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25 Oct 2017

Supreme Court rules ransom negotiation expenses recoverable in general average


The Supreme Court has today vindicated the position taken by the shipowners in a claim arising out of the seizure of the MV Longchamp by Somali pirates, Mitsui & Co Ltd v Beteiligungsgesselschaft LPG Tankerflotte MBH & Co KG. The successful shipowners, represented by Stephenson Harwood partner Duncan McDonald and associate Mary Dodwell, claimed for general average contributions under Rule F of the York-Antwerp Rules 1974 in relation to the vessel’s operating expenses incurred during the period of negotiation of a ransom with the pirates. Rule F allows the recovery of "substituted" expenses, being those incurred "in place" of another expense where that other expense would itself have been allowable in GA.

The pirates demanded a $6 million ransom. Following a period of negotiation, this was reduced to $1.85 million. The issue was whether expenses incurred during the 51 days of negotiations (namely crew wages and high risk bonus, maintenance, and bunkers consumed) were recoverable in GA. The shipowners argued that these expenses were incurred in place of the $4.15 million ransom which was saved as a result of the negotiations and accordingly were allowable.

The Judge at first instance had upheld the adjustment of the average adjusters (Stichling Hahn Hilbrich) and held that the negotiation period expenses were allowable under Rule F. Had the ransom been paid in full, it would have been recoverable in GA, so those expenses had been incurred in place of paying a higher ransom.

On appeal, the Court of Appeal agreed with the High Court that payment of the first sum demanded would have been a reasonable course of action. However, it held that Rule F was not engaged and the shipowners therefore could not recover the negotiation period expenses under the adjustment. It decided that Rule F required that there be an alternative course of action available to the shipowners which (if adopted) would have involved expenditure which could properly be charged to GA. The Court of Appeal concluded that there was no true alternative course of action available to the shipowners because from the point of view of Rule F there was no difference between paying immediately the first ransom demanded and paying a reduced amount after negotiation. Whilst the outcomes were different both scenarios “fundamentally involve doing the same thing” – i.e. engaging in a negotiation process. Rule F therefore was not engaged and the negotiation expenses were not allowable. The shipowners appealed.

The Supreme Court today allowed the appeal, endorsed the approach taken by the adjusters, and restored the decision of Deputy Judge Stephen Hofmeyr QC.

Lord Neuberger gave the main judgment, holding that for an expense to be allowable, the concern was only with whether it was an "extra expense incurred in place of another …”. On this basis the incurring of the $160,000 negotiation period expenses did represent an alternative course of action to paying the pirates' initial ransom demand. They therefore represented extra expense incurred in place of paying an additional US$4.15 million (i.e. the ransom saving). The Court of Appeal’s decision on this point was thus overturned.

General average is a technical area of practice and there are very few Court decisions on it. The arguments in the present case were complex.


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