INSURANCE ACT 1906: WHETHER PAYMENT OF RANSOM CONTRARY TO PUBLIC POLICY

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1 Masefield AG v Amlin DMC/SandT/11/01 English Court of Appeal Masefield AG v Amlin Corporate Member Ltd [2011] EWCA Civ 24: Court of Appeal, Civil Division: Rix, Moore- Bick and Patten LJJ: 26 January 2011 Sydney Kentridge QC and Andrew Henshaw, instructed by Arbis LLP, for the appellant, Masefield Peter MacDonald Eggers and Sarah Cowey, instructed by Waltons & Morse LLP, for the respondent insurers MARINE CARGO INSURANCE: VESSEL, CREW AND CARGO TAKEN BY PIRATES, LATER RELEASED ON PAYMENT OF RANSOM: NOTICE OF ABANDONMENT: CLAIM THAT ASSURED IRRETRIEVABLY DEPRIVED OF CARGO: WHETHER CARGO AN ACTUAL TOTAL LOSS UNDER s.57(1) MARINE INSURANCE ACT 1906: WHETHER PAYMENT OF RANSOM CONTRARY TO PUBLIC POLICY Note: leave to appeal to the Supreme Court has been refused. Editor, 21 July 2011 Summary The proliferation of piracy in the Gulf of Aden and around the Indian Ocean has caused the shipping and insurance industry to consider issues which have not arisen for many years - the last piracy case to be heard in the English Courts being in 1590 (Hicks -v- Palington (1590)). In the case of Masefield, the Court of Appeal, upholding the judgment at first instance[[1]], decided that the hijacking by Somali pirates of a vessel, its crew and its cargo for ransom did not result in the cargo becoming an actual total loss in terms of s.57 (1) of the Marine Insurance Act The Court further confirmed that the payment of a ransom to the pirates was not contrary to public policy This note is based on a note of the case prepared by Christopher Dunn and Matthew Wilmshurst of the London firm of solicitors, Waltons & Morse LLP [2] who acted for the respondent insurers. The note first appeared on the firm s website on 26 January 2011 Facts The "BUNGA MELATI DUA", laden with two parcels of bio-diesel owned by the Appellant/assured (Masefield AG) was seized in the Gulf of Aden

2 on 19th August 2008 by Somali pirates. In line with the usual mode of operation of Somali pirates, the vessel was taken to Somali waters almost immediately after seizure and the pirates made contact with the vessel owners with a view to negotiating a ransom for release of the vessel, crew and cargo. On or about 18th September, during the course of negotiations between hull interests and the Somali pirates, the Appellants tendered a Notice of Abandonment (the "NOA") to the Defendant insurers, which they rejected. After a ransom was agreed and paid by the shipowners, the vessel was released, some six weeks after its seizure. The period for which the vessel was held by the pirates represented the then median period a vessel would be held by Somali pirates from capture to release. The vessel arrived at the intended destination of Rotterdam on 26th October 2008 with no damage to the cargoes. The Respondent was the insurer of the cargo under open cover contract, incorporating the ICC (A) clauses. There was no dispute that seizure by pirates was an insured risk under the policy of insurance. The first instance judgment of Mr David Steel [insert hyperlink] dismissed the assured's claim that, as a result of the seizure of the vessel, the cargo laden onboard became either an actual total loss or a constructive total loss. The Appellant's argument was that the cargo owners were "irretrievably deprived" of their cargo or, alternatively, that the cargo was unlikely to be recovered. The Appellants further argued that the payment of ransoms to Somali pirates was against public policy and therefore should not be taken into account when considering whether the cargo was likely to be recovered. The Appellants abandoned their claim based on constructive total loss on the first day of the Appeal hearing. Consequently the Court of Appeal was asked to consider whether there was an actual total loss of the cargo and whether the payment of ransoms was against English public policy. Judgment Actual Total Loss Section 57 of the Marine Insurance Act 1906 provides: (1) 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, there is an actual total loss The question whether the cargo owners were irretrievably deprived of their cargo was considered at length in the leading judgment by Rix LJ. The Appellant concentrated on the codifying nature of the Marine

