The Longchamp HK - averageadj.com

3/23/18

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SUBSTITUTED EXPENSES IN GENERAL AVERAGEper York-Antwerp Rules

20th March 2018

- Workshop

THELONGCHAMP

No.1ConferenceRoom

37/F.,ChinaMerchantsTower

HongKong

TheInstituteofSeatransportwouldexpressheartfelt

gratitudetotheChinaMerchantsGroup

forthesupportthroughout

VENUE

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SPEAKER:RAYMONDTCWONG� •Fullyqualifiedin1980bystringentexamination,becomingthefirstChineseFellowoftheBritishAssociationofAverageAdjusters(better-knownasAAA).HeiscurrentlysittingontheAdvisory&DisputeResolutionPaneloftheAAA.•Raymondstartedhiscareerin1966withtheoldestaverageadjustingfirm,WilliamRichards&Sons(currentlynamedRichardsHoggLindley).HewasanequitypartnerofRichardsHoggpriortoitsincorporationandfollowingitsacquisitionbyCharlesTaylorplc.,hewasappointedtositonthelatter’sBoardofDirectors,1999/2008.Sinceretirementfromthefirmhehadworkedforsome45years,Raymondhascontinuedhisserviceandcommitmenttothemaritimeandinsurancecommunitiesandlaunched,inconjunctionwithcolleaguesintheregion,theaverageadjustingservicesundertheumbrellaofAsiaMaritimeAdjusting(HongKong)withinTCWong AverageConsultingLtd.•Raymondisaregularlecturer/speakerongeneralaverageandmaritimeclaimsrelatedtopics.HeisafoundermemberandformerchairmanofMarineInsuranceClub(establishedin1979);currentlychairmanofInstituteofSeatransport (establishedin1984)whichisaninstitutionalmemberoftheHongKongMaritimeandPortBoard,anhonorary advisoroftheHKLogisticManagementStaffAssociation(establishedin1986),andafoundermemberofHKMaritimeLawAssociation(establishedin1987).

[email protected]

http://www.averageadj.com

THELONGCHAMP

• Recapitulation

• Legalposition- English

• York-AntwerpRulesvaryposition

• ExamplesandPractice

• Law-v- Practice

• Precedentlawcases

• “TheLongchamp”

• CasualtyandGAAdjustmentperYAR1974

• ViewsofAAAAdvisoryCommittee

• TheHighCourtDecision[2014]

• TheCourtofAppealDecision[2016]

• TheSupremeCourtDecision[2017]

• Note-worthyissues

• ReportofAAAAdvisoryCommittee

• QuestionsandFeedbacksfrom

participants

AGENDA

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THELONGCHAMP

”Asthenameimplies,substituted

expensesaretheexpensesincurredin

respectofacourseofactionundertaken

asanalternativeto- orinsubstitution

for– theexpensethatwouldbeallowableasgeneralaverage.”

F.0114th EditionofLowndes&Rudolf

Theterm “hypotheticalalternative”courseofactionreferstoonewherethe

expensewouldhavebeenallowableas

GA.

SUBSTITUTEDEXPENSES����

THELONGCHAMP

WilsonvBankofVictoria(1867)

• Pre-datestheYork-AntwerpRules

• Auxiliarysailingship

• Voyage:AustraliatoBritain(laden)

• Struckiceberg,sustaineddamage,demasted

• PutintoRiodeJaneiro

• Viewprohibitivepermanentrepaircost,only

TemporaryRepairseffectedto

• allowvesseltoproceedtodestinationundersteam

requiringcoalpurchasedatRioandFayal

• Ship-ownersclaimedcostofcoalpurchasedas

substitutedexpensesinlieuofexpensesotherwise

incurredhadPRbeeneffectedatRio

Held:Claimdisallowed– useofauxiliaryenginetobring

vesselhomeandconsequentexpenditureoncoal,was

merelyperformanceofaservicebyShip-ownerstoCargo

carried- thereforenotasubjectofcontribution.

