UK: Are Expenses Incurred During Negotiation Of A Pirate Ransom Recoverable In General Average?

Last Updated: 3 August 2016
Article by Martin Hall and David Handley

Most Read Contributor in UK, September 2017

In The Longchamp [2016] EWCA Civ 708, the Court of Appeal has ruled on an issue that had not previously been considered by the English courts, namely, whether expenses incurred by a shipowner during the period of negotiation of a pirate ransom should be recoverable in general average.

Facts

The laden chemical tanker LONGCHAMP was transiting the Gulf of Aden on passage to Vietnam. The ship was subject to a pirate attack on 29 January 2009 following which she was taken, under the command of the pirates, to Eyl, Somalia.

The owners immediately formed a crisis team and, within a day, the pirate negotiator had made an initial ransom demand of US$6,000,000. This was countered with an offer from the owners of US$373,000. The day following Owners' initial offer of payment of a ransom demand, Owners declared General Average. A payment of US$1,850,000 was finally made on 22 March after a 51 day negotiation period.

The owners claimed the operating costs (which included crew wages/bonuses, media crisis response services and bunkers) for the period of time the ship was seized as substituted expenses in general average under Rule F of the York-Antwerp Rules 1974 (as incorporated into the contract of carriage), which 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 owners claimed that the operating costs should be allowed as a substituted expense under Rule F as they had been incurred for the sole reason of reducing the final ransom payment which, it was accepted, was itself allowable under Rule A.

The operating costs were allowed in general average by the adjuster, prompting cargo interests to commence proceedings seeking repayment of their contribution towards this item on the basis that they should not be allowable under Rule F.

In the High Court Mr Stephen Hofmeyr QC, sitting as a Deputy High Court Judge, delivered what was to many a surprising judgment, by holding that the 'detention expenses' for the period of time the owners were negotiating the ransom down should be allowed as an alternative expense under Rule F. His finding was that these expenses were reasonably incurred to save the parties to the adventure around US$4,150,000, that is, the negotiated reduction on the ransom amount. Cargo interests were granted leave to appeal to the Court of Appeal.

Court of Appeal

The Court of Appeal was asked to consider four issues in the appeal:

Issue 1 - Was the first instance decision to allow the expenses incurred as substituted expenses wrong?

The cargo appellants argued that the outcome of the seizure of the vessel was subject to the decisions of the pirates and that whether the ship was released and for what sums was ultimately a matter for the pirates and was outside the control of the owners. The Court of Appeal took the view that this argument was supported by the evidence given that:

  • The owners never considered that they faced a choice: a crisis team had been set up almost immediately and certainly before any ransom demand had been issued;
  • From the outset, the owners were looking to minimise the size of any ransom payment and they never considered payment of the ransom on demand;
  • The owners had no real choice in what course of action to take and that payment at the outset or later were all actions following the same path; and
  • Whether or not the ransom had been paid on demand there would still have been a period of delay and negotiation (even if just to agree the details of payment and release) that would have resulted in expenses being incurred; indeed, the pirates might even have decided to increase their demand upon any immediate acquiescence by the owners.

Considered on this basis, the Court of Appeal took the view that the negotiation period to reduce the ransom was not a true alternative within the meaning of Rule F. As Hamblen LJ put it:

"Delay will often cause loss to both ship and cargo but generally that loss lies where it falls. Whilst such owners' expenses may on occasion be recoverable under Rule F, that Rule presupposes some real choice being made, which [here] it was not."

The Court of Appeal upheld the cargo interests' appeal on Issue 1 on that basis.

Issue 2 - Was the High Court wrong to conclude that payment of the original US$6m ransom demand without negotiation would have been reasonably incurred?

Hamblen LJ agreed with Mr Stephen Hofmeyr QC in the High Court where he stated, "....on the true construction of Rule F of the York-Antwerp Rules 1974, the hypothetical alternative course of action must meet the requirement that it was "reasonably ... incurred" if the substitute expense is to be allowed in general average." It was therefore, necessary to determine whether in the circumstances the payment of the initial demand would have been reasonable.

The Court of Appeal held that whilst it might be accepted practice to undertake a period of negotiation in which to seek to reduce the ransom demand, adoption of that approach would not render a payment of the immediate ransom demand unreasonable where that payment was made to avert a very real danger to the ship, cargo and crew as quickly as possible. The cargo interests' appeal on this point was therefore dismissed.

Issue 3 - Were the bunkers an expense for the purpose of Rule F?

The appellants contended that as bunkers were consumed it could not be an expense as it is generally treated as a sacrifice, therefore it is a loss and Rule F does not extend to cover losses. The Court of Appeal found that there was no difficulty as a matter of language in treating the consumption of bunkers as an expense though whether expenses would cover bunkers in any particular case would depend on the context of the claim.

Issue 4 - Were the media response costs allowable under Rule A given that there were a number of reasons as to why those costs were incurred?

It was argued by the appellants that as media costs had been incurred for reasons in addition to the common safety of the adventure and preserving property from peril, they should be disallowed. This was rejected at first instance and again at appeal. Hamblen LJ stated that the importation of the concept of predominant purpose, "...imports undesirable and unnecessary complications". There are circumstances where it may be difficult to distinguish between two legitimate purposes to find the predominant one. It was sufficient that one purpose was to preserve the property from peril for Rule A to apply.

Comment

When assessing losses that potentially fall within Rule F it is necessary to consider whether the alternative that is being presented is a true alternative rather than a slight variation of the actions actually taken. Whilst the judgment is heavily fact specific it does give useful insight as to how the courts view the construction of the York Antwerp Rules.

The irony is that had the owners paid the ransom demand in full as soon as it was made, the Court would not have found that unreasonable and it would have been allowed in GA, whilst saving the owners the delay expenses, the justification being that we are talking about ransom demands and human lives at risk. However, as the Court of Appeal found, "...acceptance of the initial demand is not a true alternative." It simply would not have happened for all the reasons that experience in similar Somali pirate cases has shown.

Are Expenses Incurred During Negotiation Of A Pirate Ransom Recoverable In General Average?

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