The hidden costs of piracy, and where they fall

Piracy flag
Mention the words “general average” (“GA” if you’re feeling really brave) and most people look away nervously. That, of course, is most unfair given GA’s long heritage – the principles pre-date even the Romans. That heritage notwithstanding, however, GA continues to raise difficult questions: cue a decision of the Supreme Court, no less, which has just been handed down on a GA dispute of just US$160,000 (Mitsui & Co Ltd and others (Respondents) v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG and another (Appellants) [2017] UKSC 68).

For anyone wondering, “What is GA?” – in a sentence: general average is the system by which sacrifices of property made, and loss and expenditure incurred, as a direct result of actions taken for the purpose of preserving a common maritime adventure from peril are rateably shared between all those whose property is at risk in the adventure. The York-Antwerp Rules are an internationally agreed set of rules designed to achieve uniformity in ascertaining which losses fall within the principle of GA, determining the method to calculate those losses and deciding how they are to be shared.

The Rule considered in this case was Rule F, which reads:

“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 to the amount of the general average expense avoided.”

The fundamental question under consideration was this: where a laden vessel (in this case, the MV Longchamp) has been seized by pirates, and the owner succeeds in negotiating down an initial ransom demand over a period of time, can the owners include in general average not only the ransom payment ultimately made, but also the vessel and crew costs incurred during the period of negotiation (the “negotiation period expenses”)?

The majority of the Supreme Court, agreeing with the leading judgment of Lord Neuberger, answered that question with a ‘yes’. It was held:

  1. If the judge was even arguably entitled to reach the conclusion that paying the ransom of US$6 million was reasonable, it must have been reasonable to pay a ransom well under half that figure.
  2. The contention that the negotiation period expenses do not fall within Rule F because the reduced ransom (US$1.85 million) was not an “alternative course of action” to the payment of the ransom originally demanded (i.e. US$6 million) was rejected.

A range of other arguments which were put forward were also rejected. Amongst these were: a submission that owners could not recover under Rule F because they never made a conscious choice between paying the US$6 million ransom initially demanded by the pirates or negotiating with the pirates; a submission that the negotiation period expenses were not “extra expenses”, premised on a restrictive meaning of the word “extra”; and a contention that the delay which led to the negotiation period expenses may have occurred even if the owners had agreed to the pirates’ initial demand of US$6 million was also rejected.

The last word goes to Lord Mance, the dissenting voice. He felt unable to accept the judgment reached by both of the Courts below to the effect that it would have been reasonable for the owners to pay the initial ransom, and that, had they done so, they could have required the full US$6 million to be treated as general average. In his opinion, simply paying the US$6 million ransom without negotiation would “clearly have been acting unreasonably”. Given that – as he put it – the case had been “fought and decided” on the basis that this was the critical issue, he did not think that owners had established on the facts that they had any claim. As a result, he dismissed the appeal, albeit for reasons which were different from those given by the Court of Appeal.

The case has generated heated debate in the adjusting community and this decision will doubtless continue to divide opinion, just as it did in the Courts.

Richard Hugg