NottenableatEnglishlaw

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Thelosswouldbeadjustedasfollows:

Ship…………………….. 200 pays 67 50 MerchantA……….……. 100 pays 33 25 MerchantC……….……. 300 pays 100 75

600

MerchantB(jettisoned andmadegood)……… 200 pays -- 50 800 pays 200 200

Everyone whose property had been at risk sustained the same degree ofloss, i.e. 25%.

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APPORTIONMENT OF GA

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THELONGCHAMP

• Asystemofmakinggoodmaritime

lossesbasedonequity,equity beingthekeyword.

• Extraordinarysacrificeorexpenditure

voluntarilyandreasonablymadeor

incurredintimeofperiltopreserve

propertyimperiledinthecommon

adventure.

• ObjectofGAActmustbethe

preservationofthewholeadventure.

• Adventureorsomepartthereofmust

besaved.

WhatisGeneralAverage?

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THELONGCHAMP

THEYORK-ANTWERPRULES

The internationally accepted code of rulessetting out

• what losses and expenses are admissible in general average, and

• how they are to be apportioned between ship and cargo interests etc.

YorkRules1864York/AntwerpRules1877YAR1890YAR1924YAR1950YAR1974YAR1974asamended1990YAR1994YAR2004YAR2016

CMI – Comite MaritimeInternational������ thecustodiansYARnotaConventionIncorporationbyreferenceinContractofCarriage

THELONGCHAMP

RuleFofYork-AntwerpRules

RuleF- Anyextra expenseincurred

inplaceof anotherexpensewhich

wouldhavebeenallowableas

generalaverage shallbedeemedto

begeneralaverageandsoallowed

withoutregardtothesaving,ifany,tootherinterests,butonlyupto theamountofthegeneralaverage

expenseavoided.

N.B.“extra”replacedby“additional”since1994

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THELONGCHAMP

RuleF– Philosophy&Principle

(pre“Longchamp”)

“Forthisruletohaveanyapplicationtheremust

havebeenanalternativecourse which,ifadoptedwouldhaveinvolvedexpenditure

whichcouldproperlybechargedtogeneral

average.”

F.2914th EditionofLowndes&Rudolf

“AlthoughRuleFisphrasedintermswhichrefer

totheincurringoftheexpense,itsapplication

inpracticepresupposesachoicebetween two

(andsomemore)differentcourses ofaction.”

11.354th EditionofHudson&Harvey

THELONGCHAMP

Requirements(generallyaccepted)

• Itdealswith“expense”– not“loss”

• Onlyexpensesthatare“extra”(i.e.additionalandnotextraordinary)qualify– butexcludinganyordinaryvoyageexpensesaved

• Theremusthavebeenanalternativecourseofaction,thatifadopted,wouldhaveresultedinexpensewhichcouldproperlybeallowableinGA

• Extra/additionalexpensesmusthavebeenincurredinplaceofthealternativecourseofaction

• Also,needtosatisfytherequirementslaidout

intheYARasawhole,e.g.

RuleA– reasonable(natureandquantum)

RuleC– excludesindirectliabilities, delay,etc.

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THELONGCHAMP

Examples

•Workingovertimeonrepairs

•Dry-dockingwithcargoonboard•Towagetodestination•Forwardcargotodestination•Temporaryrepairs– RuleXIV

Toidentifythe“hypothetical

alternatives”ineachcase.

THELONGCHAMP

Practice-v- Law“…,thelawcannotbedecidedbywhatisunderstoodamong

writersandpractitionersintherelevantfield...Experienceshows

thatinmanyareasofpracticalandprofessionalendeavour

generallyacceptedpointsofprincipleandpractice,whentested

incourt,sometimesturnouttobeunsustainable. Iacceptthatit

mayberightforacourttohaveregardtopracticeswhichhave

developedandprincipleswhichhavebeenadoptedby

practitioners,buttheycannotdeterminetheoutcomewhenthe

issueisultimatelyoneofLaw.”

