On 29 January 2009 Somali pirates forcibly took possession of the chemical tanker MV Longchamp in the Gulf of Aden. At the time, the vessel was fully laden with the claimants’ cargo of vinyl chloride monomer in bulk. The pirates demanded a ransom of USD 6 million. On 22 March 2009 a ransom payment of USD 1.85 million was agreed by the first defendant, owners of the Longchamp. It was paid five days later. During the period of the negotiations, the owners incurred items of expenditure.

The main issue in this action was whether some of the expenditure incurred by the owners during the period of the negotiation was allowable in general average. The cargo interest claimants argued it was not. Before the Supreme Court, only the four ‘Rule F’ items were still in dispute. The Supreme Court treated the aggregate sum in dispute as being USD 160,000 (referred to below as the ‘disputed negotiation expenses’).

At the time of the hijacking, the cargo was being carried under a contract of carriage which expressly incorporated the York-Antwerp Rules 1974.

Rule F provided: ‘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.’

In the original general average (GA) adjustment, the adjusters concluded that:

- the ransom payment of USD 1.85 million was allowed in general average (it is common ground that this was correct);

- the disputed negotiation expenses were allowable pursuant to r F of the York-Antwerp Rules 1974.

The original adjusters considered that as the owners and managers had successfully negotiated down the initial ransom amount so that an amount of USD 4.15 million was saved in the common interest of all property owners concerned, and this sum would otherwise have been recoverable in General Average pursuant to r A of the York-Antwerp Rules 1974, the expenses incurred during the period of negotiation over the ransom amount could be allowed in general average as substituted expenses under r F.

The cargo interests contended that the substituted expenses (ie the disputed negotiation expenses) should not have been allowed, and they sought an order stating they had over paid/contributed.

Before the High Court, the cargo interests’ claim failed. All the disputed negotiation expenses incurred by the vessel owners were allowed in general average, as the owners had met the requirements of r F, including that the substitute expenses were reasonably incurred. For the court’s reasoning, see the summary at CMI132.

The cargo interests appealed to the Court of Appeal, which allowed the appeal on the first pleaded ground of appeal, namely that r F required two distinct courses of action, and paying the full amount of the ransom demanded versus paying a negotiated down version were not distinct alternatives.

The Court of Appeal dismissed the appeal on the other grounds of appeal, holding that:

- the first instance Judge was not wrong to find that payment of the initial ransom demanded would have been reasonable (if the owners had done so).

- The first instance Judge was not wrong in law to consider bunkers consumed an ‘expense’.

- As to expenses awarded under r A, given that the owners had established before the first instance judge that one of the reasons why the owners engaged media response consultants was to preserve the property from peril, this was sufficient, there was no principled reason for requiring it to be either the sole or only effective purpose or cause or the predominant and most effective purpose or cause.

For further details as to the Court of Appeal’s reasoning, see the summary at CMI133.

The owners appealed to the Supreme Court, asking for the disputed negotiation expenses to be allowed in general average.

Held: By Neuberger LJ, Sumption LJ,Clarke LJ and Hodge LJ, with Mance LJ dissenting, the owners’ appeal would be allowed, and the disputed negotiation expenses would be allowed in general average under r F.

The Supreme Court held that the reference in r F to an ‘expense which would have been allowable’ is to an expense of a nature which would have been allowable.

This was because first, the word ‘allowable’ in r F naturally takes one to r C, where the similar word ‘allowed’ is used, rather than r A. Unlike r A, r C is concerned purely with the type of expense, and not with quantum. Secondly, the opening part of r F is unlikely to be concerned with quantum, as that is dealt with in the closing part, which imposes a cap on a sum recoverable under r F, namely ‘only up to the amount of the general average expense avoided’.

The Supreme Court thus overruled the reasoning of the lower Courts in this case, holding that the interpretation assumed by the lower courts imposed an unnecessary fetter on the allowability of an ‘extra expense’, as there was already a reasonable fetter in the concluding part of r F.

In addition, the interpretation put forward (positively) by the Supreme Court produces an entirely rational outcome: whenever an expense is incurred to avoid a sum of a type which would be allowable, that expense would be allowable, but only to the extent that it does not exceed the sum avoided.

