Crump & Co - International Maritime and Commercial Lawyers

Sequel to Intraline Resources SDN BHD v The Owners of the Hua Tian Long (HCAJ 59/2008)

Sequel to Intraline Resources SDN BHD v The Owners of the Hua Tian Long (HCAJ 59/2008)

In our previous article on the topic of Sovereign Immunity and Crown Immunity we spoke at length about Intraline Resources SDN BHD v The Owners of the Hua Tian Long (HCAJ 59/2008).  In that case, questions were raised as to whether or not Chinese state entities could claim Sovereign Immunity in Hong Kong, whether Crown Immunity had transferred from the United Kingdom to the People’s Republic of China (PRC) upon the handover of Hong Kong back to the PRC and, indeed, whether the Common Law Doctrine of Crown Immunity even remains in Hong Kong.

In that case it was decided that:

a)                  Sovereign Immunity did not apply in relation to matters between China and Hong Kong because Sovereign Immunity means that a state cannot intervene in the affairs of another state, nor can it claim jurisdiction over it.  Since PRC and Hong Kong are not separate States, it is impossible for a Chinese State Entity to claim Sovereign Immunity. 

b)                  Crown Immunity does apply to Chinese State Entities in Hong Kong, which was interesting in that it was a demonstration as to how the Hong Kong courts would implement Common law in line with Hong Kong’s Basic Law in the context of its dealings with the PRC. 

c)                  Crown Immunity was available to Chinese Entities even if the transactions in question were commercial in nature.  Immunity granted was ‘absolute’. 

This findings in this case had considerable import to the shipping and maritime field as Hong Kong’s future as a chosen jurisdiction for resolving shipping disputes lies in its proximity and links to China.  Many foreign corporations deal with Chinese Entities and Hong Kong is respected by both Chinese and Foreign parties for its mature and trusted legal system.

Now the issue of Sovereign Immunity has arisen again in a decision that will surely affect the shipping industry once more.   

FG Hemisphere Associates LLC v Democratic Republic of Congo & Ors (Secretary for Justice, intervener) FACV 5, 6, 7/2010 

Facts: 

-          In the 1980s Energoinvest DD (Energoinvest), a Yugoslavian company based in Sarajevo was engaged to construct a hydro-electric facility and high tension electric transmission lines in the Democratic Republic of Congo (Congo). 

-          Energoinvest completed the work and it was accepted. 

-          To finance the work, the DRC had entered into credit agreements with Energoinvest.  Credit was extended by Energoinvest to the DRC and a Congolese state-owned electricity company, Societe Nationale d’Electricite. 

-          The credit agreement was revised and rescheduled but the Congo and Societe Nationale d’Electricite still defaulted on their payment obligations. 

-          The credit agreements all contained International Chamber of Commerce arbitration clauses. 

-          In 2001 Energoinvest referred its claims against the Congo and Societe Nationale d’Electricite to arbitration. 

-          One arbitration took place in Paris and the other in Zurich. 

-          The Congo did not attend either of those arbitration hearings but Societe Nationale d’Electricite participated in them.  Each arbitral tribunal made substantial awards of principle and interest in favour of Energoinvest against the Congo and Societe Nationale d’Electricite jointly and severally. 

-          Each award was dated 20 April, 2003.  One is for US$11,725,844.96 with interest from the accrual of each instalment at the annual rate o 9% on US$11,179,266.36 and 5% on US$546,578.60. The other is for US$18,430,555.47 with interest from the accrual of each instalment at the annual rate of 8.75% on US$18,073,746.94 and 5% on US$356,808.53.  Neither the Congo nor Societe Nationale d’Electricite challenged the validity of the awards in any jurisdiction. 

-          The two awards were assigned by Energovinvest to an American Company, FG Hemisphere Associates LLC (“FG”), a Delaware company that purchased the entire benefit of the principal and interest payable by the DRC and Societe Nationale d’Electricite under the two ICC arbitral awards and was seeking to enforce them around the world by litigation, on 16 November, 2004. 

-          FG is managed by a New York Company that recovers distressed debts, particularly those of defaulting states.  Notice of the assignment was given to the Congo and Societe Nationale d’Electricite. 

-          Neither the Congo nor Societe Nationale d’Electricite made any payments under either of the awards under their own volition. 

