Mitsui & Co Ltd & Ors v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG & Anor [2017] UKSC 68

Pirates seized MV Longchamp in the Gulf of Aden, demanding $6m ransom. The owners negotiated for 51 days, settling at $1.85m. The Supreme Court held that vessel-operating expenses incurred during the negotiation period were allowable in general average under Rule F of the York-Antwerp Rules 1974.

Facts

On 29 January 2009, the chemical carrier MV Longchamp, carrying a cargo of Vinyl Chloride Monomer from Norway to Vietnam, was boarded by seven heavily armed Somali pirates in the Gulf of Aden. The vessel was taken to Eyl, Somalia. On 30 January 2009, the pirates demanded a ransom of US$6m. The shipowners formed a crisis management team and, over 51 days of negotiation, eventually agreed a ransom of US$1.85m on 22 March 2009. The ransom was delivered on 27 March 2009, and the vessel was released on 28 March 2009.

The bill of lading provided that general average would be adjusted in accordance with the York-Antwerp Rules 1974. It was common ground that the US$1.85m ransom and the costs of the specialist negotiators (Captain Ganz and NYA International) were allowable in general average under Rule A. The dispute concerned approximately US$160,000 of vessel-operating expenses incurred during the 51-day negotiation period, comprising crew wages, high-risk area bonuses, crew maintenance and bunkers consumed.

Issues

The central issue was whether the negotiation period expenses were allowable in general average under Rule F of the York-Antwerp Rules 1974, which provides:

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.

Sub-issues included: (i) whether the avoided expense (the higher ransom) must itself have been reasonable to be ‘allowable’ within Rule F; (ii) whether Rule F requires an ‘alternative course of action’ rather than a mere variation in the amount of the same kind of expense; (iii) whether the expenses were incurred with the necessary intention; (iv) whether they constituted ‘extra expense’; (v) whether they would have been incurred anyway; and (vi) whether Rules C or XI excluded recovery.

Arguments

Owners (Appellants)

The owners argued that the US$1.85m ransom fell within Rule A, that the negotiation period expenses of US$160,000 were ‘extra expense’ incurred ‘in place of’ the US$4.15m saved by negotiation, and that the saving exceeded the extra expense, so Rule F was satisfied.

Cargo Interests (Respondents)

The cargo interests advanced six contentions: (a) the ransom saved was not ‘allowable’ because it would have been unreasonable to pay US$6m; (b) the ransom saved was not ‘another expense’ since negotiation was not an alternative course of action but a mere variant; (c) the expenses were not consciously incurred with the relevant intention; (d) they were not ‘extra’ expense; (e) they would have been incurred anyway; (f) Rules C and XI precluded recovery.

Judgment

Lord Neuberger (with whom Lord Clarke, Lord Sumption and Lord Hodge agreed) allowed the appeal and restored the deputy judge’s decision. Lord Sumption delivered a concurring judgment. Lord Mance dissented.

Reasonableness of the avoided expense

Lord Neuberger held that the courts below had erred in assuming that the owners had to establish that it would have been reasonable to accept the initial US$6m demand. The reference in Rule F to ‘an expense which would have been allowable as general average’ was to an expense of a nature which would have been allowable, not to its precise quantum. The word ‘allowable’ pointed to Rule C (which concerns the type of expense) rather than to Rule A’s reasonableness requirement; quantum is dealt with by the cap in the closing part of Rule F. To require the avoided sum to be reasonable would produce the ‘Hudson conundrum’, whereby owners avoiding an unreasonable expense would be worse off than those avoiding a reasonable one. In any event, the greater includes the less: even if reasonableness were required, Rule F would apply up to a reasonable amount.

Alternative course of action

The Court rejected the cargo interests’ contention that Rule F required an ‘alternative course of action’ distinct in kind from the avoided expense. Whilst commentary in Lowndes & Rudolf and Hudson & Harvey suggested such a requirement, the law is not determined by practitioner consensus. On the natural language of Rule F, the incurring of US$160,000 in vessel-operating costs did represent an alternative course of action to paying the additional US$4.15m of ransom. Reading restrictive qualifications into an international instrument was inappropriate. Lord Neuberger cited Lord Wilberforce in James Buchanan & Co Ltd v Babco Forwarding & Shipping (UK) Ltd [1978] AC 141 and Lord Hobhouse in King v Bristow Helicopters Ltd [2002] 2 AC 628 in support of the principle that internationally agreed instruments should be interpreted on broad principles of general acceptation.

Other contentions

The Court rejected the remaining arguments. The question whether an expense was incurred ‘in place of’ another is to be assessed objectively, not by reference to any conscious choice. ‘Extra expense’ means simply an expense which would not otherwise have been incurred, contrasting with ‘extraordinary’ in Rule A. The judge’s implicit finding that prompt payment would have led to prompt release was an eminently defensible factual conclusion. Rule C’s exclusion of indirect losses applies to expenses claimed as consequences of a general average act under Rule A, not to substituted expenses under Rule F. Rule XI’s specific allowance for crew wages in port of refuge situations does not, by implication, exclude such expenses elsewhere; the Rule of Interpretation provides that lettered Rules apply save where numbered Rules apply.

Lord Sumption’s concurrence

Lord Sumption emphasised that Rule F is ‘simplicity itself’ and that adjusters’ practices, however widespread, cannot override the natural meaning of the Rules. Implications should not be read into the Rules unless necessary to make them workable.

Lord Mance’s dissent

Lord Mance accepted in principle that Rule F could apply to negotiation period expenses but considered that the courts below had been wrong to conclude that it would have been reasonable to pay the initial US$6m demand. Given the established pattern of negotiation with Somali pirates, capitulation to the first demand would have been unreasonable. As the case had not been advanced on the basis of a hypothetical reasonable settlement figure, the owners had not established the factual basis for recovery, and he would have dismissed the appeal.

Implications

The decision clarifies the operation of Rule F of the York-Antwerp Rules 1974 in two important respects. First, the ‘allowability’ of the avoided expense is judged by reference to the nature of the expense (under Rule C) rather than the reasonableness of its quantum (under Rule A). The reasonableness of the substituted course is policed by the cap on recovery in Rule F itself. Secondly, Rule F is not confined to cases involving an ‘alternative course of action’ that differs in kind from the avoided expense; expenses incurred to reduce the quantum of an allowable expense may also qualify.

Practically, the decision means that vessel-operating expenses incurred during ransom negotiations with pirates may be allowed in general average, to be shared rateably between shipowners and cargo interests, provided that they do not exceed the amount of ransom saved. This has obvious significance for the maritime industry, particularly in piracy-prone waters, and for those advising on general average adjustments.

The judgment also affirms important interpretive principles for internationally agreed instruments incorporated by contract: courts should interpret them on broad principles of general acceptation, free from technical English legal rules, and should not imply qualifications that are not apparent from the natural meaning of the words. Practitioner consensus or adjuster practice cannot override the language of the Rules where the issue is ultimately one of law.

The limits of the decision should be noted: it concerns the 1974 version of the Rules (the word ‘extra’ has since been replaced by ‘additional’), and the factual finding that prompt payment would have led to prompt release was important. Lord Mance’s dissent highlights that recovery depends on the avoided expense being of an allowable nature, and questions about reasonable settlement levels may still arise in future cases on different facts.

Verdict: Appeal allowed. The Supreme Court restored the decision of the deputy judge, holding that the negotiation period expenses of approximately US$160,000 were allowable in general average under Rule F of the York-Antwerp Rules 1974. Lord Mance dissented.

Source: Mitsui & Co Ltd & Ors v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG & Anor [2017] UKSC 68