The Australian Coastal Shipping Commission (the ACSC) owned the Bulwarra and the Wangara. On 13 July 1960, the Bulwarra was moored at Port Kembla, New South Wales, when its after-moorings broke. A shore officer of the ACSC signalled to the captain of a tugboat, the Hero, for help. The Hero got a towline aboard the Bulwarra and towed it for about ten minutes before the line parted and wrapped itself around the tug's propeller, causing the propeller to stop revolving. Eventually, the Hero grounded and became a total loss, while the Bulwarra managed to get to safety.

On 17 November 1961, the Wangara grounded off Point Lonsdale at the entrance to Port Phillip, Victoria. Two shore officers of the ACSC engaged a tugboat, the Walumba, to tow it off. While the Walumba was towing the Wangara, the towrope parted and wrapped itself around the tug's propeller, causing damage. A pilot vessel, the Wyuna, towed the Walumba to safety. The Wangara also got to safety. The owners of the Wyuna claimed salvage remuneration from the owners of the Walumba and received an award.

In engaging the Hero and the Wangara, the ACSC opted for towage which contained a provision for the payment of hire at a fixed rate, subject to the UK Standard Towage Conditions (the UKSTC). The UKSTC contain stringent terms in favour of the tug owner. A wide indemnity clause protects the tug owner against the consequences of negligence by the tug's crew. Clause 3 provides:

[T]he hirer shall pay for all loss or damage, and personal injury or loss of life, and shall also indemnify the tugowner against all consequences thereof, and the tugowner shall not, whilst at the request expressed or implied of the hirer rendering any service other than towing be held responsible for any damage done to the hirer's vessel and the hirer shall indemnify the tugowner against any claim by a third party (other than a member of the crew of the tug) for personal injury or loss of life. Provided that any such liability for loss or damage as above set out is not caused by want of reasonable care on the part of the tugowner to make his tugs seaworthy for the navigation of the tugs during the towing or other services the burden of proof of any failure to exercise such reasonable care being upon the owner of the tow.

The tug owners claimed indemnification from the ACSC. On the Hero, the ACSC successfully contested the claim but had to pay costs. On the Walumba, the ACSC was found liable to the tug owners and had to pay for the damage to the tug, the salvage award payable by the tug, and both sides' costs in the tug owners' action.

The ACSC sought to recover its expenditure from John Richard Daniel Green, the underwriter of its marine insurance policies. Green insured the Bulwarra and the Wangara against marine perils under policies that contained a sue and labour clause and incorporated the Institute Time Clauses (Hulls). Clause 8(a) of the Institute Time Clauses (Hulls) provides:

General average and salvage to be adjusted according to the law and practice obtaining at the place where the adventure ends, as if the contract of affreightment contained no special terms upon the subject; but where the contract of affreightment so provides the adjustment shall be according to York-Antwerp Rules.

The York-Antwerp Rules 1950 provide:

1. 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. ...
3. 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 ACSC argued that Rule A should include the words 'measure resulting in' after the word 'extraordinary' to cover expenses that are the direct consequence of the general average act under Rule C. Without this gloss, it would be difficult to speak of expenses that were the direct consequence of expenditure.

Green contended that Rule A should not include those words, as it would extend the scope of general average considerably. There was a distinction between charges for services rendered when hiring a tug and liabilities that arose under the terms of that hiring. General average expenditure took the form of charges for services rendered, which were direct. In this case, the expenditure took the form of liabilities, and was therefore not a 'direct consequence' of the general average act. Liability was an entirely different act from incurring the charges. These liabilities were incurred in addition to such charges under the terms of the agreement.

The trial Judge held that the ACSC's expenditure arising out of the towage contracts in relation to indemnities given under the contracts was recoverable in general average. Green appealed.

Held: Appeal dismissed.

Lord Denning: The towage contracts that the ACSC made with the tug owners constitute a 'general average act'. In each case, the vessel was in dire peril, and ACSC called upon a tug for help. If the tug had rendered salvage services on the usual 'no cure, no pay' terms, the contract would be a 'general average act'. If the services were successful, the owners would have been liable to pay a high reward which would count as 'general average expenditure'. If the services had been unsuccessful, they did not need to pay anything (The Tojo Maru [1970] P 21, 62). Instead of entering into such a contract, the ACSC made a towage contract on the UKSTC.

