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Between 2008 and the nadir of Somali piracy in 2011, hundreds of attacks on merchant vessels highlighted the need for the marine insurance market to come together to establish a pragmatic response to the issue of contributing to ransom payments ensuring the safety of life of the crew and consequently the cargo and vessel.
At an open meeting in Lime Street in 2008 the marine market, including Lloyd’s syndicates, convened to discuss the concept of general average (GA) and whether it would respond adequately and equitably to the problems being encountered at that stage. The market decided that whilst there were strong arguments over whether extra expenses were reasonably incurred and would be allowable in GA, the market needed to respond pragmatically. The ramifications of that spate of Somali hijacks are still however being played out in some quarters.
Developing case law
In The Bunga Melati Dua [2011] (a case principally concerned with whether or not cargo had suffered an actual total loss within the meaning of section 57 Marine Insurance Act 1906), the Court of Appeal considered that matters of public policy did not preclude the payment of a ransom to pirates who seize a vessel. Ransom payments are, unfortunately, a necessary evil in cases where piracy threatens the life and liberty of a vessel’s crew.
Rix LJ considered that there was a curious degree of complicity between pirates, who threaten the liberty of vessel crew and demand ransom payments at levels which industry and commerce can tolerate, and the world of government, who participate in protective naval operations, but on the whole are unwilling positively to combat the pirates with force. It is in this murky and imprecise world that ransom payments exist as a reality for parties interested in the marine adventure.
Ransom paid to pirates for the release of a vessel is ordinarily classed as expenditure within a general average act.
The Supreme Court considered the place of ransom payments, and associated expenses incurred during the period of negotiation over the ransom, in general average under the York-Antwerp Rules in The Longchamp [2017].
The Supreme Court was asked to consider whether, following the seizure of The Longchamp by Somali pirates, daily operating expenses, including bunkers and crew wages, incurred during the period of 51 days in which the pirates’ ransom demands were reduced from US$6 million to US$1.85 million, were allowable in general average (under the York-Antwerp Rules 1974). The Supreme Court held (4:1) that the expenses were recoverable. Rule F did not require that the expenses be incurred in pursuing an alternative course of action but that they be of a nature which would be allowable under Rule A.
In any case, payment in response to the initial demand was a different course of action to negotiating. Dissenting, Lord Mance considered that the negotiation of the ransom was not an alternative course of action, and the expenses were not of a type and amount within Rule A, because the initial ransom demand was unreasonable.
The decision goes against what many adjusters, including the Advisory Panel of the Association of Average Adjusters, considered to be the proper application of Rule F.
The Polar [1.12.21]
In the latest decision arising out of Somali piracy from the Court of Appeal, ransom payments were again front and centre of the dispute between Owners and cargo interests. The vessel was seized by Somali pirates whilst transiting the Gulf of Aden during October 2010 and Owners declared general average. A ransom payment of US$7.7 million was paid, following a ten month detention of the vessel, the cost of which was refunded by (i) kidnap and ransom (K&R) insurers; and (ii) hull & machinery war risks underwriters. They in turn sought a contribution from cargo interests’ underwriters on the basis that the ransom was general average expenditure.
The proportion of the ransom (i.e. the general average expenditure) demanded from cargo interests was rejected on the basis that Owners had contracted under the charterparty to establish its own insurance fund that would cover all eventualities in the event of general average expenditure by payment of ransom on piratical seizure.
The charterparty was contained in a fixture recap which incorporated some amendments on the BPVOY 4 standard form, including clause 39 of the BPVOY 4 form: the “war risks” clause. It also contained a Gulf of Aden Clause which stated as follows:
“Any additional insurance premia (including, but not limited to, those in respect of H&M, crew, P&I kidnap risks and ransoms), crew bonuses (which to be in accordance with the international standard) shall be for charters account. Max USD 40,000 for charterer’s account for any additional insurance premium except for crew bonus which to be max USD 20,000 for charterers account.”
Six bills of lading for a cargo of 69,493.28 Mt of fuel oil were issued. Each expressly stated that “all terms and conditions” of the charterparty were incorporated. The court considered that this was sufficiently wide to encompass the War Risks and Gulf of Aden clauses in the charterparty.
The primary issue before the Court of Appeal was whether Owners, via the Gulf of Aden Clause, had agreed to procure insurance cover that would respond in full in the event of general average expenditure by payment of ransom on piratical seizure, thereby preventing Owners from seeking any GA contribution from the bill of lading holders (cargo interests).
The Court of Appeal held that Owners had not forgone any such right. The court accepted that Owners had agreed to waive any recovery for ransom from charterers under the charterparty and that the obligation on charterers to pay for additional war risks and K&R premium could not be manipulated so as to impose a liability on bill of lading holders to pay the premium.
However, the risk of piracy and the potential need to pay a ransom were foreseeable events and were expressly dealt with by the parties to the bill of lading contracts. The parties were deemed to have known: (a) that if the vessel was to transit the Gulf of Aden, insurance against this specific risk would be required and did in fact obtain such insurance; and (b) that payment of a ransom would ordinarily give rise to general average. Complex arguments concerning the incorporation of charterparty terms into a bill of lading contract did not entitle cargo interests to circumvent such matters. Rather, clear express words would be required to rebut the presumption that Owners retain their right to a contribution from cargo interests in general average. Both parties had insured themselves against the risk of piracy and, absent any policy coverage issues, each set of insurers ought to bear its adjusted share of the risk.
Comment
The recent decision in the MV Polar may be the last of the Somali piracy cases, due to the reducing number of incidents in the region, however such issues are of course equally applicable to the rise of piracy in the Niger Delta, and to matters of piracy more generally worldwide.
Ransom payments are unlikely to disappear from the maritime world and clarity on the position between different insurer interests when GA expenditure in the form of ransom payments arise is a welcomed decision. It seems right that each party with an interest in the marine adventure will bear its share of the risk which it has agreed to cover.
In each case, it is of course a matter of construing each bill of lading and any incorporated charterparty terms. However, the reiteration of the principle in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974], ensures that parties to any voyage must contract using clear and unambiguous words if they intend to abandon their right to collect general average contributions from other interested parties.
Read other items in Marine Brief - February 2022
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- Operating expenses incurred during piracy negotiation period allowable in general average under York-Antwerp Rules
Insurance and reinsurance
Shipping and international trade
United Kingdom