After Somali pirates seized the chemical carrier Longchamp and demanded a US$6 million ransom, her owners negotiated for 51 days and paid US$1.85 million. That ransom was accepted as a general average expense, to be shared between ship and cargo. By a majority, the Supreme Court held that about US$160,000 in vessel-operating costs incurred during the negotiations was also shareable under Rule F of the York-Antwerp Rules 1974, as an extra expense incurred in place of the much larger ransom avoided.
On 29 January 2009 the chemical carrier Longchamp was boarded by armed pirates in the Gulf of Aden while carrying vinyl chloride monomer from Norway to Vietnam. The bill of lading provided that any general average was to be settled under the York-Antwerp Rules 1974. The pirates took the vessel to Eyl in Somalia and, on 30 January, demanded US$6 million. The owners negotiated through a crisis team. On 22 March they agreed a ransom of US$1.85 million. It was paid on 27 March, and the vessel was released the next day.
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What was already agreed, and what remained in dispute
General average is the maritime system under which a sacrifice or expense deliberately incurred to save a common adventure from peril is shared rateably among those whose property was at risk. The Rules, incorporated by contract, set out which losses qualify and how they are shared. Rule A covers an extraordinary sacrifice or expenditure intentionally and reasonably made for the common safety. Rule C allows only the direct consequence of a general average act, and excludes loss through delay, such as demurrage, and indirect loss. Rule F treats as general average an extra expense incurred in place of another expense that would have been allowable as general average, but only up to the amount of general average expense avoided.
It was accepted that the US$1.85 million ransom was allowable under Rule A, as were the costs of the specialist negotiator, Captain Ganz, and his advisers, NYA International. A media expense was no longer challenged. The dispute concerned the owners’ vessel-operating costs during the negotiation period, treated by Lord Neuberger as about US$160,000: crew wages, a contractual high-risk-area bonus, crew food and supplies, and bunkers. Cargo was valued at US$787,186 and the vessel at US$3,947,096, so cargo interests’ share of general average expenditure was 14.44 per cent.
How the dispute reached the Supreme Court
The average adjuster allowed the operating costs under Rule F. He treated the 51 days of negotiation as having saved US$4.15 million which would otherwise have been recoverable under Rule A. A majority of the Advisory Committee of the Association of Average Adjusters disagreed. Cargo interests, who had paid on account, sued for repayment of the relevant share. The deputy judge held that the costs were allowable. The Court of Appeal disagreed and held that Rule F did not apply.
The majority’s reading of Rule F
Lord Neuberger, with whom Lord Clarke, Lord Sumption and Lord Hodge agreed, rejected each of the cargo interests’ answers. The first was that the saved ransom was not allowable because it would not have been reasonable to pay the initial US$6 million. Both courts below had thought the owners had to prove that payment would have been reasonable, and both concluded that it would have been. Lord Neuberger found it unnecessary to decide whether that conclusion was open to the judge. He held that “allowable” in Rule F refers to an expense of a type that would be allowable, not to a particular quantum. The word points to Rule C, which is concerned with the type of loss, rather than to the reasonableness test in Rule A. Quantum is dealt with separately by the cap at the end of Rule F. The contrary reading would produce what the judgment calls the Hudson conundrum: an owner who spent money avoiding a reasonable payment could claim, but an owner who spent money avoiding a larger and unreasonable payment could not.
The Court distinguished the type of expense from the amount claimed. A ransom could be allowable in general average. Rule F then limited the substitute expenses to the amount saved. On these figures, the settlement and the costs of negotiating it together came well within what could reasonably have been paid.
The Court of Appeal had accepted a second argument: paying a reduced ransom was not an alternative course of action to paying the sum first demanded, but only a variant of the same course. Lord Neuberger rejected any requirement, read into Rule F, that the expense must achieve a different kind of solution from the normal one. Analysed as a Rule A claim for US$1.85 million and a Rule F claim for US$160,000 in place of the US$4.15 million reduction, the operating costs were an alternative to paying that extra ransom. The Rules are an international arrangement and should be read according to their unadorned language, without English technical qualifications. He also saw practical difficulty in deciding which variants count as alternative courses, and an inconsistency in allowing the negotiators’ negotiation expenses while excluding the vessel’s operating costs incurred for the same negotiations.
The test was objective. Negotiating down the demand took time and kept the ship and crew in operating costs that prompt settlement would have avoided. “Extra” described expenditure that would not otherwise have been incurred. Rule C’s exclusion of losses caused by delay did not defeat this separate claim for expenditure that reduced an allowable ransom.
Lord Sumption explained why the established practice of average adjusters did not settle the question. The parties had incorporated the York-Antwerp Rules. Rule F expressly allowed expenditure that successfully mitigated a larger general average expense.
Lord Mance’s dissent
Lord Mance accepted that negotiation expenses could in principle qualify under Rule F. In his view an owner could not calculate the saving from an opening demand it would have been unreasonable to pay. The evidence did not support paying US$6 million without negotiation, and the case had not been put on the basis of a smaller reasonable alternative. He would have dismissed the appeal.
Verdict: By four votes to one, the Court allowed the shipowners’ appeal and restored the deputy judge’s decision. The specified operating expenses incurred during negotiation were shareable in general average under Rule F.
