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You are here: BAILII >> Databases >> United Kingdom Supreme Court >> Mitsui & Co Ltd & Ors v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG & Anor [2017] UKSC 68 (25 October 2017) URL: https://www.bailii.org/uk/cases/UKSC/2017/68.html Cite as: [2017] Bus LR 1909, [2017] UKSC 68, [2017] WLR(D) 703 |
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[2017] UKSC 68
On appeal from: [2016] EWCA Civ 708
JUDGMENT
Mitsui & Co Ltd and others (Respondents) v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG and another (Appellants)
before
Lord Neuberger
Lord Mance
Lord Clarke
Lord Sumption
Lord Hodge
JUDGMENT GIVEN ON
25 October 2017
Heard on 17 and 18 July 2017
Appellants Stephen Kenny QC Richard Sarll (Instructed by Stephenson Harwood LLP) |
|
Respondents Simon Croall QC Paul Toms (Instructed by Salvus Law Limited) |
LORD NEUBERGER: (with whom Lord Clarke, Lord Sumption and Lord Hodge agree)
1.
This appeal raises the issue whether the daily vessel-operating expenses
of shipowners incurred while they were negotiating to reduce the ransom
demands
of
pirates
should be allowed in general average - ie whether those expenses
should be shared proportionately between all those whose property and
entitlements were imperilled as a result of that seizure - or whether they must
be borne by the shipowner alone.
General average and the York-Antwerp Rules
4. The Rules are introduced by a “Rule of Interpretation”, which states that:
“In the adjustment of general average the following lettered and numbered Rules shall apply to the exclusion of any Law and Practice inconsistent therewith.
Except as provided by the numbered Rules, general average shall be adjusted according to the lettered Rules.”
The seven lettered Rules are shortly expressed and are plainly intended to be of general application, whereas most of the 22 numbered Rules are lengthier, a few of them much lengthier.
“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.”
Rule C provides:
“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, such as demurrage, and any indirect loss whatsoever, such as loss of market, shall not be admitted as general average.”
Rule F states:
“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.”
The factual background
7. On 29 January 2009 the chemical carrier MV Longchamp (“the vessel”) was transiting the Gulf of Aden on a voyage from Rafnes, Norway, to Go Dau, Vietnam, laden with a cargo of 2,728.732 metric tons of Vinyl Chloride Monomer in bulk (“the cargo”). The cargo was carried under a bill of lading dated 6 January 2009 which stated on its face that “General Average, if any, shall be settled in accordance with the York-Antwerp Rules 1974”.
8.
At 06.40, seven heavily armed pirates
boarded the vessel. The
pirates
commanded the master to alter course towards the bay of Eyl, Somalia, where she
arrived and dropped anchor at 10.36 on 31 January 2009. At 14.05
on 30 January 2009 a negotiator for the
pirates
boarded the vessel and demanded
a
ransom
of US$6m. The vessel’s owners (“the owners”) had meanwhile formed a
crisis management team who had set a target settlement figure of US$1.5m. On 2
February 2009 an initial offer of US$373,000 was put to the
pirates.
Negotiations between the
pirates’
negotiators and the owners’ crisis
management team continued over the following seven weeks with various offers
and counter-offers being made.
9.
Eventually on 22 March 2009, after a negotiation period of 51 days, a
ransom
was agreed in the amount of US$1.85m. On 27 March 2009 the
ransom
sum was delivered by being dropped at sea. At 07.36 on 28 March 2009 the
pirates
disembarked and at 08.00 that day the vessel continued her voyage.
10.
It is accepted that the US$1.85m ransom
payment itself can be allowed
under Rule A. It is also accepted that the costs and expenses
of the negotiator in relation to the
ransom,
Captain Ganz, and the costs and
expenses of his special advisers, NYA International, are allowable. There was a
dispute about the allowability of a sum of around US$20,640 in respect of media
expenses but that is no longer challenged by the cargo interests.
(1) US$75,724.80 for crew wages paid to the crew.
(2) US$70,058.70 for “high risk area bonus” paid to the crew by reason of the fact that the vessel was detained within the Gulf of Aden. These are additional wages which the crew were entitled to under their contract of employment whilst at sea within a “high risk area”.
(3) US$3,315 for crew maintenance (ie food and supplies).
(4) US$11,115.45 for bunkers consumed.
In this judgment, I shall treat the aggregate sum as being US$160,000.
The procedural history
12. The average adjuster, Mr Robin Aggersbury of Stichling Hahn Hilbrich, considered that the negotiation period expenses were allowable under Rule F on the basis that they were incurred “during a negotiation period of about 51 days” which enabled “an amount of US$4,150,000 [to be] saved in the common interest of all property owners concerned, which would otherwise have been recoverable as per Rule A”. The 51-day period to which he referred was, as explained above, from 30 January to 22 March 2009. The cargo was valued at destination at US$787,186 and the value of the vessel was assessed at US$3,947,096; so cargo interests were liable for 14.44% of the total general average expenditure. Following publication of the adjustment, the cargo interests requested and obtained a report (“the Report”) from the Advisory Committee of the Association of Average Adjusters. The Report set out the facts in considerable detail, and concluded, by a majority of four members to one, that the negotiation period expenses did not fall within Rule F.
The arguments of the parties
14.
The owners’ argument involves the following steps. First, it is rightly
common ground that the US$1.85m ransom
paid to the
pirates
for the release of
the vessel was expenditure which was “a general average act” within Rule A.
