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Multiple Interests, Multiple Stakeholders, Lives on the Line

by F. Peter Phillips
June 2012

Business Conflict Blog by Peter Phillips

F. Peter  Phillips

This blog has noted, over the years, the challenges of multiparty negotiations. It has also brought readers’ attention to the challenges of hostage negotiation. This next paper from a New York Law School student combines the two in a horrific melange of self-interest, terror and human lives.

The topic is the varying economic interests among participants in negotiations with Somali pirates. The author is rising 3L Timothy Johnson.

Somali Piracy: Determining Multi-Party Interests

and their Effects on a Ransom Negotiation

By Timothy Johnson

Introduction

“Because of the multitude of diverse interests affected by pirate attacks, there can be no single, all-encompassing insurance product that addresses all claims.”[1]

In April of 2011, Dipendra Rathore and twenty-one other sailors were taken captive by Somali pirates while their chemical carrier was in transit from India to Norway. Mr. Rathore endured two hundred and thirty-eight days of physical torture, malnutrition, and terror as his captors “negotiated” with the company that owned the ship. From a £15 million initial demand, the pirates lowered their request to £5 million before accepting the deal and releasing Mr. Rathore and his crew.[2] So why did it take the company so long to put together a ransom and free its people and property? What is the value of human life to a company like Mr. Rathore’s? Or is a more appropriate question, ‘What is the value of a ship when that vessel is intertwined with contractual obligations to various entities that have a stake in the property and persons onboard?’

Since 2005, there have been hundreds of pirate attacks targeting personal and commercial ships off the coast of Somalia and spanning as far as the middle of the Indian Ocean.[3] While most attacks result in unsuccessful hijackings,[4] the ships and their crews who are unfortunate enough to be captured become pawns of an attritional negotiation. Pirates operate by ransoming the crew, ship, and cargo back to their companies.[5] These ransoms have been estimated to cost over $400 billion per year to the shipping industry including the costs of negotiations, ransom delivery, and other associated costs.[6] Besides the costs directly associated with ransoms, there have been significant increases in insurance premiums for ships that traverse in or near the “high risk area.”[7] Andrew Voke, Chairman of Lloyds Market Association Marine Committee said that “[a]ll one can say is that [piracy off the coast of Somalia] has become part of the economic picture with which companies have to deal as a natural matter, but it brings with it huge uncertainties and huge risk factors.”[8]

Piracy is one of the few areas of international law where nations can rest assured that there is global support and legality for prevention and response[9]-yet commercial entities primarily resolve hostage situations through private agreements between pirates and the ship owners. Naval coalition forces are hesitant to attempt hostage rescue missions because of the risk to the hostages’ lives.[10] Although coalition forces allege that there will be increased preventative measures taken that will diminish future piratical attacks,[11] there is no guarantee that all ships will be safe from pirates in the “high risk area.” Some hapless carriers will still have to negotiate privately with the pirates if they want their people and property back. Furthermore, the costs of re-routing ships to avoid the area or to outfit merchant ships with defensive capabilities is more costly than paying a ransom.[12]

But negotiations are not a simple two-way channel between the pirates and the ship owners. Instead, the negotiation resembles a tug-of-war match. The pirate crew struggles to get as much money as they can on their side of the rope from the ship owner. Meanwhile, the ship owner pulls to save the crew and mitigate the financial damages. But there are others on his side of the rope that sometimes help him pull, others push him towards the pirate’s demands, and some just stand around waiting for the match to end. There are charterers, hull & machinery insurers, cargo insurers, war risk insurers, protection & indemnity insurers, kidnap & ransom insurers, and governmental entities.. Some if not all of these parties have an interest in the negotiations and will each try to exert their influence to achieve their desired results.

