UK: Piracy off Africa- Cargo's Perspective

Last Updated: 13 October 2011
Article by Stephen Askins and Stuart Shepherd

For pirates off both West and East Africa, the laden tanker has become the most sought after prize. There are two distinct business models and both present challenges to the owners and underwriters of a high value oil cargo. Off Somalia, the south-west monsoon is coming to an end and there are stark warnings from the military that the new piracy "season" is upon us. Activity levels in September matched those of the past two years and despite the best efforts of an under-resourced coalition of naval forces, the pirates continue to run rings around international law. It is inevitable that another tanker will be taken over the next few months and, as we have seen from recent cases such as the Irene SL and the Samho Dream, this will undoubtedly mean significant ransom payments to secure the release of crew, ship and cargo. Off West Africa, in the Gulf of Guinea, armed gangs are targeting the cargo itself, stealing large quantities that they intend to sell ashore. This bulletin outlines some of the legal and practical difficulties that arise in both scenarios.

Introduction

The owners and masters of vessels transiting the high risk areas of the Gulf of Aden and Arabian Sea are expected to be familiar with the Best Management Practices ("BMP") now in their fourth edition. The BMP give comprehensive guidance on reporting requirements to the relevant military authorities responsible for tracking vessels and co-ordinating a response to any attack. The BMP also make suggestions for self-protective measures ("SPM") that a vessel is recommended to adopt, including razor wire and the deployment of fire hoses. The use of armed guards still divides the maritime industry, but the mantra of the maritime security sector that no vessel with armed guards has been captured still holds true. The BMP do not recommend their use, but do recognise that some owners will deploy them where flag state laws allow. Over the past few months, some European nations such as Norway, Cyprus and indeed the UK have changed, or at least signalled that they are looking at changing, national legislation to allow arms on their flagged vessels. The military now suggests that there is about 80% compliance with BMP which it is hoped will mean that, whilst the attacks may continue, their success rate should continue to fall.

West Africa

The industry has feared that the Somali business model would in some way be exported to other parts of the world. The Gulf of Guinea and indeed the areas off the Niger Delta have long been associated with piracy, but the recent attacks have moved from intimidation and occasional kidnapping of the crew and petty theft to something more sinister. Vessels either undertaking an STS operation or preparing to provide bunkers are being targeted and attacked by armed and well organised gangs who are themselves very familiar with the workings of the tanker. The crew are hidden by the pirates and the gangs then call up a small tanker or barge owned by ostensibly legitimate and established firms based in Nigeria who must obviously be complicit in what is happening. The gangs steal the cargo, moving it quickly between other ships in the same management before selling it ashore in Benin for sale back into the commercial market.

The hijackings may last only a matter of days but, in the absence of a ransom demand, what is essentially a theft of the cargo does not constitute a General Average ("GA") event. The loss then falls in its entirety on the cargo interests to be claimed from their underwriters. The Nigerian and Benin navies are said to be mounting patrols to stop this practice, but the area has been declared a high risk area attracting an Additional Premium from war risk underwriters. If the Nigerian flag administration insisted that all oil carrying barges and tankers had to have AIS or the LRIT tracking systems on and live, this would dramatically reduce the ability of those barges and tankers to get involved.

Somalia

As at October 2011, the average duration of a hijacking by reference to the last six ships released is 241 days. That includes the Eagle and the Dover where the ransoms were paid but the vessels were unable to sail from the pirates' anchorage for mechanical or other reasons. The Savina Caylyn, an Aframax tanker fully loaded with a crude cargo, remains hijacked after seven months. So, depending on the characteristics of the cargo, a hijacking can have serious financial implications for its owners giving rise to the increased risk of significant ROBs and losses arising from the delay in delivery, both in terms of market loss and financing costs. Whilst any loss in the value of the cargo during the vessel's detention will have a marginal effect on cargo interests' contribution in GA, they will need to establish that that hijacking and detention was caused by a breach of the contract of carriage in order to make any recovery in respect of such losses (see further below).

The personal price paid by the crew who bear the burden of these events is enormous. However, despite the threats against the crew, the P & I Clubs do not contribute. Indeed, the issue of "life" contributing in GA was the subject of a recent arbitration where the Tribunal was asked to deduct an amount from the ransom in respect of crew in order to reduce the GA contribution by the cargo interests. That argument was flatly rejected by the Tribunal.