-          FG managed to recover US$3,336,757.75 through enforcement proceedings in Belgium, Bermuda and South Africa. 

-          FG sued the DRC and sought to restrain payment of entry fees and garnishee them in enforcement of arbitral awards in proceedings in Hong Kong. 

-          The DRC claimed foreign state sovereign immunity from suit and execution. 

-          Reyes J in the Court of First Instance held that the HKSAR Courts had no jurisdiction over this matter. 

-          Court of Appeal (Stock VP, Yeung and Yuen JJA) [2010] 2 HKC 487, [2010 2 HKLRD 66 allowed the appeal holding that the restrictive doctrine of foreign sovereign immunity applied in the HKSAR before and after the establishment of the HKSAR, notwithstanding the adopted position of foreign policy of the People’s Republic of China, communicated by two letters of the Office of the Commissioner of the Ministry of Foreign Affairs in the HKSAR, of the absolute doctrine of foreign sovereign immunity.  Yeung JA, dissenting, stated that HKSAR should follow the position of the Central Authorities. 

What does this case involve? 

This case is concerned with the nature and scope of state immunity which the courts of the HKSAR should recognize and apply to foreign states which are sued in HKSAR. 

Should the HKSAR be able to apply a separate principle of state immunity to the People’s Republic of China (PRC)? 

Definitions of State Immunity 

State immunity concerns relations between States.  It is based on the idea that States recognize each other as equal sovereigns and adopt a policy of not exercising jurisdiction over one another. 

Traditionally, “absolute immunity” is granted regardless of the nature of the claim or the transaction or incident underlying it.  The only exception to “absolute immunity” is where the foreign State voluntarily submits to the jurisdiction of the other state e.g. the foreign State brings a claim or counterclaim in the courts of the forum State. 

A second interpretation of State immunity is known as “restrictive immunity”.  This is a policy which arose around the mid-twentieth century and it adopts an exception whereby State immunity is not granted for a foreign State which is sued over a transaction which is commercial in nature. 

The State Immunity Policy Traditionally Applied in Hong Kong 

Before the 1^st of July, 1997, Hong Kong courts applied the same policy of State immunity as the United Kingdom, as set out in the State Immunity Act 1978 (SIA 1978).  This imported the commercial exception to State immunity.   

This Act no longer applies to the HKSAR however it has not been replaced by any similar local legislation.  This means that the position on state immunity in the HKSAR needs to be determined by the common law subject to modifications which are required to come in line with the Basic Law and with Hong Kong’s status as a Special Administrative Region of the PRC. 

The State Immunity Policy Applied in PRC 

The PRC has never recognized any commercial exception to the concept of State Immunity.  Absolute immunity has always been practiced as a matter of principle. 

Is it Possible for HKSAR to Apply the Exception? 

This case dealt with the question of whether it was possible for the HKSAR to apply a doctrine of restrictive State immunity, at odds with the policy which has been applied consistently by the PRC in relation to foreign States.   

What would the ramifications of the HKSAR Courts Adopting a Divergent Approach to State immunity be? 

-          Interference with the power and capacity of the Central People’s Government to uniformly conduct foreign affairs, which is out of line with the HKSAR’s status as a local administrative region.

 -          Could undermine the PRC’s consistent claim to absolute immunity in international law.

-          Could expose the PRC to claims by impleaded States under international law.

-          Could expose the PRC to the risk of being impleaded and its property abroad being attached by courts of foreign countries.

-          Could hamper normal intercourse and cooperation in such areas as economy and trade between PRC and its foreign trading and investment partners. 

Are the courts of Hong Kong precluded by reason of the Basic Law from determining whether a foreign State is entitled to immunity from suit and execution? 

State immunity should be applied in accordance with the requirements of the Basic Law.  The standard of state immunity to be applied is that of “absolute immunity”, which is the standard of state immunity which has been consistently applied by the People’s Republic of China (PRC) in relation to other sovereign States. 

The HKSAR is compelled by the Basic Law to apply state immunity consistently with the People’s Republic of China. 

At common law it is for a sovereign State to determine the principle of state immunity which it applies in relation to other sovereign States.  When it has determined this principle it must uniformly apply it across all State institutions within the territory, no region or municipality lacking the attributes of sovereignty can adopt a principle of state immunity that derogates from the one adopted by the State. 

