UK: Shipping And Insurance Update Piracy

Last Updated: 8 March 2010
Article by Andrew Preston, Simon Culhane and Mike Roderick

The recent decision in Masefield v Amlin [2010] EWHC 280 (Comm) has given useful guidance regarding a number of issues that have been concerning shipowners, cargo owners and their insurers arising from the piracy problem off Somalia.

The decision is timely, having been handed down seven days before the House of Lords' EU Sub-Committee on Foreign Affairs heard evidence from leading marine insurance and shipping industry figures as part of its enquiry into piracy off the coast of Somalia, which is considering the issue of ransom payments.

In this update we review the decision (which largely centres on issues of actual and constructive total loss of cargo under the Marine Insurance Act 1906) and comment on some of the wider issues touched upon in the judgment that will be of interest to the shipping and insurance market in general, in particular the legality and public policy issues raised by ransom payments.

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 primary issue for the Court, and to which the majority of the judgment was directed, was whether at the time of tender of the Notice of Abandonment it could be said that the Claimant had been irretrievably deprived of the cargo and therefore it had been actually totally lost within the meaning of s57(1) of the 1906 Act.

In the alternative the Claimant argued that there had been a constructive total loss 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.

Finally, for the purpose of determining whether the cargo could properly be considered to be irretrievable, the Claimant argued that the payment of ransom to pirates was contrary to public policy (though not illegal) and therefore could not be taken into account in considering the prospects of recovery.

The decision

In determining the ATL claim, Steel J noted that there was unchallenged authority confirming that for the purpose of establishing irretrievable deprivation (and therefore actual total loss under s57(1) of the Act), the assured must show that recovery is impossible. Given the history of previous cases of capture by Somali pirates, there was ample evidence before the Court (and conceded by the Claimant) that in reality there was a reasonable hope and perhaps even a likelihood that the ship and cargo would be recovered by payment of a ransom. The Claimant argued, however, that it had been established in Dean v Hornby (1854) that in the case of capture by pirates there is an actual total loss straightaway even though the property is later recovered.

That case was referred to by Rix J in Kuwait Airways v Kuwait Insurance [1996] where he noted:

"In case of capture, because the intent is from the first to take away dominion over a ship, there is an actual total loss straightaway, even though there later be a recovery: see Dean v Hornby (1854) 3 El.& Bl 179 (a case of piratical seizure)"

Steel J accepted that, when read in isolation, Dean v Hornby might be viewed as determining that a capture by pirates as such would constitute a total loss. However, following an extensive review of the authorities he concluded that this was not in fact the case. The judge held that the proposition was fact sensitive given that the intention of pirates can be various. At one extreme would be pirates who "steal" the vessel and use it for their own purposes. At the other extreme are pirates who simply retain possession of the ship in order to extract a ransom. Mere seizure by pirates without more could not be said to impact on the proprietary interests in a vessel. As Steel J put it:

"What has been transferred is possession and not title and the question thus arises, in my judgment, as to whether recovery of possession is legally or physically impossible."

Applying this test to the facts of the present case the Judge held that the vessel had not been actually totally lost.

Turning to the CTL claim, the Judge noted that in order to satisfy the criteria of s60 of the Act, it was necessary to show that the subject matter was abandoned because an ATL appeared unavoidable. Steel J held that these criteria had not been met for two reasons. First, the meaning of 'abandonment' in this sense did not simply refer to the tender of a Notice of Abandonment, but rather an abandonment of any hope of recovery, which clearly did not exist on the facts of this case. Secondly, for the reasons given in his analysis of the ATL claim, there was no reasonable basis on which it could be said that an ATL was unavoidable.

Having reached these conclusions it was clear that the only way in which the Claimant could now succeed was to establish that the payment of ransom was contrary to public policy. If this were the case then, it was argued, the potential for release of the vessel by this means could not be taken into account when considering whether a vessel and her cargo were in practice irretrievable.

The Judge noted that whilst it might be said that payments of ransom encourage further seizures, particularly where insurance is usually in place, in practice there is little option but to pay a ransom where that is the only effective means (absent diplomatic or military intervention) to remove vessel crews and property from harm. Steel J also noted that the payment of ransom is not illegal under English law (this point had been conceded by the Claimant) and where the 'balance of convenience' was not clear cut the Court should resist any temptation to intervene where there is no clear and urgent reason to categorise an activity as contrary to public policy. It followed that the Claimant's claim for a total loss, whether actual or constructive, was rejected by the Court.

Comment

The case provides welcome clarification on some of the legal issues raised by the many recent incidents of piracy off Somalia. Although primarily focussed on insurance coverage issues, and in particular the rejection of the Claimant's primary argument that where a vessel is captured by pirates there is an actual total loss straightaway irrespective of later recovery (the Dean v Hornby point), the judgment provides helpful guidance on other related issues of interest to the wider shipping community.

The rejection of the Claimant's assertion that ransom payments are contrary to public policy is particularly interesting because it led the Judge to reflect upon both the legality of such payments and whether they can be recoverable as a sue and labour expense. The point also has relevance for ship and cargo owners in relation to general average.

In the event, the Claimant chose not to contend that the payment of ransom was illegal under English law. Noting this concession, the judge remarked that "the payment of ransom is not illegal as a matter of English law" and also noted that in other circumstances Parliament had intervened to make ransom payments illegal, but had not done so in this context. Therefore, the fact that payment of a ransom is not illegal was relied on by the Judge as one of the reasons for rejecting the argument that such payments are contrary to public policy.

In relation to sue and labour, the Judge referred to and relied upon the majority opinion expressed by the Court of Appeal in Royal Boskalis v Mountain [1999] that "the assumption of the editors of Arnould that payment of a ransom, if not itself illegal, is recoverable as an expense of suing and labouring is well founded."

Whilst the Judge's finding reflects market understanding of the legality position in relation to Somali pirates, it should be noted that legality was not fully argued because of the concession by the Claimant 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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions