Public policy and the payment of ransoms - Masefield AG v Amlin Corporate Member [2011] EWCA Civ 24

This article considers the recent decision in Masefield AG v Amlin Corporate Member in which the Court of Appeal was asked to decide (i) if the taking of a vessel and its cargo amounted to an actual total loss; and (ii) if ransom payments by shipowners to pirates were as a matter of English law against public policy. In finding for Owners, the Court held that whilst each capture by pirates needed to be viewed on the facts, capture in itself was not sufficient to trigger an actual total loss. The Court also reaffirmed the decision at first instance that ransom payments to pirates are not against English public policy and therefore legal.

In February 2010 the Commercial Court gave judgement in the matter of the Bunga Melati Dua, a tanker captured by Somali pirates whilst en route between Malaysia and Rotterdam. Despite having their post capture economically diminished cargo restored to them, Masefield nonetheless claimed an indemnity from their cargo insurers - Amlin. It was the Claimant assured’s primary case that on the capture of the vessel by the pirates and its removal into Somali waters the cargo became an Actual Total Loss (ATL) under s 57(1) of the Marine Insurance Act 1906 (MIA) in that the Assured had become irretrievably deprived of the cargo. In the alternative, the Claimant asserted that there had been a Constructive Total Loss (CTL) under s 60(1) of MIA in that the vessel and cargo had been reasonably abandoned on account of its ATL appearing to be unavoidable.

The vessel and its cargo were released some 11 days after capture following the payment of a ransom of $2 million by the vessel’s owners. The primary issue for determination was, whether when notice of abandonment was served, the Claimant had been irretrievably deprived of the cargo and thus it had been actually totally lost regardless of the fact that it was restored at a later date following payment of a ransom by the shipowners. At first instance Mr Justice Steel held that no such abandonment had occurred and that to the contrary at the time the notice was served by the Assured the shipowners had every intention of recovering their property and that of the Assured and were fully hopeful of doing so, and accordingly that there was no reasonable basis on the part of the Claimant for regarding an ATL as unavoidable.

This lead to the question whether the fact that the pirates were holding the ship to ransom to which the owners succumbed altered this position. The Claimant in this regard advocated that although the payment of a ransom was not illegal it was contrary to public policy. This argument was rejected, the judge holding that Masefield could not argue that the payment of a ransom to secure the cargo be disregarded for the purposes of assessing whether the cargo was a total loss.

On appeal the Claimant continued its argument that (i) capture by pirates created an immediate ATL, whatever the prospects of recovery might be, and (ii) the law would not or could not take into account the payment of a ransom as a relevant and legitimate reason for calculating the possibility of recovery of the cargo. Taking each argument in turn:

Lord Justice Rix, giving judgment for the Court of Appeal, disagreed, holding that:

... piratical seizure in the circumstances of this case, where 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 further held that it was not an irretrievable deprivation of property, but rather a wait and see situation. Despite the Claimant relying on authority from 1854, and hence pre the MIA, Rix LJ nonetheless held that each case was question of fact and as such there is no automatic rule of law that capture or seizure amounted to an ATL. Perhaps with recognition that captured vessels may be used as mother ships, Rix LJ added that piratical seizure may amount to an ATL in circumstances where the pirates escape with their prize for their own use and there is no prospect whatever of finding or recovering the vessel or cargo. However, this was not the case here.

As regards public policy, the Claimant’s restrictive submission was that the payment of a ransom amounted to a submission to extortion and 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 assured’s duty to preserve his property from loss by succumbing to a ransom demand: and that being the case, the property concerned must be considered to have been irretrievably lost, physically and/or legally, where the only means of recovering it was to do something which an assured could not reasonably be expected or required to do.

It necessarily followed that if payment of a ransom could not be required, an underwriter could not assert that the assured had not suffered an ATL. Here the Claimant’s counsel placed heavy reliance on s 78(4) of the MIA which provides that it is the duty of an assured to take such measures as may be reasonable for averting or minimising loss. In common with Steel J, the Court of Appeal relied on the decision in Fender v St John-Milway which laid down fundamental guidance as to the circumstances in which public policy could be invoked by a court. In citing the guidance established by the Court in Fender, the Court of Appeal reiterated that, when determining public policy:

... the doctrine should only be invoked in clear cases in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds.

Rix LJ also noted that Parliament had intervened by way of repeal of the Ransom Act 1782, which in any event only outlawed the payment of a ransom in respect of British ships taken by the King’s enemies. Notwithstanding legislative intervention, the Court of Appeal noted, as had Steel J, and by way of reference to the decision in Royal Boskalis Westminster NV v Mountain, that the payment of a ransom can be recovered as a sue and labour expense pursuant to s 78(4) of the MIA. It logically followed that the payment of a ransom could not be against public policy.

The Claimant also submitted that it could not or should not be under a duty of sue and labour to make a ransom payment meaning that capture, which could only be resolved by way of a ransom payment, fulfilled the test of an ATL. This argument was dismissed by the Court. According to Rix LJ,

The fact that there may be no duty to make a ransom payment does not turn a potential total loss which may be averted by the payment of ransom into an actual total loss: any more than the fact that there is no duty to spend an extravagant sum seeking to save a vessel driven onto the rocks means that there is an ATL (as distinct from a potential CTL) if, quite sensibly, the money and effort are not expended on such a forlorn and in every way undesirable venture. In any event, all such questions of reasonableness are pertinent to CTL, but not to the incidence of ATL.

With the scourge of piracy expanding deeper into the Indian Ocean, the Court of Appeal’s confirmation that a ransom paid to a pirate is a timely decision and leaves in place one of the few options an owner has to secure the release of his vessel, cargo, and most importantly, his crew, in a safe and timely manner. To this extent the Court’s decision can only be welcomed in these morally opaque times.