Case Alert - 2016] EWCA Civ 708  

Whether certain expenses were allowable as general average, after ransom demand was paid – of possible interest to marine insurers

Salvus Law for appellants, Stephenson Harwood for respondents

A vessel laden with cargo was seized by pirates and, following a negotiation of almost two months, a ransom was paid of USD 1.85m (the original demand was for USD 6 million). The issue in this case was whether the vessel operating expenses incurred during the period of negotiation are allowable in General Average. The bill of lading stated that General Average would be settled in accordance with the York-Antwerp Rules 1974. It was accepted that the ransom payment itself was allowed under Rule A of the Rules. The main dispute was whether the negotiation period expenses would be allowed as substituted expenses under Rule F.

Rule F provides that: "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 the other interests, but only up to the amount of the general expense avoided".

The Court of Appeal held that the judge had erred in concluding that the expenses were incurred in adopting a course of action as an alternative to (or in substitution for) one where the expense would have been allowable as general average. There had been only one course open after the hijacking of the vessel (ie negotiation to achieve the release of the vessel and cargo). Whether or not a ransom is paid on demand, there will still be a negotiation, delay and the incurring of running costs during the period of delay: "there is only one road open to owners…. It is a single track road with no forks in the road and it ends in the eventual ransom payment agreement. That there are no forks in the road is significant. Just as acceptance of the initial ransom demand is not a true alternative; nor is acceptance of any other ransom sum less than that initially demanded but greater than that eventually agreed".

Accordingly, the negotiation period expenses were not recoverable under Rule F.

The Court of Appeal further found that, had the expenses been recoverable under Rule F, they would have been reasonably made or incurred (and so allowable as general average under Rule A), in the event that the owners had paid the initial ransom demand without attempting to negotiate (ie had the owners paid USD 6 million). In reaching that conclusion, the Court of Appeal agreed with the conclusion in Masefield AG v Amlin (see Weekly Update 08/10) that "the most safe, timely and effective means of [securing the release of a ship and crew] 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".