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General Average: piracy negotiation expenses allowed by the Supreme Court

15.11.2017 Maritime

Michael Volikas

Michael Volikas Partner

Frances Drain

Frances Drain Associate

Mitsui & Co v. Beteilingungsgesellschaft LPG (Longchamp) [2017] UKSC 68

The Supreme Court has allowed an appeal by shipowners and ruled that expenses incurred during the negotiation of a piracy ransom fall within Rule F of the York Antwerp Rules (YAR) as “substituted expenses” and are payable as General Average (GA).

The background facts

The Longchamp was hijacked on 29 January 2009 in the Gulf of Aden and the Master was ordered to divert the vessel to Eyl, Somalia. A ransom of US$6 million was demanded, which was countered by an initial offer of US$373,000 by the Owners, after which GA was declared on 3 February 2009. The crisis management team set up by the Owners had a target settlement figure of US$1.5 million and, after a negotiation period of 51 days, a ransom of US$1.85 million was agreed. During the negotiation period, the Owners incurred operating expenses, including in respect of bunkers, crew wages and maintenance, totalling around US$160,000. The recoverability of these expenses as GA and the interpretation of Rule F of the YAR became the focus of the proceedings.

The Average Adjuster included these negotiation expenses in the average adjustment. Cargo interests and their insurers brought a claim for the repayment of their GA contributions in respect of such expenses, which they contested were not properly payable as GA.

Lower court decisions

At first instance, the Commercial Court ruled against cargo interests and their insurers and found that the expenses incurred during the negotiation period were payable as GA under Rule F of YAR as “substituted expenses”.

Rule F of YAR provides as follows:

“Any additional expense incurred in place of another expense which would have been allowable as general average shall be deemed to be general average and so allowed without regard to the saving, if any, to other interests, but only up to the amount of the general average expense avoided.” (Emphasis added)

The Court of Appeal overruled the decision at first instance, finding that the negotiation period expenses were not payable as GA as they did not fall within Rule F of the YAR and could not be classified as “substituted expenses”. Cargo interests successfully argued that the negotiation expenses did not represent an alternative to the ransom and, therefore, were not “in place of another expense”. In their interpretation of Rule F of the YAR, the Court of Appeal said that there had to be a ‘real choice’ open to owners, which, in this case, there was not. It is worth noting that the Court of Appeal’s decision was in line with the views of the majority of the Advisory Committee of the Association of Average Adjusters UK, who also considered that the expenses had not been incurred in place of another as the only option available to the Owners was negotiation.

The Supreme Court decision

The Supreme Court considered six issues presented by cargo interests in opposition to the Owners’ appeal, on two of which the Supreme Court made an alternative ruling to the Court of Appeal. These two issues are discussed below.

The first issue

“It would not have been reasonable to accept the initial ransom demand”

Both the Commercial Court and the Court of Appeal found that the Owners had to (and did) establish that it would have been reasonable to accept the initial ransom demand to justify the argument that the negotiation period expenses fell within Rule F. The Supreme Court did not agree and said that, if followed, this would lead to “very odd results”.  The Supreme Court considered that the words in Rule F “another expense which would have been allowable as general average” were a reference to an expense of a type which would have been allowable under Rule A (under which a ransom would be recoverable in GA) and that the quantum of such expense should not be the deciding factor (Lord Mance dissented on this point and considered that both type and quantum should be relevant).

On this basis, the US$160,000 incurred in operating expenses fell within Rule F as it represented expenses incurred to avoid paying a type of expense, namely a ransom, which would have been an allowable expense. The only other requirement was that the expense in question did not exceed the cap in Rule F; that the actual expense does not exceed the general average expense avoided – this was satisfied in this case.

The second issue

“The reduction in ransom was not an alternative course of action”

The cargo interests won on this point at the Court of Appeal and successfully argued that the payment of a reduced ransom was not “an alternative course of action” to paying the initial ransom but instead was a “variant” and, therefore, Rule F was not engaged. The Supreme Court did not agree with the Court of Appeal’s logic on this point, finding that incurring US$160,000 in negotiation period expenses was an alternative to paying a higher ransom; “the former involved incurring vessel-operating expenses whereas the latter involved paying a ransom”.

The Supreme Court went on to comment that the notion of placing a qualifying requirement that Rule F expenses must be an “alternative course of action” in order to be payable was “very dangerous”. They placed emphasis on the international nature of the YAR and that due to the number of jurisdictions reliant upon them, a plain reading using ordinary language must be adopted.

Comment

This case is the first time that the English courts have considered Rule F of YAR and the outcome of the Supreme Court’s decision is likely to cause some reflection as to how it is to be applied in practice. It leaves open the issue of how, in practice, the cap imposed by Rule F will be applied and, in particular, how the hypothetical expense avoided is to be determined. Of more general note is the Supreme Court’s caution that: (i) in interpreting an international convention or treaty (with which it equated the YAR) it is not appropriate to read in words or qualifications to the language actually used; and (ii) care is needed in relying on what might be regarded as industry accepted practices and texts, commenting that “the law cannot be decided by what is understood among writers and practitioners in the relevant field”.

Article authors:

Michael Volikas Frances Drain