KNOWLEDGE BANK>CLASSIC CASES

Mitsui & Co Ltd and Others v Beteiligungsgesellschaft LPG Tankerflotte mbH & Co KG and Another (The “Longchamp”) – Supreme Court (Lord Neuberger PSC, Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge JJSC) [2017] UKSC 68 – 25 October 2017

2018-02-06

Mitsui & Co Ltd and Others v Beteiligungsgesellschaft LPG Tankerflotte mbH & Co KG and Another (The “Longchamp”) – Supreme Court (Lord Neuberger PSC, Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge JJSC) [2017] UKSC 68 – 25 October 2017


General average – Vessel seized by pirates in Gulf of Aden – Negotiations for payment of ransom – Whether expenses incurred by shipowner during period of negotiations allowable in general average


On 29 January 2009 Somali pirates forcibly took possession of the chemical carrier Longchamp in the Gulf of Aden. The vessel was carrying a cargo of vinyl chloride monomer in bulk. The pirates initially demanded a ransom of US$6 million. On 22 March 2009 a ransom payment of US$1.85 million was agreed by the shipowners (the owners) and was paid five days later. 


During the period of the negotiation, which lasted 51 days, the owners incurred operating expenses (the negotiation period expenses) in the following sums: 


(1) US$75,724.80 for crew wages;


(2) US$70,058.70 for “high risk area bonus” payments to the crew by reason of the fact that the vessel was detained within the Gulf of Aden; 


(3) US$3,315 for crew maintenance (food supplies); 


(4) US$11,115.45 for bunkers consumed. 


[The Supreme Court treated the aggregate sum as being US$160,000.] 


The bill of lading provided that general average should be settled in accordance with the York-Antwerp Rules 1974. The issue was whether the negotiation period expenses were allowable in general average. 


Rule A provided:


“There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.” 


Rule C provided: 


“Only such losses, damages or expenses which are the direct consequence of the general average act shall be allowed as general average. 


Loss or damage sustained by the ship or cargo through delay, whether on the voyage or subsequently, such as demurrage, and any indirect loss whatsoever, such as loss of market, shall not be admitted as general average.” 


Rule F provided: 


“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.” 


It was accepted that the US$1.85 million ransom payment itself was allowable under Rule A. However, there was an issue as to whether the negotiation period expenses were allowable under Rule F as an “extra expense incurred in place of another expense which would have been allowable as general average”. 


The average adjuster considered that the negotiation period expenses were allowable under Rule F on the basis that they were incurred during the negotiation period of 51 days which enabled US$4.15 million to be saved in the common interest, which would otherwise have been recoverable under Rule A. 


The cargo interests brought proceedings against the owners challenging the adjuster’s conclusion that the negotiation period expenses fell within Rule F. 


At first instance, the judge held that the negotiation period expenses were allowable under Rule F – see (2014) 912 LMLN 3. 


The Court of Appeal allowed the cargo interests’ appeal, holding that the payment of a ransom on demand was not to be regarded as an alternative course of action. There was only one road open to owners, namely negotiation, and that road led to wherever the negotiation ended – see (2016) 957 LMLN 3. 


The owners appealed to the Supreme Court. They submitted that the negotiation period expenses fell within the expression “expense incurred” by the owners within Rule F. They were “incurred in place of another expense”, namely the US$4.15 million saved as a result of the negotiations, and were less than “the general average expense avoided”, namely the US$4.15 million. Accordingly, the negotiation period expenses were properly allowable under Rule F. 


The cargo interests contended:


(1) The ransom saved was not allowable under Rule F because it would not have been reasonable for the owners to have accepted the initial ransom demand for US$6 million. Thus, the payment of US$6 million (or, more accurately, the saving of US$4.15 million) would not have been “expenditure … reasonably … incurred” within Rule A, and therefore could not qualify as an “expense which would have been allowable as general average” in Rule F. 


