On 19 September 1992, around 2320 hours, the vessel Nagasaki Spirit, which was laden with crude oil, collided with the container vessel Ocean Blessing in the northern part of the Malacca Straits. As a result of the collision, about 12,000 tonnes of Nagasaki Spirit’s cargo of crude oil was spilled into the sea and caught fire. Both the ships were engulfed by fire. Only two members of the crew of the Nagasaki Spirit survived. All of the crew of the Ocean Blessing perished.

At 0900 hours on 20 September 1992, Semco Salvage & Marine Pte Ltd (Semco) agreed to salve the Nagasaki Spirit and its cargo on the terms of the Lloyd’s Open Form 1990 (LOF 1990) which incorporates arts 13 and 14 of the International Convention on Salvage 1989 (Salvage Convention 1989). Later the same day, Semco agreed to salve the Ocean Blessing on the same terms. Semco mobilised a number of tugs and successfully extinguished the fire on the Nagasaki Spirit on 26 September 1992. That same day, the Malaysian police expressed concern that the casualty might cause pollution and ordered Semco to tow the Nagasaki Spirit away from the Malaysian coast. From 3-24 October 1992, Nagasaki Spirit was anchored off Belawan in Indonesia. On 22 October, Indonesian authorities gave Semco permission for a ship-to-ship transfer of the cargo remaining on board the Nagasaki Spirit. Following the transfer of the cargo the Nagasaki Spirit was towed to Singapore and redelivered to Lancer Navigation Co Ltd (owners) on 12 December 1992.

The salvage claim was referred to arbitration. Semco and the owners appealed the arbitrator’s award. At first instance, Clarke J held that the expression ‘fair rate’ in art 14.3 of the Salvage Convention 1989 meant a fair rate of expenses and not a fair rate of remuneration and therefore no profit element was included; and that the salvor was entitled to special compensation in respect of the whole period of the salvage service. Semco appealed on the issue of the construction of ‘fair rate’ and the owners cross-appealed on the period for which a salvor was entitled to special compensation. The Court of Appeal dismissed both appeals, upheld Clarke J’s decision and granted leave to Semco to appeal and the owners to cross-appeal to the House of Lords.

Held: Appeal and cross-appeal dismissed.

The Salvage Convention 1989 came into force July 1996 and is given the force of law in the United Kingdom by s 224 of the Merchant Shipping Act 1995. The Act did not affect rights and liabilities arising out of operations arising before 1 January 1996. Therefore this claim is a private law claim based on LOF 1990. The Salvage Convention 1989 is relevant because arts 1.a-e, 8, 13.1-3 and 14 are incorporated into LOF 1990.

Article 1.d defines damage to the environment as 'substantial physical damage to human health or to marine life or resources in coastal or inland waters … caused by pollution, contamination, fire, explosion or similar major incidents'. Article 1.e provides that payment is 'any reward, remuneration or compensation due under this Convention'.

Article 8 sets out the duties of the salvor and of the owner and master. Article 12 provides that salvage operations which have had a 'useful result' give right to reward. Article 13 provides the criteria for fixing the reward.

Article 14 provides the terms and conditions required for the payment of special compensation. Where a 'salvor has carried out salvage operations in respect of a vessel which by itself or its cargo has threatened damage to the environment and has failed to earn a reward under article 13 at least equivalent to the special compensation in accordance with [art 14], he shall be entitled to special compensation from the shipowner equivalent to his expenses'. The principal issue in the appeal concerned the definition of 'expenses' in art 14.3 and in particular the aspect of expenses comprising 'a fair rate for equipment and personnel actually and reasonably used' and whether this should include an element of profit.

The concept of 'expenses' permeates the first three paragraphs of art 14. The ordinary meaning of 'expenses' is the amount disbursed or borne rather than earned as profits. It is significant that art 14.2 makes use of the expression 'expenses incurred' by the salvor. In ordinary speech, the salvor would not incur something which yields a profit. This is reinforced by the description of recovery as 'compensation' which has a flavour of reimbursement.

Measuring the account of the text against the aims of the Salvage Convention 1989 does not mean that profitability must be written into expenses. Salvors do not need a profit element as a further incentive. Under the former regime, the undertaking of salvage services was a stark gamble: no cure - no pay. This is no longer the case as, if traditional salvage yields little or nothing under art 13, the salvor, in the event of success in protecting the environment will be awarded its direct costs and indirect standby costs. Lack of success no longer means no pay.

Furthermore, the drafters of the Salvage Convention 1989 did not choose to create an entirely new and distinct category of environmental salvage. Although art 14 undoubtedly is concerned to encourage salvors to keep vessels readily available, this is still for the purposes of a salvage for which the primary incentive is a traditional salvage award. The remedy under art 14 is subordinate to the reward under art 13 and the function of art 14 should not be confused by giving it a character to closely akin to salvage. Finally, the travaux préparatoires strongly reinforce the interpretation of art 14 as linked to salvage and not a stand-alone regime.

In relation to the cross-appeal by the owners as to the question whether the expenses comprise those incurred during the whole of the salvage operation or only during the times when a threat to the environment is still in existence, Clarke J and the Court of Appeal preferred the former opinion. The House of Lords adopted the reasons given by Clarke J and dismissed the cross-appeal.