The purpose of this paper is to raise awareness and discuss the implications of contractual obligations ship owners may have with their charterers, various insurers, and governments in the event of a pirate ransom negotiation. By calling attention to the contracts and general legal obligations that may be imposed by these diverse parties, a savvy ship owner can determine the necessary insurances to mitigate risk by agreeing to terms specific to his needs. Just as there are preventative measures that can be taken to reduce pirate takeovers, contract review is a preventative action to reduce odds of ’surprising’ loopholes or uninsured damages. Also, by understanding the interplay between the diverse interests and relationships, mechanisms to respond more effectively to pirate ransom negotiations may be created.

Before discussing each party’s interest to the negotiations, it is important to remember to consider the uniqueness of each contract between the ship owner and the numerous insurers and other parties-contracts should not be treated as a “one size fits all” matter. Companies of the same industry may have similar provisions in their contracts but may not be the same in every agreement. Wise drafters will design clauses specific to piracy while others use standard form language which may lead to disputes of interpretation when a piratical incident occurs.[13] It is also important to note that the contracts must be considered under their respective governing substantive law. This discussion primarily focuses on United Kingdom and United States maritime and insurance laws but is not exclusive.

The Pirates

“Nothing can stop a hungry man. The hunger is your master. . . . There’s no planning. We sail out, and then mostly it depends on luck.” - Anonymous Somali Pirate Captain[14]

The Somali pirates’ interests are the most “simple” interests to understand in hostage negotiations-yet the most difficult to satisfy. Most of the pirates are believed to be former fishermen and militia members of Somali warlords.[15] The fishermen lost their livelihoods due to illegal fishing and toxic waste dumping by foreign governments.[16] These men have now converted their seafaring skills into piratical assets. Earnings as a pirate can be very lucrative when 30 percent of a multi-million dollar ransom is divvied between five or six men who successfully hijack a ship.[17] However, risks as a pirate are remarkably high with estimates of up to 7% of the total Somali pirate population missing or killed in a year.[18]

When pirates hijack a ship, there are two basic interests that underlie the pirates’ stated positions: (1) Achieve the maximum amount of money possible for the crew, ship, and its contents; and (2) Make it off the ship and back to pirate headquarters/mainland Somalia alive with the money. These interests are consistent with the United Nations’ definition of piracy requiring “any illegal acts of violence or detention . . . committed for private ends by the crew or the passengers of a private ship . . .”(emphasis added).[19] Politically-oriented demands infer that the pirates are not really “pirates” but may actually be considered terrorists-an important distinction.[20] The pirates have a business model at this point which creates a mutual interest with the ship owners: to release hijacked ships quickly.[21] By ransoming more ships per year, the pirates would be willing to reduce their ransom demands. As a part of that transaction, the pirates must trust the other side to guarantee safe passage once the ransom money has been received and the pirates agree to release the ship and crew.[22]

Although financial gain and security are the pirates’ primary motivations, it is important to remember when negotiating with the pirate ‘leaders’ for ransom payments to consider their own egos. There is a crew of men who recently risked their lives to overtake a ship from what could have been fatally defensive persons, expect payments, and live in suspense every day that ransom monies may never come and naval interventions could cost them their freedoms and/or lives. Furthermore, some communities in Somalia (such as the families of the pirates) rely on ransom payments in order to survive,[23] so a lot of personal attention must be given to the pirate negotiators.

Charterers

“When a document containing a contractual term is signed, then, in the absence of fraud, or, I will add misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.” - Sir Thomas Edward Scrutton, Judge[24]

Charterers are parties who contract with ship owners to use the ships for commercial purposes. The underlying interest of charterers is a commercial objective to turn a profit. To maximize profit, the charterer will take numerous positions that affect the timeliness of the transportation, limit its liability, and assure a successfully cost-mitigated voyage and delivery. The following discussion will establish the numerous positions that charterers (and ship owners) should be aware of when drafting the charter party-an agreement between the ship owner and a charterer-for a voyage through the “high risk area.”

There are two general types of charters: (1) demise of the ship or (2) contract of affreightment charterers. Demise of the ship refers to charterers who take control and use the ship for a specified time. These parties act as “ship-owners” similarly to subleases in property law. Contracts of affreightment are the other form of chartering where the ship-owner maintains control, carries the cargo for the charterer, and delivers it. Each type of charter carries unique benefits and liabilities.

