so that the vessel would be indefinitely immobilised without engaging a tug on LOF terms, then it was necessary to take salvage.
The issue as between the salvors and the cargo interests was the extent to which, if at all, the cargo interests were bound by the variation in the LOF when ports of redelivery were subsequently agreed with the owners. As I understand it, the cargo interests were not able to argue that agreeing the LOF in the first place was unreasonable due to the 1989 Salvage Convention. However, it is a different matter being bound to an LOF and then subsequently being bound to a variation of that contract or agreeing to a collateral contract.
Clarke J held that no reasonable shipowner with the interests of his underwriters and of cargo in mind would have committed the owners of cargo to an LOF contract involving a long tow on salvage terms without carrying out further investigations such as informing Class (as the Rules require) and asking both the Class and the Salvage Association surveyors to investigate the position. Accordingly, the salvors failed to discharge the burden of proving on the balance of probabilities that the vessel’s managers acted bona fide and reasonably in the interests of cargo by adding the Dubai/Colombo or Singapore options.
Quite what the position of the hull insurers in the “Pa Mar” was I do not know, but this judgment does provide interesting food for thought when considering the position between the assured shipowner and his hull underwriter in terms of the conditions for accepting salvage assistance and the terms thereon, even though this particular decision dealt with whether or not a salvor can impose a variation of an LOF contract on a cargo interest.
For further information, please contact:
Martin Hall, Partner, Hilldickinson
martin.hall@hilldickinson.com