(2) The ransom saved was not “another expense”. The payment of a reduced ransom of US$1.85 million was not an “alternative course of action” to the payment of the ransom originally demanded, namely US$6 million: it was merely a variant. To trigger Rule F, it was not enough for a claimant to incur expense in achieving a result which cost less than what an allowable item would otherwise have cost: the expense must be incurred to achieve a result which involved replacing that allowable item with a different and cheaper item. 


(3) The negotiation period expenses were not consciously and intentionally incurred by the owners. The owners never made a conscious choice between paying the US$6 million ransom or negotiating with the pirates. 


(4) The negotiation period expenses were not “extra expense”. In order to qualify as “extra expense”, an expense would have to be of a nature which would not normally have been incurred in response to the peril threatening the adventure 


(5) The negotiation period expenses would or might have been incurred even if the owners had agreed to the pirates’ initial demand of US$6 million. 


(6) The negotiation period expenses were irrecoverable because Rule C or (by implication) Rule XI excluded from general average expenditure which was an “indirect loss” including demurrage, and/or because Rule XI included crew wages and maintenance where it applied. 


Held, (Lord Mance JSC dissenting) that as to the cargo interests’ first contention, the owners did not have to establish that it would have been reasonable to accept the pirates’ initial demand in order to justify the contention that the negotiation period expenses were allowable under Rule F. The reference to an “expense which would have been allowable” was to an expense of a nature which would have been allowable, not to the quantum of the expense. Subject to the cargo interests’ other arguments, the US$160,000 fell within Rule F. It was incurred in order to avoid paying a ransom of around US$4 million more than the ransom actually paid, and as the ransom was an allowable expense in principle, the US$160,000 therefore fell within Rule F, subject to the owners establishing that it would have been reasonable to have paid a ransom of around US$2.4 million (the ransom they did pay plus the US$160,000 together with some further expenses). Since the judge had found that paying a US$6 million ransom would have been reasonable, it must have been reasonable to pay a ransom well under half that figure. 


The cargo interests’ second contention involved arguing that to trigger Rule F, it was not enough for a claimant to incur expense in achieving a result which cost less than what an allowable item would otherwise have cost: the expense had to be incurred to achieve a result which involved replacing that allowable item with a different and cheaper item. That argument would be rejected. The notion that Rule F was only engaged in a case where the claimant achieved an “alternative course of action” in the sense used by the cargo interests was not supported by the ordinary language of Rule F (dicta of Hoffmann LJ in The Bijela [1993] 1 Lloyd’s Rep 411 disapproved). 


Even if the “extra expense” had to involve an alternative course of action, the owners’ claim satisfied that requirement. The right analysis of the owners’ claim was that it was for: (i) US$1.85 million under Rule A; and (ii) US$160,000 under Rule F, on the basis that (i) the US$1.85 million, as a reasonable sum paid to ransom the vessel and the cargo, was within Rule A, and (ii) the US$160,000, as negotiation period expenses, represented “extra expense incurred in place of” the US$4.15 million, the amount by which the ransom was reduced. On that basis, the incurring of the US$160,000 did represent an alternative course of action from the payment of the US$4.15 million: the former involved incurring vessel-operating expenses whereas the latter involved paying a ransom. 


Accordingly, the cargo interests’ second contention had to involve the proposition that the expenses incurred in negotiating a reduction in the cost of an allowable item did not fall within Rule F because the reduction in the cost of an allowable item which would be paid for anyway, and which fell within Rule A, could not be within the scope of Rule F. However, it was not easy to see how one could get that out of the words of Rule A or Rule F. Given that the Rules represented an international arrangement it was inappropriate to adopt an approach to their interpretation which involved reading in any words or qualification. As a matter of ordinary language, Rule F applied to the negotiation period expenses. To imply some qualification such as the requirement that those expenses must have been incurred so as to achieve an “alternative course of action” was very dangerous ( James Buchanan & Co Ltd v Babco Forwarding & Shipping (UK) Ltd [1978] 1 Lloyd’s Rep 119 and King v Bristow Helicopters Ltd [2002] 1 Lloyd’s Rep 745 considered). 