LordNeubergerin“TheLongchamp”[2017]

“…Intheabsenceofacomprehensivebodyofcaselaw(general

averagerarelyreachesthecourts),adjustershaveavarietyof

practicesorrulesofthumbtosupplementtheRules.Thisis

perhapsinevitable,butsuchpracticesarenotlawandthereisa

tendencyinthisfieldforthemtolosesightofthebasicconcepts

expressedintheRulesthemselves.”

LordSumption in“TheLongchamp”[2017]

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THELONGCHAMP

Vlassopoulos v.British&Foreign• Vessel’sforemastcollapsedatloadingport

• Derrickfellintohold

• Repairsnecessaryforsafeprosecutionofvoyage

• AllowanceforexpensesperRules10&11(intention)

• Butvesselandcargonotinperilwhilstatport

• Held:LetteredRulesconstitutethegeneralprincipleswhicharetobeapplied,towhichthenumberedRules

weresubservient.

Ø The“Makis”Agreement(BritishShip-owners&

Underwriters)

“ExceptasprovidedintheNumberedRules1to23

inclusive,theAdjustmentshallbedrawnupinaccordance

withtheLetteredRulesAtoGinclusive.”

• LeadingtointroductionofaRuleofInterpretationincludedinthe1950YAR

The“Makis”(1929)

THELONGCHAMP

CorfuNavigationv.MobilShipping• VesselgroundedatsankbankintheRiverZaire

• Vesselandcargoinperil

• Masterusedengineinefforttorefloat causing

substantialdamages– unskilfulandnegligent

• DamagesallowedperRuleVII

• Cargocontendedallowanceunreasonablymade

• Held:ClaimunderRuleVIIisnotsubjectto

requirementofreasonablenessinRuleA

Ø LeadingtointroductionofRuleParamountincludedinthe1994YAR

The”Alpha”(1991)

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THELONGCHAMP

Marida Ltd.v.Oswal Steel

The”Bijela”(1994)

THELONGCHAMP

Marida Ltd.v.Oswal Steel• BulkerloadedcargoatProvidence,RhodeIslandforIndia

• VesselgroundedshortlyaftersailingfromProvidence

• Sustainedsubstantialbottomdamage

• PutintoJamestownwherenodrydockavailable

• Vesselcouldhavedischargedcargo,proceededtoNew

York,dry-dockedandpermanentlyrepaired,then

returnedtoreloadcargoandresumevoyage– estimated

GA$535,000

• TemporaryRepairseffectedatJamestown- $282,606

• AdjusterWdisallowedTRviewnoalternativeat

Jamestown– practiceofmanyadjusters

• Ship-ownerreferredcasetoAdjusterMwhoallowedTR

asGAintermsofRule14,YAR1974

Ø CommercialCourtdisallowedongroundthatPRatNew

Yorkwouldnothavebeennecessaryforthesafe

prosecutionofvoyage– TRservedthatpurposes

The”Bijela”(1994)

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THELONGCHAMP

Pendingappeal,AAAUniformityResolutionsupportedbymarket

Underwriters:

ApplicationofRuleXIV

Thatinpractice,inconsideringthesavinginexpensereferred

tointhesecondparagraphofRuleXIVofYork-AntwerpRules

1974,thedeterminationastowhetherpermanentrepairswould

havebeennecessaryforthesafeprosecutionofthevoyageshall

notbeaffectedbythefactthattemporaryrepairswere

practicable.

Ø CourtofAppealupheldthedecisiontodisallow

Ø HouseofLordsupheldtheShip-owners’claim

Ø Q.The2nd paraofRuleXIVobligesustosupposethat

theTRhadnotbeeneffectedatJamestown.Whatthen

wouldhavehappened?Ø “Itisnotnecessarytoassumethatthevesselcouldnot

havebeenrepairedatJamestowninordertogiveeffect

tothetworules[rulesXandXIV].Itisonlynecessary

toassumethatshewasnotsorepaired,asr.XIV

requires.”

