Piracy, Ransom And General Average

In August 2008, the Bunga Melati Dua,1 a vessel owned by MISC,2 was on a voyage from Malaysia to Rotterdam carrying a cargo of biodiesel when it was hijacked by pirates in the Gulf of Aden. The ship and its crew were taken into Somali waters. The vessel was released less than six weeks after her capture on payment of USD2 million in ransom. The value of the vessel and her cargo amounted to USD80 million. It was common ground between the cargo owners and their insurers that the theft of the cargo and seizure by the pirates were insured risks. Some 11 days before the release of the vessel, the cargo owners issued a notice of abandonment, claiming actual total loss or constructive total loss of the cargo. The owners contended that, on the capture of the vessel by the pirates and its removal into Somali waters, the cargo became an actual total loss within the meaning of s 57(1) of the Marine Insurance Act 1906. The High Court of England held that there was no actual total loss.

On appeal, the cargo owners argued that:

(a) the capture by the pirates created an immediate actual total loss, whatever the prospects of recovery might have been, since the law would or could not take into account the payment of a ransom as a legitimate reason for calculating the possibilities of recovery; and

(b) that although payment of a ransom was not illegal, it was so undesirable from the point of view of 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.

The insurer contended that:

(a) the statutory test for an actual total loss was that the insured should be "irretrievably deprived" of their property and, on the authorities, that would connote a physical or legal impossibility of recovery; and

(b) the cargo could not be said to be irretrievably lost when there was a good chance of negotiations for payment of ransom, which was neither illegal nor against public policy, being fruitful.

The Court of Appeal held that it could not be against public policy to pay a ransom to save property and the liberty or life of hostages, and observed that as long as there remained no practical alternative for shipowners and their insurers, the practice of paying ransoms would continue. The court also referred to an earlier decision,3 which suggested that a ransom paid could be recovered as sue and labour expenses in certain circumstances and that, therefore, the...

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