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Web alert: are the expenses during negotiation in a piracy case allowable in general average?

02 December 2014

In the Longchamp[1], the issue for the court was whether the expenses of negotiation in a piracy case were allowable in general average under the York-Antwerp Rules 1974. 
 
Background
The vessel was seized by pirates in January 2009 and a ransom demand of $6 million was made shortly thereafter. In March 2009, the owner agreed to a ransom payment of $1.85 million. During the period of negotiation, the owner incurred expenses of around $182,000.
 
The issue for the court was whether the expenses of $182,000 (including bunkers and crew wages) were allowable in general average under Rule F of the York-Antwerp Rules 1974. Rule F reads:
 
‘Any additional expense incurred in place of another expense which would have been allowable as 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.’
 
Before comment on the above, the court had to consider the basis of the allowance of ransom payments in general average. This is made under Rule A of the York-Antwerp Rules, which sets a requirement for every expense to be ‘reasonable’. 
 
The Arguments
The court rebutted the claimant's argument that an allowance in general average for the full amount of a ransom of $6 million would not have been reasonable and that in piracy cases the negotiation process which eventually reduces the initial ransom request is a customary procedure within the course of business. The court’s comments on this argument were as follows:
 
‘I have the most profound difficulty with the concept of a “reasonable” ransom. At least in one sense, no ransom payment could ever be described as “reasonable”. Pirates are criminals engaged in extortion and their demands are unlawful and deplorable. How can a payment extorted by pirates be described as “reasonable”? In my view, it cannot. The idea of a “reasonable ransom” is radically misconceived and the term an oxymoron.’
 
The claimants sought to contend that the expenses claimed under Rule F were not ‘extra’ within the meaning of the Rule and therefore that they should be disallowed. The court expressly stated that the facts of this case matched exactly the requirement of Rule F, which was that the substitute expense undertaken resulted in additional financial outlay which would not ordinarily have been incurred. The court went on to qualify that an unreasonable ransom would be one where the amount demanded clearly exceeded the value of the property involved in the maritime adventure.
 
The claimant's final argument was that the cost of bunker consumption claimed as part of the expenses incurred during the period of ransom negotiation is actually a loss and could not be qualified as an ‘expense’. Again, this argument was rejected by the court.
 
The Advisory Committee of the Association of Average Adjusters had been asked to comment on the facts before judgment was handed down. The Committee convened a panel to consider the issue and found that there was no justification for an allowance of wages and bunkers etc under Rule F. The views of the panel were not followed by the court.  
 
The Court’s Decision
The court approved the expenses incurred during the period of ransom negotiations in general average as being substitute expenses to the ransom amount eventually paid.
 
Comment
Permission to appeal has been granted to the claimant, so Rule F may yet be considered by the Court of Appeal. The view of the author of this article is that the court has taken a pragmatic approach on the specific facts of this case, based on the commercial reality that ship owners often have to face.


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[1] (1) Mitsui & Co Ltd (2) Thai Plastic and Chemicals Public Company Limited (3) Stephen Redmond (4) RSA Insurance Group plc v (1) Beteiligungsgesellschaft LPG Tankerflotte MbH & Co KG (2) LPG Carriers Ltd (The “Longchamp”) [2014] EWHC 3445