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General Average – Back to Basics


Jagan - August 3, 2017 - 3 comments

Following the judgement in The Longchamp (presently under appeal at the UK Supreme Court), there were many articles/commentaries on whether the additional expenses incurred by Owners during the negotiations with the Pirates were correctly considered as General Average Expenditutre. Our view is contrary to the “majority” view and therefore we would welcome comments from readers on whether the development of General Average is going on the correct way!

  1. General Average, as we understand, is a principle of equity in which all parties involved in a maritime adventure (Ship, Cargo and Freight) share losses arising from a voluntary and successful sacrifice (ship or cargo) to save the whole adventure from an impending peril, or incur extraordinary expenses for the joint benefit. The adjustment of General Average is accomplished where the adventure terminates on the basis of the prevailing law, or as may be provided in the contract of carriage (Charterparty/Bills of Lading) which invariably incorporate the York Antwerp Rules (1950,1974,1994, 2004 or 2016, as the case may be).
  2. The Longchamp:
    1. Background: A laden chemical tanker was seized on 29thJan 2009 by Somali pirates and who demanded ransom for her release. The initial ransom demanded was for US$ 6 million and which the Owners were able to negotiate it down to US$ 1.85 million leading to the vessel being released on 22ndMarch 2009. The adjusters involved in the adjustment of the General Average allowed the sum of US$ 181,604.25 as expenses incurred during the negotiation of the ransom (crew wages, maintenance & fuel) under Rule F of the York Antwerp Rules 1974 (Rule F 1974: 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) given that that the Owners actions resulted in a saving of costs for all parties (reduction of the ransom amount).
    2. The High Court Judgement (MITSUI & CO LTD AND OTHERS
v BETEILIGUNGSGESELLSCHAFT LPG TANKERFLOTTE MBH & CO KG AND ANOTHER
(THE “LONGCHAMP”) [2014] EWHC 3445 (Comm): As cargo interests disputed the Owners entitlement to these “substituted expenses”, they initiated an action in the English High Court. The matter was heard before Stephen Hofmeyer Q.C. sitting as a Deputy High Court the Judge and who gave judgement that Owners were entitled to submit these “additional costs” as “substituted expenses”.
    3. The Court of Appeal Judgement: The cargo interests appealed and the matter was heard before the Court of Appeal ((THE “LONGCHAMP”)[2016] EWCA Civ 708). By the end of the hearing, there remained four grounds of appeal and which were as follows:
      1. Whether the judge ought not to have concluded that the expenses were incurred in adopting a course of action undertaken as an alternative to – or in substitution for – one where the expense would have been allowable as general average.
      2. Whether the judge erred in concluding that payment by the respondents of the initial ransom demand without attempting to negotiate would have meant that the hypothetical ransom payment of US$6 million would have been “reasonably incurred” within the meaning of Rule A in the Rules and whether he ought to have concluded that the payment of the originally demanded sum was not a course a reasonable shipowner would have taken and therefore was not reasonably incurred.
      3. Whether the judge erred in law in concluding that the consumption of bunkers was an “expense” for the purposes of Rule F.
      4. Whether the judge was wrong to conclude that the media response costs were recoverable under Rule A since, as there were a number of purposes for which those costs had been incurred, the respondents had not proved that all of the costs had been incurred for the “common safety”.Barring Issue i, all other issues were dismissed by the COA. With respect to issue i, the COA held for the cargo interests in that as there was no alternative but for the Owners to make payment of the ransom, Rule F would not apply.
    4. The Supreme Court: Owners have appealed and we understand that it was to be heard in July 2017 (we would therefore believe that the much-anticipated judgement would be soon provided by the English Supreme Court and which will give finality to this matter).
  3. Back to basics:
    1. As mentioned in 1 above, the aim of General Average is to do “equity”. The York Antwerp Rules were formulated after negotiation with various maritime associations, some of them having different systems of law. It is therefore submitted that any interpretation of the York Antwerp Rules should follow the “purposive” instead of the “literal” approach.
    2. The English Supreme Court’s judgement would result in a finality of how such additional Owners costs will be dealt in the future. If the Supreme Court maintains the COA’s judgement, should a similar piracy event occur, Owners may have no incentive to negotiate a reduced ransom and instead prefer to settle at the earliest (given that the ransom would fall for consideration under GA). In the circumstances, the aim of General Average would be defeated.
    3. The English Supreme Court’s judgement may also lead to Owners to incorporate clauses in their contract of carriage to cater for circumstances such as The Longchamp and this will obviously depend on their (Owners) bargaining position. However, it will not be possible to factor the multitude of situations which may arise in a voyage so as to allocate these risks. It is submitted that the best solution in these circumstances would be to look at Equity and which may not only lead to reduction of claims / legal costs but also better co-operation between the parties involved in the maritime adventure.
    4. The developing law of “unjust enrichment” may also be an avenue for recovery in circumstances such as The Longchamp. However, given that this field of law is still very young and the development happening in incremental steps, it may not be of assistance at the present moment.
  4. Conclusion:
    1. The English Supreme Court Judgement would go a long way to decide whether such expenses as incurred by Owners in The Longchamp situation should fall for consideration under GA.
    2. The market remains the ultimate decider and if Owners are unhappy with the decision, they can always negotiate and incorporate a suitable clause in their contract of carriage for allocation of such expenses.
    3. It may also be time to re-look at the purpose of the clause in the contract instead of only looking at the literal wordings to consider and work out its effect. This would not only result in a saving of costs but also lead to co-operation amongst the various parties involved in the maritime adventure.

We are aware that there are more qualified people to comment on these issues and we would be happy to hear their comments and publish their views. The views expressed here together with all errors are entirely ours.

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3 comments

  1. […] had, in our earlier article, General Average – Back to Basics, argued that adjustment of General Average should be accomplished, by taking a purposive rather […]

  2. Jean-Christophe Ribot

    Heard an interesting argument at a legal seminar also touching on the recently finalized Longchamp case that the initial ransom demand of USD 6 million was exceeding the salvageable value, including cargo, anyway and as such the GA claim cannot exceed the salvageable value.

    Which further complicates the way to correctly grasp the whole issues at stake here. Anybody would be able to clarify the value of cargo interests on board by the time of the piracy event?

    Kind regards

  3. […] Supreme Court Judgement of The Longchamp can be viewed here. See also our earlier articles on General Average Back to Basics& General Average Back to Basics – […]

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