The Supreme Court allows the Owners’ appeal reversing the decision of the Court of Appeal and restoring the decision of the High Court.
On 25 October 2017 The Supreme Court handed down judgment in The Longchamp discussing the meaning of Rule F of the York-Antwerp Rules 1974 (“YAR”).
The Court of Appeal decision was discussed in an earlier article: https://www.steamshipmutual.com/publications/Articles/thelongchamp1216.htm
Background
On 30 January 2009 the “Longchamp”, a chemical tanker, was hijacked by Somalian pirates. The pirates demanded US$6 million for release of the vessel. Over a 51 day period, and with the assistance of a ransom expert, Owners negotiated the ransom down to US$1.85 million, and thereafter paid this sum. During the period of negotiation various operational expenses were incurred, such as crew wages and bonuses, maintenance, general supplies and bunkers, in the sum of US$160,000. The General Average Adjuster allowed this sum in General Average under Rule F of the York-Antwerp Rules 1974.
Rule F of the York-Antwerp Rules 1974 states:
“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 High Court upheld the adjustment so that these expenses fell within Rule F because, if the Owners had paid the initial ransom this would have been a reasonable course of action within the meaning of Rule A of the York Antwerp Rules and, therefore, the expenses “would have been allowable as general average” under Rule F as substitute expenses.
However the Court of Appeal decided the expenses would only fall within Rule F if incurred in place of other allowable expenses. In this respect the reasoning was that a short negotiation with the pirates was not a true alternative to a longer negotiation to pay a smaller ransom because in both cases expenses were incurred and the difference between the two was only as to the extent of the expenses; they were not “incurred in place of another expense”.
Decision of the Supreme Court
By a majority The Supreme Court allowed the Owners’ appeal. The Supreme Court concluded that payment of the initial ransom demand was a different course of action to negotiating for 51 days, and Rule F did not require that the expenses were incurred following an alternative course of action. Hence expenses incurred whilst the ransom was negotiated should be allowed in GA (in addition to the ransom itself). The expenses were “extra expense incurred in place of another expense” since the alternative would have been an extra US$4.15 million paid in ransom.
It is noteworthy that the Court ruled that expenses incurred shall be allowed “only up to the amount of the general average expense avoided.” Accordingly, in future cases it will be necessary to decide what general average expense has been avoided to give effect to the cap. In The Longchamp that was the ransom albeit Lord Neuberger, giving the main judgment of the majority, had misgivings as to whether payment of the initial demand would have been reasonable and, therefore, allowable under Rule A. However, he concluded the correct interpretation of Rule F was that the “reference to an “expense which would have been allowable” [in Rule F] is to an expense of a nature which would been allowable”; i.e. it did not matter that the expense avoided (the initial ransom demanded) would not have been allowed so long as it was of a type which in principle was allowable under Rule A.
Comment
The true meaning and effect of Rule F as decided in this case is important and potentially has wide ranging consequences. It may now be that whenever a ship owner negotiates with a third party to reduce expenses which are of a kind allowable in general average, operating expenses incurred in that period are strong candidates for Rule F allowances. Prior to The Longchamp this may not have been the view of all Average Adjusters.
Furthermore, difficulties may now be encountered when determining what cap to apply to expenses incurred, which are allowable under Rule F, when this is subject to identifying the accepted amount by which an allowable GA expense has been reduced by negotiation. The question being whether the reduction to be used is the overall reduction achieved, whether the initial expense or claim was reasonable or not or, as in The Longchamp, or should the reduction be based upon what a reasonable figure might be for the expense in question.
