Operating expenses incurred during ransom negotiations. Now allowable under Rule F of YAR 1974.

In The Longchamp reported in our blog of 9 August 2016, the Court of Appeal held that four items of vessel operating expenses incurred during ransom negotiations with pirates were not allowable in general average as substituted expenses under Rule F of the York Antwerp Rules 1974.

Rule F provides:

“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 items claimed in respect of this period were: crew wages; the high risk bonus due to the crew for being at sea in a high risk area; crew maintenance; bunkers consumed. The expenses were incurred over a 51 day period of negotiation with the pirates which resulted in the release of the vessel on payment of a ransom of US1.85m, as opposed to the US$ 6m initially demanded. The Court of Appeal held that Rule F presupposes some real choice being made. Acceptance of the initial ransom demand is not a true alternative; nor is acceptance of any other ransom sum less than that initially demanded but greater than that eventually agreed.

The Supreme Court has now overturned the decision of the Court of Appeal and held, Lord Mance dissenting on the facts, that the four operating expenses were allowable under Rule F. The Supreme Court disagreed with the Court of Appeal’s decision that the operating expenses did not fall within Rule F because payment of a reduced ransom was not an ‘alternative course of action’ to paying the ransom initially demanded, but was merely a variant. This reasoning required a different means to be adopted to complete the adventure from that which might normally be expected. This was the prevailing view of the texts on General Average and among practitioners, but was not supported by the language of Rule F. In any event, incurring the operating expenses did represent an ‘alternative course of action’ to paying the ransom intially demanded.

Both lower courts had found that the reference in Rule F to “another expense which would have been allowable as general average” is to an expense whose quantum is such that it would have qualified as a claim under Rule A. Both lower courts had accepted that on the facts payment of the ransom in full would have been reasonable. The Supreme Court disagreed with this construction of Rule F. The reference in Rule F to ‘allowable in General Average’ did not mean that the expense (in this case payment of the full ransom demanded) had to be reasonably incurred. It had to be of a type that would constitute a General Average expense. If so, the substituted expense (in this case the payment of the lower ransom together with the operating costs during the period of negotiation) would be allowable, but only to the extent that it did not exceed the sum avoided and that it was established that it was reasonable to pay the ransom that was paid together with incurring the operating expenses and the negotiation expenses during the 51 days.

The Supreme Court also rejected cargo interest’s argument that the exclusion of indirect loss including demurrage from General Average under Rule C served to exclude the operating expenses from Rule F. Rule C did not apply to expenses recoverable under Rule F which by definition were expenses not themselves allowable in General Average but were alternatives to sums that were allowable.

 

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