90% Salvage Security

1. Following a casualty in which salvage services were engaged, Salvors would seek adequate security prior to releasing the property involved in the adventure. We had earlier written on a similar topic, Salvage & General Average – Excessive Security, and are revisiting the subject of given that we had some enquires recently.
2. In a recent casualty, the Average Adjusters sought Salvage security of 90% of salved value either by way of ISU 1 Guarantees provided by Insurers who meet the Salvors credit ratings, a Lloyd’s Guarantee by a Guarantor residing in UK on the basis of the standard guarantee form issued by Lloyds or a cash deposit of 90% of the CIF value. Given the quantum of security sought, cargo interests would necessarily be concerned whether they should provide security and if so, should it be in the basis of CIF value? We take each in turn
   1. Quantum of security: The Salvors are entitled to seek security for their best arguable case. Should the quantum of security be excessive, cargo interests can certainly deny by approaching the courts. However, in the liner context, this is unlikely due to the multitude of cargo interests together with the potential values involved.
   2. CIF value: The next question is whether the valuation should be based on CIF value of the cargo?  One of the leading textbooks on Salvageⁱ, suggests that using CIF values would be a fair way to assess the cargo values in most cases. However, if there is a drop in the market value of the cargo due to the cargo being time sensitive or due to reaching the market in a particular season (say X-Mas / New Year Rush), it would be incorrect to base the values on CIF basis. In this case, we would suggest that the cargo interests negotiate with the Salvors to accept security basis the actual value of cargo upon termination of the salvage services.
   3. Cash deposit: We believe that any security demanded would generally be on the higher side to factor in the timelines for settlement and which may include in some interest accruals. The issue which we have is that while in theory cash deposits should earn similar interests, the fact is that this rarely happens. Additionally, if at the time of delivery, the cargo is found to be damaged, there may be delays encountered in the return of securityⁱⁱ. This being the case, as far as possible, it would be preferable to provide security by way of an insurance or Lloyd’s Guarantee.
   4. Should security be provided at all? Given that the quantum of security demanded is 90%, it may be that it would not make commercial sense to take delivery of the cargo. In this case, it may make sense to abandon the cargo instead of spending good money on goods which may not even realize the monies spent.
3. One of the ways to deal with risks such as these is to ensure that the cargo is insured with a reputable insurer and who will step in promptly to provide security for both Salvage and General Average. Subsequently, cargo insurers would engage lawyers / experts to negotiate with the Salvors / Owners (as the case may be) to try and bring the salvage reward / GA contributions to more manageable levels.
4. In conclusion, shipping of cargoes still remain a marine adventure such that
   1. it would be best to insure for marine risks including Salvage and General Average.
   2. If uninsured, cargo interests must objectively consider the values they would realize from their cargoes prior to providing any cash security demanded by Salvors.

^i. See 3-133 of Brice on Maritime Law of Salvage, V^th Edition which states “it would be very expensive and time-consuming to obtain an assessment of market value or of the cost of getting the cargo to a market in every case, particularly where there is a general cargo. It is often the practice to take the c.i.f. value as a means or basis of assessing the salved value of cargo; for in doing so it is known that the cargo interests were at least prepared to invest that sum in the property so that must be some indication of its value to them. This is not a hard and fast rule and may for example not be followed in the case of an homogenous cargo where rises and falls in market values are easy to ascertain”.
^ii. We have had an unfortunate experience on the return of s cash deposit in a GA and therefore do not wish a similar fate to befall to cargo interests unless this issue is agreed to.