The "LONGCHAMP" case1 examined how Rule F of the York-Antwerp Rules (on substituted expenses) should be interpreted when assessing whether the substituted expenses of negotiating down a ransom demand should be allowed in general average. Such expenses must be incurred in place of an alternative course of action which would have been "reasonably incurred" in accordance with Rule A (general average act). Here, to assess this criterion, the Judge had to consider whether a USD 6 million ransom payment would have been reasonable and would have fallen within the ambit of Rule A.
Facts
On 29 January 2009, pirates forcibly seized the "LONGCHAMP" in the Gulf of Aden and demanded a ransom of USD 6 million. Following negotiations between the ship manager's chief security officer and a negotiator acting for the pirates, a ransom was agreed in the amount of USD 1.85 million.
On 3 February 2009, general average was declared. The USD 1.85 million ransom payment was included in the adjustment as expenditure allowed in general average.
The adjustment also allowed certain substituted expenses in the amount of USD 181,604.25. These included expenses, such a crew wages and "high risk area bonus" payments, which were said to have been necessarily incurred during the period of negotiation (the Expenses).
Shipowners claimed these were allowable as substituted expenses under Rule F of the York-Antwerp Rules as they were incurred to facilitate the reduction in the amount of the ransom payment. Rule F provides that any extra expenses which are incurred in substitution for an amount which would have been allowable as general average, should be deemed to be general average. Shipowners argued these expenses were in substitution for the USD 4.15 million difference between the initial ransom demand (USD 6 million) and the final ransom payment (USD 1.85 million).
The claim
The claimant cargo interests sought an order that these substituted expenses should not have been allowed in the general average adjustment.
Their principal argument was that a hypothetical USD 6 million ransom payment (in substitution for which the Expenses were incurred) would not have been allowable as general average. Rule A of the York-Antwerp Rules sets out that, among other things, a sacrifice or expenditure must be reasonably incurred in order to give rise to a right of contribution. The claimants submitted that such a payment would not have been "reasonably incurred" since the logical course of action, when faced with such a demand, would be to negotiate the figure down. As such, Rule F could not be engaged.
Rule F requirements
Although this was the first binding judgment to interpret and apply Rule F, the Judge held that it was generally accepted that Rule F imposes the following requirements:
- it is only concerned with "expenses"
- it is only those expenses which 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; and
- the extra expenses must have been incurred in place of the alternative course of action
The principal debate revolved around the third requirement.
Decision
The Judge held that the Expenses were in substitution for the differential between the initial ransom demand and the final ransom payment. This was sufficient to engage Rule F.
However, the requirements of Rule A would also need to be satisfied. In other words, had it been paid, the initial USD 6 million ransom would need to have qualified as a "reasonably incurred" expense.
Given the criminal nature of piracy, the Judge rejected the notion that the amount of some ransom demands could be considered "reasonable" whereas others could not. That being said, the Judge stressed that the relevant consideration was not the amount of the ransom payment, but whether it had been "reasonably incurred".
The Judge stated that, save in exceptional circumstances, it would not be reasonable to say that a ransom payment was not "reasonably incurred" when the ship had been detained by pirates.
In suggesting a situation where such a payment would not be "reasonably incurred", reference was made to the value of the cargo. If the ransom demand clearly exceeded the
reasonably understood value of the property involved in the maritime adventure, then the payment of such a demand would be unlikely to qualify as a "reasonably incurred" expense under Rule A.
On the facts, it was held that it could not be argued that the hypothetical payment of the initial USD 6 million figure demanded would not have been "reasonably incurred".
The Judge further confirmed that when determining whether hypothetical alternative expenses would have been allowable, the appropriate assumption was that the substituted expenses had not been incurred. This is in contrast to the alternative analysis based on the assumption that the substituted expenses could not have been incurred. As such, the Judge allowed the Expenses to be included in the adjustment by virtue of Rule F.
Comment
With the "LONGCHAMP", the Judge demonstrated a willingness to follow a more flexible interpretation of Rule F of the York-Antwerp Rules on substituted expenses.
The Judge was clearly cognizant of Rule F's somewhat self-defeating nature in that, the greater the hypothetical alternative expense which was avoided, the less likely it would be that this hypothetical expense would have been allowable under Rule A. This means that the greater the expense which was avoided, the less likely that substituted expenses incurred in its place would be permissible under Rule F. As such, the Judge recognised that sufficient latitude must be given in order for Rule F to have effect.
The principle of general average was founded on equitable principles and the desire to apportion the expense of certain sacrifices between those that benefit from it, i.e. all parties to the common maritime adventure. These equitable origins are evident in the Judge's reasoning that "in the circumstances of this case... natural justice requires that all should contribute to the substituted expenses."
Footnote
1 (1) Mitsui & Co Ltd (2) Thai Plastic & Chemicals Public Co Ltd (3) Stephen Redmond (4) RSA Insurance Group PLC v Beteiligungsgesellschaft LPG Tankerflotte mbH & Co KG (2) LPG Carriers Ltd [2014]
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