A pragmatic judgement on General Average

The LONGCHAMP case (Mitsui & Co Ltd & Ors vs Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG & Anor (2017)

When modern-age piracy began around 2005 off the Somalian coast, the main aim of the pirates was to seize vessels and seek ransom which ran into millions of dollars. In majority of the cases, the cargo was untouched & the vessels with cargo safely released after the ransom had been paid. The typical vessels targeted were chemical tankers & bulk carriers because of their low freeboards & slow speeds.

The challenge faced by marine insurers initially was whether the ransom money paid by the vessel owners could be claimed under General Average & the various interests be made to contribute towards the same. Now it has been established by numerous Court judgments that the ransom money paid WILL be part of General Average as it meets all the criteria laid down by Rule A of the York-Antwerp Rules 1974 which form the basis of General Average adjustments.

Rule A:

”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 the property involved in a common maritime adventure.

 General average sacrifices and expenditures shall be borne by the different contributing interests on the basis hereinafter provided”.

It must be noted that payment of ransom is NOT CONSIDERED illegal under English Law.

Going one step further in the Longchamp case, as it is popularly called, The Supreme Court in the UK, reversed the decision of the Court of Appeal and held that vessel operating expenses during the period of ransom negotiation could also be claimed as part of ‘alternative expenses’ under Rule F of the York-Antwerp Rules 1974.

Rule F:

 “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 General Average expense avoided”.

 Brief facts of the case are as under:

The chemical tanker LONGCHAMP carrying VCM in bulk from Norway to Vietnam was seized by pirates on 29^th January 2009 and diverted to Somalia. The Bill of Lading issued to the cargo owner specified that General Average, if any, would be settled according to the York-Antwerp Rules, 1974. The initial ransom demand of the pirates was US$ 6 million which over protracted negotiations of 51 days was brought down to US$ 1.85 million. The ransom was paid on 27^th March 2009 & the vessel released the following day. The amount of US$ 1.85 million was allowed as General Average under Rule A.

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reasonably incurred ‘ as required by Rule A and hence any reduction from that cannot be claimed under Rule F.

The Court held that negotiation for reducing the ransom amount satisfied the definition of ‘alternative course of action’ as required by Rule F.

The judgment is extremely pragmatic, which a common man can well appreciate. If US $ 4.15 million is saved in ransom, why not pay an expense of US$160,000. However legal experts are still coming to terms with the fact that the traditional interpretation of Rule F has been turned inside out. It also throws up certain incidental questions:

• What could be the duration up to which expenses of this nature would be considered under Rule F? What if the negotiations had extended for over a year? Would the hull insurance premium, interest on loan repayments, etc also qualify as expenses under Rule F?
• Can mitigation expenses of any nature be claimed in General Average under Rule F even in cases other than piracy?
• Will closed Average adjustments where expenses of this nature had not been included be re-opened and presented before the Courts?

Only time will tell.