Simon Croall QC and Paul Toms, who acted for cargo interests.

In one of two Supreme Court judgments released today in which Quadrant Chambers acted, the Supreme Court has handed down judgment in The Longchamp. The case is the first time the English Courts have had to interpret the meaning of Rule F of the York-Antwerp Rules 1974 (“the Rules”).

Rule F, first introduced in 1924, admits expenses in general average which would not otherwise be allowable.  The expenses are allowed where they have been “incurred in place of another expense which would have been allowable as general average” but “only up to the amount of general average expense avoided”. 

The judgment is an important one for shipping practitioners and, although arising in the factual scenario of a seizure by pirates of a vessel and her cargo, it is of wider application and hence significance.

The Facts

The Longchamp was a chemical carrier that was hijacked in January 2009 by Somalian pirates.  On 30 January 2009, the pirates demanded U$6 m for its release.  The shipowners refused that demand and – consistent with normal practice – negotiated with the assistance of expert ransom consultants over a 51 day period with the result that the ransom paid was US$1.85 m.  During that period they incurred various operational expenses, namely crew wages, additional wages payable because the vessel was in a high risk area, the cost of food and supplies, and bunkers. The expenses totalled c. US$160,000 and amounted to increased operating expenses. Shipowners claimed that the expenses should be allowed in general average under Rule F.

At first instance, it was held that the expenses fell within Rule F on the basis that if the shipowners had paid the initial ransom demand in full the payment of US$6 m would have been an expense “reasonably … incurred” within the meaning of Rule A and, therefore, “would have been allowable as general average” within Rule F.  The Court of Appeal overturned that decision. The Court concluded that expenses only fell within Rule F if they were incurred in place of other allowable expenses and this required there to be two or more alternative courses of action open to the party seeking to mitigate the consequences of an incident when incurring the actual expense. The Court held that a short negotiation by which agreement was reached to pay the initial ransom demand was not a different course of action to a longer negotiation which led to a reduction in the ransom paid.  The Court, however, refused to reverse the Judge’s finding that, had Rule F been engaged, payment of US$6 m would have been “reasonably … incurred”.

Decision of Supreme Court

The Supreme Court (by a majority of 4 to 1) allowed the shipowners’ appeal.  The majority concluded that the language of Rule F did not require that the expenses were incurred following an alternative course and that, in any event, payment of US$6 m in response to the initial demand was a different course of action to negotiating for 51 days, incurring the expenses, and paying a ransom of US$1.85 m.

On the question of whether the expenses were “incurred in place of another expense which would have been allowable as general average”, the majority did not follow the approach taken by the courts below.  Lord Neuberger, giving the main judgment of the majority, appeared to have misgivings as to whether payment of the initial demand would have been reasonable and hence allowable under Rule A [18-19] but concluded that the Rules did not require this test to be met. The correct interpretation of Rule F was, he said, that the “reference to an “expense which would have been allowable” [in Rule F] is to an expense of a nature which would been allowable” [19].  Thus to qualify as allowable under Rule F it did not matter that the hypothetical expense avoided would not have been allowed so long as it was of a type which in principle was allowable under Rule A. The reasoning placed emphasis on the language “allowed” in Rule C to which the majority concluded Rule F was referring when requiring the avoided expenses to be “allowable”.   

However, the closing words of Rule F which provide that the actual expense incurred shall be allowed “only up to the amount of the general average expense avoided” acts as a cap on the allowability in general average of the actual expense.  Thus, in each case, it is necessary to determine what general average expense has been avoided so as to give effect to the cap. This, in the present context, involves considering whether a ransom payment in excess of that which was in fact paid by at least the sum of the Rule F expenses claimed would have been allowable under Rule A.  On the facts of this case, Lord Neuberger concluded that this was the case [20].

Lord Mance dissented. He concluded that the requirement that avoided expenses would have been allowable referred back to Rule A and hence required those expenses to be allowable under Rule A (both as to type and quantum).  He concluded that the payment of the initially demanded ransom would not have been allowable because it was unreasonable in its amount. He considered that it was not legitimate to allow the expenses because some lesser ransom figure (for example US$2.4 m) might have been reasonable because the Adjuster and the parties had proceeded on the basis that the expenses incurred were recoverable during the whole period of the negotiation when in fact the period of time spent negotiating from US$2.4 m to the final ransom sum was much shorter.

Implications

As Lord Sumption noted in his judgment, General Average rarely reaches the Courts and even more rarely reaches the appellate courts. The consequence is that aspects of the Rules have never been the subject of interpretation by the Courts.  Rule F is just such an example.  Instead it has been applied in accordance with practices and understandings adopted by adjusters. There seems little doubt that the ruling in this appeal will challenge some of what had hitherto been regarded as orthodox thinking. As the majority judgements note, the Court of Appeal in overturning the judge were following reasoning supported by the leading textbooks and obiter statements. It would appear that those texts (particularly on the question of whether there is a requirement for two alternative courses) and the practices which they reflect will need to be revisited.

The reasoning of the Court as to the true meaning and effect of Rule F is important and has potentially wide reaching consequences. Whenever a shipowner negotiates with a third party to reduce expenses which are of a kind allowable in general average (repair or salvage costs are two possible examples) all and any operating expenses incurred in that period are strong candidates for Rule F allowances. It has never previously been thought that such expenses would be allowed. That they are likely to be allowable appears to be so even where the original figure quoted or demanded is excessive or exorbitant so long as it could be said that it was reasonable to agree a figure in excess of that finally agreed and the excess is at least the amount of the expenses claimed.

In the context of piracy cases the final point made above is striking.  Both the Judge and the Court of Appeal were critical of any regime which required adjusters or courts to determine when a hypothetical ransom payment in excess of that actually agreed and paid was reasonably incurred. However that is precisely the exercise which must now be undertaken without any guidance from the Supreme Court as to how to perform it.