Dealing with the Costs of a Hijacking

By Stephen Askins, Partner, Ince & Co and David Richards, Senior Associate, Ince & Co

Mitsui & Co Ltd & others v. Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG (Longchamp)  [2014] EWHC 3445 

The recent judgment in the Longchamp has overturned accepted industry thinking in how bunkers and crew wages are dealt with in a hijacking. Not only has it wrong-footed lawyers, but it flies in the face of the written and considered views of the Advisory Committee of the Association of Average Adjustors and opens up interesting questions on other heads of claim not considered in the judgment.

The Judge was asked to consider whether a number of items (familiar to anyone who has dealt with a Somali hijacking case) were recoverable in General Average (“GA”). These included: media response services, crew wages, bunkers and telephone charges. The hijacking took place in January 2009, lasted just under two months and resulted in a ransom of US$1,850,000. The total amount of expenses in issue was a modest US$181,604, reflecting the short duration of the hijacking. Of these, the most controversial were the bunkers and crew wages.

After capture, the vessel’s Master was directed to sail the vessel to the Somali coast, to what the Advisory Committee referred to as a “pirates’ lair” which in their view, was not a port of refuge in the sense understood under the York Antwerp Rules (“YAR”). Their rationale was that the lives of the crew were at the complete mercy of the pirates and the dangers threatening the vessel were at their maximum. Any vessel anchored off Somalia in the control of pirates remains in the grip of an insured peril.

The background facts

The negotiations began with the pirates demanding US$6,000,000 and the Owners countering with their own opening of US$373,000. The pirates’ arbitrary opening was matched by a figure set by the Owners at an amount giving rise to the impression of accounts being emptied. The “target settlement figure” was said to be US$1,500,000, which put it at what must have been the lower end of the pirates’ own expectation of an acceptable settlement range. That is, the range of figures where both sides can be happy with the result which is often referred to as the “market rate” – a concept roundly condemned by the Judge. The figures are important in the context of the dispute and argument that arose between the parties on “substituted” expenses.

Substituted expenses

Under Rule F of the YAR, a substituted expense is only allowed in GA if , amongst other things, there was a hypothetical alternative course of action which, had it been adopted, would have involved expenditure claimable in GA. The expense is allowed where it appears more economical than the alternative expense and, in the event that the substituted expense turns out to be more expensive, then it is capped at the lower alternative amount.  

Having concluded that bunkers, like wages, were an expense, the Court considered whether the saving between the ransom initially demanded and the ransom ultimately paid was real, in circumstances where no owner would ever pay the original demand made. The final hurdle for the Claimants was to prove that the expenditure was “reasonably … incurred”. That was not the same, the Judge held, as the ransom being “reasonable” which he said was “…rationally misconceived”. There is no such thing it seems as a “reasonable ransom”. Surprisingly, however, he also found against the assertion made that it was inevitable that the amount of ransom would be reduced by the process of negotiation. Such was the unpredictability of the pirates, it seems, that this was not certain. Pirates are not necessarily rational in many things, but it seems improbable that any owner has ever paid a ransom that exceeded the initial demand and certainly not one that was for more than the value of the vessel. 

Whereas the Judge found that the US$6,000,000 could have been “reasonably incurred”, the Association had said that the only “reasonable” ransom was the one actually agreed and paid. The Court’s conclusion meant that the starting point for the calculation of the substituted expenses was the opening demand of the pirates, not the actual amount paid. It would therefore follow that in any normal piracy hijacking situation, where there would normally always be a saving between the original demand and the amount paid, then the costs and expenses incurred during the negotiation (including those not directly incurred to secure the release of the vessel) are recoverable in GA. In this case, that also included the media communication costs and the telephone charges claimed.

It follows that those costs, which are claimed as substituted expenses, are capped at the difference between the starting point of the pirates’ ransom demand and the final amount paid. One can foresee a situation where that figure may be exceeded and the cap comes into play.   

Comment

In the end, the Judge seems to have been guided by principles of equity and accordingly it was right, in his view, that natural justice requires that all should contribute to such substituted expenses. In this case, the amounts in issue were small. However, in the larger, more drawn out hijackings involving higher value tankers which lasted over ten months, then the cost of wages and bunkers could be as much as US$2,000,000 and there are several claims and adjustments that have not been settled that may yet need to be reconsidered.

Having opened the door on such expenses, particularly bunkers, the decision raises another interesting possibility that was not considered by the Judge. There were vessels where pirates burnt the bunkers on board and, when these were exhausted, then burned cargo to avoid the need for a bunker resupply. This happened in circumstances where the negotiation process was completely controlled by owners, leaving charterers and cargo unable to influence or contribute to the strategy being followed. In the interests of equity, it will be interesting to see whether these costs can also be brought into GA.

This case is being appealed.