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  (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 .
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.