Secondly, the negotiation period expenses claimed fell within the expression
“expense incurred” by the owners within Rule F. Thirdly, those expenses were
“incurred in place of another expense”, namely the US$4.15m saved as a result
of the negotiations. Fourthly, those expenses, being US$160,000, are less than
“the general average expense avoided”, namely the US$4.15m (and for the sake of
simplicity I will treat this as the saving, although the actual saving was
somewhat less by virtue of expenses such as those paid to Captain Ganz and
NYA). Fifthly, it follows from this that the negotiation period expenses are
properly allowable under Rule F.
15. The cargo interests raise a number of points in answer to this argument, and those points (which I shall take in a slightly different order from that in which they were argued in this court or discussed by Hamblen LJ in his judgment) are as follows:
a)
The ransom
saved was not “allowable”.
b)
The ransom
saved was not “another expense”.
c) The negotiation period expenses were not incurred with the necessary intention.
d) The negotiation period expenses are not “extra expense”.
e) The negotiation period expenses would or may have been incurred anyway.
f) The negotiation period expenses are irrecoverable by virtue of Rule C or (by implication) Rule XI.
I shall consider those arguments in turn, although it is the first and second arguments which justify particular consideration partly because they are the most difficult points and partly they are issues on which my view differs from that of the Court of Appeal.
It would not have been reasonable to accept the initial
ransom
demand
16.
The cargo interests’ first contention is based on the proposition that
it would not have been reasonable for the owners to have accepted the pirates’
initial
ransom
demand for US$6m. On that basis, it is said that a payment of US$6m
(or, more accurately, the saving of US$4.15m) would not have been “expenditure
… reasonably … incurred” within Rule A, and therefore cannot qualify as an
“expense which would have been allowable as general average” in Rule F. The judge
accepted that, in order to succeed in its claim under Rule F, the owners would
have to establish that it would have been reasonable for them to have accepted
the
pirates’
initial demand, but decided that, in all the circumstances, it
would have been reasonable for the owners to have paid US$6m
ransom.
The Court
of Appeal agreed with the judge’s analysis of the legal position, and declined
to interfere with his conclusion that it would have been reasonable of the
owners to have met the
pirates’
initial demand.
17.
It is a difficult question whether the Court of Appeal ought to have
concluded that the judge was entitled to conclude that it would have been
reasonable for the ship-owner to have paid the pirates
the US$6m which they
initially demanded. While an appellate court should be slow to interfere with a
trial judge’s finding of fact, this was not a finding of primary fact. And, at
least on the face of it, one would have thought that it would have required
very unusual circumstances for a ship-owner not to try and negotiate with
pirates
who had made such a very high demand. Further, the evidence suggests
that no ship-owner accepted an initial demand made by Somali
pirates
and that
their demands were generally pitched on the basis that they would be
substantially reduced by negotiation. On the other hand, one must beware of the
perils of wisdom of hindsight, and it is right to bear in mind that there was a
wounded sailor on the vessel and that the cargo was perishable.
18.
In my opinion, it is not necessary to resolve this difficult issue, because
I do not consider that the judge or the Court of Appeal were correct in
assuming that the owners had to establish that it would have been reasonable to
accept the pirates’
initial demand in order to justify the contention that the
negotiation period expenses were allowable under Rule F. One does not need to
examine the wording of the Rules to appreciate that the assumption made by the
courts below would lead to very odd results, as explained by Hamblen LJ at
[2016] Bus LR 1285, paras 62 to 64. It would mean that, if a ship-owner incurs
an expense to avoid paying a reasonable sum, he can in principle recover under
Rule F, whereas if he incurs expense to avoid paying an unreasonable sum (ie a
larger sum), he cannot recover. The more obvious his duty to mitigate, and the
greater the likely benefits of such mitigation, the less likely he would be to
be able to recover. Such a state of affairs (apparently known to cognoscenti
as the “Hudson conundrum”, after the writer who first described it) would be a
remarkable result. Fortunately, examination of the wording of Rules A, C and F
shows that it does not arise.
20.
Applying that reasoning to this
case, and subject to the discussion below as to the cargo interests’ other
arguments, the US$160,000 falls within Rule F. The US$160,000 was incurred in
order to avoid paying a US$6m ransom
(or, more accurately, a
ransom
of around US$4m
more than the
ransom
actually paid), and as the
ransom
was an allowable expense
in principle, the US$160,000 therefore falls within Rule F, subject to the
appellant establishing that it would have been reasonable to have paid a
ransom
of around US$2.4m (ie the
ransom
it did pay plus the US$160,000 together with
the further expenses such as those paid
to Captain Ganz and NYA). If the judge
was even arguably entitled to reach the conclusion that paying a US$6m
ransom
was reasonable, it must have been reasonable to pay a
ransom
well under half
that figure.
21.
Even if the analysis in para 19 above were not right, I would have
reached the same conclusion. As pointed out by Lord Sumption in the course of
the argument, where an unreasonably high sum is expended, there would be no
reason not to hold that Rule F applied, albeit only to the extent of a
reasonable sum, on the basis that the greater includes the less. Thus, if (contrary
to the analysis in para 19 above), Rule F only applied where a sum was
reasonably incurred, and in this case the judge had concluded that the maximum
reasonable ransom
would have been US$4m, then Rule F would have applied to US$4m
of the US$6m
ransom.
The reduction in ransom
was not an alternative course of
action
22.
