On 25 October 2017 the Supreme Court handed down judgment in the matter of Mitsui & Co Ltd & others v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG & anor, (“The Longchamp”) [2017] UKSC 86. Stephen Kenny QC and Richard Sarll acted on behalf of the successful appellants. 

The Supreme Court reversed the decision of the Court of Appeal ([2016] Bus. L.R. 1285) and restored the decision of the Deputy High Court Judge ([2015] 1 Lloyd’s Rep. 76). (The judge at first instance had been Stephen Hofmeyr QC, another member of 7 King’s Bench Walk.)

The proceedings concerned general average, the principle of maritime law by which parties to a maritime adventure share extraordinary sacrifice or expenditure, reasonably incurred for the common safety, rateably according to the values of their respective property at the time and place that the adventure ends. 

Since the earliest days of maritime trade, it has been established that payment of ransom to pirates may be allowed in general average, such that the other parties to the adventure, whose property has been saved, must contribute to it. This ancient principle has re-emerged and been applied in relation to the spate of Somali piracy which ravaged maritime trade between 2008 and 2012.

In these proceedings a slightly different issue was debated: whether daily operating expenses incurred whilst the amount of the ransom was being negotiated downwards (crew wages, high risk area bonuses, maintenance and bunkers) should be allowed in general average, in addition to the ransom. The Supreme Court has held that they may be so allowed.

Whilst the facts were specific to Somali piracy, the case gave rise to broader questions about the proper interpretation of Rule F of the York-Antwerp Rules. Rule F permits the allowance of expenses which, while not themselves qualifying as general average expense under the Rules, nevertheless result in the avoidance of such general average expense. Where the Rule applies, these expenses are “deemed to be” general average expenses, and fall to be shared as so-called “substituted expenses”. (The costs of towing laden vessels to destination and of forwarding cargo to destination are common examples.)

Rule F however appeared to create a potential conundrum. A shipowner will normally have incurred substituted expenses because that will have appeared the more economical course. The avoided course of action will have been rejected as less economical; and therefore an unreasonable course to pursue. Indeed, the more uneconomical the avoided course, the more reason to incur the substituted expenses. However, Rule F only permits the treatment of substituted expenses as general average when they have been “incurred in place of another expense which would have been allowable“. To be admitted in general average, expenditure (such as ransoms) must have been reasonably incurred to be covered by Rule A.  Could substituted expenses be admitted in general average under Rule F where incurred to avoid a general average expense which it would have been unreasonable to incur?

In the present case the shipowner claimed for his negotiation period expenses on the following basis. On Day 1 of the ransom negotiations, a ransom demand had been made in the amount ofUS$6m. Instead of paying that sum, negotiations were undertaken.  As a result of the negotiations – which meant the incurring of daily operating expenses – the ransom was reduced to US$1.85m. The expenses of negotiation were therefore, the shipowner contended, incurred in place of US$4.15m of general average expense, otherwise allowable in general average. 

This argument was resisted by cargo interests for a variety of reasons. It was contended that it would not have been reasonable to pay US$6m on Day 1, such that there was no scope for the operation of Rule F. It was also suggested that allowance of such expenses under Rule F was prohibited by Rule C which provides (in its second paragraph), “Loss or damage sustained by the ship or cargo through delay … shall not be admitted as general average”. The costs of conducting the negotiations amounted to loss by delay.

In the Supreme Court, the leading judgment was given by Lord Neuberger, with whom Lords Sumption, Clarke, and Hodge agreed. (A dissenting judgment was given by Lord Mance.)

In the judgment of Lord Neuberger, the answer to the apparent conundrum was as follows.  It was unnecessary for the shipowner to demonstrate that it would have been reasonable to accept the pirates’ initial demand. The reference in Rule F to “another expense which would have been allowable as general average” was not to an expense whose quantum was such that it would have qualified as general average under Rule A. Rather, the reference was to an expense of a nature which would have been allowable in general average (e.g. ransom). As for Rule C, Lord Neuberger held that Rule C only applies to loss consequential on a general average act defined by Rule A.  It does not apply to expenses covered by Rule F, which is concerned with sums expended in avoiding expense otherwise allowable as general average.

The decision marks the last word in a lengthy debate, in which the majority of the UK average adjusting community has sided against the allowance of negotiation period expenses. Such allowance is, however, by no means unprecedented. Until July 2014 the Spanish Commercial Code had expressly allowed in general average “the salaries of any member of the crew taken hostage by enemies, privateers or pirates, and the necessary expenses arising from his imprisonment”.  Similarly, until April 2013 the German Commercial Code had allowed the expense of maintenance of crew during such detention. On the basis that the incurring of such expenses inures to the benefit of all parties to the adventure, it seems fair that all parties should contribute.

To view the judgment please click here.