Piracy – Legal Issues for Insurers and their Insureds Andrew Rourke (骆安都), Partner, Shanghai

Introduction 1. Facts and figures

2. What is piracy?

3. The legality of ransom payments

4. General Average, seaworthiness and Best Management Practices

5. The English court’s view of piracy

6. Armed guards

7. Other issues for insurers and their insureds

Statistics – Cause for Optimism?

2011 2012

Acts of piracy/armed robbery against ships reported to IMO

544 341

Somali pirates’ success rate 33 out of 286 13 out of 99

Crew members taken hostage 599 313

Piracy Statistics 2011 vs 2012

Facts and Figures International Chamber of Commerce Crime Services reported (as at 15

April 2013) 76 attacks and four hijackings. – As at April 2013, five vessels were held by Somali pirates along with 77

hostages. – The majority of reported incidents took place in the Arabian Sea and East

Africa. – The majority (44%) of attacks worldwide are reported to have taken place

in port areas (international waters 37% and territorial waters 19%). – The average of reported ransoms paid last year was around US $4

million. Where next?

– Increase in piracy off Ecuador's northern coast. – Indonesia.

What is Piracy? UN Convention on the Law of the Sea (UNCLOS) 1982, Art 101 Any illegal acts of violence or detention or any act of depredation, committed for private ends by

the crew or the passengers of a private ship or a private aircraft, and directed: – On the high seas, against another ship or aircraft, or against persons or property on board

such ship or aircraft; – Against a ship, aircraft, persons or property in a place outside the jurisdiction of any State;

Any act of voluntary participation in the operation of a ship or of an aircraft with knowledge of facts making it a pirate ship or aircraft;

Any act of inciting or of intentionally facilitating an act described above. International Maritime Bureau “… The act of boarding any vessel with an intent to commit theft or any other crime and with an

intent or capacity to use force in furtherance of that act …”. English law Republic of Bolivia v Indemnity Mutual Marine Assurance Co Limited [1909] 1 KB 785, 802 – 3: “Piracy is forcible robbery at sea, whether committed by marauders from outside the ship or by mariners or passengers within it. The essential element is that they violently dispossessed the Master, and afterwards carry away the ship itself, or any of the goods, with felonious intent”. Piracy is not, however, confined to international waters: “In public international law, piracy consists of acts of violence done on the High Seas without the recognised authority and outside the jurisdiction of any State. In the context of an insurance policy, piracy is not limited to acts outside territorial waters” (The “ANDREAS LEMOS” [1982] 2 Lloyd’s Rep 483”).

The legality of ransom payments The payment of ransoms is not contrary to public policy and can be

refunded by kidnap and ransom insurers or war or property insurers (hull and machinery/cargo) (see Masefield v Amlin)

Is the payment of a ransom legal? – UK – Anti-Terrorist Legislation – UK Proceeds of Crime Act – President Obama’s Executive Order on Somalian Piracy

• Seeks to block payment, transfer or dealings in any property or property interests to specifically designated persons and prohibits similar transactions for the benefit of any person whose property is blocked

• Directed to US entities and their overseas branches • Payments in US dollars may trigger it

General Average The payment of a ransom can be recovered in General Average ie. shared

between ship and cargo interests proportionally. – English law : Hicks v Palington (1590 Moore’s QB 297) – York Antwerp Rules “... Extraordinary sacrifice or expenditure …

intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in the common maritime adventure”.

– Rule D of the York Antwerp Rules may, however, provide cargo interests with a defence: “Right to contribution in General Average shall not be affected, though the event which gave rise to the sacrifice or expenditure may have been due to the fault of one of the parties to the adventure but this shall not prejudice any remedies or defences which may be open against or to that party in respect of such fault.”

General Average The Hague/Hague-Visby Rules state:

“Article III 1. The carrier shall be bound before and at the beginning of the voyage to exercise due diligence

to (a) Make the ship seaworthy; (b) Properly man, equip and supply the ship; … 2. “Subject to the provisions of Article IV, the carrier shall properly and carefully load, handle,

stow, carry, keep, care for and discharge the goods carried”

The Rules go on to state: “Article IV …

2. Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from

… (q) Any other cause arising without the actual fault or privity of the carrier, or without the fault or

neglect of the agents or servants of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception …”.

Seaworthiness and Best Management Practices Following BMPs should make seizure by pirates less likely, but will also make it

more likely that, in the event of the vessel being taken and a ransom being paid, Owners will be able to obtain contributions in General Average.

Conversely, if BMPs are not followed it may make it easier for cargo interests to resist a demand for a contribution in General Average.

BMPs include: – Risk assessment (vulnerability of vessel, weather and sea state etc) – Liaising with relevant naval forces – Raising level of security on board as necessary – Conducting crew training sessions/drills – Defining ship’s AIS policy – Following prescribed/recommended routes (eg. following IRTC) – Avoiding territorial waters where naval forces will be unable to assist – Implement self-protection measures

Contribution from P & I Club? Amount of ransom payment? Illegality?

Case study before the English courts Masefield v Amlin [2011] EWCA Civ 24

The Facts On 19 August 2008 a tanker, crew and cargo were seized by Somali

pirates off the Gulf of Aden en route from Malaysia to Rotterdam. Two parcels of bio diesel insured by the defendant underwriter and

covered by an open cover policy covering piracy and theft were taken with the vessel.

One month after the seizure cargo owners tendered Notice of Abandonment.

Insurers declined the Notice of Abandonment. Within ten days of the Notice of Abandonment, a ransom was agreed and

the pirates were paid. Vessel crew and cargo released and arrived in Rotterdam on 26 October.

The issues Claimant cargo owners argued that capture by pirates immediately created an

actual total loss and the law should not take into account the possibility of a ransom being paid when calculating the possibility of a recovery.

Insurers rejected the assertion that capture by pirates created an immediate ATL as negotiations were ongoing at the time of the abandonment and there was a good chance that a ransom would be paid and the vessel would be released.

S57(1) Marine Insurance Act 1906 states that there is an ATL where “the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof” and so there would not actually need to be a Notice of Abandonment.

It was argued at first instance that there was a constructive total loss under S60(1) of the Marine Insurance Act 1906 as the cargo had been reasonably abandoned due to its actual loss appearing to be unavoidable. The Judge held that “What is required [for a CTL] is not a Notice of Abandonment … but the abandonment of any hope of recovery”. Given that shipowners were doing everything they could to negotiate the release of the vessel, a CTL could not be claimed. This argument was not included in the appeal.

Held by the Court of Appeal Rix LJ: “Piratical seizure in the circumstances of this case, where there was not only

a chance, but a strong likelihood, that payments of a ransom of a comparatively small sum, relative to the value of the vessel and her cargo, would secure recovery of both, was not an actual total loss. It was not an irretrievable deprivation of property. It was a typical “wait and see” situation”. Crucially, the owners of the cargo had not been “irretrievably deprived” of the cargo.

The Court of Appeal noted that payment of a ransom can be recovered as a sue and labour expense.

The Court of Appeal also found that paying a ransom is not against “public policy”. The Court clearly set out the difficult position shipowners, insurers and cargo

interests can be placed in when dealing with piracy: “In these morally muddied waters, there is no universally recognised principle of morality, no clearly identified public policy, no substantially incontestable public interest, which could lead the courts as matters stand at present, to state that the payment of ransom should be regarded as a matter which stands beyond the pale, without any legitimate recognition”.

Armed guards The use of armed guards on vessels has been proposed as a solution to

the problem of piracy. It does, however, create its own problems: – The risk of escalation and increased danger – Rules for the use of force – Who is in charge/who has the final decision/chain of command/the

Master’s role – Insurance issues

Other issues for insurers and their insureds Piracy: on or off hire for time charterers? War risks Cargo insurance:

– All risks insurance (piracy covered) – Institute Cargo Clauses (A) – piracy as an exception to the “capture,

seizure, arrest, restraint or detainment” exclusion – Related arguments (e.g. strikes exclusion/riot)

Conclusion

Contact details

T: +86 21 6035 6109 M: +86 136 1171 2073 E: andrew.rourke@clydeco.com

Andrew Rourke (骆安都) Partner, Shanghai

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