These conditions were reasonable. It was well-known that there was a substantial risk in towage operations that the towrope might break and foul the tug's propeller. If that happened, the tug might run aground or be damaged and would need rescuing. In a salvage agreement, the tug owners took that risk upon themselves in return for the chance of a high salvage reward. In a hiring agreement, at a fixed rate of hire, they could not be expected to take the risk on themselves. It was only right and fair that they should ask for and receive an indemnity. The benefit to the shipowner was that, if the service was successful, it would pay much less than it would under a salvage award. In return, it had to give an indemnity to the tug owner.

The ACSC was bound under the indemnity clause to indemnify the tug owners. In both cases, the tow-line parted and wrapped around the tugs' propellers, and the Hero became a total loss while the Walumba was salvaged at great expense. The expenditure under the indemnity clause as a general average loss depended on whether the expenditure was a 'direct consequence' of the general average act within Rule C of the York-Antwerp Rules 1950.

The distinction between 'direct' and 'indirect' consequences was hallowed by Weld-Blundell v Stephens [1920] AC 956, 983-984 (Lord Sumner), adopted by Parliament in the Indemnity Act 1920, and applied in A & B Taxis Ltd v Secretary of State for Air [1922] 2 KB 328 and Moss Steamship Co Ltd v Board of Trade [1924] AC 133. The framers of the York-Antwerp Rules used this distinction too. Forty years later, the Privy Council poured scorn upon it. In The Wagon Mound [1961] AC 388, 423, Lord Simonds commented that the 'direct consequence' test leads 'to nowhere but the never-ending and insoluble problem of causation'. To add to the confusion, Rule C of the York-Antwerp Rules lists 'loss of market' as an instance of indirect loss, following The Parana (1877) 2 PD 118 (cp Czarnikow (C) Ltd v Koufos [1969] 1 AC 350, 385 (Lord Reid) where the defendants' breach of contract 'directly caused' the loss of market).

The prevailing test for the distinction between direct and indirect consequences is that 'direct consequences' denote those consequences which flow in an unbroken sequence from the act, whereas 'indirect consequences' are those in which the sequence was broken by an intervening or extraneous cause. The sequence of events after the general average act of engaging the tug on the towage conditions was:

1. The making fast of the towline and the subsequent towage;
2. The snapping of the towline and it fouling the propeller;
3. The loss, or salvage, of the tug; and
4. The claim for indemnity.

The only possible points in time where the sequence might have been broken were at points 2 and 4.

The loss and expenditure would never have happened if the towline did not snap and foul the propeller. Although this snapping and fouling was an intervening cause of much importance, it did not break the chain of causation.

If the master, when he performed the 'general average act', ought to have reasonably foreseen that a subsequent accident of the kind might occur, or even a distinct possibility of it, the subsequent accident did not break the chain of causation. In both cases, the master should have envisaged that it was distinctly possible that the towline might break and foul the propeller when he engaged the tug. When it happened, that situation did not break the chain of causation. If the towline had not parted and the tug had completed its task safely, the hiring charge would have been a general average expenditure.

The indemnity clause also did not break the chain of causation. Although the terms were stringent, the master agreed to it in a just and fair manner, and so the expenditure flowed directly from the general average act. If the indemnity clause had been unreasonable such that the master should not have agreed to it in justice to the cargo owners, the expenditure would not flow from the general average act but from the onerous clause in the towage agreement. If a master unjustly agreed to pay an exorbitant charge, then the excess of the charge - over and above a reasonable charge - would not flow from the general average act but from the onerous clause, and only a reasonable charge would be allowable as a 'general average loss'.

Phillimore LJ: In both cases, a ship needed the assistance of a tug. The question was whether the claim made by the tug against the ship constituted a general average loss that was a direct consequence of a general average act. This question concerned the true interpretation of the York-Antwerp Rules 1950, specifically Rules A and C. The true construction of Rule A, which defined a 'general average act', would also determine the answer to the question of whether the claim against the insurer in either case was too remote such that it could be dismissed as not being a direct consequence of the general average act.