Article 19(1) of the Basic Law gives the HKSAR independent judicial power and the power of final adjudication while Article 19(2) gives the HKSAR courts jurisdiction over all cases however, Article 19(3) removes jurisdiction “over acts of state such as defence and foreign affairs” from the HKSAR courts so the courts of the HKSAR cannot have jurisdiction over the determination of the policy of State immunity. 

The Central People’s Government (CPG) states that the principle of “absolute immunity” should be applied uniformly across the PRC, including in HKSAR and all of its instutions.  This determination is an act of state within Article 19(3) thus the courts of the HKSAR cannot review it.  They must respect and act in conformity with this determination. 

An inconsistent doctrine of State immunity is not permissible as a matter of law and constitutional principle.  It is impossible for any region or municipality to adopt a state immunity doctrine which is not in line with the state immunity policy adopted by the State it belongs to.  State immunity covers the entire territory over which each State exercises jurisdiction.  Common law recognizes that each State can only have one state immunity policy.  This has been accepted by the Courts. 

After the resumption of the exercise of sovereignty by the PRC on 1 July 1997, does the law of Hong Kong incorporate the restrictive doctrine of State immunity? 

The Basic Law gives constitutional force to the fact that HKSAR courts must apply its State immunity doctrine consistently with that of the PRC.  Article 8 states that the common law previously in force continues to apply in the HKSAR only so far as inconsistency with the Basic Law is avoided and subject to modifications, adaptations, limitations or exceptions which are necessary to bring the rules in line with Hong Kong’s status as a Special Administrative Region of the PRC. 

If the law of Hong Kong incorporates the absolute doctrine of State immunity, what is the scope of the commercial exception to which that doctrine gives effect? 

It is not open to the Hong Kong Courts to adopt a legal doctrine of state immunity which recognizes a commercial exception to absolute immunity and therefore a doctrine on state immunity which is different from the principled policy practiced by the PRC. 

When a State voluntarily submits to arbitration pursuant to the Rules of Arbitration of the International Chamber of Commerce in force on 1 January 1988, does it thereby waive such state immunity as it otherwise enjoys from proceedings for the recognition and execution of the resulting award? 

In this case, the majority judgment rejected the plaintiff’s suggestion that the DRC had waived its state immunity.   

A State only waives its immunity when it voluntarily submits itself to the exercise jurisdiction by the courts of the forum state.  The common law requires such a voluntary submission to be unequivocal and made at the time when the courts of the Forum State are being asked to exercise their jurisdiction against the foreign State in question. 

The plaintiff alleged that the DRC impliedly waived its immunity by entering into the arbitration agreements resulting in the awards ought to be enforced.  Those agreements contained a promise by the DRC to carry out the award and to waive any form of recourse.   

Such an agreement is only a contract between a State and the other party to the arbitration agreement.  It does not involve any relations between the two States.  Failing to carry out its promise may put a State in breach of its contract with the other party but it has not done anything to submit itself to the jurisdiction of the courts of another State. 

 

Accident To The Airbus A330-203 Flight Af 447 On 1st June 2009

Accident To The Airbus A330-203 Flight Af 447 On 1st June 2009

UPDATE ON INVESTIGATION 

SPECIAL FOREWORD TO ENGLISH NOTE 

This note has been translated and published by the BEA to make its reading easier for English-speaking people.  As accurate as the translation may be, the original text in French should be considered as the work of reference. 

HISTORY OF FLIGHT 

On Sunday 31 May 2009, the Airbus A330-203 registered F-GZCP operated by Air France was programmed to perform scheduled flight AF447 between Rio de Janeiro Galeão and Paris Charles de Gaulle.  Twelve crew members (3 flight crew, 9 cabin crew) and 216 passengers were on board.  Departure was planned for 22 h 00^_1. 

At around 22 h 10, the crew was cleared to start the engines and to leave the parking space.  Take-off took place at 22 h 29.  The Captain was PNF, one of the co-pilots was PF. 

The take-off weight was 232.8t (for a MTOW of 233t), including 70.4t of fuel. 

At 1 h 35 min 15 (1), the crew informed the ATLANTICO controller that they had passed the INTOL point then announced the following estimated times: SALPU at 1 h 48 then ORARO at 2 h 00.  They also transmitted the SELCAL code and a test was undertaken successfully. 

