UK: Somali Piracy: The Effect Of Ship Hijacking On Marine Insurance Policies

Last Updated: 23 February 2010
Article by John Knott

The judgment of Mr Justice Steel, delivered in the English Commercial Court on 18 February 2010 in Masefield AG v. Amlin Corporate Member Ltd, [2010] EWHC 280 (Comm), resolved an issue between the parties as to whether or not the hijacking of the tanker Bunga Melati Dua by Somali pirates justified a claim under an open cover marine insurance policy for the total loss of cargo, alternatively its constructive total loss, notwithstanding that the cargo was eventually recovered. In the course of his judgment the learned judge made a number of observations that will be of interest to anyone having to deal with legal or insurance issues arising from a ship hijacking.

The Hijacking

The chemical/palm oil tanker Bunga Melati Dua was hijacked in the Gulf of Aden on 19 August 2008, while on passage from Sumatra to Rotterdam. During the attack one of the 39-member crew (29 Malaysians and 10 Filipinos) was killed. The owners negotiated a ransom payment and the vessel, the remaining crew, and the cargo were released on 29 September, six weeks after capture.

The Claim

The claimants were the owners of two parcels of bio-diesel, with a declared value of over US$13 million, which had been shipped onboard the vessel. The defendants were their insurers. Masefield's primary claim was for an actual total loss ("ATL") in the sum of US$7 million, representing their net loss after giving credit for the proceeds from the disposal of the recovered cargo at Rotterdam. The claimants asserted that an ATL occurred when the vessel was hijacked because, in terms of s57(1) of the Marine Insurance Act 1906, they had been "irretrievably deprived" of the cargo, notwithstanding its ultimate recovery. In the alternative, Masefield claimed on the basis of a constructive total loss ("CTL") within the terms of s60(1) of the 1906 Act, contending that the cargo had been reasonably abandoned because its actual loss appeared to be unavoidable.

Insurance Cover and Exclusions

The all risks insurance policy contained a war risks exclusion for "loss, damage or expense caused by ... capture, seizure, arrest restraint or detainment (piracy excepted), and the consequences thereof or any attempt thereat." A further clause avoided cover for a CTL except where "the subject-matter insured is reasonably abandoned either on account of its actual loss appearing to be unavoidable or because the cost of recovering, reconditioning and forwarding the subject-matter to the destination to which it is insured would exceed its value on arrival."

Main Issue

The main issue was whether, on 18 September 2008, when the claimants served notice of abandonment, they had been "irretrievably deprived" of the cargo—regardless of the fact that they recovered it after the shipowners paid a ransom. At first sight, given that the claimants did later recover the cargo, this may seem to be a rather startling proposition. To support it, the claimants sought to rely on a statement made by Mr Justice Rix in Kuwait Airways v Kuwait Insurance [1996] 1 Lloyd's Rep. 664, approving a mid-19th century decision dealing with the effect of capture of a merchant vessel by pirates, the vessel subsequently being recaptured by an English warship and treated as a prize ship in proceedings in the Admiralty Court. Rix J had said:

"In case of capture, because the intent is from the first to take 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)."

The Court's Finding

Steel J, however, considered that this statement could not be regarded as being of universal application. In his view, there was a fallacy in the claimants' reliance on it, because the impact and the fact of a capture was very fact sensitive; and whereas in Dean v. Hornby title to the captured vessel passed lawfully when she became a prize ship, title to Bunga Melati Dua had not passed to the Somali pirates: they merely acquired unlawful possession of the ship. Quite apart from that, Steel J considered that the claim in Dean v. Hornby had really been not for an ATL, but for a CTL. And in the present case he held that there had not been a CTL, as the cargo had not been abandoned within the meaning of s60 of the Marine Insurance Act, because "the shipowners and the cargo owners had every intention of recovering their property and were fully hopeful of doing so." As, in light of the history of Somali hijackings, they had good reason to believe that they would be successful in achieving a recovery, there was no reasonable basis for considering that an ATL was unavoidable.

Public Policy in relation to Ransom Payments

The claimants had a further argument, which was that the recovery of the Bunga Melati Dua and its cargo by the payment of a ransom should be ignored, because the payment of the ransom, although not illegal under English law, was, in the claimants' submission, contrary to public policy. This, they contended, had a bearing on whether the ship and cargo should be treated as "irretrievable" in practice.

On this issue, Steel J followed the approach in Fender v. St John Mildmay [1938] AC 1, where Lord Atkin had said:

"The doctrine [of public policy] should only be invoked in clear cases in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds."

Among the reasons why Steel J was persuaded that payment of the ransom was an appropriate action for the shipowners to take, were that a payment was not illegal, and that, although payment would encourage further hijackings—particularly where there was insurance cover—there was no other feasible method available to the shipowners to take the crew out of harm's way. In the circumstances, the learned judge felt that there was no clear and urgent reason for categorising the activity as contrary to public policy. He also pointed out that a contrary finding would have a catastrophic effect upon the kidnap and ransom insurance market.

Duty to Pay a Ransom

Steel J dismissed a further argument by the claimants, who sought in the alternative to have the payment disregarded on the ground that they were not under a duty to pay a ransom. The learned judge considered the argument to be misconceived, and that the existence or otherwise of a duty was irrelevant. The real issue was whether a payment would or might lead to a recovery. And a related consideration was that the amount paid was in fact reasonable, given that it represented only a small proportion of the value of the property.

Sue and Labour

In the course of his judgment, Steel J noted that a ransom payment was in principle recoverable as a sue and labour expense by reason of the decision in Royal Boskalis Westminster NV v. Mountain [1999] QB 674, where the majority of the Court of Appeal approved the view to that effect expressed in Arnould: The Law of Marine Insurance.

Conclusion

The learned judge's robust approach to the issues in the case will give welcome reassurance to shipowners faced with the appalling situation of having a vessel attacked and captured, and their crew held hostage.

Additionally, Steel J's observation that a shipowner has virtually no option but to pay a ransom to take his crew out of harm's way is sound common sense, and comes as a refreshing change from the increasingly strong vocal stance taken by the American administration against the payment of ransoms to pirates, and the concern expressed by the United Nations Security Council in its Resolution 1897 passed in December 2009. As shown in an earlier article, the payment of a ransom is not in itself illegal under English law, and concerns about money laundering and supporting terrorism by making such payments to Somali pirates, do not stand up to careful analysis.

© Copyright John Knott, 2010

The author is a consultant at the London head office of Holman Fenwick Willan LLP, who have been instructed in relation to over 40 of the commercial vessel hijackings that have occurred off Somalia since 2008, in addition to similar incidents elsewhere. Specific legal advice should be sought for particular situations on any matters falling within the scope of the article.

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