As to the ransom paid, the rolling average for ransoms is about US$4.5 million although, for the tankers taken in the past year, it is probably twice that. The ancillary costs of negotiating the vessel's release, delivery of the ransom and the loss in transit insurance are likely to add nearly US$1 million to the cost. These costs are recoverable in GA and fall to be paid by the relevant property underwriters pro rata to the property values at the end of the voyage.

Legality of ransoms

As a matter of English law, the starting point is that no payments can be made to terrorists or Al Shebab, the Islamic organisation in Somalia whose involvement in piracy is carefully monitored. As long as the pirates are seen as criminals rather than terrorists, then notwithstanding any moral arguments about their payment, ransoms are legal and this was confirmed by the Court of Appeal in the case of Amlin v Masefield [2011] EWCA Civ 24. The Appeal Court concluded in that case that the ransom was legal and expressed the view that the payment of a ransom remained the only way to free the crew in these situations. Other jurisdictions approach this issue differently and there are countries which do not allow payments of ransoms in respect of individuals. This is a factor that has to be taken into account in these situations.

The problem is complicated by the US Executive Order ("EO") of 13th April 2010 and a similar EU Directive issued at the same time. The EO is more wide-reaching but only applies to "US persons" or those companies with a US nexus and prevents funds being paid to certain people that it sees as undermining the peace and stability in Somalia. Both the EO and the Directive name Al Shebab as a "prohibited" entity. However, the EO goes on to name at least two senior figures in the pirate world, to whom any payments are prohibited. This places any cargo owner or cargo underwriter to whom the EO applies and who is paying a ransom under the almost impossible obligation of having to know to whom that ransom money is ultimately going. The EU Directive is narrower in scope and also provides a defence to prosecution where the party paying the ransom has a "reasonable belief" that it is not making a payment destined for Al Shebab.

Total Loss

The Amlin case referred to above also considered the issue of whether a seizure by pirates constituted an Actual Total Loss ("ATL") at the point of capture, as was alleged by cargo interests. In that case, the Court was likely influenced by the fact that the vessel had already been released by the time the matter came to Court. The Court did make it clear, however, that an ATL required the cargo owners to have been "irretrievably deprived" of their goods. This meant not only that the assured must have lost control of its goods at the time of the loss but that there was no hope or possibility of ever ultimately recovering possession of them in the future. A Somali piracy case was described as a classic "wait and see" case where the expectation was that a ransom would be paid and the ship and cargo recovered. However, some policies have detention clauses which provide that there is a deemed Constructive Total Loss after say six months, regardless of whether the ship and cargo are then subsequently released.

Unseaworthiness

Usually, cargo interests play little part in the negotiations for the release of the vessel and this is often out of choice, although the lack of any information regarding the negotiations can be a source of serious frustration. After release, the vessel proceeds to a port of refuge. Before the cargo is discharged, it is likely that GA security will be required from the cargo owners and their underwriters. Liability in GA arises after the cargo has been delivered. This is not the place to set out a detailed analysis of the law in this area but, in general terms, in order to resist that liability, the cargo owners have two potential lines of argument. The first is to allege that the amount paid is unreasonable where the burden of proof is on the owners to show that all the items of expenditure are reasonable. The second line is to allege that the vessel was unseaworthy in that, for example, BMP had not been followed and the crew were ill-prepared for the voyage, with the result that the hijacking arose as a result of the fault of the owners. The definition of seaworthiness is that the owner must properly man and equip the ship to meet the usual perils of the sea. Arguably, a vessel sleep-walking its way into a hijacking is open to criticism, although causation in these cases is difficult to demonstrate. A ship can be well secured with a plethora of SPMs and yet a master of a laden tanker faced with a sustained attack by pirates with RPGs can hardly be blamed for surrendering his ship if he believes his crew or indeed the environment is threatened.

BMP do not on their face apply to the Gulf of Guinea, although many of the principles that apply to risk assessment and threat analysis are common to all regions and will increasingly be seen as good practice in all those areas where pirates are active.

Conclusion

With no immediate solution at hand and piracy set to continue for the foreseeable future, it is probable that more trading companies will find themselves involved in a hijacking off Africa. It remains a complex area giving rise to both legal and practical difficulties which have to be considered and dealt with. This is an area in which Ince & Co LLP has accumulated considerable experience. Similarly to all other maritime crises, it is recommended that early and proactive steps are taken to protect any and all interests that may be affected by piracy.

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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