As demise charterer (also known as bareboat charterer), the risks and obligations that the ship owner would have are placed on the charterer. That charterer must maintain, operate, and provide the appropriate insurance for the ship-similarly to renting. This type of charter can also act as means of acquiring ownership over a long period of time.[25] Demise charterers should purchase all forms of insurance as if they were the ship owner especially if they have years of future interest in the boat. If the charterer does not intend to use the boat for long-term usage, it would be wise for the ship owner to purchase Hull & Machinery insurance.

Ship owners have an obligation to provide a “seaworthy” vessel at the time of the commencement of the contract.[26] This means that the vessel “is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.”[27] If a ship owner plans to demise charter his boat to a charterer who intends to navigate through the “high risk area,” the owner may be liable. There may be an obligation on the owner to establish that the vessel is fit for pirate waters.[28] A ship owner can be protected from this risk by establishing the boat is in good working order and with proper operation it can outrun pirate attacks, withstand attacks, or has the equipment necessary to detect and avoid pirates.

If the charter party is a contract of affreightment, then there is a delivery of cargo where the ship owner still maintains control of the ship. There are two typical charters in this category: (1) Time Charters and (2) Voyage Charters.[29]

Time charters are agreements where the charterer controls the commercial operations of the ship while the ship owner controls nautical and technical operations for a period of time. Charterers are often liable for negligent personnel injuries,[30] time losses, and damaged properties associated with the cargo and commercial decisions of the ship. Time charterers must also pay for fuel and any variable costs. It would be prudent to consider the various forms of insurance (to be discussed further) that cover cargo and crew members hired by the charterer for cargo transfer and protection services against pirate attacks.[31]

There has been a significant revision to a standard piracy clause for time charters that all time charterers should be aware of and consider incorporating. BIMCO’s Piracy Clause for Time Charter Parties 2009 was amended to reflect a tradeoff of risks between the owner and charterer.[32] Under the Piracy Clause, the ship owner has the authority to leave a pirate area once a real threat is perceived, not just a general threat of piracy in a given area. If the owner diverts the ship’s course, the charterers will be notified and must indemnify the ship owners for any damages caused by time lost and performance of the diversion. Crews will also receive indemnified “hazard pay” from the charterer if those provisions are agreed upon between the ship owner and his employees. In the event that the ship is captured, the ship will remain “on-hire” for the first ninety days it is captured.[33]

Voyage charters establish finite routes to transfer cargo with determined prices. Ship owners are responsible for both fixed and variable costs associated with the operation of the ship. Cargo-related responsibilities and liabilities may be negotiated between the ship owner and the charterer in the contract of affreightment.[34] The ship owners are on the hook for most of the risks in these types of charters unless contractually passed to the charterer. This charter crucially requires ship owners to consider the numerous insurance options available when traversing the “high risk area. Charterers should also consider any contractual obligations to the cargo owners (if any) when contracting with a ship owner and insurers to see if liability is placed elsewhere. Some important provisions to consider as a charterer involved in the “high risk area” are loss of hire provisions, premium-increase clauses, and co-assured agreements.[35]

In sum, charterers should confirm that their contracts expressly cover their expected liabilities and costs for when the ship will proceed through pirate waters. If a ship is hijacked, a charterer needs to be aware of their obligations possibly to assist paying for ransom or at least notifying their insurance agent that must help pay the ransom. All charterers should pay close attention to whether the law governing the contract will permit a charterer to contract for limited liability. Some national laws will not abide by private agreements to limit liability such as the United States while others may restrict liability as per international covenants.[36]

