The Supreme Court heard the case of Mitsui & Co Ltd & Ors v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG & Anor [2017] UKSC 68 in which it considered whether the expenses occurred by a vessel during a negotiating period with pirates are allowable under Rule F, which covers additional expenses, of the York-Antwerp Rules 1974. This is the first time the English Courts have considered the meaning and application of Rule F.

The case was heard before Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge on 17 and 18 Jul 2017. Judgment was given on 25 Oct 2017. Lord Neuberger, Lord Clarke, Lord Sumption and Lord Hodge were in agreement and allowed the appeal. Lord Mance, dissenting, dismissed the appeal.

Facts of the case:

On 29 Jan 2009, the chemical carrier MV Longchamp was transiting the Gulf of Aden on a voyage from Rafnes, Norway to Go Day, Vietnam, with a cargo of 2,728.732 metric tons of Vinyl Chloride Monomer. The cargo was carried on the basis that, any General Average “shall be settled in accordance with the York-Antwerp Rules 1974”.

The York Antwerp Rules state three clear principles, all of which must be met in order for the rule to be applied. The first stipulation is that danger to the ship must be imminent. Second, there must be a voluntary jettison of a portion of the ship’s cargo in order to save the whole. Third, the attempt to avoid the danger must be successful. If a situation meets all the stipulations, then all parties involved in the maritime adventure must share proportionately in the financial burden of the losses incurred to the owner or owners of any of the cargo that was jettisoned in order to save the vessel.

Pirates boarded the vessel and commanded the master to change course towards the bay of Eyl, Somalia. From here, a period of negotiations between the pirates’ negotiators and the owners’ crisis management team began. The negotiations lasted a period of 51 days and a ransom was agreed in the amount of US$1.85m.

It is agreed that the US$1.85m ransom payment, the costs, expenses of the negotiator and advisers and the media expenses are covered according to the York Antwerp Rules.

The issue appealed to the Supreme Court is whether the negotiating period expenses are also included in the York Antwerp Rules – the aggregate sum of which is US$160,000.

Decision of the Advisory Committee of Association of Average Adjusters:

The average adjuster, Mr Robin Aggersbury of Stichling Hahn Hilbrich, considered that the negotiation period expenses fell within Rule F. However, the Advisory Committee of the Association of Average Adjusters produced a detailed report concluding that the negotiation period expenses did not fall within Rule F. Payments had been made following the decision of the average adjuster, but following the publication of the report the cargo interests issued proceedings challenging the adjuster’s conclusion.

The High Court:

Expenses incurred during the lengthy negotiation period could be allowed within the general average under Rule F because the US$160,000 were incurred in substitution for the higher cost of paying the initial ransom sum demanded.

The Court of Appeal:

The High Court’s decision was reversed by the Court of Appeal. It was held that Rule F cannot apply because there was only ever one course of action available: to pay the ransom. Rule F only applies to a substituted expense. On these facts, the expense was the same (payment of a ransom) – it was only the extent of that payment that varied.

The issues before the Supreme Court:

The owners argue that the expenses do fall within Rule F of the York-Antwerp Rules and therefore the cost should be shared by all the parties. The cargo interests argue that it does not and therefore the costs should be paid by the owners.

The owners argue that it is right that the US$1.85m ransom paid to the pirates is deemed to fall within Rule A. That the negotiation period expenses are ‘expenses occurred’ as is described by Rule F. That the expenses were incurred instead of accepting the first ransom offer made by the pirates; by refusing the first offer (US$6 million) and entering into the negotiations, and thus incurring these disputed expenses, US$4.15m was saved. The US4.15m would have been shared between all parties under Rule A.

The cargo interests raise the following points in response. Firstly, the ransom saved was not ‘allowable’ or ‘another expense’ because it would never have been reasonable to pay a ransom of US$6m. Therefore it would not have been expense ‘reasonably occurred’ and so would not have fit within Rule A.

The Supreme Court favoured a practical solution: “wherever an expense I incurred to avoid a sum of a type which would be allowable, that expense would be allowable, but only to the extent that it does not exceed the sum avoided.”

Lord Sumption, in agreement, added that the practices of average adjusters is not law and that he felt that there had been a tendency to lose sight of the principles behind each of the rules. It is important to apply the Rules to the facts as laws, rather than as subjective guidelines.

Lord Mance, dissenting, concluded that Rule F is not intended to be applied to the current situation and so the sum should not be included within Rule F.