TM Law’s marine team frequently advises clients on General Average and related issues. Here, Nico Saunders reviews three interesting decisions from among a spate of recent cases on GA.
1. THE “JIA LI HAI” [2017] EWHC 2509 – Knowles J
This case arose following a collision. In response to the owner’s claim for general average contribution from cargo, the cargo insurer raised a defence of causative unseaworthiness, in reliance on a report which concluded that there had been inadequate oversight and supervision on board, failure to proceed at a safe speed in conditions of restricted visibility, and negligence. The cargo insurer submitted the collision would have been avoided if adequate systems had been in place and implemented. The owner applied for summary judgment.
Seaworthiness
To be seaworthy, a vessel, its equipment and systems must be reasonably fit to withstand the perils which might foreseeably be encountered on the voyage and to keep the cargo reasonably safe from those perils.
The burden of proving unseaworthiness rests on the party which asserted it and it should be pleaded with sufficient particularity. In certain circumstances, the facts may afford prima facie evidence of unseaworthiness which must be rebutted.
Summary judgment
The court was satisfied that the cargo insurer had no real prospect of success and had pleaded a defence without foundation; summary judgment was accordingly granted in the owner’s favour. In doing so, the Judge was influenced by the following:
(i) The defence was based on the fact of the collision and the report; however, it did not follow from those two matters that the vessel had had no adequate safety systems;
(ii) The cargo insurer had not sought any documentation from the claimant before making the allegations of unseaworthiness, whilst the claimant had produced copies of the relevant safety management certificates and manuals;
(iii) The cargo insurer had not responded to the claimant’s request for further information in respect of its defence;
(iv) The cargo insurer’s submission that the documentation did not go far enough was tantamount to saying that something might turn up on disclosure;
(v) The cargo insurer had not provided evidence of causative unseaworthiness;
(vi) Even if the cargo insurer could show that the systems had been breached, it could not show that the arrangements for their implementation were inadequate;
(vii) There were no reasonable grounds to believe that any further evidence would be available at trial to substantiate the allegations.
In conclusion, the pleaded defence had no real prospect of success and waiting for disclosure was not a proper reason to allow this part of the case to proceed to trial.
2. MT “CAPE BONNY” [2017] EWHC 3036 – Teare J
The owners claimed general average contributions from cargo insurers arising from a casualty following an engine breakdown during a laden voyage.
The cargo insurer denied any liability in GA because the casualty was caused by the owners’ failure to exercise due diligence to make the Vessel seaworthy.
Unseaworthiness
The judge summarised the usual test of unseaworthiness (referring to Scrutton on Charterparties) being whether a prudent owner would have required that the defect in question should be made good before sending his ship to sea; if he would then the ship is not seaworthy.
Once unseaworthiness and damage resulting therefrom has been established, the burden of proving due diligence lies on the wners as carrier pursuant to Article IV r.1 of the Hague-Visby Rules.
Due diligence
The judge addressed the exercise of the duty of due diligence to make the vessel seaworthy imposed by Article III r.1 of the Hague-Visby Rules. If an inspection failed to reveal a defect, that does not necessarily amount to a failure to exercise due diligence. Two questions should be asked; firstly was the examination of a character such as a skilled and prudent owner should reasonably have made and, if so, was the examination carried out with reasonable skill, care and competence?
Application to the case
Having heard the cross-examination of numerous expert and factual witnesses, the Judge ruled the breakdown resulted from foreign particles, which should have been removed from the luboil, damaging main bearing no.1 (see paragraphs 113 and 116). Teare J was in “no doubt” that the vessel was unseaworthy at the commencement of the voyage (see paragraph 118).
Two instances of failure to exercise due diligence were identified, one which was found not to be causative of the engine breakdown (a failure to visually check filter ‘candles’ prior to the commencement of the voyage – see paragraphs 126 & 127) and one which was held to be causative (a failure to take bearing clearance measurements – see paragraphs 141 and 154).
The general average expenditure incurred by the owners was therefore due to an actionable fault of the owners and the cargo interests were not liable to make a general average contribution.
On the issue of quantum, the judge confirmed that the burden of proving that general average expenditure was reasonably incurred lies upon the owners.
3. THE “LONGCHAMP” [2017] UKSC 68 – Lords Neuberger, Mance, Clarke, Sumption and Hodge
The Supreme Court held that vessel-operating expenses (including crew bonuses and bunkers consumed) incurred by the owner during a period of negotiations with pirates to secure the release of the vessel were allowable in general average.
The ransom paid at the end of negotiations was significantly lower than the amount originally demanded. It was accepted that the ransom itself was allowable under Rule A of the York Antwerp Rules. The average adjuster allowed the operating expenses under Rule F as an “extra expense incurred in place of another expense which would have been allowable as general average”, on the basis that they were incurred during the negotiation period which enabled sums (which would otherwise have been recoverable under Rule A) to be saved in the common interest. The cargo interests brought proceedings against the owners challenging this.
The first instance judge agreed with the average adjuster (finding that it would have been reasonable for the owners to accept the original ransom demand). The Court of Appeal sided with the cargo interests, holding that the payment of a ransom on demand was not to be regarded as an alternative course of action.
The Supreme Court (Lord Mance dissenting) agreed with the average adjuster (ruling in the owners’ favour), as the operating expenses were incurred in order to avoid paying more than the ransom actually paid (which was an allowable expense).
To fall within Rule F, the expense had to achieve a result which cost less than an allowable item would otherwise have cost. The owners therefore had only to demonstrate that it would have been reasonable to have paid a ransom of around the combined sum of the ransom they did pay plus the operating expenses. This had been established before the judge at first instance.
The Court applied an objective test in considering whether the expense in question had been incurred “in place of another expense” within the meaning of Rule F. In this case negotiations were needed to reduce the ransom, which would inevitably take time, during which operating expenses would be incurred. The negotiations resulted in the ransom being reduced and consequently the operating expenses were incurred “in place of” the amount saved. It was not necessary that the expense should be of a nature which would not normally have been incurred in the circumstances of the general average event.
COMMENT
General average cases do not often reach the courts; the decisions discussed above are recent examples of those that do. Whilst the JIA LI HAI is more relevant to the procedure of summary judgment than to the subject-matter of GA, the decision in the CAPE BONNY provides potentially valuable assistance with the apparent conflict in the York-Antwerp Rules in respect of the burden of proving an expense is allowable. Whereas Rule A was understood to place the burden on the party being asked to contribute in GA, Rule E provides that the onus is on the party claiming GA. The decision of Teare J indicates that the Rule E approach is to be preferred.
The LONGCHAMP is the first case in which the meaning of Rule F of the York-Antwerp Rules has been considered by the courts. The Supreme Court decision calls in to question views put forward in leading textbooks (referred to within the Court of Appeal judgment) that Rule F will only apply where there are two or more alternative courses of action open to the party seeking to mitigate the effect of a GA incident. The implication for shipowners is that any operating expenses incurred during negotiation in respect of GA expenses (including piracy, salvage and repair costs) could fall within Rule F allowable expenses. In such circumstances, it will be necessary for the adjuster to consider what amount it would have been reasonable for the shipowner to have paid; a point on which no guidance has been provided by the courts.
