UK: Shipping And Insurance Update – Piracy

Last Updated: 24 February 2011
Article by Simon Culhane, Margaret Curzon and Andrew Preston

Is a vessel, or cargo, lost immediately when it is captured by pirates? This and other issues relevant to piracy and the payment of ransom have been considered recently by the Court of Appeal in Masefield v Amlin [2011] EWCA Civ 24.

The facts

On 19 August 2008, the chemical / palm oil tanker 'Bunga Melati Dua', together with her crew and cargo, was seized by Somali pirates in the Gulf of Aden during a voyage from Malaysia to Rotterdam.

Two parcels of bio-diesel carried on the vessel were insured by the defendant Underwriter under an open cover contract that covered loss by both piracy and theft. About a month after the seizure (while negotiations for the release of ship and cargo were continuing) the claimant cargo owners tendered a Notice of Abandonment to the Defendants, which was declined. Within about 10 days of the Notice of Abandonment a ransom was agreed with the pirates and paid. The vessel, crew and cargo were subsequently released and arrived at Rotterdam on 26 October.

It was common ground that both theft of cargo and the capture or seizure of the cargo by pirates were insured risks under the cargo insurance. The Claimant sought recovery of about US$7 million under the policy for the total loss of the cargo, that sum being the net loss after allowance for the proceeds of disposal of the cargo at Rotterdam.

The issues

The claimant cargo owners argued that capture by pirates created an immediate actual total loss ("ATL"), whatever the prospects of recovery might be. In addition it was argued that the law would not or could not take account of the payment of a ransom as a relevant, legitimate, reason for calculating the possibilities of recovery. Therefore, since the cargo had not been recovered by the time proceedings were deemed to have been commenced, the insured was entitled to succeed.

The insurers did not accept that capture by pirates created an immediate ATL and submitted that the cargo was not irretrievably lost when there was a good chance of negotiations for payment of ransom bearing fruit. It was argued that payment of a ransom was neither illegal nor against public policy, and therefore there was nothing to prevent the prospects of recovery by payment of a ransom from being a relevant and legitimate factor to take into account.

Section 57(1) of the Marine Insurance Act 1906 ("the Act") provides that there is an actual total loss ("ATL") where "the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof" (there is no need to give notice of abandonment).

In the High Court, Steel J held that, for an ATL, the issue was whether the cargo owner was "irretrievably deprived" of the cargo before the ransom was paid. The judge held that an insured is not irretrievably deprived of property "if it is legally and physically possible to recover it (and even if such recovery can only be achieved by disproportionate effort and expense)". The facts in this case were that (as shown by contemporaneous correspondence and information in the public domain) the claimant was fully aware that the cargo was likely to be recovered and that other vessels seized by Somali pirates had been promptly released following negotiations, and indeed in this case the vessel and cargo were recovered shortly afterwards.

In addition, in the High Court the Claimant argued that there had been a constructive total loss ("CTL") under s60(1) of the Act on the basis that the cargo had been reasonably abandoned due to its actual total loss appearing to be unavoidable. Given the wording of the policy it was common ground that the additional category of constructive total loss provided for under s60(2)(i) of the Act (where an assured is deprived of possession of the goods by an insured peril and it is unlikely that they can be recovered) was excluded from the cover. Although exclusion of s60(2)(i) was common ground between the parties, it is arguable that such an approach is in fact contrary to previous authority and market practice in respect of a cargo policy on ICC(A) clauses.

Steel J held that there had not been a CTL as it could not be said that the subject matter had been abandoned or that an actual total loss appeared unavoidable: "What is required is not a notice of abandonment....but the abandonment of any hope of recovery". In this case, the shipowners and cargo owners had every intention of recovering their property and were fully hopeful of doing so. The Claimant chose not to pursue its CTL claim before the Court of Appeal.

The decision

After a thorough review of the leading caselaw, the Court of Appeal rejected the Claimant's argument that capture by pirates created an immediate ATL. Rix LJ stated: "piratical seizure in the circumstances of this case, where there was not only a chance, but a strong likelihood, that payment of a ransom of a comparatively small sum, relative to the value of the vessel and her cargo, would secure recovery of both, was not an actual total loss. It was not an irretrievable deprivation of property. It was a typical "wait and see" situation." Likewise, even if there had been a theft (which was an insured peril) that peril had not caused an ATL because the claimant had not been "irretrievably deprived" of the cargo. Turning to the question of whether payment of a ransom could be taken into account as a relevant, legitimate, reason for calculating the possibilities of recovery, the Court of Appeal upheld the decision of the High Court in confirming that it could. Although the Claimant accepted that payment of ransom was not illegal or contrary to public policy under English law, it argued that it was so undesirable that an insured could not be required to pay a ransom and hence the property had been irretrievably lost if only the payment of a ransom would secure the vessel's release. That argument was rejected by the Court of Appeal. The fact that there was no duty to make a ransom payment did not mean that there was an obligation not to make such payment: "The fact that there may be no duty to make a ransom payment does not turn a potential total loss which may be averted by the payment of ransom into an actual total loss". Furthermore, questions of reasonableness are pertinent to whether there has been a CTL but not an ATL.

The Court of Appeal also noted that payment of a ransom can be recovered as sue and labour expenses and that was another reason for finding that it cannot be against public policy. Reference was made to the Court of Appeal decision in Royal Boskalis Westminster v Mountain (1999), where the summary of the law stated by Arnould was cited with approval: "There appears to be little doubt that where a payment which is not itself illegal under any relevant law is made to secure the release of property, this can be recovered even though the persons demanding the payment are not acting lawfully in so doing. Thus, for example, payment to recover property from pirates or hi-jackers must, it is submitted, in general be recoverable."

Comment

The decision of the Court of Appeal to uphold the judgment of Steel J in the High Court and reject the claim reflects market understanding of the issues raised by piracy and the payment of ransom. As such, the ruling provides welcome clarification surrounding an issue that unfortunately remains all too relevant for the shipping and insurance community. In rejecting the suggestion that capture by pirates created an immediate ATL, both the Court of Appeal and Steel J have followed a string of earlier cases which made it clear that although hindsight might not be directly material, the courts can "wait and see" what develops before concluding whether there has really been an ATL. So, for example, it had been held in The Anita [1970] 2 Lloyd's Rep 365 that there had been no ATL because it would have been possible to recover a detained vessel by paying a bribe. Such a case contrasts with (for example) the case where a ship was seized and subsequently sold and thus did amount to an ATL. Accordingly, the Court of Appeal has held that: "There is no rule of law that capture or seizure is an ATL. The subject-matter is not amenable to a rule of law at all: it is all ultimately a question of fact".

The Claimants' carefully framed argument that ransom payments could not be taken into account as a relevant, legitimate reason for calculating the possibilities of recovery (which did not extend to suggesting that such payments were illegal) was also rejected. In doing so the Court of Appeal had the benefit of considering the findings of a report of the House of Lords European Committee in respect of Somali piracy, (published on 14 April 2010, and therefore subsequent to the High Court decision) entitled "Combating Somali Piracy: the EU's Naval Operation Atalanta". The report was based on evidence given over the previous year by witnesses representing the government, the military and industry, in particular the shipping and insurance industries. In relation to ransom payments, the committee concluded that it supported the status quo whereby the payment of ransom to pirates is not a criminal offence under United Kingdom law. It also recommended that where shipowners intend to pay a ransom to recover their vessel and crew, that they should use experienced and effective ransom operators to conduct negotiations. Against this background the Court of Appeal has acknowledged the practical realities facing shipowners and insurers when placed in the difficult position of dealing with Somali piracy. As Rix LJ summarised; "In these morally muddied waters, there is no universally recognised principle of morality, no clearly identified public policy, no substantially incontestable public interest, which could lead the courts, as matters stand at present, to state that the payment of ransom should be regarded as a matter which stands beyond the pale, without any legitimate recognition."

So for the present the position appears to be clear. However, the problem of piracy in Somalia remains serious and indeed may be getting worse. Incidents involving violence seem to be on the increase and it is by no means certain whether the attitude of governments towards the payment of ransom will remain as tolerant. Already we have seen how US and EU regulations have restricted the payment of ransom to specially designated persons. The potential for changes in the law in such a fluid situation cannot be disregarded and may have a significant impact on claims of the type seen in this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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