The”Bijela”(1994)

THE“LONGCHAMP”- CASUALTY

THELONGCHAMP

VESSEL

VOYAGE

CARGO

MVLongchamp

TransitingtheGulfofAdenonavoyagefromRafnes,

Norway,toGoSau,Vietnam

2,728.732MetrictonsofVinylVhloride Monomerin

Bulk

Underbillofladingdated6th January2009which

statedthat“GeneralAverage,ifany,shallbesettled

inaccordancewithYorkAntwerpRules1974”.

Eyl,Somalia

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THECASUALTY

THELONGCHAMP

DATEOF

CASULTY

SUMMERY

RANSOM

29TH January2009

At6:40,sevenheavilyarmedpiratesboardedthe

vesselandcommandedthemastertoaltercourse

towardsthebayofEly,Somalia

31st January2009– Vesselarrivedanddropped

anchor

30th January2009- negotiatorsforpiratesboarded

thevesselanddemandedaransomofUS$6million

Negotiationperiodof51days

22nd March2009– ransomagreedatUS$1.85m

27th March2009– Ransomdelivered

28th March2009– Piratesdisembarked

THELONGCHAMP

NORMALGAALLOWANCES

•CostofsearchingShip

•Ransommoneyitself

•Feesandexpensesofnegotiatingteam

•Associatedlawyerscost

•Costofdeliveringtheransomcash

•Insurance Premiumontheransomcash

•Associatedbankcharges

(Detentionexpensesandlossofhirenotrecoverable)

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THEADJUSTMENT31August2011

• Totalc.v. US$5,452,278

• Cargo– US$787,186(14.4377%)

• TotalGA. US$3,298,365.49

• Cargopays US$476,209.60

• POA+interest 573,538.26

• Refund US$97,328.66

THELONGCHAMP

THEADJUSTMENT

THELONGCHAMP

i) Mediaresponseservice

ii) Crewwages

iii) High-riskareabonus

iv) Crewmaintenance

v) Bunkers

vi) Telephonerenegotiations

US$20,639.30

75,724.80

70,058.70

3,315.00

11,115.45

751.00

US$181,604.25

Itwasnotedthattheadjustershadallowedingeneralaverage

underRuleFthefollowingexpensesincurredduringthe

negotiationperiod,inviewofthat“anamountofUS$4.15mwas

savedinthecommoninterestofallpropertyownersconcerned,

whichwouldhavebeenrecoverableinGAperRuleAoftheYork-

AntwerpRules1974.”:

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THEADJUSTMENT

THELONGCHAMP

• CargoInterestsdisagreed

• Cargo’sproportion

US$26,220!

• SoughtopinionofAAAAdvisoryCommittee– (4:1)expensesclaimeddidnotcomewithinRuleF.]

• DisputefounditswaytotheCourt.

THECOMMERCIALCOURTDECISION

THELONGCHAMP

TheCourtfoundthat:

a) Hypothetical alternativecourseofactionmust

meetrequirementthatitwas“reasonably…

incurred”withinmeaningofr.A

b) Expensesii)– v)allowableinGAunderr.Fas

“substitutedexpenses”inlieuofsaving$4.15m

c) Expensesi)andvi)allowableinGAunderr.A

d) PaymentoftheoriginaldemandUS$6m

withoutnegotiationwouldnothavebeen

unreasonablyincurred.

Construction”extra” – ordinaryandnaturalmeaning,whichis

“additional”andnot“extraordinary”

“expense” (inthecontextofbunkers)–

consumptionofbunkersincluded.

“extra”expenses – allthatisrequired:the

substitutedexpenseresultedinadditionalfinancial

outlaywhichwouldnotordinarilyhavebeen

incurred

Commercial

Court

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THECOURTOFAPPEALDECISION

THELONGCHAMP

Thecargoappealedchallengingtothe

judgmentonexpensesi)– v)andtheCourt

agreedthat:

a) Paymentoftheoriginalransomdemandof

US$6mwithoutnegotiationwouldhave

beenreasonable;

b) Themediaresponsecosts,i)areallowable

ingeneralaverageunderRuleA;

c) Consumptionofbunkersistreatedasan

expenseforthepurposeofRuleF;

BUT,theCourtheldthat

d) Expensesii)– v)notallowableunderRuleF– not“analternativecourseofaction”,therebeingonlyoneroadopentotheship-owners,namelynegotiationandthatroadledtowhereverthenegotiationended.

