UK: Court of Appeal Rules in Somali Piracy Case

Masefield AG v. Amlin Corporate Member Ltd [2011]
Court of Appeal 26 January 2011¹

Under the provisions of the Marine Insurance Act 1906, a total loss of the insured subject matter may be actual or constructive; a marine policy will cover both, unless it expressly provides otherwise. An actual total loss calls for the subject matter to be destroyed or for the assured to be "irretrievably deprived thereof". A constructive total loss (CTL), exists where the subject matter is "reasonably abandoned on account of its actual total loss appearing to be unavoidable". This will be so where the assured be presently "deprived" of the subject matter and that either (a) it is unlikely that he can recover it, or (b) the cost of doing so would exceed the value once recovered.²

Where a CTL exists, the assured may either treat the loss as a partial loss, or he may elect to treat it as if it were an actual total loss, by giving notice of abandonment to the insurer.³ In many cases, the insurer will decline the notice of abandonment, often disputing that circumstances exist amounting to a CTL, but typically the parties will agree that proceedings are deemed to have been commenced as at the date of the relevant notice. Consequently, the question of whether a CTL existed, or not, is measured against the circumstances present at the date of the notice, rather than by reference to what happened subsequently.

The present case concerned an insured cargo of bio-diesel on board a tanker bound from Malaysia to Rotterdam, seized by pirates in the Gulf of Aden.

The pirates took the vessel to Somali waters, but negotiations soon ensued with the owners of the vessel, with a view to the release of the vessel, cargo and crew. While those negotiations were still ongoing, notice of abandonment was served on the insurers, who refused to accept it, but agreed to the date of notice as the deemed date of proceedings.

The negotiations with the pirates were ultimately successful. Some 10 days after the date of the notice, shipowners paid an agreed ransom to the pirates and the vessel was released. She proceeded to Rotterdam where the cargo was safely discharged. The insured cargo owners nevertheless pursued their total loss claim on the policy, in preference to taking delivery of the cargo. The court was therefore required to decide whether the seizure by the Somali pirates amounted to a total loss, notwithstanding the subsequent recovery of the cargo.

Commercial Court

The matter went to trial in the Commercial Court, upon which judgment was delivered in February 2010.

Firstly, on the question of actual total loss (ATL), the Commercial Court noted that the test of whether the assured had been "irretrievably denied" the cargo was an objective one, to be assessed at the relevant time against the true facts then present, whether all of those facts were known to the assured or not⁴. Although the actual fact of recovery of the vessel and cargo within a short period was not directly material, let alone decisive, the court was entitled to consider what in fact happened after the relevant date in so far as that might assist in showing what the probabilities really were.⁵ Moreover, the correspondence following the seizure, and the information in the public domain at that time, showed that all interested parties were fully aware that the cargoes were likely to be recovered, a view also consistent with the unchallenged expert evidence. Other vessels seized by Somali pirates had been promptly released following negotiations over a relatively short period. The vessel and cargo were safely recovered only 11 days later upon payment of a ransom, representing only a tiny proportion of the value of the ship and cargo.

The trial judge also noted that an assured could not be said to be "irretrievably deprived" of property if it was legally and physically possible to recover it, even though such recovery could only be achieved by disproportionate effort and expense⁶. Rather, the assured had to establish that the recovery was not possible. Mere capture by pirates did not, of itself, constitute an actual total loss⁷, not least since acts of pirates did not necessarily occasion any loss at all. The impact and effect of such a capture was very much dependant upon the facts, and on the facts of the present case the assured had lost only possession and not the property in its goods. Recovery of possession was not legally or physically impossible, and indeed was expected after the usual period of negotiation.

As to the alternative CTL claim, this also failed in the Commercial Court, for two reasons. Firstly, the cargo had not, in truth, been "abandoned" for the purposes of s.60, which required abandonment of any hope of recovery⁸. Although notice of abandonment had been served, the reality was that the shipowners and the cargo owners had every intention of recovering their property and were fully hopeful of doing so. Secondly, for all the reasons considered in the context of the ATL claim, it could not be said that there was a reasonable basis for regarding an actual total loss as "unavoidable", without which there could be no valid CTL.

Finally, the court also rejected the assured's alternative public policy argument, namely that a release of the subject-matter in response to payment of a ransom should not be treated as a relevant or appropriate consideration when deciding whether a vessel and her cargo were, in practice, irrecoverable. The court noted that payment of a ransom was not illegal, nor could it find any "clear and urgent reason" to categorise it as contrary to public policy. On the contrary, the courts have previously held that ransom payments are recoverable as sue and labour expenses incurred pursuant to the assured's duties under section 78(4) Marine Insurance Act 1906⁹.

On this basis, the Commercial Court found in favour of insurers, against which finding the assured appealed.

Court of Appeal

The case presented by the assured in the Court of Appeal was more limited in scope. Firstly, the argument was focused purely on whether there had been an ATL. The CTL case was no longer under consideration. It was the assured's case that seizure by pirates automatically amounted to an ATL, as a rule of law. What actually happened thereafter, as a matter of fact, was irrelevant. Alternatively, argued the assured, seizure by pirates amounted to an act of "theft" within the English criminal law definition. Under the Theft Act 1968, a person who takes the property of another with the intention of returning it only upon terms inconsistent with the owner's rights¹⁰ is guilty of theft. Since theft is an insured peril in its own right, said the assured, an insured loss by theft occurred at the moment of seizure.

As to public policy, the assured conceded that the payment of a ransom was neither illegal nor was it formally contrary to public policy. Nevertheless, it amounted to submission to extortion, and hence was so undesirable from the point of view of the public interest and universal principles of morality, that it could not form part of the assured's duty to avert or minimise the loss. If payment of a ransom could not be required of an assured, as part of its duty under section 78(4), then it must follow that the ATL was suffered at the point when the vessel was seized, or at any rate when notice of abandonment was given.

The Court of Appeal dismissed the assured's appeal on all grounds. Affirming the decision of the trial judge on the question of the ATL, the court held that there was no rule of law that seizure by pirates equalled an ATL. Such a seizure may go on to mature into an ATL, but that depended upon the facts. In this case, the facts were clear. 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 the recovery of both. This was no irretrievable deprivation of property, so much as the typical "wait and see" situation. The court noted that the facts would not even have supported the CTL claim, since it could not be said that there was an "unlikelihood" of recovery.

As to the theft argument, this confused the concept of the "peril" with that of "loss". While theft was a peril insured against, what was required to pursue an insurance claim was the occurrence of a loss as a result of the said peril. There could be no loss without irretrievable deprivation.

Turning finally to public policy in the context of section 78(4), the Court of Appeal could find no universally recognised principle of morality to allow it to conclude that payment of a ransom was "beyond the pale" or "without any legitimate recognition". While it accepted that section 78(4) did not impose a duty on an assured to pay a ransom, it did not follow that a potential total loss which may be averted by the payment of such a ransom thereby became an ATL.

Result: Judgment for insurers

Footnotes

1. [2011] EWCA Civ 24

2. s. 60(2) Marine Insurance Act 1906

3. ss. 61 and 62 Marine Insurance Act 1906

4. Marstrand Fishing Co Ltd v Beer (1936) 56 Ll L Rep 163

5. Bank Line Ltd v Arthur Capel & Co [1919] AC 435

6. Fraser Shipping Ltd v Colton [1997] 1 Lloyd's Rep 586 QBD

7.Dean v Hornby [1854] EngR 113

8. Court Line Ltd v R [1945] 78 Ll L Rep 390

9.Royal Boskalis Westminster NV v. Mountain [1999] QB 674

10. For example, upon payment of a ransom.

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