I turn then to the second contention raised by cargo interests, which
was the ground on which they succeeded in the Court of Appeal. That contention
is that the negotiation period expenses do not fall within Rule F, because the
payment of a reduced ransom
of US$1.85m was not an “alternative course of
action” to the payment of the
ransom
originally demanded, namely US$6m: it was
merely a variant. This contention involves arguing that to trigger Rule F, it
is not enough for a claimant to incur expense in achieving a result which costs
less than what an allowable item would otherwise have cost: the expense must be
incurred to achieve a result which involves replacing that allowable item with
a different and cheaper item. As Lord Mance expressed it during the argument,
this argument involves saying that Rule F applies only where some means is
adopted to complete the adventure, and that means is different from that which
might normally be expected.
23. The notion that Rule F is only engaged in a case where the claimant achieves an “alternative course of action” in that sense was said by Hamblen LJ at [2016] Bus LR 1285, paras 38 to 40 to be supported by passages in the two leading books in English on general average. In paras F.01 and F.29, the editors of Lowndes & Rudolf, The Law of General Average and the York-Antwerp Rules, 14th ed (2013) write:
“As the name implies, substituted expenses are the expenses incurred in respect of a course of action undertaken as an alternative to - or in substitution for - the expense that would be allowable as general average.
For this rule to have any application there must have been an alternative course which, if adopted, would have involved expenditure which could properly be charged to general average.”
In Hudson & Harvey, The York-Antwerp Rules: The Principles and Practice of General Average Adjustment, 3rd ed (2010), para 11.33, there is this:
“Although Rule F is phrased in terms which refer to the incurring of the expense, its application in practice presupposes a choice between two (and sometimes more) different courses of action.”
26.
Turning to the language of Rule F, I consider that this “alternative
course of action” contention goes nowhere. Even if one accepts that the “extra
expense” must involve an alternative course of action, it seems to me that the
owners’ claim satisfies that requirement. It appears to me that (ignoring other
sums for present purposes) the right analysis of the owners’ claim is that it
is for (i) US$1.85m under Rule A and (ii) US$160,000 under Rule F, on the basis
that (i) the US$1.85m, as a reasonable sum paid to ransom
the vessel and the
cargo, is admittedly within Rule A, and (ii) the US$160,000, as negotiation
period expenses, represents “extra expense incurred in place of” the US$4.15m,
the amount by which the
ransom
was reduced. On that basis, as I see it, the
incurring of the US$160,000 did represent an alternative course of action, in
the sense that the cargo interests use that expression, from the payment of the
US$4.15m: the former involved incurring vessel-operating expenses whereas the
latter involved paying a
ransom.
27.
There is an alternative analysis
of the owners’ claim, which is that it should be treated as being for a single
sum of US$2.01m, namely the US$1.85m ransom
actually paid plus the US$160,000
negotiation period expenses, under Rule F on the basis that this combined sum
was “extra expense incurred in place of” the US$6m originally demanded.
However, I do not see how that helps the cargo interests. Logically, their
argument on this basis should be that the US$1.85m is disallowable under Rule F
as it was not an alternative course of action from paying the originally
demanded US$6m
ransom,
but the negotiation period expenses are recoverable
under Rule F, as they did involve an “alternative course of action” - which is
precisely the opposite of the cargo interests’ actual case, and indeed a
nonsensical result.
29. Given that the Rules represent an international arrangement, it is particularly inappropriate to adopt an approach to their interpretation which involves reading in any words or qualification. As already mentioned, it appears to me that, as a matter of ordinary language, Rule F applies to the negotiation period expenses for the reasons given in para 26 above. To imply some qualification such as the requirement that those expenses must have been incurred so as to achieve an “alternative course of action” appears to me to be very dangerous. In the same way as an international convention or treaty, the Rules should be interpreted by a United Kingdom court “unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation”, to quote Lord Wilberforce in James Buchanan & Co Ltd v Babco Forwarding & Shipping (UK) Ltd [1978] AC 141, 152. As Lord Hobhouse said in King v Bristow Helicopters Ltd [2002] 2 AC 628, para 148, in relation to an article in the Warsaw Convention, “it is the unadorned language of the article to which attention must be directed”.
30. Quite apart from this, the cargo interests’ second contention appears to me to lead to difficulties and potential anomalies in practice. Thus, there would be difficulties about deciding whether a particular variant was an “alternative course of action”. Towage to destination, extra costs of arranging dry-docking with cargo on board, overtime worked on repair or cargo operations (at least sometimes), and (historically) air freight instead of sea freight for spare parts were examples given by the respondents of “alternative courses of action” (mostly taken from Lowndes & Rudolf, op cit). But it is hard to see where the line is to be drawn. The difficulties about deciding whether overtime payments qualify is plain from reading Lowndes & Rudolf, op cit, para F.25; in addition, overtime payments are enhanced payments for the same work whose cost would have been recoverable under Rule A in any event. And if air freight can qualify if it is incurred instead of sea freight, it is hard to see much logic in disqualifying sea freight at a lower rate negotiated with a new party on a different type of vessel. Further, given that, on the cargo interests’ case, negotiation period expenses could not be claimed if they were incurred as a result of negotiating a reduction in the cost of repair with one shipyard, what would the position be if the negotiations were with a competing shipyard and/or in respect of a novel and different way of effecting the repairs?
31.