CourtofAppeal

Commercial

Court

SUPREMECOURTDECISION

THELONGCHAMP

TheownersappealedtotheSupremeCourt

submittingthatthenegotiationperiod

expenses,ii)– v)amountingto

US$160,213.95,fellwithintheexpression

“expenseincurred”bythemwithinRuleF

andthoseexpenseswereincurred“inplace

ofanotherexpense”,i.e.thesavingof

US$4.15mresultingfromthenegotiations.

Sincethenegotiationperiodexpenseswere

lessthanthe“generalaverageexpense

avoided”,theywereaccordinglyallowablein

generalaverageunderRuleF.

TheSupremeCourt(byamajorityof4to1)reversedtheCourtofAppealdecision,allowingthenegotiationperiodexpenses,ii)– v),ingeneralaverageunderRuleF

CourtofAppeal

Commercial

Court

SupremeCourt

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THELONGCHAMP

CourtofAppeal

Commercial

Court

SupremeCourt

a) thelanguageofRuleFdidnotrequirethat

theexpenseswereincurredfollowingan

alternativecourse;incurringthenegotiation

periodexpenseswasanalternativetopaying

ahigherransom;“theformerinvolved

incurringvessel-operatingexpenses whereasthelatterinvolvedpayingaransom”

b) itwasnotnecessarytoconsiderwhetherthe

initialransomdemandwasreasonableunder

RuleA;thewordsinRuleF“anotherexpense

whichwouldhavebeenallowableasgeneral

average”wereareferencetoanexpenseofa

nature/typewhichwouldhavebeen

allowable(ratherthanits’quantum)under

RuleA,underwhicharansomwouldbe

allowableingeneralaverage.

SUPREMECOURTDECISION

THELONGCHAMP

CourtofAppeal

Commercial

Court

SupremeCourt

c)RuleConlyappliestolossconsequential

onaGAactdefinedbyRuleA.Itdoesnot

applytoexpensescoveredbyRuleF,which

isconcernedwithsumsexpendedin

avoidingexpenseotherwiseallowableas

generalaverage.

d) TheCourtsawnoreasonforrestrictively

interpretingtheword“extra”soasto

requireanexpensetobeifanaturewhich

wouldnotnormallyhavebeenincurredin

responsetotheperilthreateningthe

adventure.TheCourtwasoftheopinion

thatthenaturalcontextualmeaningof

“extraexpense”was“simplyanexpense

whichwouldnototherwisehavebeen

incurred(butforthesavingofthe“other

expense”)”.

SUPREMECOURTDECISION

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THELONGCHAMP

• YARbeinganinternationalruleshouldbeinterpretedbyits

wordinginsteadofbypractice.

• “GiventhattheRulesrepresentaninternationalarrangement,it

isparticularlyinappropriateto adoptanapproachtotheirinterpretationwhichinvolvedreadinginanywordsorqualification.….asamatterofordinarylanguage,RuleFapplies

tothenegotiationperiodexpenses...Toimplysomequalification

suchastherequirementthatthoseexpensesmusthavebeen

incurredsoastoachievean“alternativecourseofaction”

appearstometobeverydangerous.”

• TheCourtfavouredinterpretationofRuleF:“wheneveran

expenseisincurredtoavoidasumofatypewhichwouldbe

allowable,thatexpensewouldbeallowable,butonlytothe

extentthatitdoesnotexceedthesumavoided.”

(Accordingly,thenegotiationperiodexpensesinthe

amountofUS$160,213.95fellunderRuleFastheywere

incurredtoavoidpayingUS$6m,resultinginasavingof

US$4.15m.)