At 1 h 35 min 46, the controller asked the crew to maintain FL350 and to give their estimated time at TASIL. 

At 1 h 55, the Captain woke the second co-pilot and said "[...] he's going to take my place". 

Between 1 h 59 min 32 and 2 h 01 min 46 (2), the Captain attended the briefing between the two co-pilots, during which the PF said, in particular "the little bit of turbulence that you just saw [...] we should find the same ahead [...] we're in the cloud layer unfortunately we can't climb much for the moment because the temperature is falling more slowly than forecast" and that "the logon with Dakar failed".  The Captain left the cockpit. 

The airplane approached the ORARO point.  It was flying at flight level 350 and at Mach 0.82 and the pitch attitude was about 2.5 degrees.  The weight and balance of the airplane were around 205 tonnes and 29% respectively.  Autopilot 2 and auto-thrust were engaged. 

At 2 h 06 min 04, the PF called the cabin crew, telling them that "in two minutes we should enter an area where it'll move about a bit more than at the moment, you should watch out" and he added "I’ll call you back as soon as we're out of it".

At 2 h 08 min 07 (3), the PNF said "you can maybe go a little to the left [...]".  The airplane began a slight turn to the left, the change in relation to the initial route being about 12 degrees.  The level of turbulence increased slightly and the crew decided to reduce the speed to about Mach 0.8. 

From 2 h 10 min 05 (4), the autopilot then auto-thrust disengaged and the PF said "I have the controls".  The airplane began to roll to the right and the PF made a left nose-up input.  The stall warning sounded twice in a row.  The recorded parameters show a sharp fall from about 275 kt to 60 kt in the speed displayed on the left primary flight display (PFD), then a few moments later in the speed displayed on the integrated standby instrument system (ISIS). 

Note 1: Only the speeds displayed on the left PFD and the ISIS are recorded on the FDR; the speed displayed on the right side is not recorded.

Note 2: Autopilot and auto-thrust remained disengaged for the rest of the flight. 

At 2 h 10 min 16, the PNF said "so, we've lost the speeds" then "alternate law [...]". 

Note 1: The angle of attack is the angle between the airflow and longitudinal axis of the airplane.  This information is not presented to pilots. 

Note 2 : In alternate or direct law, the angle-of-attack protections are no longer available but a stall warning is triggered when the greatest of the valid angle-of-attack values exceeds a certain threshold. 

The airplane's angle of attack increased progressively beyond 10 degrees and the plane started to climb.  The PF made nose-down control inputs and alternately left and right roll inputs.  The vertical speed, which had reached 7,000 ft/min, dropped to 700 ft/min and the roll varied between 12 degrees right and 10 degrees left.  The speed displayed on the left side increased sharply to 215 kt (Mach 0.68).  The airplane was then at an altitude of about 37,500 ft and the recorded angle of attack was around 4 degrees.

 From 2 h 10 min 50, the PNF tried several times to call the Captain back. 

At 2 h 10 min 51 (5), the stall warning was triggered again.  The thrust levers were positioned in the TO/GA detent and the PF maintained nose-up inputs.  The recorded angle of attack, of around 6 degrees at the triggering of the stall warning, continued to increase.  The trimmable horizontal stabilizer (THS) passed from 3 to 13 degrees nose-up in about 1 minute and remained in the latter position until the end of the flight. 

Around fifteen seconds later, the speed displayed on the ISIS increased sharply towards 185 kt; it was then consistent with the other recorded speed.  The PF continued to make nose-up inputs.  The airplane's altitude reached its maximum of about 38,000 ft, its pitch attitude and angle of attack being 16 degrees. 

Note: The inconsistency between the speeds displayed on the left side and on the ISIS lasted a little less than one minute. 

At around 2 h 11 min 40 (6), the Captain re-entered the cockpit.  During the following seconds, all of the recorded speeds became invalid and the stall warning stopped. 

Note: When the measured speeds are below 60 kt, the measured angle of attack values are considered invalid and are not taken into account by the systems.  When they are below 30 kt, the speed values themselves are considered invalid. 

The altitude was then about 35,000 ft, the angle of attack exceeded 40 degrees and the vertical speed was about -10,000 ft/min.  The airplane's pitch attitude did not exceed 15 degrees and the engines' N1’s were close to 100%.  The airplane was subject to roll oscillations that sometimes reached 40 degrees.  The PF made an input on the sidestick to the left and nose-up stops, which lasted about 30 seconds. 

