Operating expenses incurred during piracy negotiation period allowable in general average under York-Antwerp Rules
Mitsui & Co Ltd and Others v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG and another (The “Longchamp”) [25.10.17]
The Supreme Court was asked to consider whether, following the seizure of The Longchamp by Somali pirates, daily operating expenses, including bunkers and crew wages, incurred during the period of 51 days in which the pirates’ ransom demands were reduced from US$6 million to US$1.85 million, were allowable in general average (under the York-Antwerp Rules 1974).
Rule F admits expenses in general average which would not otherwise be allowable where they have been “incurred in place of another expense which would have been allowable as general average”. The traditional view of most practitioners has been to give these words a very narrow interpretation, requiring two alternative courses of action to be available and that the expense against which the substitution was being made was reasonable with regards to nature and quantum. The Court of Appeal had adopted this traditional approach.
Owners’ put forward the following arguments:
- The US$1.85 million ransom paid to the pirates for the release of the vessel was an expenditure which was “a general average act” within Rule A.
- The negotiation expenses claimed fell within the expression “expenses incurred” by the Owners within Rule F.
- Those expenses were “incurred in place of another expense”, namely the US$4.15 million saved as a result of the negotiations.
- Those expenses, being US$160,000, were less than the “general average expense avoided”.
- It followed from this that the negotiation period expenses were properly allowable under Rule F.
The Supreme Court held (4:1) that the expenses were recoverable. Rule F did not require that the expenses be incurred in pursuing an alternative course of action but that they be of a nature which would be allowable under Rule A. In any case, payment in response to the initial demand was a different course of action to negotiating. Dissenting, Lord Mance considered that the negotiation of the ransom was not an alternative course of action, and the expenses were not of a type and amount within Rule A, because the initial ransom demand was unreasonable.
In opposition to the views of the judge at first instance and the Court of Appeal, Lord Neuberger opined that it was not necessary that the “other expense” which would have been allowable as general average should have necessarily qualified as a general average expense under Rule A. With regards to Rule F, it was his view that “another expense which would have been allowable as general average” was reference to an expense which was only of a nature which would have been allowable. This interpretation of the Rules is contrary to longstanding adjusting practice, which is that for a substituted expense to be allowable under Rule F, the expense being substituted must be “reasonable” both in nature of the expense and with regards to quantum.
The final sentence of Rule F however provides a limit on the amount of the substituted expense to be allowed in so far as it is an amount “up to the amount of the general average expense avoided”. Where a Rule F substitution is then to be considered, it is necessary to determine whether the general average expense avoided is a reasonable course of action which is capable of being followed and is of a reasonable amount.
It is important to note that this decision may not only be of relevance in piracy cases where a ransom is negotiated (as is commonly the case) and operating costs continue to be incurred by the Owners. If allowed to do so, this may open the floodgates for the allowance of a multitude of other costs as substituted expenses in instances, for example, where the vessel is detained by third party contractors whilst a salvage award is negotiated.
As the Supreme Court recognised, the decision goes against what many adjusters, including the Advisory Panel of the Association of Average Adjusters, considered to be the proper application of Rule F. It is likely to lead to significant factual disputes in future cases. It will be interesting to see whether amendments to Rule F will be proposed in light of the decision.