Shipping

November 2014

Update

The LONGCHAMPExpenses incurred

negotiating down a pirates
ransom demand allowable
in general average
The LONGCHAMP case1 examined how Rule F of the
York-Antwerp Rules (on substituted expenses) should be
interpreted when assessing whether the substituted expenses
of negotiating down a ransom demand should be allowed in
general average. Such expenses must be incurred in place of an
alternative course of action which would have been reasonably
incurred in accordance with Rule A (general average act). Here,
to assess this criterion, the Judge had to consider whether a
USD 6 million ransom payment would have been reasonable
and would have fallen within the ambit of Rule A.
Facts
On 29 January 2009, pirates forcibly
seized the LONGCHAMP in the Gulf
of Aden and demanded a ransom of
USD 6 million. Following negotiations
between the ship managers chief
security officer and a negotiator acting
for the pirates, a ransom was agreed in
the amount of USD 1.85 million.
On 3 February 2009, general average
was declared. The USD 1.85 million
ransom payment was included in the
adjustment as expenditure allowed in
general average.
The adjustment also allowed certain
substituted expenses in the amount
of USD 181,604.25. These included
expenses, such a crew wages and high
risk area bonus payments, which were
said to have been necessarily incurred
during the period of negotiation (the
Expenses).

1.(1) Mitsui & Co Ltd (2) Thai Plastic &

Chemicals Public Co Ltd (3) Stephen
Redmond (4) RSA Insurance Group
PLC v Beteiligungsgesellschaft LPG
Tankerflotte mbH & Co KG (2) LPG
Carriers Ltd [2014]

Shipowners claimed these were

allowable as substituted expenses
under Rule F of the York-Antwerp Rules
as they were incurred to facilitate the
reduction in the amount of the ransom
payment. Rule F provides that any
extra expenses which are incurred
in substitution for an amount which

would have been allowable as general

average, should be deemed to be
general average. Shipowners argued
these expenses were in substitution
for the USD 4.15 million difference
between the initial ransom demand
(USD 6 million) and the final ransom
payment (USD 1.85 million).

The claim
The claimant cargo interests sought an
order that these substituted expenses
should not have been allowed in the
general average adjustment.
Their principal argument was that a
hypothetical USD 6 million ransom
payment (in substitution for which the
Expenses were incurred) would not
have been allowable as general average.
Rule A of the York-Antwerp Rules sets
out that, among other things, a sacrifice
or expenditure must be reasonably
incurred in order to give rise to a
right of contribution. The claimants
submitted that such a payment would
not have been reasonably incurred
since the logical course of action, when
faced with such a demand, would be
to negotiate the figure down. As such,
Rule F could not be engaged.

Rule F requirements
Although this was the first binding
judgment to interpret and apply Rule
F, the Judge held that it was generally
accepted that Rule F imposes the
following requirements:
1) it is only concerned with expenses
2) it is only those expenses which can
be described as extra which qualify
3) there must have been an alternative
course of action which, if it had
been adopted, would have involved
expenditure which could properly
be charged to general average; and
4) the extra expenses must have been
incurred in place of the alternative
course of action

Further information
If you would like further information
on any issue raised in this update
please contact:

Stephanie Morton
E: stephanie.morton @clydeco.com

Andrew Nicholas
E: andrew.nicholas@clydeco.com

Clyde & Co LLP

1 Stoke Road
Guildford GU1 4HW
T: +44 (0)20 7876 5000
F: +44 (0)20 7876 5120
Further advice should be taken
before relying on the contents
of this summary.
Clyde & Co LLP accepts no responsibility for loss
occasioned to any person acting or refraining
from acting as a result of material contained in
this summary.
No part of this summary may be used,
reproduced, stored in a retrieval system or
transmitted in any form or by any means,
electronic, mechanical, photocopying, reading
or otherwise without the prior permission of
Clyde & Co LLP.
Clyde & Co LLP is a limited liability partnership
registered in England and Wales. Authorised and
regulated by the Solicitors Regulation Authority.
Clyde & Co LLP 2014
CC006375 - November 2014

The principal debate revolved around

the third requirement.

Decision
The Judge held that the Expenses were
in substitution for the differential
between the initial ransom demand
and the final ransom payment. This
was sufficient to engage Rule F.
However, the requirements of Rule A
would also need to be satisfied. In
other words, had it been paid, the
initial USD 6 million ransom would
need to have qualified as a reasonably
incurred expense.
Given the criminal nature of piracy,
the Judge rejected the notion that the
amount of some ransom demands
could be considered reasonable
whereas others could not. That being
said, the Judge stressed that the
relevant consideration was not the
amount of the ransom payment, but
whether it had been reasonably incurred.
The Judge stated that, save in
exceptional circumstances, it would
not be reasonable to say that a ransom
payment was not reasonably incurred
when the ship had been detained
by pirates.
In suggesting a situation where such
a payment would not be reasonably
incurred, reference was made to the
value of the cargo. If the ransom
demand clearly exceeded the

reasonably understood value of the

property involved in the maritime
adventure, then the payment of such
a demand would be unlikely to qualify
as a reasonably incurred expense under
Rule A.
On the facts, it was held that it could
not be argued that the hypothetical
payment of the initial USD 6 million
figure demanded would not have been
reasonably incurred.
The Judge further confirmed that when
determining whether hypothetical
alternative expenses would have been
allowable, the appropriate assumption
was that the substituted expenses had
not been incurred. This is in contrast
to the alternative analysis based on
the assumption that the substituted
expenses could not have been
incurred. As such, the Judge allowed
the Expenses to be included in the
adjustment by virtue of Rule F.

Comment
With the LONGCHAMP, the Judge
demonstrated a willingness to follow
a more flexible interpretation of
Rule F of the York-Antwerp Rules on
substituted expenses.
The Judge was clearly cognizant of Rule
Fs somewhat self-defeating nature
in that, the greater the hypothetical
alternative expense which was avoided,
the less likely it would be that this
hypothetical expense would have been
allowable under Rule A. This means
that the greater the expense which was
avoided, the less likely that substituted
expenses incurred in its place would be
permissible under Rule F. As such, the
Judge recognised that sufficient latitude
must be given in order for Rule F to
have effect.
The principle of general average was
founded on equitable principles and
the desire to apportion the expense
of certain sacrifices between those
that benefit from it, i.e. all parties to
the common maritime adventure.
These equitable origins are evident
in the Judges reasoning that in the
circumstances of this case natural justice
requires that all should contribute to the
substituted expenses.