At 2 h 12 min 02, the PF said "I don't have any more indications", and the PNF said "we have no valid indications".  At that moment, the thrust levers were in the IDLE detent and the engines' N1’s were at 55%.  Around fifteen seconds later, the PF made pitch-down inputs.  In the following moments, the angle of attack decreased, the speeds became valid again and the stall warning sounded again.

At 2 h 13 min 32, the PF said "we're going to arrive at level one hundred".  About fifteen seconds later, simultaneous inputs by both pilots on the sidesticks were recorded and the PF said "go ahead you have the controls". 

The angle of attack, when it was valid, always remained above 35 degrees. 

The recordings stopped at 2 h 14 min 28.  The last recorded values were a vertical speed of -10,912 ft/min, a ground speed of 107 kt, pitch attitude of 16.2 degrees nose-up, roll angle of 5.3 degrees left and a magnetic heading of 270 degrees. 

NEW FINDINGS 

At this stage of the investigation, as an addition to the BEA interim reports of 2 July and 17 December 2009, the following new facts have been established:

- The composition of the crew was in accordance with the operator's procedures.

- At the time of the event, the weight and balance of the airplane were within the operatio­nal limits.

- At the time of the event, the two co-pilots were seated in the cockpit and the Captain was resting.  The latter returned to the cockpit about 1 min 30 after the disengagement of the autopilot.

- There was an inconsistency between the speeds displayed on the left side and the integra­ted standby instrument system (ISIS).  This lasted for less than one minute.

- After the autopilot disengagement: 

• the airplane climbed to 38,000 ft,
• the stall warning was triggered and the airplane stalled,
• the inputs made by the PF were mainly nose-up,
• the descent lasted 3 min 30, during which the airplane remained stalled.  The angle of attack increased and remained above 35 degrees,
• the engines were operating and always responded to crew commands. 

- The last recorded values were a pitch attitude of 16.2 degrees nose-up, a roll angle of 5.3 degrees left and a vertical speed of -10,912 ft/min.

Endnotes

1 All times are UTC.

The New Arbitration Ordinance

The New Arbitration Ordinance

The new Arbitration Ordinance, Cap. 609 (the “Ordinance”) will come into force on 1 June 2011.  A commencement notice was published in the Government Gazette on 4 March 2011.

 The Ordinance, which is based largely on the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), will replace the current Arbitration Ordinance, Cap. 341 (the “Old Law”).  The Old Law will apply to all arbitrations and related proceedings commenced prior to 1 June 2011.  The Ordinance will apply to all arbitrations and related proceedings commenced on or after that date.  The main feature of the Ordinance is that the distinction between domestic and international arbitrations is abolished.  There is now a unitary regime of arbitration based on the Model Law, subject to certain transition and opt-in provisions, modifications and supplements as expressly provided in the Ordinance.

 The Objectives of the Ordinance are:

• to facilitate fair and speedy resolution of disputes by arbitration without unnecessary expense
• to make it more user-friendly by setting out provisions by references to stages of arbitration
• to apply Model Law to all arbitrations as overseas practitioners are familiar with it
• to increase attractiveness of Hong Kong as a place to conduct arbitrations
• to promote Hong Kong as a regional centre for legal services and dispute resolution

  The Principles of the Ordinance are:

• to accord a greater degree of party autonomy, subject to safeguards that are necessary in the public interest
• to minimise court intervention

 Some of the key features of interest are:

1.                  Abolition of the distinction between “domestic” and “international” arbitrations.  There are no longer separate provisions governing domestic and international arbitrations.

2.                  Provisions of the Model Law that are expressly stated in the Ordinance as having effect, have the force of law (subject to modifications and supplements).  The Model Law provisions are clearly identified in the Ordinance.

3.                  The Ordinance has wide application and is not limited to international commercial arbitrations.  It also applies to statutory arbitrations.  It covers all arbitrations under arbitration agreement where the place of arbitration is Hong Kong.

4.                  The contents of the arbitration agreement can be recorded in writing in any form, that includes an agreement made by electronic communication.

