Masefield v Amlin

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DMC/INS/10/02

English High Court

Masefield AG -v- Amlin Corporate Member Ltd [2010] EWHC 280 (Comm): David Steel J.: 18 February 2010

Sydney Kentridge QC and Andrew Henshaw, instructed by Arbis LLP, for the claimant Peter MacDonald Eggers and Sarah Cowey, instructed by Waltons & Morse LLP, for the defendant insurers

MARINE CARGO INSURANCE: VESSEL, CREW AND CARGO TAKEN BY PIRATES, THEN 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 CARGO A CONSTRUCTIVE TOTAL LOSS UNDER s.60(1): PIRACY: POSSESSION: WHETHER PAYMENT OF RANSOM CONTRARY TO PUBLIC POLICY

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. In the case of Masefield, the High Court 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 1906 nor a constructive total loss under s.60 (1) of the Act. The Court further held that the payment of a ransom to the pirates was not contrary to public policy - a question which had been the subject of much discussion within the London Market.

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 [1] who acted for the defendant insurers. The note first appeared on the firm’s website on 19 February 2010.

Facts

The "Bunga Melati Dua", laden with two parcels of bio-diesel owned by the Claimant Masefield, was seized in the Gulf of Aden on 19th August 2008 by Somali pirates. In line with their usual way of operating, the Somali pirates took the vessel to Somali waters almost immediately after seizure and then 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 Claimants 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 on 29th September 2008. This was some six weeks after its seizure. The period for which the vessel was held by the pirates represented the 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 Defendant was the insurer of the cargo under an open cover contract. The open cover incorporated the terms of the ICC (A) clauses. There was no dispute that seizure by pirates was an insured risk under the policy of insurance.

The Claimant's primary case was that the cargo became an actual total loss once the vessel was seized by Somali pirates and taken to Somali waters, claiming that the Claimant had been "irretrievably deprived" of the cargo. The Claimant argued that, in determining whether it had been irretrievably deprived of the cargoes or whether an actual total loss appeared unavoidable, the Court could not take into account the prospects of recovering the vessel and cargoes by reasons of the payment of ransom, because such payment was contrary to English Public Policy.

Judgment

Actual Total Loss (‘ATL’)

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 Court was asked to consider whether on the date that the NOA was tendered, the Claimant was "irretrievably deprived" of the cargo. The test for this is assessed on the true facts as at the date of the NOA, whether or not known or apparent to the assured - Marstrand Fishing Co Ltd -v- Beer (1936) 56 Ll. L. Rep 163). When considering the facts, a Court can consider what happened after the date of the NOA as this "may assist in showing what the probabilities really were, if they had been reasonably forecasted" - Bank Line, Limited -v- Arthur Capel and Company [1919] A.C. 435 per Lord Sumner at p 454.

Contemporaneous correspondence exchanged between the Claimant, the shippers of the cargo, the ship brokers and the owners indicated that, from only one day after the seizure of the vessel, the owners and Malaysian government were negotiating with the pirates. From this and the information available in the public domain, Mr Justice Steel considered that the Claimant was fully aware that the cargo was likely to be recovered. This was in line with expert evidence adduced by the Defendant, with the experience of other seized vessels and with the actual facts in this case - the vessel being released 11 days after the NOA was tendered by the Claimant.

Mr Justice Steel considered what degree of probability of recovery of the cargo was required for the Claimant not to have been irretrievably deprived of the cargo. Having considered the relevant authorities such as George Cohen, Sons & Co -v- Standard Marine Insurance Co (1925) 21 Ll. L. Rep. 30, Mr Justice Steel noted that there was an extremely high bar for showing irretrievable deprivation:

"an assured is not irretrievably deprived of property if it is legally and physically possible to recover it (and even if such can only be achieved by disproportionate effort and expenses)".

Despite accepting that there was a reasonable hope of recovery of the cargo, the Claimant argued that an ATL occurred when the vessel was first seized by the pirates, relying on Dean -v- Hornby (1854) 3 El & Bl. 180, allegedly supported by the dicta of Rix J in Kuwait Airways -v- Kuwait Insurance [1996] 1 Lloyd's Rep. 644 (a non-marine case): "in the case of capture, because the intent is from the first to take dominion over a ship, there is an actual total loss straightaway, even though there later be a recovery". Mr Justice Steel considered that the pirates had not intended to assert dominion over the vessel. The circumstances of the case and the fact that the pirates immediately entered into negotiations for the release of the vessel and that previously seized vessels had been released following payment of a ransom, showed that the Claimant had "lost only possession and not dominion over (or property in) their goods". Mr Justice Steel held that "the suggestion of capture leading to ATL straightaway is rightly described as "doubtful" by the editors of Arnould Law of Marine Insurance and Average 17th Ed. Para 28-03 note 9"

Constructive Total Loss (‘CTL’)

By reason of a bespoke CTL clause contained within the policy of insurance, the application of s.60 of the Marine Insurance Act was limited to s. 60 (1) which provides: (1) Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.

The additional category of constructive total loss contained within s. 60 (2) (i) was excluded.

The criteria to be satisfied by the Claimant were: (i) The subject matter must have been abandoned (ii) because an ATL appeared unavoidable.

David Steel J held that the cargoes were not totally lost, whether actually or constructively. The abandonment referred to above is not a Notice of Abandonment in the sense of s. 62 and s. 63 of the Act, but abandonment of the hope of any recovery - Court Line -v- R (1945) 78 Ll. L. Rep 390. As it was clear that the shipowners had every hope of recovering the vessel, crew and cargo, no such abandonment had occurred.

Public Policy

The Claimant accepted that payment of a ransom is not illegal under English law. However, the Claimant submitted that it was against public policy and therefore should not be taken into consideration when considering if the vessel and cargo were in practice retrievable. The test for being contrary to public policy is a high one - a transaction will only be held illegal as contrary to public policy if the harm to the public interest is “substantially incontestable" - Fender -v- St John Mildmay [1938] AC 1, 12 per Lord Atkin)

Mr Justice Steel was “wholly unpersuaded” that payment of a ransom would be contrary to public policy. He noted the fact that payment of a ransom is not illegal as a matter of English law, that the legislature had previously made payments of ransom illegal (The Ransom Act, 1782), but this had subsequently been repealed by the Supreme Court Act 1981 (now the Senior Courts Act 1981) and that the Courts should resist from entering into the same field. He acknowledged that payments of ransom do encourage further actions of piracy; however, as diplomatic or military intervention could not be relied upon, failure to pay a ransom would put other vessels and their crews in jeopardy.

Mr Justice Steel was further persuaded by the existence of K&R (kidnap and ransom) policies which have long existed in the London insurance market and the fact that such polices are widely acceptable to the market. To decide that payment of ransom is against public policy would render these polices unenforceable.

The fact that payment of a ransom has been held to be recoverable as a sue and labour expense Royal Boskalsis Westminster NV -v- Mountain [1999] QB 674 was thought by Mr Justice Steel to be a strong indication that the Claimant’s position was misconceived.

Comment

It may be that pirates may be properly considered to be the "enemies of mankind" (as stated in Dean -v- Hornby, above) and, as acknowledged by the expert evidence given in this case, that paying ransoms to them encourages further hostage taking. However, in our view, the payment of a ransom to secure the safety and release of the crew and the preservation of property is not morally objectionable. Rightly therefore, in our opinion, the Courts should be wary of intervening in such matters on the basis of English Public Policy, particularly in a case involving the payment of a ransom by a Malaysian entity to Somali pirates in connection with a Malaysian owned vessel and cargoes owned by Swiss traders.