It also appears to me to be somewhat inconsistent in terms of logic that
(as has been agreed between the parties in this case) the costs and expenses of
Captain Ganz and NYA are subject to general average whereas the negotiation
period expenses are not. It is clear that the costs and expenses claimed by and
paid to Captain Ganz and NYA included costs and expenses attributable to the
negotiations with the pirates
(for instance, hotel bills for most of the 51-day
period). They can only be justified on the basis that they were referable to
the negotiations to reduce the
ransom,
in the sense that they were incurred
solely because of the negotiations taking place. Accordingly, if they are
claimable, it is hard to understand why the negotiation period expenses should
not also be claimable.
32.
At [2016] Bus LR 1285, para 47,
Hamblen LJ suggested that there were a number of anomalies if the negotiation
period expenses were allowable. First, he mentioned the difficulty of
establishing that the expenses would not have been incurred even if the initial
demand for US$6m ransom
had been accepted. I doubt that that problem would
arise in most cases where the vessel-operating costs are said to fall within
Rule F, and it may well arise in some cases where it would be common ground
that Rule F would apply. In any event, it is for the claimant in each case to
establish, on the balance of probabilities, that the delay caused by the
negotiation would not have occurred if there had been no negotiation. Secondly,
he said that, in a case such as this there could be no entitlement to claim
vessel-operating costs as Rule F expenses until a demand had been made. I
agree, but fail to see why it is an anomaly. Thirdly, Hamblen LJ pointed out
that, in the absence of a demand, eg if there were simply negotiations, it
might be hard to say when, or even whether, Rule F was engaged. I accept that
there may be
ransom
cases where it is hard to determine at what precise point
Rule F is engaged, but it would, I think, be a rare case where at some point
early in the negotiations the
pirates
did not come up with a figure. Anyway, I
suspect that point could apply to cases where Rule F is undoubtedly engaged.
Quite apart from that, I do not accept that the fact that there may be
difficulties for claimants in a few other
ransom
cases is a reason for holding
that Rule F is not engaged in this case. More broadly, if (as appears to me to
be appropriate) one views Rule F simply as entitling a claimant to claim in
respect of an expense successfully incurred for the purpose of mitigating a
loss, it seems to me that none of these points should give rise to concerns.
The cargo interests’ other arguments
33.
The cargo interests’ third contention is that, in order to be
recoverable under Rule F, the negotiation period expenses must be shown to have
been consciously and intentionally incurred by the owners, and there was no
evidence that the owners or their agent had consciously decided to incur those
expenses in order to reduce the ransom
payable to the
pirates.
Indeed, Hamblen
LJ said at [2016] Bus LR 1285, para 43 that “it does not appear that the owners
ever considered that they faced a choice” and that there was “no evidence to
suggest that they ever considered choosing between paying the
ransom
on demand
and paying a lesser sum following negotiation”. Accordingly, runs the argument,
the owners cannot recover under Rule F as they never made a conscious choice
between paying the US$6m
ransom
initially demanded by the
pirates
or
negotiating with the
pirates.
34.
I do not accept that contention. The question whether one expense has
been incurred “in place of another expense” must be assessed objectively. In
this case, it is clear (and must have been clear at the time) that negotiations
were (and would be) needed if the ransom
was to be reduced, that such
negotiations took (and would take) time, and that the passage of time resulted
in the negotiation period expenses (and would result in expenses of that
nature) being incurred. As the negotiations resulted in the
ransom
being
reduced, it seems to me that, subject to any other argument, it must follow that
the expenses incurred as a result of those negotiations were incurred “in place
of” the US$4.15m saved (or that the expenses incurred plus the US$1.85m actual
ransom
were incurred “in place of” the original US$6m
ransom
demand).
35. The cargo interests further contend that the negotiation period expenses were not “extra expense” within the meaning of that word in Rule F. This contention is based on the proposition that, in order to qualify as “extra expense”, an expense would have to be of a nature which would not normally have been incurred in response to the peril threatening the adventure. I can see no reason for giving the word “extra” such a restrictive meaning. First, it is not its natural contextual meaning, which, in my view, is simply an expense which would not otherwise have been incurred (but for the saving of the “other expense”). Secondly, such a meaning is supported by the contrast with the word “extraordinary” in Rule A. Thirdly, such a restrictive meaning lies unhappily with the French equivalent adjective, which is “supplémentaire”. I take some comfort from, but do not rely on, the fact that the word “extra” in Rule F has now been replaced, in later versions of the Rules, by the word “additional”.
36.
The cargo interests’ next
contention is that the delay which led to the negotiation period expenses may
well have occurred even if the owners had agreed to the pirates’
initial demand
of US$6m. For instance, if the owners had accepted the US$6m, the
pirates
may
have thought that they had pitched their initial demand too low, and would have
increased it, leading to further negotiations and consequent delay. That is of
course a possibility. However, it is inherent in the judge’s conclusion that he
considered it more likely than not that the vessel and cargo would have been
released promptly if the US$6m
ransom
demand had been accepted and paid. That
was the sort of finding (albeit an implied finding, but necessarily so, in his
conclusion) with which an appellate court should be very slow to interfere. And
in this case it appears to me that we should clearly not question it: it was an
eminently defensible finding. It is clear that a delay of some period would be
inevitable as a result of the negotiations, and it is clear that the 51 days
(between the initial demand of US$6m and the final agreement at US$1.85m) was
inevitable as a result of the negotiations; on the other hand, to put it at its
very lowest, it is not unlikely that none of the 51 days delay would have been
suffered if the US$6m demand had been met.