5.                  Certain provisions that only apply to domestic arbitrations (in respect of arbitration agreements entered into before or within 6 years after the commencement of the Ordinance which provide that the arbitration is a “domestic arbitration”) have been retained as opt-in provisions either by express agreement or in some of the construction cases or statutory arbitrations, automatically.  The opt-in provisions relate to:

(a)                determination of a dispute by a sole arbitrator;

(b)               consolidation of arbitrations;

(c)                determination of preliminary question of law by the Court of First Instance;

(d)               challenging an arbitral award on ground of serious irregularity; and

(e)                appeal against an arbitral award on question of law.

  6.                  The Tribunal is able to grant interim measures (this includes Mareva and other injunctions and Anton Pillar orders) as well as preliminary orders ex parte for a limited period in an emergency.  Interim measures can be effective as they are enforceable by the Court.

7.                  The Ordinance contains provisions that facilitate mediation.  HKIAC has the power to appoint a mediator on the application of any parties and such appointment is not subject to appeal.  The arbitrator may act as mediator.

8.                  Limitation of actions under the Limitation Ordinance, Cap. 341 and other legislation shall apply to arbitrations as they apply to actions in courts.

9.                  To enhance confidentiality, any court proceedings are not to be heard in open court unless a party makes an application for open hearing or the Court considers that there ought to be an open hearing.  Unless otherwise agreed by the parties and subject to statutory exceptions, no party may publish, disclose or communicate any information relating to the arbitral proceedings or the arbitral award.

10.              Chapter VIII of the Model Law is not incorporated into the Ordinance.  The Ordinance contains separate provisions regarding the recognition and enforcement of the New York Convention awards and Mainland Chinese awards, which are substantially the same as the corresponding provisions under the Old Law.

Piracy Cases-Constructive and Actual Total Loss under Cargo Policy

Piracy Cases-Constructive and Actual Total Loss under Cargo Policy

INTRODUCTION

Somali piracy in and around the Gulf of Aden and the Indian Ocean has given rise to a maritime industry of a kind.  The subject from the viewpoint of ship-owners and cargo owners was covered by us in two earlier articles:-  When the Worst Happens - Recovering Piracy Losses (March 11 2009) and Piracy and Insurance - How Can Risk be Covered? (November 11 2009).  At First Instance in the case of Masefield AG v. Amlin Corporate Member Ltd., the English High Court in the Judgment of Mr. David Steel J decided that the hijacking of the Malaysian owned “BUNGA MELATI DUA”, her crew, and cargo owned by the assured Swiss traders, Masefield, for ransom did not result in the cargo becoming An Actual Total Loss or a Constructive Total Loss.  The Court further held that the payment of a ransom was not contrary to public policy.  On appeal, the English Court of Appeal (Rix, Moore-Bick and Patten LLJ’s) in upholding the Judgment at First Instance has provided important guidance on the legality of ransoms in marine insurance cases.

FACTS

“BUNGA MELATI DUA” was laden with two parcels of bio-diesel owned by Masefield and was seized by Somali pirates in the Gulf of Aden in August 2008.  The pirates took their booty within Somali waters and contacted the vessel owners to negotiate a ransom for release of the vessel, crew and cargo.

After a ransom was agreed and paid by the ship-owners, the vessel was released on 29 September 2008, some six weeks after seizure, which represented the median period the vessel would be held by Somali pirates from capture to release, arriving at the declared port of destination, Rotterdam, around four weeks later on 26 October 2008 with no cargo damage.

The respondent insurer had insured the cargo under an open cover, incorporating the ICC (A) Clauses which insure all risks of loss or of damage to the subject-matter insured and under which the piracy is not excluded.  There was no dispute that the seizure by pirates was an insured risk under the All-Risks policy.

At First Instance, Masefield’s primary case was that the cargo became an Actual Total Loss upon seizure of the vessel by the pirates and being taken to Somali waters.  They claimed that they had been “irretrievably deprived” of the cargo.  Their argument was that, in determining whether it had been irretrievably deprived of the cargo or whether an Actual Total Loss appeared unavoidable, the Court should not take into account the prospects of recovery of the vessel and cargo by reasons of the payment of ransom because, they argued, payment of ransom was contrary to English Public Policy.

