Marine & Transit - April 2010

Somali pirates: coverage issues and public policy concerns

Masefield AG v Amlin Corporate Member Ltd (The “Bunga Melati Dua”) – Commercial Court (David Steel J) [2010] EWHC 280 (Comm)

On 19 August 2008 the “Bunga Melati Dua”, a chemical/palm oil tanker, was seized by Somali pirates in the Gulf of Adan during a voyage from Malaysia to Rotterdam.  The vessel, together with crew and cargo, was taken to Somali waters.  Shortly after, the Somali pirates demanded a ransom for the vessel’s safe return - a familiar story but this time with a significant legal twist.  A dispute arose between the owners of two parcels of bio-diesel shipped on board the vessel and the insurer of that cargo under an open cover contract covering loss by piracy and theft. This lead to Commercial Court proceedings before Mr Justice David Steel, whose judgment is of considerable importance to anyone dealing with marine insurance and piracy claims.

Soon after seizure, negotiations between the pirates and the owners commenced with the view to obtaining release of the vessel, cargo and crew.  During those negotiations (about a month after the vessel was seized) the cargo owners served a notice of abandonment on the insurers.  This was declined but the parties agreed that proceedings should be deemed to have commenced on 18 September 2008.  About ten days later, the vessel’s owners paid a ransom to the pirates and the vessel was released, together with the crew.  The vessel arrived in Rotterdam on 26 October 2008 and the cargo was discharged.

The cargo owners’ primary case was that the capture of the vessel by pirates and its removal into Somali waters meant the cargo had become an actual total loss (“ATL”) for the purposes of Section 57(1) of the Marine Insurance Act 1906 (“the Act”).  Alternatively, they claimed the cargo had become a constructive total loss (“CTL”) under Section 60(1) of the Act in that the vessel and cargo had been reasonably abandoned on account of its ATL appearing to be unavoidable.  Finally, they also submitted that ransom payments were contrary to public policy and therefore should not be taken into consideration in considering the prospects of vessel and cargo recovery. 

The key issue, therefore, was whether as of 18 September 2008, the cargo owners were “irretrievably deprived” of the cargo.  Steel J’s view was that they were not.  In reaching this decision, he took the following facts into consideration:

1. All interested persons (including the cargo owners) were fully aware that the cargo was likely to be recovered.  The ship owner was in contact with the pirates very soon after the vessel was seized, the pirates had demanded a ransom and the ship owner was negotiating that ransom with a view to securing the safety of the crew as well as the vessel and cargo.  The total value of the property at stake was in excess of US$80 million; as such it was likely that the ship owners would pay the ransom demand of US$4.7 million.  By 31 August 2008, the Malaysian Government was indicating to the crew members’ families that the ordeal would be over in 30 – 40 days and by 2 September 2008, the Malaysian Navy had sent two Naval vessels to the area, the obvious implication being that the vessels carried the ransom payment and would be used to escort the “Bunga Melati Dua” back to safety.
   
2. Expert evidence was presented which showed that prior to 18 September 2008, nine vessels had been taken and released by Somali pirates between 2007 and that date.  The taking of this vessel fitted the typical profile for a Somali pirate seizure.  The pirates would not have been interested in the cargo and there would have been a high expectation that upon the vessel being released, the cargo would also be released. 
   
3. Other vessels seized by Somali pirates had been promptly released following negotiations over a relatively short period. 
   
4. Indeed the vessel and cargo were safely recovered only 11 days later.  

Despite these facts being accepted by the cargo owners, they nonetheless contended that an ATL had occurred as and when the vessel was seized by the pirates, thus entitling them to cover under their policy.  In doing so, they relied on the decisions in Dean v Hornby (1854) 3 El & Bl.180 and Kuwait Airways Corp v Kuwait Insurance Co SAK (No 1) [1996] 1 Lloyd’s Rep. 664, which they alleged supported the proposition that in the case of capture by pirates who intended to exercise dominion over a ship or cargo there is straight away an ATL even though the property is later recovered.  However, the court distinguished these cases from the case in hand stating that the impact and effect of a capture is very fact sensitive.  In the current case, what had happened was transfer of possession and not transfer of title.  Furthermore, it had been highly likely that possession would be recovered and the condition of the cargo had not deteriorated significantly by the time it was recovered.

Regarding the alternative claim for CTL, the Court held that the cargo claimants had failed to satisfy the criteria of Section 60 of the Act as the cargo had not been abandoned due to an ATL appearing unavoidable.  To the contrary the ship owners and the cargo owners had every intention of recovering the property and were fully hopeful that this would be achieved from the outset. 

Steel J was also wholly unpersuaded by the cargo owners’ submission that ransom payments were contrary to public policy and therefore should not be taken into consideration in respect of the vessel and cargo’s irretrievability.  Whereas he acknowledged that ransom payments do encourage further actions of piracy, he also noted that diplomatic or military intervention could not be relied on.  In practice therefore, there is little option but to pay a ransom where that is the only effective means of removing crews and property from harm.  Furthermore, he supported the view that such ransoms are recoverable as expenses of sue and labour under general average.

This decision provides welcome reassurance to the shipping industry and marine insurance market, placing a seal of approval on ship owners negotiating with pirates to ensure no harm comes to vessel, crew and cargo.  However, the question of whether a vessel or cargo seized by pirates will be considered an ATL for insurance purposes depends on the individual facts of each case.