Semco Salvage & Marine Pte Ltd v Lancer Navigation Co Ltd (Lancer Navigation Co Ltd v Semco Salvage and Marine Pte Ltd, Nagasaki Spirit, The)

Under article 14 of the International Convention on Salvage 1989, special compensation is a safety net subordinate to the traditional salvage reward. A fair rate for equipment and personnel under article 14.3 is a rate of expenditure. It includes direct costs, overheads and the additional cost of maintaining resources in readiness, but no remuneration or profit.

General overheads must be fairly attributed to the equipment and personnel actually and reasonably used. Relevant considerations include promptness, availability, readiness, efficiency and value. Profit may arise only through the enhancement permitted by article 14.2 where environmental damage has been prevented or minimised. Expenses are referable to the whole salvage operation, rather than only the period during which an environmental threat remains.

Following a collision in the Malacca Straits, the tanker Nagasaki Spirit released crude oil and caught fire. Semco undertook salvage under Lloyd's Open Form 1990, extinguished the fire, transferred the remaining cargo and delivered the tanker to Singapore. The contract incorporated article 14 of the International Convention on Salvage 1989.

The salvage arbitrator assessed article 14.3 expenses at rates containing an encouraging commercial element. The appeal arbitrator excluded profit and concluded that no special compensation exceeded the traditional salvage reward. Clarke J upheld that construction but remitted quantification issues: [1995] 2 Lloyd's Rep. 44. A majority of the Court of Appeal affirmed: [1996] 1 Lloyd's Rep. 449.

The principal issue was whether a fair rate under article 14.3 could include profit or remuneration. The contingent cross-appeal concerned whether recoverable expenses extended throughout the salvage operation or only while an environmental threat persisted.

1. Appeal and cross-appeal dismissed unanimously. Lord Mustill delivered the leading speech. Lord Mackay LC, Lord Goff, Lord Lloyd and Lord Hope agreed with it. Each appeal was dismissed with costs.

2. Per Lord Mustill, article 14.3 defines expenses rather than remuneration. A fair rate for equipment and personnel therefore includes direct expenditure, standing costs and overheads, including the additional cost of keeping salvage resources available. It contains no element of profit. The repeated references to expenses being incurred, and the contrast between compensation and reward, point to reimbursement rather than earnings.

3. The reference to article 13.1(h), (i) and (j) permits account to be taken of promptness, availability, use, readiness, efficiency and value when attributing overhead expenditure. The omission of article 13.1(a) to (g) prevents special compensation from being assessed on the generous basis applicable to a successful salvage reward. The assessment may use a broad brush, supported by the salvor's financial records.

4. Article 14 does not establish free-standing environmental salvage. Special compensation remains dependent on salvage operations undertaken for a vessel in distress. It is a safety net subordinate to the traditional reward under article 13. The possibility of recovering direct and standby costs, together with an enhancement where environmental damage is prevented or minimised, supplies the intended additional incentive.

5. Lord Mustill rejected Evans LJ's view that fair rate meant the commercial value of the services. In context, “rate” denotes the amount fairly attributable to the equipment and personnel used. It does not direct the tribunal to a market rate. Lord Lloyd separately emphasised that any profit element is confined to an enhancement under article 14.2.

6. The preparatory materials strongly confirmed this construction, although the contractual text was sufficiently clear without them. Applying Fothergill v Monarch Airlines Ltd [1981] AC 251, recourse to such materials is permissible where an international agreement is unclear.

7. On the contingent cross-appeal, Lord Mustill adopted Clarke J's reasons. Article 14 expenses are referable to the entirety of the salvage operation, not merely to periods during which the threat of environmental damage continues.

1. House of Lords: The appeal and contingent cross-appeal were dismissed unanimously. The Court of Appeal's disposition was left undisturbed.

2. Court of Appeal: By a majority, Staughton and Swinton Thomas LJJ agreed that a fair rate under article 14.3 included indirect expenses and availability costs but not remuneration or profit. Evans LJ dissented. Semco's appeal on that issue was dismissed: [1996] 1 Lloyd's Rep. 449.

3. Commercial Court: Clarke J upheld the appeal arbitrator's governing construction of article 14.3, but disagreed with aspects of the substituted figures and remitted quantification of the salvage award: [1995] 2 Lloyd's Rep. 44.

4. Appeal arbitrator: The traditional salvage reward was increased. Article 14.3 expenses were reduced to exclude profit, with the result that no special compensation was payable.

5. Salvage arbitrator: Expenses were assessed at rates containing an encouraging commercial element and enhanced under article 14.2. Special compensation exceeding the traditional salvage award was consequently awarded.