37. The cargo interests’ final contention is that, as Rule C excludes from general average expenditure which is an “indirect loss” including demurrage, and/or because Rule XI includes crew wages and maintenance where it applies, the claim in the present case must fail. In my opinion, there is nothing in that point. I accept that the negotiation period expenses, if consequential on a general average act, would have fallen within the exclusion in Rule C of loss sustained through delay, but I do not accept that it follows that they must therefore fall outside Rule F. Rule C applies to expenses and other sums claimed by way of general average as consequences of a general average act (as defined by Rule A). It does not apply to expenses covered by Rule F, which is concerned with sums which are expended or lost in mitigating or avoiding the sums which would otherwise be claimable as general average. By definition, sums recoverable under Rule F are not themselves allowable in general average, but are alternatives to sums which would be allowable. One can understand why, as a matter of policy, demurrage and similar indirect liabilities are not recoverable as general average, but it does not follow that such indirect liabilities should be irrecoverable if they are expended in order to mitigate what would otherwise be a larger general average claim.
Conclusion
39. For these reasons, I would allow this appeal and restore the decision of the deputy judge.
LORD SUMPTION: (with whom Lord Hodge and Lord Clarke agree)
40. I agree with the judgment of Lord Neuberger.
41.
The York-Antwerp Rules have a status in shipping law similar to that of
the Uniform Customs and Practices in the law relating to documentary credits. They
depend wholly on contractual incorporation for their binding force. But they
are designed to create a body of principle applicable internationally in a
uniform way, although incorporated in shipping agreements of different kinds,
governed by different laws. It will therefore rarely if ever be appropriate to
imply matter into them which is not apparent from the natural meaning of the
words, unless the implication is necessary to make them workable or
intelligible or to avoid absurdity. Rule F is simplicity itself. It provides
for the allowance of expenditure which is not allowable as general average
expenditure but has successfully mitigated expenditure or sacrifice which would
have been allowable as general average. The cost of maintaining the ship and
crew during a period of delay which would not have occurred but for the peril
but was necessary to enable the ransom
to be reduced, is deemed to be general
average up to the amount of the reduction.
43. In my opinion, the appeal should be allowed.
LORD CLARKE:
LORD MANCE: (dissenting)
46.
The core question is simple. Where a vessel with its cargo has been
seized by pirates,
and the owners over a period succeed in negotiating down an
initial
ransom
demand, can the owners include in general average not merely the
ransom
payment ultimately made, but also vessel and crew costs totalling US$160,213.95
incurred during the period of negotiation (“the negotiation period expenses”).
The vessel MV Longchamp was boarded by
pirates
at 06.40 hours on 29 January
2009. A
ransom
demand of US$6m was made by the
pirates
at 14.05 on 30 January
2009 and was rejected by the owners as “too high” on 31 January 2009. The
vessel had by then been taken to a position off Eyl on the coast of Somalia.
Thereafter, negotiations took place lasting until 18.25 on 22 March 2009, when
the
pirates
accepted the owners’ last offer of US$1.85m. The
ransom
was dropped
at sea off Eyl on 27 March and the vessel was released to proceed on her voyage
at 07.36 on 28 March 2009. The negotiation was in practice conducted by the owners.
The negotiation period to which the relevant expenses relate runs from 14.05 on
30 January to 08.25 on 22 March 2009.
47.
The relevant bill of lading provided for any general average to be
adjusted according to the York-Antwerp Rules 1974. The ransom
payment and the
costs of specialist negotiators are accepted as direct general average costs,
falling within Rule A of those Rules. The question is whether the negotiation
period expenses fall to be included in general average under Rule F, reading:
“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.”
48.
The owners’ case is that: (i) if they had paid the US$6m ransom
initially demanded, that “would have been allowable as general average” within
the meaning of Rule F; (ii) instead of doing this, they entered into successful
negotiations; (iii) the resulting reduction in the
ransom
payable from US$6m to
US$1.85m avoided general average expense of US$4.15m; and (iv) the negotiation
period expenses totalling US$160,213.95 can and should be treated as an extra
expense incurred in place of the general average expense of US$4.15m avoided.
49.
Before the deputy judge, Mr Stephen Hofmeyr QC [2015] 1 Lloyd’s Rep 76,
the focus was on point (i), whether the US$6m would, if paid, have been
allowable as general average. He held that it would have been. The Court of
Appeal agreed with the judge on this point. But it focused on a different
aspect, whether Rule F was in principle applicable when all that had occurred
was negotiation, in the event a long, rather than a short negotiation, but not
an alternative course of action by which expenditure different in kind was
incurred. In the Court of Appeal’s view, this was not a case of extra expense
being incurred “in place of” another expense, but a case where the owners had
no “real choice” or “true alternative” to pursue (per Hamblen LJ [2016] Bus LR 1285, paras 51-53) and there was “only one course of action open … namely to
treat with the pirates
… however long that might take” (per Sir Timothy Lloyd,
para 99).
“… an alternative to, or in substitution for - what might prima facie be thought of as being the normal or standard means of dealing with a given situation.”
Hoffmann LJ went on (p 422) to leave open the question whether under Rule F “the course of conduct giving rise to the substituted expense should have fallen outside the obligations contained in the contract of affreightment” or whether it is “sufficient that the expenditure was a less usual and more [sic] expensive way by which the owner complied with his contractual obligation, eg to repair the ship”. He concluded by noting that “Lowndes & Rudolf suggest that expenditure of the latter kind could fall within the Rule”, but that Rule F “certainly contemplates that there was a practical alternative by which the adventure could have been completed”.
52.
The cargo interests conceded in their written case, and I am prepared
for present purposes to accept, that this does not exclude all possibility that
Rule F might cover a situation in which, by some unusual or non-standard step,
the owners are able to replace or reduce in amount an expense of one kind by
incurring a lesser expense of the same kind. It does not however seem to me
necessary to go even that far in the present case, since what is submitted is
that the owners have, by incurring negotiation period expenses, consisting of
vessel and crew costs, avoided a different kind of expense, namely extra ransom
costs.
56. The “Hudson conundrum”, to which Lord Neuberger refers (para 18 above), does not lead to any different conclusion. In most, if not all, circumstances in which Rule F applies, there will be a prima facie or standard course of action to be taken in the face of the general average event, but the owners will, by adopting some unusual means, have arrived at an alternative solution to further the common adventure. In such cases, the other paying parties will be hard pressed to suggest that the prima facie or standard reaction would have been unreasonable. There is a parallel here with the duty to mitigate, which is not lightly to be imposed or treated as broken. The Court of Appeal ([2016] Bus LR 1285, paras 73-74) was in this respect right in my view to agree with the deputy judge’s general conclusion of principle ([2015] 1 Lloyd’s Rep 73, para 77) that the hypothetical other expense must be one which would have been reasonably incurred in a sense “interpreted and applied with a sufficient degree of latitude to give rule F practical effect”. In many cases, the differences between the two courses (the standard and that adopted) may not be large, and both may easily be reconciled as reasonable reactions. Rule F is also careful, by its concluding words, to recognise that the extra expense may not be less than that which would have resulted from taking the standard course. In such a case, Rule F performs the valuable function of allowing recovery up to the amount which would have been recoverable had the standard course been adopted.
57.
Turning specifically to an unusual situation like the present: if there
is no course at all open to take, the expenses of which would have been
allowable as general average, then matters must run their course. If a ransom
is demanded and paid in an amount which is unreasonable to pay, the only amount
allowable in general average will be whatever lesser amount it would have been
reasonable, after negotiation, to pay. If the negotiation period expenses are
regarded as an extra expense incurred in place of the amount of the
ransom
avoided by the negotiation, they can be recoverable at most only so far as the
negotiation avoided the making of a
ransom
payment which it would have been
reasonable to pay.
59.
Both the courts below have in this case concluded that it would have
been reasonable for the owners to accept and pay the first ransom
demand of US$6m.
The Court of Appeal has however decided the case against the owners on the
basis that they faced no real choice but to negotiate, however long the
negotiation might take. There is to my mind a tension between the two strands
of the Court of Appeal’s reasoning. If it would have been reasonable to accept
and pay the first demand, then the owners were on the face of it taking a stand
by seeking an even more reasonable deal in the interests of all concerned in
the common adventure. It is not apparent that Rule F could not extend to such a
course, if, as here, it involved the owners in some expense in the form of
additional crew and vessel expenses.
60.
But I find even more difficult the joint conclusion of both courts below
that it would have been reasonable for the owners to meet the first ransom
demand. The deputy judge found difficulty in seeing how any
ransom
payment
could be described as reasonable: [2015] 1 Lloyd’s Rep 76, para 98. He said:
“At least in one sense, no ransom
payment could ever be described as ‘reasonable’.
Pirates
are criminals engaged
in extortion and their demands are unlawful and deplorable. How can a payment extorted
by
pirates
be described as ‘reasonable’? In my view, it cannot. The idea of a
‘reasonable
ransom’
is radically misconceived and the term an oxymoron.”
That is however to look at the point from only one
direction. The relevant viewpoint is that of the unfortunate victims involved
in a common adventure. From their viewpoint, there must be some ransom
demands
to which it is reasonable and others to which it is unreasonable to respond.
Even the deputy judge appeared prepared to accept that the latter would include
a
ransom
demand well in excess of the value of the vessel and cargo.
61.
However, this was as far as the deputy judge was prepared to go. Leaving
aside exceptional circumstances, where the value of the ransom
demanded clearly
exceeded the value of the property involved in the venture, he thought it
obvious that it would not be reasonable to say that an owner under an
obligation to proceed with due despatch had not reasonably incurred a
ransom
paid. He went on, at para 99:
“Even if it may be said that, by
January 2009, a pattern of dealing between Somali pirates
and shipowners had
developed, as described by David Steel J in Masefield AG v Amlin Corporate
Member Ltd (The Bunga Melati Dua) [2010] 2 All ER 593’ [2010] 1 Lloyd's Rep 509 at paras 19, 23, 25 and 26 (affirmed on appeal: [2011] 1 Lloyd’s Rep 630;
[2011] 1 WLR 2012), such a pattern would not remove the potential for
unreasonable, irrational and illogical behaviour.”
In support, the deputy judge said that negotiation was an
uncertain process and it “was not possible to state with reasonable certainty
when the ransom
demand was made that the amount of the
ransom
would inevitably
be significantly reduced by the process of negotiation” (para 100). Whether or
not it is “possible to state with reasonable certainty” that a negotiation will
achieve significant success cannot however be the test of whether or not
negotiation should reasonably be essayed. The deputy judge also derived comfort
from his conclusion on this point from the consideration that “natural justice
requires that all should contribute to the substituted expenses incurred” (para
103). A difficulty about this observation is that nothing in Rule F could
enable cargo interests to recover any matching loss or damage that they might
suffer from the delay during negotiations. The cargo was in fact perishable,
even though in the event it survived the rigours it underwent without apparent
deterioration. As the Court of Appeal correctly recognised in this connection
(para 51), whether or not an item falls within general average depends on the
proper interpretation of the York-Antwerp Rules. They represent a balanced
framework, negotiated over time between all interests involved.
