Salvage in China – apportioning the cost of salvage between shipowners and cargo interests

The recent decision of the Chinese Supreme People’s (SCP) Court in MV Archangelos Gabriel¹ has brought the issue on who is liable to salvors for salvage fees in a pre-fixed tariff rates salvage contract to the fore.

In finding for the salvors, the SCP held that a shipowner is solely liable to the salvor for salvage fees in Chinese-law governed fixed rates salvage contracts. Although case law is not legally binding in China, the decision is likely to stand unless the SCP issues a guidance note to overturn its own decision on this point of law in the future.

Facts - a prefixed tariff rates salvage

MV Archangelos Gabriel is an oil tanker owned by Archangelos Investments (Shipowner). On 12 August 2011, on its voyage from Hong Kong to Qinzhou, the Archangelos Gabriel grounded with a cargo of 54,580 mt Cabinda crude oil on board in the Qiongzhou Strait, China. Immediately after the grounding, the Shipowner negotiated and contracted with the local China Nanhai Rescue Bureau (Salvor) for salvage services. It was agreed that the services were to be paid on pre-fixed tariff rates, regardless of the outcome of the salvage operation.

The salvage was successful. The Salvor claimed a total of approximately US$1.05 million for their services which they demanded from the Shipowner. The Shipowner disputed the calculation of the salvage fees and, in addition, contended that cargo interests should share liability for the salvage fees on a pro rata basis in proportion to their respective salved values. The Salvor disagreed, submitting that the Shipowner was the sole contracting party in the salvage contract and was liable to pay the full amount of the salvage fees, notwithstanding that the ship’s salved value represented only 38.85 per cent of the total salved value.

Judgements - who is liable for the salvage fees

The dispute was heard at first instance before the Guangzhou Maritime Court (GMC). It was common ground that the salvage contract was governed by Chinese law and that it was a pre-fixed tariff rates basis contract.

The Shipowner submitted that it was only liable for its proportion of the salvage fees, and made an application to join cargo interests as a third party to the proceedings on the basis that the ship and the cargo were in common danger and general average contribution should be allowed for the salvage fees. The application was rejected by the GMC on the grounds that the cause of action in the case did not derive from general average but from a pre-fixed tariff rates salvage contract under which general average contributions are not required. Applying the Chinese Maritime Code (CMC) which reproduces the relevant sections of the Salvage Convention 1989, the GMC held that the Shipowner was liable to the Salvor for the entire salvage fees, but adjusted the pre-fixed tariff rates by taking into account the reward factors set out in the CMC for salvage reward that apply in a “no-cure no-pay” salvage.

The Shipowner appealed the decision before the Guangdong Provincial Higher People’s Court (GPHPC), seeking an order that they were only liable for 38.85 per cent of the adjusted salvage fees. They relied upon Article 183 of the CMC which states that “the salvage reward shall be paid by the owners of the salved ship and other property in accordance with the respective proportions which the salved values of the ship and other property bear to the total salved value”. The Salvor counter-argued that Article 183 purports to deal with a “no cure no pay” salvage and has no application to this case.

The GPHPC, having considered the wording of Article 183 of CMC, held that it did apply in this case. In their view, the CMC did not draw a distinction between a “no-cure no-pay” salvage and a pre-fixed tariff rates salvage. Salvage fee is a form of salvage reward which falls within the scope of Article 183. In either situation, the salvage reward/fees should be apportioned between the shipowner and the cargo interests according to their respective salved values. The court therefore allowed the appeal.

The Salvors did not accept the GPHPC decision and applied to the SPC for a retrial. The key issues argued before the SPC were (i) what is the nature of the salvage contract in question; and (ii) whether Article 183 of the CMC applies to it.

The SPC held that both the first instance court and the appellate court applied the law incorrectly. The SPC held that CMC provisions on salvage only apply to a “no cure no pay” salvage contract. For pre-fixed tariff rates salvage contracts, general contract law principles and provisions apply. Payment of salvage fees is not linked to salved values. In particular, Article 183 of the CMC does not apply for the purpose of allocating responsibility between shipowners and other property interests for salvage fees in such contracts.

The SPC also commented that the first instance court was wrong to adjust the pre-fixed tariff rates by applying the assessing factors used for “no cure no pay” salvage reward in the CMC. However, as the salvor did not object to the adjustment, the court decided to maintain this aspect of the decision of the first instance court.

Comments

Salvage in China can be complicated when the governing law is Chinese law. Many Chinese salvage companies do not contract on the otherwise widely accepted and used Lloyd’s Open Form (LOF) because they object to the “no cure no pay” principle embedded in LOF. The SPC decision clarifies that, as a matter of Chinese law, in a pre-fixed tariff rates salvage contract, shipowners as the sole contracting party are liable for all of the salvage fees.

The decision of the SPC is not dissimilar to the position under English law. Under  English law, the liabilities of ship and cargo interests to pay salvage are several.  However, if the salvors and the master of the salved ship enter into an agreement which fixes the amount of the reward, ship interests cannot subsequently plead against the salvor that he is only liable for salvage of his own property. The decision in MV Archangelos Gabriel confirms that this is also the position under Chinese law, although their reasoning behind the decision does not reflect English law.

Given the reluctance of Chinese salvors to engage on LOF terms, and in order to avoid full liability for salvage fees when contracting on pre-fixed tariff rates, shipowners should consider having cargo owners sign the pre-fixed tariff rates salvage agreement as an additional contracting party who will be severally liable to pay salvage. It is important to note that an Average Guarantee or Average Bond do not achieve the same effect as they serve different purposes.

This dilemma that shipowners find themselves in is not new. As a matter of English law, where a shipowner voluntarily agrees with salvors to accept liability to discharge the liability of otherwise contributing interests, he will not be assumed to forego his normal rights and remedies against those interests in the absence of clear and binding reasons. It follows that a shipowner will be entitled to exercise a lien over cargo until he is reimbursed or receives security for his claim. This position has not been tested in China although there is no apparent legal or policy consideration which would oblige a Chinese court to take a different approach.  It follows that until further guidance is received from the SPC, shipowners should not release cargo until they have received payment or security from cargo interests for their proportion of salvage fees.