Thedecision- Construction

THELONGCHAMP

Thedecision- Construction

• “Anyextraexpense” - Anyadditionalexpense“whichsimplywouldnototherwisehavebeenincurredbutfor

thesavingofthe“otherexpense””.

• RuleCofYork-AntwerpRulesexclusionshasno

applicationtoRuleF– “…itdoesnotfollowthat

suchindirectliabilitiesshouldbeirrecoverableif

theyareexpendedinordertomitigatewhat

wouldotherwisebealargerGAclaim”.

• “inplaceofanotherexpense” – “mustbeassessed

objectively… itisclear… thatnegotiationswere…

needediftheransomwastobereduced,thatsuch

negotiationstook… time,andthatthepassageoftime

resultedinthenegotiationperiodexpenses… being

incurred.”Asaresultofthosenegotiationsresultingin

theransomreduced,suchexpenseswereincurredinplaceof thealternativeofpayingtheextra.

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THELONGCHAMP

Thedecision- ApproachSuggestedquestionstobeasked(assetbyAAA

AdvisoryCommittee):

1. Istheexpenseavoidedofanature(notquantum)thatwouldhavebeenallowable?

2. HasthesubstitutedexpensesbeenincurredtoavoidorminimizeaGAexpenseofatypethatwouldbeallowable?

(MitigationoflossisofferedastheprincipleunderlyingRuleF.)

3. Doesthesubstitutedexpenseincurredexceedthesumavoided?

THELONGCHAMP

EffectofRuleParamount- Reasonableness

TheRulerequiresthesubstitutedexpenseto

havebeenreasonablyincurred;nosuch

requirementofreasonablenessappliestothe

hypotheticalalternativecourse.

Speaker’sviewapparentlysharedby

formerEditorofLowndes&Rudolf– 12th Edition

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THELONGCHAMP

AAAADVISORYCOMMITTEE(ReferenceisrequestedtotheReportdated25th January2018)

• “Longchamp”decisiondepartsfrom• viewsofmainYARstakeholders– IUMIBIMCO/ICS

• Generalinternationalunderstanding

• Future(English,alsoHongKong)GAadjustments• Negotiatingransom

• Negotiatingawardwith(cash)salvors

• Alsoimpactoffollowinginwiderangeofcases

involvingRuleF:

• Discardingofthe“reasonableness”testin

favour ofrequiringonlythatthehypothetical

alternativeisof“anature”thatmightbe

allowable

• Broadeningunderstandingofwhatconstitutes

an“extraexpense”inRuleFtoincludeany

expenseincluding“indirectliabilities”suchas

demurragethathasmitigatedaGAexpense

• RuleChasnoapplicationtoRuleF

• Lookingforwardtocommentsfromallquarters

THELONGCHAMP

Speaker’snotes• EffectofRuleParamount- Reasonableness

TheRulerequiresthesubstitutedexpensetohavebeen

reasonablyincurred;nosuchrequirementof

reasonablenessappliestothehypotheticalalternative

course.

ApparentlysharedbyformerEditorof

Lowndes&Rudolf– 12th Edition

• EquityEquityistheaimofGA;itishoweverthemarketwhich

remainsbeingtheultimatedecider.

• RoleofAverageAdjustersAAA:ItisnotfortheAverageAdjusterstodeterminewhat

shouldcomewithinGA,whichisamattersolelyforthe

stakeholdersthemselves.Theroleofadjustersisto

explaintheimplicationsofanydevelopmentsinthelaw

asbesttheycan,andthenawaittheresponseofthe

marketstheyserve.

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THELONGCHAMP

THELONGCHAMP

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THELONGCHAMP

RaymondWongASIAMARITIMEADJUSTING(HONGKONG)OfficeB,9/F.,SaiWanHoPlaza,

68Shau KeiWanRoad,HongKong

T. +85235905653/39969876

[email protected]

SUBSTITUTED EXPENSES IN GENERAL AVERAGEper York-Antwerp Rules

20th March 2018

- Workshop