62.
As I have already observed, the Court of Appeal’s reasoning involves a
potential tension between the approaches taken to the scope of Rule F and to
the issue of the reasonableness of paying the initial ransom
demand. In the
former context, Hamblen LJ said this [2016] Bus LR 1285, paras 43-46:
“43. Some support for the cargo
interests’ approach is to be found in the evidence. Thus, it does not appear
that the owners ever considered that they faced a choice. The owners’ crisis
management and negotiation team were set up before any ransom
demand had been
made. From the outset the goal was to negotiate to obtain release of the vessel
upon payment of a
ransom,
but in a reduced amount. There is no evidence to
suggest that they ever considered choosing between paying the
ransom
on demand
and paying a lesser sum following negotiation.
44. This is also borne out
by the advisory committee’s stated experience, which is that in all Somali
piracy cases the same course of action is taken, namely to negotiate and pay a
reduced ransom
leading to release of the vessel. Again it does not appear that
there is considered to be a choice of payment on demand.
45. In my judgment this
failure to recognise that there is a choice reflects the reality, which is that
payment on demand is simply a different way of going about the same course of
action and not a true alternative course of action. Whether or not the ransom
is paid on demand there will still be a negotiation, there will still be delay,
there will still be the incurring of vessel and crew running costs during the
period of delay. In either case the same expenses will be incurred; the
difference is only in their extent.
46. In this case, for
example, there was a period of delay between the hijacking and the first ransom
demand. Even if that first demand had been accepted, it does not follow that it
would have been agreed. As the majority of the advisory committee state, the
unprecedented acceptance of the
ransom
on demand may well have been ‘met by a
demand from the
pirates
for a still higher figure’. Even if that was not the
case, it would still have been necessary to negotiate and agree matters
relating to place and method of payment and to the release of vessel and crew.
Thus in this case it is to be noted that there was a period of six days between
the agreement of the
ransom
and the release of the vessel.”
63. In the latter context, however, Hamblen LJ said, at paras 77-84:
“77. The cargo interests contend that the judge was wrong to conclude that payment on demand would have been reasonable and that account should have been taken (but was not) of the following matters:
(1) The established modus
operandi for Somali pirates
as at the date of the hijacking, namely invariably
to negotiate down the amount of the
ransom
demanded over a period of time with
little or no risk to cargo or crew.
(2) In the experience of the majority of the advisory committee, ‘the negotiation period is common in all piracy cases’ and ‘there is always a period of negotiation before a vessel is released and it is the normal means of dealing with such situations’.
(3) The minority member
accepted that there was a reasonable period of ‘customary’ negotiation and that
‘clearly, the ransom
amount initially demanded cannot automatically be allowed
in general average’.
(4) The position adopted by
the owners in their skeleton argument at trial, ‘That is not to say that paying
the first-demanded ransom
is ever likely in fact to be a reasonable course of
action. In reality, where there is the option of entering into negotiations
with
pirates,
it will almost always be the right thing to do’.
78. They submit that if
proper regard is had to these matters it should be concluded that it would be
unreasonable to pay the originally demanded ransom
without even attempting to
negotiate the amount of the
ransom
payment, contrary to the established practice,
and that the judge was wrong to conclude otherwise. They further submit that
payment on demand would be an ‘artificial invention’.
79. The owners do not accept
that there is satisfactory evidence to establish the matters sought to be
relied upon by the cargo interests, but that in any event they do not render
payment of the full ransom
demand unreasonable.
80. The owners accept that
the evidence at that time was that Somali pirates
would release a vessel upon
payment of a
ransom.
As they point out, that being so, the sooner the
ransom
was paid, the quicker the vessel would be released and the vessel, cargo and
crew removed from danger.
81. In my judgment, if, as
stated in the Masefield case [2010] 2 All ER 593, ‘the safest, most
timely and effective means to secure the release’ of a ship and crew was to pay
a ransom,
it follows that the most safe, timely and effective means of so doing
is to pay as soon as possible. It may be that the general practice was to try
to negotiate the
ransom
down, but that does not mean that it would be
unreasonable to pay the
ransom
straight away so as to avert the very real
danger to vessel, cargo and crew as quickly and effectively as possible. Nor
can a course of action which procures such real and tangible benefits be regarded
as an ‘artificial invention’.
82. Further, in my judgment
the reasons given by the judge are all cogent and compelling reasons for
concluding that payment of the initial ransom
sum would have been reasonable.
83. Further reasons for supporting that conclusion include the following:
(1) The effect of the delay
involved in seeking to negotiate a lower ransom
is to keep the vessel, cargo
and crew in peril, with all the risks of saying ‘no’ to
pirates,
who are
violent, armed criminals.
(2) The vessel and cargo
were under the control of the pirates.
As such, there were obvious dangers
should there be a storm or other peril of the sea.
(3) The owners knew that there had been a firefight during the capture of the vessel and that a crew member had been wounded.