Applying their reasoning to the facts of this case, the majority held that the USD 160,000 disputed negotiation expenses fell within r F. These expenses were incurred in order to avoid paying a USD 6 million ransom (or, more accurately, a ransom of around USD 4 million more than the ransom actually paid), and, as the ransom was an allowable expense in principle, therefore the USD 160,000 fell within r F, subject to the owners establishing that it would have been reasonable to have paid a ransom of around USD 2.4 million (ie the ransom they did pay plus the USD 160,000 together with the further expenses such as those paid to Capt Ganz, the lead negotiator, and NYA).

As the first instance Judge reached the conclusion that paying a USD 6 million ransom was reasonable, it must have been reasonable to pay a ransom well under half that figure. The judge’s findings were the sorts of finding which an appellate court should be very slow to interfere with. In this case they were eminently defensible, and should clearly not be questioned. The owners’ appeal would accordingly be allowed.

Overruling the Court of Appeal’s reasoning in particular, the Supreme Court held that there was no requirement that the claimant had to take an ‘alternative course of action’, notwithstanding that that may have been the prevailing view among writers on the subject or those who work in the field.

To imply some qualification such as the requirement that the expenses must have been incurred so as to achieve an ‘alternative course of action’ appeared to the Supreme Court to be very dangerous. In the same way as an international Convention or treaty, the York-Antwerp Rules should be interpreted by a United Kingdom court 'unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation'. Further, this type of contention would lead to difficulties and abnormalities in practice, because it was difficult to see where the line should be drawn.

Yet even if there had been this type of requirement, the Supreme Court held that the incurring of the USD 160,000 disputed negotiation expenses did represent an alternative course of action, an extra expense incurred in place of the USD 4.15 million, the amount by which the ransom was reduced (one involved incurring vessel operating expenses while the other involved paying a ransom).

The Supreme Court went on to dismiss the cargo interests’ contention that the expenses must be shown to have been consciously and intentionally incurred, holding that the question whether one expense has been incurred ‘in place of another expense’ must be assessed objectively.

To repeat, as the negotiation resulted in the ransom being reduced, it must follow that the expenses incurred as a result of those negotiation were incurred ‘in place of’ the USD 4.15 million saved (or that the expenses incurred plus the USD 1.85 million actual ransom were incurred ‘in place of’ the original USD 6 million ransom demand).

Further, the Supreme Court dismissed the restrictive interpretation contended for by the cargo interests for the meaning of the words ‘extra expense’, holding that the natural contextual meaning of the word ‘extra’ was simply an expense which would not otherwise have been incurred (but for the saving of the ‘other expense’). Such an interpretation was supported by the contrast with the word ‘extraordinary’ in Rule A. Also, the restrictive meaning contended for by the cargo interest sat unhappily with the French equivalent adjective, which was ‘supplementaire’. Finally, the Court took comfort from, although did not rely on, the fact that the word ‘extra’ in r F has been replaced in later versions of the Rules by the word ‘additional’.

Finally, the Supreme Court held that there was nothing in r C nor r 11 which prevented the disputed negotiation expenses falling within r F.

It clarified that r C applies to expenses and other sums claimed by way of general average as consequences of a general average act (as defined by r A). It does not apply to expenses covered by r F, which is concerned with sums which are expended or lost in mitigating or avoiding the sums which would otherwise be claimable as general average. By definition, sums recoverable under r F are not themselves allowable in general average, but are alternatives to sums which would be allowable. Lord Neuberger went on to hold that one can understand way, as a matter of policy, demurrage and similar indirect liabilities are not recoverable as general average, but it does not follow that such indirect liabilities should be irrecoverable if they are expended in order to mitigate what would otherwise be a larger general average claim.

Finally, the cargo interests’ reliance on r 11 was misconceived. The fact that vessel-operating expenses are specifically allowed in one specific type of case, did not mean that it should be presumed that they were excluded from every other type of case. Indeed, the York-Antwerp Rules start by saying that the lettered Rules apply save where the numbered Rules apply, thus a specific allowance in a numbered rule did not impliedly rule out such an allowance in a lettered Rule. Specific references in numbered rules did not impinge upon the general principles set out in the lettered rules, as applied to other situations.

For all the above reasons, the owners’ appeal would be allowed and the decision of the High Court judge would be restored. The disputed negotiation expenses would be allowed as substitute expenses in general average, under r F.