Piracy - is Cargo Lost? (Part II)

September 2011

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Piracy - cargo loss - Masefield/Bunga Melita

The English High Court decision in the “Bunga Melati Dua” was discussed in issue 16 of Sea Venture and in an earlier website article (September 2010) Piracy – is Cargo Lost?. The vessel, along with her cargo of bio fuel and crew had been taken by pirates off Somalia in August 2008. The vessel was released in late September but some eleven days prior to her release the cargo owners served notice of abandonment on their insurers seeking to have the cargo declared an actual and/or constructive total loss. Cargo underwriters rejected the notice but it was agreed that proceedings were deemed to have been commenced. On arrival at the discharge port the cargo had not deteriorated but had missed its market and was stored until the following year when it was sold at a price substantially less than its insured value. The cargo claimants claimed the balance, some US$7.6 million, from their underwriters. Their claim was unsuccessful at first instance and although the CTL argument was not pursued, on appeal the main focus of cargo interests’ appeal was twofold: First, the plaintiffs maintained they had been irretrievably deprived of cargo at the time the notice of abandonment was issued and second, they expanded on the question of whether payment of a ransom might be considered to be contrary to public policy.

The court reviewed a number of authorities on claims for Actual Total Loss (ATL). Whilst none of them related to piracy incidents they nevertheless supported the view of the first court that “an assured is not irretrievably deprived of property unless it is physically and legally impossible to recover it, even if such recovery can only be achieved by disproportionate effort and expense”. Recovery of the cargo was achieved in this case, although it was only after the vessel owners’ ransom had been paid. Plaintiffs’ argument that the cargo was not recovered by the time the notice of abandonment had been served was dismissed for the same reason, namely that even by that time there was a possibility that the cargo could be recovered if a ransom was paid. The court commented that “…there was not only a chance, but a strong likelihood, that payment 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.”

Regarding the question of whether payment of ransom was contrary to public policy, the plaintiff cargo owners acknowledged that ransom payments were not illegal under English law and it was assumed this would also be the case under Malaysian law (the country from which the goods were shipped), as well as Somali law. The main thrust of cargo owners argument was that “payment of ransom, which amounted to submission to extortion, was so undesirable from the point of view of the public interest and universal principles of morality, that it could be no part of an insured’s duty to preserve his property from loss by succumbing to a ransom demand” and that, as a consequence, the cargo must be deemed irretrievably lost when its only realistic method of recovery would be to do something that an insured could not reasonably be expected to do (i.e. pay a ransom to pirates).

However, the court of appeal did not agree with this analysis. First of all, the cargo interests did not make the ransom payment. The payment was made by or on behalf of the vessel owners, thus rendering the argument superfluous. Perhaps more importantly, ransom payments have in some cases been recoverable as sue and labour expenses in general average and this further weakened the argument that they were against public policy. The court commented as follows: “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” 

The court of appeal therefore upheld the ruling from the court of first instance.

Article by Neil Gibbons (neil.gibbons@simsl.com)