Web Alert: Are the expenses during negotiation in a piracy case allowable in general average? (part two..)

News & Insights 31 July 2016


This follows the decision of The Longchamp [1] in 2014. Following this judgement, some requests were made to re-open earlier adjustments where such costs had been excluded and the same principle was extended in some adjustments to similar expenses incurred while negotiating with salvors.

This follows the decision of The Longchamp [1] in 2014. The High Court held that the crew wages and fuel consumed during lengthy ransom negotiations with Somali pirates could be allowed as general average under Rule F of York Antwerp Rules (YAR) as an expense incurred in substitution for the higher cost of paying the initial ransom demand. Please refer to one of our previous web alerts here for the facts of the case.
 
Following this judgement, some requests were made to re-open earlier adjustments where such costs had been excluded and the same principle was extended in some adjustments to similar expenses incurred while negotiating with salvors. 

The Court of Appeal [2] has now reversed this judgement on the basis that Rule F cannot be applicable because there was only ever one course of action available – to pay the ransom.  Rule F requires that the substituted expense is incurred 'in place of' another expense which would have been allowable as general average.  In this case the same expense (payment of ransom) was going to be incurred, the only difference being the extent of that payment. After the negotiations, the ransom figure was reduced to $1.85 million from $6 million which was the initial demand.
 
The position under English law therefore reverts to the position taken in 2012 by the majority on the Advisory Committee of the Association of Average Adjusters that such costs were not allowable under Rule F. This decision also makes it clear that Rule F has no application regarding such detention expenses during a salvage negotiation.
 
In addition, the view was taken that the expenses incurred during the period of ransom negotiations are 'ordinary operating costs incurred by reason of delay'. Under Rule C of YAR all losses resulting from delay are excluded. However, the judgement also made a few points of academic interest, one of which was the fact that it would not have been unreasonable for the owners to have paid the initial ransom demand.
 
Does this mean that owners will now consider the issues from a different perspective when they are facing big casualties, with a view to avoiding lengthy periods of negotiation with pirates or salvors, since the expenses incurred during such periods are not going to be recovered either from their underwriters or in general average? That remains to be seen.
 
Leave to appeal was denied, but it remains open to the respondents to make an application directly to the Supreme Court.
 
[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

[2] (Mitsui & Co. and others vs Beteiligungsgesellschaft LPG Tankerflotte) [2016, EWCA Civ 708]

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