CONSTRUCTIVE TOTAL LOSS (“CTL”)

David Steel J held at First Instance that, because of a bespoke CTL Clause within the Policy, the application of S60 of the Marine Insurance Act was limited to S60(1) which provides:-

“Subject to an 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 this expenditure had been incurred.”  The additional category of constructive total loss contained within S60(2)(i):-

“Where the assured is deprived of the possession of his ship or goods by a peril insured against, and (a) it is unlikely that he can recover the ship or goods, as the case may be, or (b) the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered;”

was excluded.

Therefore, according to the Judgment of David Steel J, the criteria to be satisfied by Masefield were:-

(i)                the subject-matter must have been abandoned

(ii)               because an ATL appeared unavoidable

At First Instance, 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 S62 and S63 of the Act, but abandonment of the hope of any recovery[1].  As it was clear that the ship-owners had every hope of recovering the vessel, crew and cargo, no such abandonment had occurred.

Masefield abandoned its claim based on Constructive Total Loss on the first day of the appeal.

ACTUAL TOTAL LOSS (“ATL”)

The question remained whether Masefield had been irretrievably deprived of the cargo.  This was considered at length by Rix LJ in his Judgment which 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 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

At First Instance, Masefield had accepted that payment of a ransom was not illegal under English law but submitted that it was against Public Policy and therefore should not be taken into consideration when considering whether the vessel and cargo were in fact retrievable.  The test for being contrary to Public Policy is stringent and that transaction would only be held illegal as contrary to Public Policy if the harm to the public is “substantially uncontestable”[2].  At First Instance, Mr. Justice David Steel had been “wholly unpersuaded” that payment of ransom would be contrary to Public Policy under English law, noting that the fact that payment of a ransom is not per se illegal as a matter of English law[3].  Notwithstanding that payments of ransom do encourage further actions of piracy, as diplomatic or military intervention could not be relied upon, failure to pay a ransom would put other vessels and their crews at risk.

Mr. Justice Steel had also been further persuaded by the existence of Kidnap and Ransom policies and the wide acceptability of such policies in the market.

Masefield adjusted its position before the Court of Appeal to the proposition that payments of ransoms were not per se illegal but were so undesirable from the point of view of the public interest and universal principles of morality that it could not be part of an insured’s duty to preserve its property from loss[4] by acceding to a ransom demand.

The Court of Appeal noted that there is no legislation in England prohibiting the payment of ransoms (Mr. Justice David Steel J had, at First Instance, emphasized that the Ransom Act 1982 had been repealed by the Supreme Court Act 1981 (now the Senior Court’s Act 1981) and cited Royal Boskalis[5] to the effect that a payment of ransom had been held to be recoverable as a sue and labour expense as a strong indication that Masefield’s position was misconceived.

In the Court of Appeal, a report of the House of Lords European Committee concerning Somali piracy was extensively considered.  In summary, the conclusions of 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 the Government continue to monitor the potential risks of monies reaching terrorists.

……….

88.  We understand that skilled ransom negotiators can help to keep risk to life and vessels, as well as ransom payments, to a minimum.  Where ship owners 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.”

In the Court Appeal Judgment, Rix LJ succinctly commented on the report of the House of Lords European Committee:-

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 described it as a “fragile status quo”.  In these morally muddied waters, there is no universally recognized principle of morality, no clearly identified public policy, no substantially uncontestable 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 rejected Masefield’s submissions that there should not be a duty⁴ to pay a ransom, stating that, if there were no duty to pay a ransom, it does not turn a potential loss into an actual loss or mean that there is any obligation not to make such a payment.  In any event, this was not a case of failure by Masefield, the cargo assured, to pay a ransom, as this was negotiated and paid by the ship owners.

COMMENT

The Court of Appeal Judgment is of considerable assistance in clarifying otherwise somewhat muddy waters and achieving a delicate judicial balance of exigencies between the paying of ransom on the one hand, encouraging further hostage taking; but on the other, securing the safety and release of vessels and crews and preservation of property, therefore, in a commercial sense, not morally objectionable.  As clearly enunciated by Rix LJ above, in reality, there is no pragmatic or commercial alternative for ship owners and their insurers, therefore the practice is likely to continue.  In so far as cargo insurers are concerned, as here, the Court of Appeal decision clarifies the issue of Actual Total Loss and provides clear guidelines both for assureds such as Masefield and insurers and their legal advisors.