(4) Although, as matters
turned out, the pirates’
main negotiator was said to be a ‘calm, rational
communicator’ who never resorted to threats or other coercive tactics, the
owners had no reason to assume that.
(5) This was just one of many ‘known unknowns’ facing the owners.
84. For all these reasons I
conclude that it cannot be shown that the judge was wrong to find that payment
of the initial ransom
demand would have been reasonable. It follows that I
would dismiss the appeal on this issue.”
I note that, after the quotation from the Masefield case
[2010] 2 All ER 593 in para 81 of Hamblen LJ’s judgment, the words “to pay a
ransom”
are not a correct citation. The actual words in the Masefield
judgment were “to negotiate and subsequently pay a
ransom”.
64.
The cargo interests rely on the apparent acceptance both by the deputy
judge ([2015] 1 Lloyd’s Rep 76, para 99, quoted in para 61 above) and by the
Court of Appeal ([2016] Bus LR 1285, paras 43, 44, 46 and 81) of a general
practice to negotiate any ransom
demand down over a period. The owners object
that there is no evidence justifying any such conclusion. But their own
skeleton argument for the trial stated that:
“This is not to say that paying
the first-demanded ransom
is ever likely in fact to be a reasonable
course of action. In reality, where there is the option of entering into
negotiations with
pirates,
it will almost always be the right thing to do. But
when considering the allowability in GA of the costs of the negotiation, the
relevant alternative scenario to be considered is the one in which there is no
negotiation possible/available.”
The last sentence reflects the owners’ then case, which relied on a suggested analogy with the reasoning of the House of Lords in The Bijela, discussed in para 58 above.
65.
The trial in the present case was a Commercial Court trial on the
documents. It seems clear that the deputy judge treated himself as entitled to
rely on all the material before him when considering the factual position,
including the statements in the Masefield case and the Report of the
Advisory Committee of the Association of Average Adjusters on the present case,
which he summarised at some length, while recording that it was common ground
that it was not binding on the court. I see no reason to regard either the
deputy judge or the Court of Appeal as having erred in this respect. David
Steel J’s judgment in the Masefield case noted ([2010] 2 All ER 593, para
14) that the initial ransom
demand in that case of US$2m in August 2008
“was all of a piece with the process of Somali hijacking. Fortunately the process of negotiating such a demand and making an agreed payment had invariably led to the release of all vessels involved. Against that background, I did not understand it to be controversial that the actual prospects of recovery of the cargo as at 18 September 2008 were good.”
66.
Other relevant factors on the issue of reasonableness are that the range
of potential values as assessed at the time was between US$5m and US$7m (with
US$5.4m being later established as the correct figure). A demand of US$6m
self-evidently exhausted or very nearly exhausted all interests involved.
Further, any indication of agreement to pay anything like the initial demand
would almost inevitably have fed a suspicion on the pirates’
part that they had
demanded far too little, and would have complicated matters then and for the
future. In contrast, and in the light of the past experience of other
shipowners whose vessels had been seized by Somalian
pirates,
there was on the
face of it every reason to give effect to what was evidently the present
owners’ immediate reaction, that is to hire experienced negotiators and engage
on a time-consuming and painstaking process of negotiation.
67.
In reaching a conclusion that it would have been reasonable for the owners
to capitulate in response to the very first demand, the courts below were
making an evaluative judgment on the basis of documentary evidence and
material. This is not a situation in which their evaluation commands a large
inherent advantage, compared with that which the Supreme Court is in a position
to make, although of course it merits weight and it is for the cargo interests
to show that it was wrong. In the light of all the circumstances, the cargo
interests have satisfied me that it was wrong. I am unable to accept the
evaluative judgment reached by both 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$6m to be treated as general
average. The reasoning of the courts below appears to me contrary to all the
relevant indications as to how the owners actually acted and would have been
expected to act. It is clear that the owners never contemplated the sort of
remarkable capitulation that payment of the initial
ransom
would have involved,
and that it would have taken them and other shipowners into uncharted
territory, as opposed to a relatively familiar negotiation process, had they
ever done so. They would in my opinion clearly have been acting unreasonably in
the circumstances had they done so.
68.
The case has been fought and decided on the basis that this is the
critical issue. No alternative case has been advanced to the effect that
negotiations would or might have led to a settlement at some lesser figure
which might have covered some, no doubt lesser figure of negotiation period
expenses. Lord Neuberger notes (para 20 above) that the actual negotiation
period expenses claimed of US$160,000 would have been covered (together with
the negotiators’ expenses) by a ransom
payment of around US$2.4m. That is
mathematically correct. But it does not reflect the reality which has to be
addressed. It postulates immediate agreement on or about 30 January 2009 on a
ransom
of US$2.4m. Yet, even in early March 2009 the
pirates
were still looking
for a
ransom of US$3m, reduced on 2 March 2009 to US$2m. Depending on where one
dates and places a reasonable settlement at a reasonable settlement figure, it
is clear that, on this basis, any recoverable negotiation period expenses would
be considerably reduced below the US$160,000-odd claimed. The case has not been
put on a basis which required or allows now for any such hypothetical exercise
(of assessing when and at what figure below US$6m a reasonable settlement could
have been achieved) to be undertaken. The owners have established that Rule F
is in principle capable of applying to negotiation period expenses, which may
well be the principle which this litigation is about. But I do not think that
they have established on the facts that they have any claim on the only factual
basis on which the case has been put. I would therefore dismiss this appeal,
albeit for reasons different from those given by the Court of Appeal.