Average adjuster conflict over payment for negotiation time

Should a shipowner alone be responsible for expenses accumulated while trying to get pirates to reduce their ransom demand? An outline of the arguments was presented to the London market at the Association of Average Adjusters London City seminar for Spring 2017, held this month in association with the International Underwriting Association. James Brewer reported.

Argument over the principle at issue is currently on its way to the UK Supreme Court, the final court of appeal in the UK for civil cases.

Robert Tomlinson, adjusting manager at Richards Hogg Lindley and a senior associate of the adjusters’ association, speaking in a personal capacity, welcomed the Court of Appeal finding, which is to be challenged in the Supreme Court in a hearing likely to begin in September.

Chemical tanker Longchamp was seized by Somali pirates on January 29th, 2009; and a ransom of $6m was demanded. This was subsequently reduced to $1.85m, but only after 51 days of negotiation. The owning company spent $180,000 on crew wages, maintenance and fuel during this time. A General Average act arises from an extraordinary sacrifice or expenditure made to safeguard the common property during a maritime adventure, and Rule F of the York Antwerp Rules 1974 states: “Any extra expense incurred in place of another expense which would have been allowable in general average shall be deemed to be general average and so allowed… but only up to the amount of general average saved.”

Although payment of a ransom is usually allowable within a general average settlement, wages incurred and fuel consumed while the vessel is detained by pirates are not, because those losses are caused by delay and therefore excluded under Rule C of the York Antwerp Rules.

In the Longchamp case the average adjusters allowed the $180,000 expenses to general average under Rule F because these were incurred during the negotiation period, which saved considerable ransom money. However, cargo insurers objected, and after a submission to the advisory committee of the Association of Average Adjusters, a majority came out against the terms of the proposed adjustment. The High Court backed the original adjusting decision, but then the Court of Appeal overturned the High Court ruling, stating that there was no alternative course available to owners but to negotiate with the pirates. As such Rule F could not be applied. The Court of Appeal said that there would always be negotiation and that expenses would always be incurred. However, the Appeal Court also said that it would not have been unreasonable to have paid the initial $6m ransom demand.

Mr Tomlinson said that the Court of Appeal decision was welcomed by most adjusters and achieved what most would deem the correct application of Rule F, but noted that Mitsui & Co and Others vs Beteiligungsgesellschaft LPG Tankerflotte (the Longchamp case) was by no means a settled issue.

He noted that Somali piracy followed well known protocols. After an average of about 50 days an agreement is reached and the ransom is paid, and the extent to which the initial demand can be negotiated down could be predicted quite accurately. Tomlinson said. He therefore questioned whether the option not to negotiate even existed. ?” In Masefield vs Amlin expert evidence had been given that the safest, most timely and effective means to secure the release of a ship’s crew had been shown, in case after case, to be to negotiate and subsequently pay a ransom.

The majority of the advisory committee noted that an acceptance of a ransom on demand might well have led to the pirates asking for more money.