In considering the operation of Rule F of the 1974 York Antwerp Rules (the YAR) the Court of Appeal held that operating expenses incurred during time spent negotiating a ransom with pirates were not allowable in General Average (GA) as 'substituted expense.' but were allowable under Rule A.

Mitsui & Co Ltd and Others v Beteiligungsgesellschaft LPG Tankerflotte mbH & Co KG and Another (The "Longchamp") [2016] EWCA Civ 708

Facts

The chemical carrier "Longchamp" was hijacked by pirates during her passage through the Gulf of Aden. Pirates made a ransom demand of US$6 million which was rejected by the vessel's Owners. Thereafter negotiation took place between the pirates' negotiator and professional negotiators hired by Owners. After a period of 51 days a ransom payment of US$1.85 million was agreed, and five days later it was delivered to the pirates. The pirates released the vessel the following day.

The vessel's cargo was carried pursuant to a bill of lading which incorporated the YAR. During the vessel's captivity Owners declared GA. There was no dispute that the ransom payment was a GA expense allowable as reasonably incurred under Rule A. The GA adjustment determined that, in addition, (i) Owners' operating costs (wages, bonuses, maintenance and bunkers consumed) incurred during the vessel's detention and, (ii) professional media response expenses incurred to facilitate negotiations, were allowable as substituted expenses under Rule F. Cargo interests contested the decisions on operating costs and media response expenses. The decision on operating costs was upheld at first instance where Stephen Hoffmeyr QC also held the media response expenses should be allowable under Rule A. Cargo interests appealed.

Court of Appeal Judgment

Held:

1. That payment of a ransom on demand was not to be regarded as an alternative course of action. There was only one road open to Owners, namely negotiation. Accordingly, the appeal on the operating expenses was allowed as these were not alternative or substituted expenses for the purposes of Rule F. They were ordinary operating costs incurred by reason of delay.
   
   The Court of Appeal also held that had Owners paid the ransom demand in full as soon as it was made, this would not have been unreasonable and the payment would have been allowed in GA, thereby saving Owners the delay expenses; the justification being that human lives, ship and cargo were at risk. Had the Court of Appeal held otherwise, one can imagine parties to future GA proceedings seeking to avoid contribution to ransom payments as a GA expense under YAR Rule A by arguing that Owners should have negotiated a better deal and that the payment made was "unreasonable."
2. That the media response costs were allowed under Rule A, given that Owners' purpose in incurring those costs was to secure the release of the vessel and cargo as cheaply and efficiently as possible. Provided that the expense was, at least in part, incurred to preserve the property from peril that was sufficient to be allowable under Rule A. Even if cargo interests were right to contend that there were two other purposes, namely to protect the corporate image of Owners and to reduce the possibility of litigation by the crew or their families, that would make no difference. There was no reason in principle for requiring preservation of property to be either the sole or only effective purpose or indeed the predominant and most effective purpose.

Comments

This is the first English authority to consider the operation of Rule F and the principle of substituted expenses.