Insurers

“It is important to understand that insurers indemnify the ship owner . . . under the sue and labour clause. It is not just the hull insurers; ultimately, the cargo insurers have an interest in the venture, too, because it will be treated as a general average. To that extent, [Lloyd's Market Association] have no direct involvement in the negotiations at all. We are very much a second party and when a negotiation is completed, we will be indemnifying the amount of payment . . . There is discussion among insurers, because a number of insurers are involved in each risk, and therefore there is constant cross-fertilisation in terms of who is involved; but we are not the front line for negotiating.” - Andrew Voke[37]

Maritime insurance law and business practices are very complex. There is a web of relationships and covers that must be carefully considered for the needs of a particular venture. By considering the primary forms of insurance separately, that web can be disentangled when a pirate hijacking occurs. This simplification will help to provide swift responses that can save money and lives. There are two important maritime concepts that pervade insurance policies: (1) sue and labor clause and (2) general average. Understanding these practices will clear a lot of the smoke that surrounds pirate ransom negotiations.

The sue and labor clause “requires the insured to protect damaged property from further loss once a loss has occurred.”[38] In the event that a pirate hijacking occurs, numerous insurers will be called on to contribute to the ransom payment in order to prevent any further loss that the particular insured policies cover. Unfortunately, it may not be so easy to obtain contribution from insurers because the underwriters will analyze whether the particular facts of the pirate attack and current hostage situation will invoke the protections of the policies in the first place that require further loss prevention.

While the sue and labor clause applies to all insurers whose policies are triggered by the piratical encounter, the principle of general average is slightly more difficult to press insurers into action. General average refers to an ancient maritime practice where parties retroactively reimbursed other parties who had interests in the cargo or the ship for their losses when the crew voluntarily jettisoned cargo in order to save the rest of the ship and its cargo.[39] The concept has been defined and accepted universally in maritime law as “only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.”[40] To reimburse for general average contributions, property must be sacrificed to the pirates or while escaping the pirates; but property damaged by the pirates will not invoke general average.[41] If a ransom payment is made without clarification for how much is paid specifically for crew, ship, and cargo, the payment will be considered a payment for recovery for vessel and cargo,[42] thus triggering a reimbursement for general average when the ransom might have been for the purposes of saving crew rather than property. It should be noted that an argument can be made that without a crew, the cargo will be lost and therefore a ransom payment specific to crew member lives may extend as a general average.

The following types of insurances cover particular risks but are all subject to sue and labor clauses as well as general averages based on the previous discussion.

Hull & Machinery (H&M) Insurers

H&M insurance refers to the coverage provided if the vessel or its machinery is damaged. H&M insurers can be part of a large insurance company that provides numerous insurance covers to a ship owner or may just specialize in H&M insurance. In either case, it is vital to establish as a charterer/ship owner whether multiple insurance covers overlap regarding particular perils associated with vessel damage.[43] Piracy is one of those perils that may be covered under other options such as War Risk insurance.[44] However, the recent trend since the rise of Somali piracy is for hull damages caused by piracy to be covered under War Risk insurance.[45]

The Institute Times Clause (ITC) Hulls policy incorporates piracy as a covered “peril.”[46] But just because “piracy” is incorporated as a covered peril does not guarantee coverage for vessel damages. The insurer has an interest in reducing payouts to the insured so the company remains profitable. To accomplish this, insurers will carefully review the cover policy with the insured and determine whether the factual circumstances meet the policy selected. H&M policies that cover piracy will consider the facts of a ship’s hijacking and determine whether the attackers sought to achieve “private ends by the crew” in accordance with the United Nations definition. If the attack is considered to be an act of war or terrorism, H&M insurance will not cover it-a possibility if governments establish connections between the Somali pirates and terrorist or Somali warring factions.[47]

In a pirate ransom negotiation, H&M insurers will not be directly involved in the negotiations as principals. They will often contribute to the ransom in some capacity. Like other insurers, the H&M insurer will contribute to a ransom payment under the sue and labor clause or as a general average. How much will be contributed is a complicated matter that would be assessed based on the particular policies the insurers are expected to cover in the event of vessel damage. Since there is an increased risk that a ship will sustain damage the longer it is not properly maintained by a crew and will be vandalized by pirates, H&M insurers would prefer short captive periods. H&M insurers are less likely to be affected by high ransom payments because the expected contribution will be much less than the total value of the ship and knowing that the ship will deteriorate with time, it is less costly to retrieve the ship as soon as possible.

