In brief - Ransom negotiation period expenses allowable under Rule F of York Antwerp Rules

In Mitsui & Co Ltd and others v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG and another [2017] UKSC 68, the UK Supreme Court has reversed the Court of Appeal's judgment and restored the first instance judgment, finding that negotiation period expenses can be deemed to be general average expenses.  

Were vessel's operating expenses during ransom negotiating period allowable under Rule F of York Antwerp Rules?

The chemical carrier "Longchamp" was boarded by pirates while transiting the Gulf of Aden on 29 January 2009. A ransom was negotiated on 22 March 2009 (51 days later). It was paid on 27 March and on 28 March the pirates disembarked and the vessel proceeded on her voyage. 
A ransom of US$1.85 million was paid to the pirates. It was agreed between all parties that the ransom was a General Average payment. The issue which gave rise to proceedings which have now come to an end in the Supreme Court of the United Kingdom was whether the vessel's operating expenses during the negotiating period were allowable under Rule F of the York Antwerp Rules 1974
Rule F reads, "Any extra 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."
Rule F has remained unchanged in both the 2004 and the 2016 revisions of the York Antwerp Rules. 
The expenses which were in issue were:
  • Crew wages - US$75,724
  • A hire risk bonus paid to the crew - US$70,058.70
  • Crew provisions - US$3,315
  • Bunkers - US$11,115.45 

Court of Appeal overturns decision that expenses were recoverable as substituted expenses in general average and were within Rule F

The history, briefly, of this litigation was that:
i. The average adjuster allowed the expenses. 
ii. The Advisory Committee of the Association of Average Adjusters said that the expenses did not fall within Rule F. 
iii. Deputy High Court Judge Stephen Hofmeyer QC held that the expenses were recoverable as substituted expenses in general average and were within Rule F. (We reported on this judgment in the article Does General Average cover piracy expenses? written by Andrew Tulloch in January 2015). 
iv. This decision was overturned on appeal by the Court of Appeal (as we reported in Transport & Logistics News in September 2016). The Court of Appeal's decision was premised on the perceived requirement that in order to come within Rule F there needed to be a real choice made by the owner and in this case there was no choice. There was only ever one course of action available, that was to pay a ransom. A ransom would be paid whether it was at the beginning of the negotiations or later and was going to take place in any event. The Court of Appeal's decision was also thought to be consistent with such expenses which are incurred during a salvage negotiation. Whether a payment demanded by the salvors is made immediately or after being negotiated downwards, it was considered to be like a ransom payment and was one continuing course of action. 
Other examples of substituted expenses which occur are much more obviously categorised as substituted expenses. They include such activities as towing a laden vessel to destination or forwarding the cargo by some other means to destination. The cargo interests had claimed that the expenditure was not incurred in place of the expenses of the ransom payment but was additional to it. The first instance judge had held that the expenditure was incurred in substitution for the saving in ransom, that is the difference between the ransom initially demanded and the ransom which was ultimately paid. 

UK Supreme Court reverses Court of Appeal's judgment

The Supreme Court has now reversed the Court of Appeal's judgment and restored the decision of the first instance judge. The leading judgment has been given by Lord Neuberger with whom Lords Sumption, Clarke and Hodge agreed. Lord Mance dissented. 
In reaching his decision, Lord Neuberger differed from the first instance and Court of Appeal judges in circumstances which he explained (at [19]) as follows:
Where I part company with the Judge and the Court of Appeal is in relation to their view that the reference in Rule F to "another expense which would have been allowable as general average" is to an expense whose quantum is such that it would have qualified as a claim under Rule A. In my opinion, the reference to an "expense which would have been allowable" is an expense of a nature which would have been allowable. First, the word "allowable" in Rule F naturally takes one to Rule C, where the similar word "allowed" is used, rather than Rule A, where there is no reference to anything being "allowed". …Unlike Rule A, Rule C is concerned purely with the type of expense and not with quantum. …the interpretation I favour produces an entirely rational outcome, whenever an expense is incurred to avoid a sum of a type which would be allowable, that expense would be allowable, but only to the extent that it does not exceed the sum avoided.
Lord Neuberger then explained (at [26]) what he saw as the appropriate analysis as follows:
It appears to me that (ignoring other sums for present purposes) the right analysis of the owners' claim is that it is for (i) US$1.85m under Rule A and (ii) US$160,000 under Rule F, on the basis that (i) the US$1.85m, as a reasonable sum paid to ransom the vessel and the cargo, is admittedly within Rule A, and (ii) the US$160,000, as negotiation period expenses, represents "extra expense incurred in place of" the US$4.15m, the amount by which the ransom was reduced. On that basis, as I see it, the incurring of the US$160,000 did represent an alternative course of action, in the sense that the cargo interests used that expression, from the payment of the US$4.15m, the former involved incurring vessel-operating expenses whereas the latter involved paying a ransom.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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