Whether Daily Vessel Operating Expenses Of Shipowners Incurred While Negotiating To Reduce Ransom Demands By Pirates Constitute General Average

Whether Daily Vessel Operating Expenses Of Shipowners Incurred While Negotiating To Reduce Ransom Demands By Pirates Constitute General Average


Date Posted: 2020-01-23 19:32:02

Introduction

The Supreme Court of the United Kingdom had occasion in, Mitsui & Co. Ltd and ors vs Beteiligungsgesellschaft LPG Tankerflotte MBH & another (the Longchamp), to decided in 2018 upon an interesting issue raised with regard to general average. The issue raised was whether the daily vessel-operating expenses of shipowners while they were negotiating to reduce the ransom demands of pirates should be allowed in general average i.e. whether those expenses should be shared proportionately between all those whose property and entitlements were imperilled as a result of the seizure or whether they must be borne by the shipowner alone. The Supreme Court found that such expenses were indeed general average.

Background and Decision

On the 29 of January 2009, the chemical carrier MV Longchamp (the vessel) was transiting the Gulf of Aden on a voyage from Rafnes, Norway, to Go Dau, Vietnam, laden with a cargo of 2,728.732 metric tons of Vinyl Chloride Monomer in bulk (the cargo). The cargo was carried on a bill of lading dated 6 January 2009 (the Bill of Lading) which stated on its face that General Average, if any shall be settled in accordance with the York-Antwerp Rules, 1974. It is common knowledge that the York-Antwerp Rules, 1974 (the Rules), although internationally agreed between relevant expert and interested bodies, are not the subject of English legislation or international convention, and they derive legal force only through contractual incorporation, such as was done in the Bill of Lading.

At 0640 on the same day, seven heavily armed pirates boarded the vessel. The pirates commanded the master to alter course towards the bay of Eyl, Somalia, where she arrived and dropped anchor at 1036 on 31 January 2009. At 1405 on 30 January2009 a negotiator for the pirates boarded the vessel and demanded a ransom of US$6m. The vessels owners (the owners) had meanwhile formed a crisis management team who had set a target settlement figure of US$1.5m. On 2 February 2009 an initial offer of US$373,000 was put to the pirates. Negotiations between the pirates negotiators and owners crisis management team continued over the following seven weeks with various offers and counter-offers being made.

Eventually on 22 March 2009, after negotiating for a period of 51 days, a ransom was agreed upon in the sum of US$1.85m. On 27 March 2009 the ransom money was delivered by being dropped at sea. At 0736 on 28 March 2009 the pirates disembarked and at 0800 that day the vessel continued on her voyage.

The parties in the dispute were in agreement that the US$1.85m ransom payment could itself be allowed as General Average under Rule A o the Rules which reads:

There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.

It was also accepted that the costs and expenses of the negotiator in relation to the ransom, Captain Ganz, and the costs and expenses of his special advisers, NYA International, are allowable. There was a dispute about the allowability of a sum of around US$20,640 in respect of media expenses but that is no longer challenged by the cargo interests.

The essential issue on the appeal was whether the vessel-operating expenses incurred during the period of negotiation (the negotiation period expenses) were allowable in general average under Rule F which reads as follows:

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.

The sums for the negotiation period expenses were made up as follows:

essential issue on the appeal was whether the vessel-operating expenses incurred during the period of negotiation (the negotiation period expenses) were allowable in general average under Rule F which reads as follows:

1. US$75,724.80 for crew wages paid to the crew.

2. US$70,058.70 for high risk area bonus paid to the crew by reason of the fact that the vessel was detained within the Gulf of Aden. These are additional wages which the crew were entitled to under their contract of employment whilst at sea within a high risk area.

3. US$3,315 for crew maintenance (i.e. food and supplies).

4. US$11,115.45 for bunkers consumed.

The average adjuster considered that the negotiation period expenses were allowable under Rule F on the basis that they were incurred during a negotiation period of about 51 days which enabled an amount of US$4,150,000 [to be] saved in the common interest of all property owners concerned, which would otherwise have been recoverable as per Rule A. The cargo was valued at destination at US$787,186 and the value of the vessel was assessed at US$3,947,096; so cargo interests were liable for 14.44% of the total general average expenditure. Following publication of the adjustment, the cargo interests requested and obtained a report (the Report) from the Advisory Committee of the Association of Average Adjusters. The Report set out the facts in considerable detail, and concluded, by a majority of four members to one, that the negotiation period expenses did not fall within Rule F.

Having already previously made payments on an account of general average, but following the publication of the adjustment, the cargo interests issued proceedings challenging (in accordance with the Report) the adjusters conclusion that the negotiation period expenses fell within Rule F, and seeking an appropriate repayment.

The owners arguments were as follows: First, it was rightly common ground that the US$1.85m ransom paid to the pirates for the release of the vessel was expenditure which was a general average act within Rule A. Secondly, the negotiation period expenses claimed fell within the expression expense incurred by the owners within Rule F. Thirdly, those expenses were incurred in place of another expense, namely the US$4.15m saved as a result of the negotiations. Fourthly, those expenses, being US$160,000, were less than the general average expense avoided, namely the US$4.15m. Fifthly, it follows from this that the negotiation period expenses are properly allowable under Rule F.