In sum, H&M insurers will not likely press for much in the ransom negotiations unless the ship will be significantly damaged by sitting at sea for a long period of time.

War Risk Insurers

War Risk insurance is a specialist policy that refers to coverage for damages caused by war-related, terrorism-related, and if specified, piracy-related claims.[48] War Risk insurance can cover damages of all kinds-H&M, cargo, and personnel injuries.[49] This type of insurance acts as a gap-filler for the traditional covers that are excluded due to the rarity of violent attacks against a commercial ship.

As per the H&M discussion, some hull policies will not cover damages caused by piracy. War risk covers are designed as add-ons for the gaps in H&M coverage. It can also serve as protection in the event the H&M cover that includes piracy does not apply if the hijacking suggests “terrorist” motives rather than piratical conduct.[50] There are some distinct advantages for segregating piracy coverage as a War Risk from hull coverage: (1) Deductibles do not apply to war risk claims; (2) Protects a ship owner’s marine risks claim record/hull records in the event of a claim; and (3) Insurers can charge a premium for traversing the “high risk area” and this can be passed on to the charterer or a third-party.[51] Employing security guards and implementing appropriate piratical evasive/defensive tactics may also reduce War Risk premiums.[52]

War Risk insurers have raised premiums significantly since the rise in Somali piracy.[53] The increase in premiums indicate that the insurers are able to pay out for piracy claims. During pirate ransom negotiations, the War Risk insurer will contribute under the sue and labor clause, general average if applicable, and to the extent that the policy covers specific protections. War Risk insurers do not cover the cost of the ransom negotiations and associated costs, however. Before agreeing to a ransom payment, the War Risk insurer will pay out whatever the ship owner agrees to in the ransom. If the ransom demands are higher than the value of the policy, the insurer will only pay up to the maximum value of the policy and the rest will be left with the ship owner (and other interested parties).

In sum, War Risk insurers sit on the sideline and provide payments when requested as long as the policy applies.

Cargo Insurers

Cargo insurers cover the transported subject-matter of the voyage… the freight. The delivery of this merchandise is the purpose for sailing through the “high risk area.” Whoever has the responsibility over the cargo (charterer or ship owner) should obtain cargo insurance that will protect against damage caused by piracy. This may require purchasing War Risk reinsurance for cargo if the insurer’s policy does not cover it under their cargo clause. The recently amended Institute Cargo Clause (A) expressly provides coverage for cargo damaged or lost caused by piracy,[54] while the American Institute Cargo Clauses expressly exclude piracy.[55] Parties interested in the protecting themselves from loss earnings or damages caused by the delay of the cargo should amend (or supplement with another policy) the Institute Cargo Clause’s § 4.5 provision that excludes “loss damage or expense caused by delay, even though the delay be caused by a risk insured against.”[56]

Cargo insurers benefit the most from the implementation of general average in ransom negotiations. If the cargo is the most “valuable” asset in the negotiation (such as a tanker full of crude oil)[57], a significant proportion of ransom payment will be attributed to the cargo insurer, but will be reduced when spread amongst other interested parties in the general average. Unfortunately for cargo insurers, if the ship or the crew members are the primary bargaining chips for the pirates, a high ransom price will seem unjustifiably high to their expected interest in the cargo for ransom.[58] This might entice cargo insurers to press the ship owner to negotiate for lower ransom demands in order to reflect a more accurate price for the cargo’s significance (and costs). Since cargo insurers are concerned with the cargo and not the ship or its crew, there is less incentive to rush a ransom. The cargo onboard may depreciate in value slightly or significantly, but it is ultimately the charterer and shipper’s problems unless value depreciations caused by delays were included in the policy.

