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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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