Australia: Does General Average cover piracy expenses?

In brief - English High Court's decision highlights maritime law of General Average

The English High Court has held that various expenses incurred during a period of piracy of the vessel "Longchamp" off Somalia are recoverable as substituted expenses in General Average. The decision is likely to be reconsidered on appeal.

The decision of Deputy High Court Judge Stephen Hofmeyr QC in Mitsui & Co Ltd & Others v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG (2014) EWHC 3445 (Comm) should be read by all interested in the law of General Average, as it includes a very clear exposition of the applicable law and the history of its development.

Shipowner incurs additional expenses during period of negotiation with pirates

On 29 January 2009, Somali pirates forcibly took possession of the chemical carrier, "Longchamp", which was fully laden with a cargo of vinyl chloride monomer in bulk. The pirates demanded a ransom of US$6 million and on 22 March 2009, a ransom payment of US$1.85 million was agreed and paid by the first defendant, the vessel's owner. However, during the period of negotiation the shipowner incurred expenditure in the sum of US$181,604.25 for:

  • professional media response services in relation to the ransom amount
  • crew's wages during the period of negotiation
  • a high risk area bonus payment to the crew during the period of negotiation
  • crew maintenance during the period of negotiation (at a reduced rate due to the insufficiency of food on board)
  • bunkers consumed during the period of negotiation
  • telephone charges incurred during negotiations

The ransom payment of US$1.85 million was included within the expenditure allowed by the average adjusters in General Average and the additional sums totalling US$181,604.25 were said to be allowable pursuant to Rule F of The York-Antwerp Rules 1974, a decision which was contested by the cargo interests in the proceedings.

Bill of lading incorporates York-Antwerp Rules

The long-established general principle of General Average loss was defined by Lawrence J in Birkley v Presgrave (1801) 1 East 220 (at [228]) where he said:

All loss which arises in consequence of its extraordinary sacrifices made, or expense incurred, for the preservation of the ship and cargo comes within general average, and must be borne proportionably by all who are interested.

Following the adoption of The York-Antwerp Rules, these principles have generally been adopted and applied by contract by incorporation through reference in the bill of lading.

Rule F and extra expenses

Rule F of The York-Antwerp Rules (which was the relevant version forming part of the contract in this instance) 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 expense avoided.

The judge noted that it is generally accepted that Rule F imposes the following requirements:

  • The rule is concerned only with "expenses".
  • It is only those expenses that can be described as "extra" which qualify.
  • There must have been an alternative course of action which, if it had been adopted, would have involved expenditure which could properly be charged to General Average.
  • The extra expenses must have been incurred in place of the alternative course of action.

Was payment of ransom reasonably incurred?

The cargo interests contended that the expenditure which was allowed in the adjustment was not incurred in place of the expense of a ransom payment, but was in addition to that expense.

The judge found that there could be no doubt that the expenditure was incurred in substitution for the saving in ransom, that is, the difference between the ransom initially demanded and the ransom which was ultimately paid. That was sufficient to engage Rule F.

However, the cargo interests contended that the original ransom demand would not have been allowable in General Average as it would not have been "reasonably... incurred" within the meaning of Rule A of The York-Antwerp Rules.

The judge noted that the essential question was not whether a ransom in a particular amount was or was not "reasonable", but whether the payment of the ransom was "reasonably... incurred". The judge commented, "Pirates are not reasonable people. In the minds of most right-thinking people their behaviour is seldom rational" (at [99]).

Therefore, it was by no means certain that negotiation would result in a reduced ransom. It could have resulted in an increase in the ransom demand. Accordingly, the judge concluded that it was not possible to say that the ransom payment of US$6 million would not have been "reasonably incurred" within the meaning of Rule F of The York-Antwerp Rules and so expenditure incurred in substitution for payment of that amount should be recoverable as a General Average expense.

The conclusion reached by the judge was at odds with a previous non-binding but written considered view of the Advisory Committee of the Association of Average Adjusters on the same facts. The judge's view was that the "cap" under Rule F was the difference between the starting point of the ransom demand and the final amount paid.

Judge's controversial decision may not withstand appeal

The decision is controversial largely because it is based upon the finding that the original ransom demand could have been "reasonably incurred" if paid. Furthermore, although this was a relatively short period of pirate detention and the amount at issue was small, it is foreseeable that some much longer periods of detention could lead to very significant claims for the cost of wages, bunkers and the like during the period of piracy, all of which, on the basis of this authority, would be recoverable in General Average.

Time will tell whether the decision withstands review on appeal.

Andrew Tulloch
Transport and logistics
CBP Lawyers

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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