3 Insurance Act 1906 and submitted that, unless it was clear from the text that the Act intended to depart from the pre-existing common law, cases prior to the Act should be taken into consideration. The court was directed to a number of capture cases, all of which were dealt with in the first instance judgment. Rix LJ concluded that "piratical seizure in the circumstances of this case where there was not only a chance, but a strong likelihood, that payment of a comparatively small sum, relative to the value of the vessel and 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" Public Policy The Appellants refined their argument in relation to public policy for the Court of Appeal hearing. At the first instance hearing, the Appellants had argued that payments of ransoms to Somali pirates for the release of a vessel, crew and cargo should be against public policy. The submissions on Appeal were that ransom payments were not illegal but were so undesirable from the point of view of the public interest and universal principles of morality that it could not be a part of an insured's duty to preserve his property from loss (s.78(4) Marine Insurance Act 1906(fn. )) by acceding to a ransom demand, which an insured could not be reasonably required or expected to do. Generally, the courts are reluctant to intervene on matters of public policy, unless there is a real risk of harm to the public as a whole. Rix LJ noted that there is no legislation in England prohibiting the payment of ransoms, this point being emphasised by the repeal of the Ransom Act 1782 (which in any event would not have prohibited the payment that was made in this case). Rix LJ also gave weight to the decision of the Court in Royal Boskalsis Westminster NV -v- Mountain [1999] QB 674, where it was held that the payment of a ransom could be recovered as a sue and labour expense. He noted that it would seem to follow from the Court s decision in that case that payment of a ransom could not be against public policy. But Pill LJ, in the Royal Boskalis case, left open the question whether payments made under s.78(4) of the Act, when related to issues of extortion of money from shipowners, would have the effect of encouraging such threats. The Respondent Insurers drew the Court's attention to a Report of the House of Lords European Committee in respect of Somali piracy. The report followed discussions on Somali piracy in December 2009, which had the benefit of written and oral evidence from representatives of the military and the shipping and insurance industries. Though the report was intended to consider the impact and effectiveness of the EU Operation Atalanta(fn ), the issue of payments to Somali pirates

4 featured heavily. Representatives of the UK Chamber of Shipping, the UK Shipping Defence Advisory Committee and the Oil Companies Marine International Forum supported the current state of the law and did not support any initiative to make payments of a ransom illegal. In their conclusions the committee stated. "82. We support the status quo whereby the payment of ransom to pirates is not a criminal offence under United Kingdom Law. We recommend that government continue to monitor the potential risks of monies reaching terrorists. 83. We understand that skilled ransom negotiators can help to keep risk to life and vessels, as well as ransom payments, to a minimum. Where shipowners intend to pay a ransom to recover their vessel and crew, we recommend that they use experienced and effective ransom operators. Where insurance policies do not already insist on experienced negotiators, they should do so." Rix LJ s comments on the Report are noteworthy: "There is thus something of an unexpressed complicity: between the pirates, who threaten the liberty but by and large not the lives of crews and maintain their ransom demands at levels which industry can tolerate; the world of commerce, which has introduced precautions but advocates the freedom to meet the realities of the situation by the use of ransom payments; and the world of government, which stops short of deploring the payment of ransom but stands aloof, participates in protective naval operations but on the whole is unwilling positively to combat the pirates with force. Mr Williams [an expert who gave evidence to the House of Lords Committee] described it as a fragile status quo. 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. There are only elements of conflicting public interests, which push and pull in different directions, and have yet to be resolved in any legal enactments or international consensus as to a solution, save that of wary watchfulness, the deployment of naval resources as a form of law enforcement or policing operation, and a regard for a comprehensive approach, seeking to address political, economic and security aspects of the crisis in a holistic way Rix LJ found that the above was "not a promising context for [the Appellant's counsel's] submissions" but did explain the approach he had taken. The Appellants had argued that because there should not be a duty under s.78(4) of the Act to pay a ransom, a hijack situation which

5 will only be resolved by payment of a ransom must be regarded as though there are no prospects of recovery at all, thus fulfilling the test of an actual total loss. This argument was rejected by Rix LJ. He held that, if there were no duty to pay a ransom, that did not turn a potential loss into an actual total loss or mean that there was any obligation not to make such a payment. Rix LJ concluded by noting that, regardless of the arguments put forward by the Appellants, the case was not concerned with the failure by an assured to pay a ransom, as this was negotiated and paid by the shipowners. On that basis, Rix LJ that it was "simply impossible" for the Appellant's submissions to succeed. The appeal was accordingly dismissed. Comment The decision of the Court of Appeal will be welcomed by those involved in the shipping, and insurance industries and their legal advisers. Whilst proponents of making ransoms illegal will continue to argue the moral dilemma of continuing to pay ransoms to Somali pirates to release vessels, crews and their cargoes, the reality is that as long as there remains no practical alternative for shipowners and their insurers, the practice will continue. Cargo insurers will be relieved that the Court of Appeal dismissed the claim for an actual total loss at the time of capture; a reversal of the first instance judgment could have resulted in cargo underwriters being faced with a significant number of total loss claims from assureds and becoming owners of valuable cargoes currently being held by the Somali pirates.