The cargo interests’ third contention, that the negotiation period expenses were not consciously and intentionally incurred by the owners, would be rejected. The question whether one expense had been incurred “in place of another expense” had to be assessed objectively. In the present case it was clear that negotiations were needed if the ransom was to be reduced; that such negotiations would take time; and that the passage of time resulted in the negotiation period expenses being incurred. As the negotiations resulted in the ransom being reduced, it followed that the expenses incurred as a result of those negotiations were incurred “in place of” the US$4.15 million saved. 


The cargo interests’ fourth contention, that the negotiation period expenses were not “extra expense” within the meaning of that word in Rule F, was based on the proposition that, in order to qualify as “extra expense”, an expense would have to be of a nature which would not normally have been incurred in response to the peril threatening the adventure. However, there was no reason for giving the word “extra” such a restrictive meaning. 


As to the cargo interests’ fifth contention, that the delay which led to the negotiation period expenses might well have occurred even if the owners had agreed to the pirates’ initial demand of US$6 million, that was a possibility. However, the judge implicitly found that the vessel and cargo would have been released promptly if the US$6 million ransom demand had been accepted and paid. That was the sort of finding with which an appellate court should be very slow to interfere. In any event, it was an eminently defensible finding. 


The cargo interests’ sixth contention was that as Rule C excluded from general average expenditure which was an “indirect loss” including demurrage, and/or because Rule XI included crew wages and maintenance where it applied, the claim in the present case had to fail. However, there was nothing in that point. It was true that the negotiation period expenses, if consequential on a general average act, would have fallen within the exclusion in Rule C of loss sustained through delay, but it did not follow that they therefore had to fall outside Rule F. Rule C applied to expenses and other sums claimed by way of general average as consequences of a general average act (as defined by Rule A). It did not apply to expenses covered by Rule F, which was concerned with sums which were expended or lost in mitigating or avoiding the sums which would otherwise be claimable as general average. By definition, sums recoverable under Rule F were not themselves allowable in general average, but were alternatives to sums which would be allowable. One could understand why, as a matter of policy, demurrage and similar indirect liabilities were not recoverable as general average, but it did not follow that such indirect liabilities should be irrecoverable if they were expended in order to mitigate what would otherwise be a larger general average claim. 


As for the cargo interests’ reliance on Rule XI, it was hard to see why the fact that vessel-operating expenses were specifically allowed in one specific type of case meant that it should be presumed that they were excluded from every other type of case. In any event, the Rules started by saying that the lettered Rules applied save where the numbered Rules applied. That made it particularly difficult to justify the notion that a specific allowance in a numbered Rule should impliedly rule out such an allowance in a lettered Rule. 


[In dissenting, Lord Mance JSC considered that Hoffmann LJ’s dicta in The Bijela were correct, and that the substituted expenses had to be an alternative to, or in substitution for what might prima facie be thought of as being the normal or standard means of dealing with a given situation. Rule F was not intended to cover general average situations in which owners simply did what would in the ordinary course be expected of them in the interests of the common adventure. In the present case, if there was no course at all open to take, the expenses of which would have been allowable as general average, then matters had to run their course. If a ransom was demanded and paid in an amount which was unreasonable to pay, the only amount allowable in general average would be whatever lesser amount it would have been reasonable, after negotiation, to pay. If the negotiation period expenses were regarded as an extra expense incurred in place of the amount of the ransom avoided by the negotiation, they could be recoverable at most only so far as the negotiation avoided the making of a ransom payment which it would have been reasonable to pay. In Lord Mance’s view (and contrary to the conclusions of the judge and the Court of Appeal) it would not have been reasonable for the owners to have accepted the initial ransom demand of US$6 million without attempting to negotiate the figure down.] 



Stephen Kenny QC and Richard Sarll, instructed by Stephenson Harwood LLP, for the owners; Simon Croall QC and Paul Toms, instructed by Salvus Law Ltd, for the cargo interests. 


(quoted from ilaw)


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