York Antwerp Rules, 1974 – crewing and bunker expenses incurred during negotiation of ransom demanded by pirates allowed under Rule F.
While crossing the Gulf of Aden on a voyage from Rafnes, Norway, to Go Dau, Vietnam, the vessel was captured by pirates and taken to the Bay of Eyl, Somalia.
The pirates demanded a ransom of $6 million. In response, the vessel’s owners formed a crisis management team who set a target settlement figure of $1.5 million.
After negotiations lasting 51 days, a ransom was agreed in the amount of $1.85 million.
The main dispute between the parties was whether the vessel operating expenses incurred during the period of negotiation were allowable in general average.
The York Antwerp Rules to be considered were:
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…
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… shall not be admitted as general average…
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 ransom payment itself could be allowed under Rule A. The main dispute between the owners and cargo interests was whether the negotiation period expenses could be allowed as substituted expenses under Rule F.
Findings at first instance and in the Court of Appeal
Stephen Hofmeyr QC (sitting as a deputy High Court judge) held simply:
There can be no doubt that the expenditure was incurred in substitution for the saving in ransom, i.e. the difference between the ransom initially demanded and the ransom ultimately paid. This is sufficient to engage Rule F.
The Court of Appeal (Hamblen, Kitchin and Sir Timothy Lloyd LJJ) (main judgment by Hamblen LJ) disagreed.
The appeal hearing focused on four distinct issues, the first two of which were whether the negotiation period expenses could be regarded as substituted for an allowable general average expense as required by Rule F and secondly, whether it would have been reasonable for the owners to pay the amount initially demanded without resorting to planned, strategic negotiations.
The Court of Appeal accepted the argument that there was no meaningful distinction between paying the initial ransom demand and the amount arrived at by negotiation. There was therefore no substituted expense as required by Rule F. On a true analysis, the negotiation period expenses were incurred as result of ordinary delay and so disallowed by the operation of Rule C.
Oddly, they endorsed Hofmeyr QC’s findings that paying the initial ransom demanded would have been reasonable, so satisfying the provisions of Rule A.
Separating the negotiation period expenses from the ransom itself led to an error in the reasoning of the Court of Appeal.
It was accepted that the payment of ransom money was expenditure for the purposes of Rule A. No reason suggests itself why the negotiation period expenses plus the ultimate ransom paid could not be fairly regarded as an alternative expense “in place of” (the ipsissima verba of Rule F) payment of the initial demand.
Hamblen LJ‘s over-elaborate analysis could be compared to that of Hobhouse J in the Bijela ultimately rejected by the House of Lords.
Findings in the UKSC
Lords Neuberger, Clarke, Sumption and Hodge (Lord Mance dissenting) restored the judge of first instance.
Whereas the Court of Appeal had been much influenced by the argument that standard industry opinion was that Rule F required a different type of expense from that allowable under Rule A, this was not the law. The criterion was the saving,
Lord Neuberger put it thus:
However the law cannot be decided by what is understood among writers and practitioners in the relevant field (or even by views expressed by Hoffmann LJ in a dissenting judgment – the Bijela – especially in a case where the point did not strictly arise and does not appear to have been argued). Experience shows that in many areas of practical and professional endeavour generally accepted points of principle and practice, when tested in Court, sometimes turn out to be unsustainable. I accept that it may be right for a Court to have regard to practices which have developed and the principles which have been adopted by practitioners, but they cannot determine the outcome when the issue is ultimately one of law.
It was also not necessary to find, as Hofmeyr QC and the Court of Appeal had done, that paying the initial ransom would have been reasonable. All that was necessary to engage Rule F was that extra expense was incurred in place of another “allowable” expense which referred back to Rule C, the purpose of which was to qualify the type of expense, and not Rule A, which had to do with quantum.
Lord Mance took a different line and would have dismissed the appeal on the basis that the factual finding that paying the initial ransom was a reasonable course, was wrong.
Lord Mance makes the good points that: the case was decided on documents, not ideal to enable definitive findings of fact, and, such indications as there were, suggested that in Somali piracy cases, the initial demand was never met and, had it been in this case, could have led to unpredictable results, for instance the making of a higher demand.
A better solution might have been to regard the negotiated ransom and all that went with it i.e. the expenses incurred during the period of negotiations as an organic whole representing an extraordinary sacrifice under Rule A, provided that the overall qualification of reasonableness was met.
This would have led to the same outcome in this case which seems to be fair.
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