The cargo interests on their part contended as follows: First the ransom saved was not allowable. Second, the ransom saved was not another expense. Third, the negotiation period expenses were not incurred with the necessary intention. Fourth, the negotiation period expenses were not extra expense. Fifth, the negotiation period expenses would or may have been incurred anyway. Sixth, the negotiation period expenses were irrecoverable by virtue of Rule C of the Rules or (by implication) Rule XI of the Rules. Rule C of the Rules reads:

Only such losses, damages or expenses which are the direct consequence of the general average act shall be allowed as general average.

Loss or damage sustained by the ship or cargo through delay, whether on the voyage or subsequently, such as demurrage, and any indirect loss whatsoever, such as loss of market, shall not be admitted as general average.

The Supreme Court of the United Kingdom considering all the arguments, by a majority found the negotiation period expenses to be general average.

With regard to the first contention by the cargo interests, i.e. it would not have been reasonable for the owners to have accepted the pirates initial ransom demand for US$6m, the Supreme Court of the United Kingdom disagreed with the finding of the High Court of the United Kingdom and the Court of Appeal of the United Kingdom that the owners had to establish that it would be reasonable to accept the pirates initial demand in order to justify the contention that the negotiation period expenses were allowable under Rule F.

With regard to the second contention by the cargo interests, i.e. the negotiation period expenses do not fall within Rule F of the Rules, because the payment of a reduced ransom of US$1.85m was not an alternative course of action to the payment of the ransom originally demanded, the Supreme Court of the United Kingdom found that even though this was the prevailing view among the writers of the subject, the same was not supported by the clear language of Rule F of the Rules.

With regard to the cargo interests third contention i.e. in order to be recoverable under Rule F of the Rules, the negotiation period expenses must be shown to have been consciously and intentionally incurred by the owners, and there was no evidence that the owners or their agent had consciously decided to incur those expenses in order to reduce the ransom payable to the pirates, the Supreme Court of the United Kingdom did not accept the contention, arguing that the question whether one expense has been incurred in place of another expense must be assessed objectively and since the negotiations resulted in the ransom being reduced, it followed that the expenses incurred as a result of the said negotiations were incurred in place of the US$4.15m saved.

With regard to the cargo interests fourth contention, i.e. the negotiation period expenses were not extra expense within the meaning of that word in Rule F of the Rules, based on the proposition that, in order to qualify as extra expense, an expense would have to be of a nature which would not normally have been incurred in response to the peril threatening the adventure, the Supreme Court of the United Kingdom saw no reason for giving the word extra such a restrictive meaning, arguing firstly, it was not its natural contextual meaning and secondly, the natural meaning of the word extra was supported by the contrast with the word extraordinary in Rule A of the Rules.

With regard to cargo interests fifth contention i.e. the delay which led to the negotiation period expenses may well have occurred even if the owners had agreed to the pirates initial demand of US$6m, the Supreme Court of the United Kingdom refused to interfere with the finding of the judge below to the effect that it was more likely than not that the vessel and cargo would have been released promptly if the US$6m ransom demand had been accepted and paid.

With regard to cargo interests fifth contention i.e. as Rule C of the Rules excludes from general average expenditure which is an indirect loss including demurrage, and/or because Rule XI of the Rules includes crew wages and maintenance where it applies, the claim by the owners should fail, the Supreme Court of the United Kingdom found that Rule C of the Rules applies to expenses and other sums claimed by way of general average as consequences of a general average act (as defined by Rule A of the Rules) and it does not apply to expenses covered by Rule F of the Rules, which is concerned with sums which are expended or lost in mitigating or avoiding the sums which would otherwise be claimable as general average.

Our Comments

General average refers to the system of maritime law by which sacrifices of property made, and loss and expenditure incurred, as a direct result of actions taken for the purpose of preserving a common maritime adventure from peril are rateably shared between all those whose property is at risk in the adventure and the Rules along with the other versions of the York Antwerp Rules, with the first set (under that name) propounded in 1877, and the latest version agreed in 2016, are designed to achieve uniformity in ascertaining which losses fall within the principle, in determining the method of calculating those losses, and in deciding how they are to be shared.

This was the first time an English court had occasion to interpret the meaning of Rule F of the Rules and the Supreme Court of the United Kingdom agreed that given that the rules represented an international arrangement, it was particularly inappropriate to adopt an approach to their interpretation which involved reading in any words or qualification. Section 4 (2) of the Kenya Judicature Act provides that the admiralty jurisdiction of the High Court of Kenya shall be exercisable over and in respect of the same persons, things and matters and in the same manner and to the same extent and in accordance with the same procedure as in the High Court in England, and shall be exercised in conformity with international laws and the comity of nations. Thus, this decision is, from an admiralty perspective, very important to Kenya, because a Kenyan court has never had occasion to determine such a question and the ruling of the Supreme Court of the United Kingdom will be of great persuasive value.

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