In both cases, the ACSC hired the tug on a towage contract that included indemnity terms based on the UKSTC. The conditions included an indemnity for damage to the tug, expressed in very broad terms.

Regarding the Bulwarra incident, no extraordinary sacrifice was made as nothing was jettisoned or cut away. However, this case still qualified as an extraordinary expenditure as the tug was summoned and a towage contract was entered into, resulting in an inevitable payment for the tug's services.

The general average act was the master summoning the tug and entering into the towage contract on reasonable terms. the ACSC incurred costs in defending the claim for indemnity brought against them by the tug owners under the UKSTC, included in the towage contract. Such costs were reasonably incurred because the conditions were well-known and had been widely used.

The ACSC made a reasonable bargain when it summoned the tug and entered into the towage contract. Under the terms of that contract, reasonable expenditure was incurred, including liability for indemnifying the owners of the tug, unless it could be shown that its loss was due to a want of care on the part of its owners to make the tug seaworthy.

The tug's claim succeeded, and the amount involved was a direct consequence of the indemnity included in terms of the contract reasonably entered into as a matter of extraordinary expenditure comprising a general average act. Since the parties agreed that the costs of defending the Bulwarra's claim were 'general average expenditure', these costs constituted reasonable expenditure, a direct consequence of the act of general average. On the Wangara, it was impossible to dissect the operation and say that summoning the tug was the general average act and that the act did not comprise the terms on which the tug was reasonably employed and on which the extraordinary expenditure was to be calculated.

The towage contract comprising the UKSTC formed part of the general average act. It was impossible to argue that entering into a contract comprising these well-known conditions was unreasonable.

It was fallacious to say that the parting of the towrope, fouling of the tug's propeller and compelling the tug into entering into a salvage contract with the Wyuna for its preservation were novus actus interveniens situations. The expenditure resulting from these events was a direct consequence of the indemnity terms included in the contract reasonably entered into by the Wangara as a general average act.

The result would have been different if the ship had entered into a salvage contract instead of a towage contract. If the tug had failed to save the ship, it would have lost any claim to remuneration. However, if it had successfully effected salvage, it would have gained a salvage award far greater than what would have been due under the towage contract.

If the tug's claim had succeeded, the amount involved would clearly have been a direct consequence of the indemnity included in the terms of the contract reasonably entered into as a matter of extraordinary expenditure comprising a general average act. It follows that the costs to which the plaintiffs were put by their successful defence constituted reasonable expenditure which was a direct consequence of the act of general average.

Cairns LJ: The expenditure incurred by the ACSC was a general average expenditure.

The Marine Insurance Act 1906 and the York-Antwerp Rules 1950 provide that a general average act occurs when an expenditure is voluntarily and reasonably incurred for the common safety. They define a general average loss as the direct consequence of a general average act.

The question was what the general average act would be when expenditure was incurred but no sacrifice was made. It could not have been the expenditure itself as the expenditure was the general average loss and defined as a consequence of the general average act. The definitions do not need additional words to make sense as incurring expenditure is different from making expenditure. Expenditure would be incurred when a contract made between a shipowner and a tug owner provided for payments to the tug owner. Thus, making the contract was the general average act, and any payment due under the contract would be a direct consequence of it.

The York-Antwerp Rules 1950 excludes loss or damage sustained by the ship or cargo through delay and any indirect loss. This sentence does not apply to expenditure arising under a contract.

It was only relevant to refer to cases where the general average act was a sacrifice. It was unnecessary to consider whether breaking the towrope was a 'subsequent accident'. If the contract provided for the shipowner to indemnify the tug owner against the consequences of a subsequent accident, the expenditure involved in such indemnity would still be a direct consequence of the contract.

The ACSC's expenditure constituted a general average loss. The contracts that the ACSC entered into in respect of both ships were reasonable for the general safety. The payments made by the ACSC all fell due under the contracts.

The second sentence in Rule C of the York-Antwerp Rules 1950 seemed to give a much narrower meaning to the word 'direct' than that understood when directness was considered to be the test in relation to remoteness of damage. Regardless, it did not apply to expenditure arising under a contract.