In sum, cargo insurers can be ransom contributors hoping to secure a speedy release of a hijacked ship or may try to stall and press the principals to negotiate for lower ransoms.

Protection & Indemnity (P&I) Insurers

P&I insurance primarily covers ship owner liabilities to third parties.[59] Examples of liabilities to third parties arising from pirate hijackings are: injuries to crew; death to crew; crew substitution; crew effects; and cargo liabilities (general average). P&I insurance arises from P&I clubs which consist of ship owners who contribute ‘premiums’ to the mutual insurance association they belong to. P&I clubs provide their members with a “risks covered” rule set that acts similarly to a contracted for insurance policy. P&I policies generally do not name piracy as a covered risk, but the consequential liabilities as a result of a pirate hijacking may be covered.[60]

Although crew member claims are well within the reach of P&I insurers, the clubs have resisted contributing to ransom payments as part of the general average.[61] P&I insurers have declined to contribute to ransoms because ransom payments have been for the ship/cargo rather than the crew.[62] But P&I clubs are forcibly becoming more involved in the scene as hired security teams become commonplace escorts-creating another third party liability for ship owners.[63]

A P&I insurer recently stated is to “do everything possible to expedite the safe release of the vessel’s officers and crew, provide full support to them and their families during and after the attack, and help to ensure that the vessel resumes trading as soon as possible.”[64] If P&I clubs genuinely wish to reduce their payouts, they should live up to this public statement rather than dodge general average contributions even if general average historically has applied to ship/cargo payments. There have been over sixty crew member fatalities caused by pirate hijackings since 2007.[65] Also, there are many instances of released hostages who have developed traumatic psychological disorders that will require long-term care and familial assistance.[66] P&I insurers can reduce large payouts to estates and families of deceased crew members, reduce chances of significant psychological traumatization that will require mental healthcare, reduce costs of crew substitutions-just by contributing to the general average. Furthermore, by contributing to the ransom, P&I clubs can dodge worst-case scenarios where ship is destroyed by pirates and is left as a wreck causing environmental damage… another covered risk P&I clubs are responsible to pay for and clean up.

Parties involved with the ransom negotiation should press reluctant P&I clubs to contribute to the ransom as a general average because it is in their financial interests to do so. By providing early loss prevention, P&I insurers will have significantly less long-term or large payout financial risk from crew member or other third party liabilities. At that point, a P&I insurer will ideally be supportive of paying a ransom demand sooner rather than later as long as the contribution expected will be significantly reduced by including the hull/war risk insurers.

Kidnap & Ransom (K&R) Insurers

K&R insurance retroactively indemnifies ship owners for ransoms payments, associated ransom costs such as negotiator fees and ransom deliveries, and a variety of unique, proactive K&R plan provisions that range from crisis management teams to victim aftercare.[67] Since the rise in Somali piracy, there has been a boom in K&R purchases and a competitive market has spawned[68]-an increase as much as 1,000%![69] All other insurers should be expected to discount their own premiums if a K&R policy is taken out for a voyage through the “high risk area” because the other insurers would no longer need to worry about any significant contribution to a general average ransom payment since K&R would take care of it.[70]

One of the services that K&R insurers typically provide is a negotiator/consultant to handle the ransom negotiations.[71] While this practice seems helpful to have an experienced first-respondent available, it also raises questions of conflicting interests where the insurer and their appointed negotiator may not act for the interests of the insured.[72] If a negotiator is paid by an insurer to handle a ransom negotiation, there is not likely much incentive for a negotiator to blitzkrieg the negotiation in order to rescue the cargo and crew in a timely manner. The insurer is concerned about whittling ransom demands down as much as possible because that is what they are primarily liable for-so there is every incentive for the negotiator paid by the insurer to take as long as necessary to get the lowest acceptable ransom.[73] Furthermore, the negotiator does not need to take into consideration the concerns of the other insurers responsible for the vessel, cargo, and possibly the welfare of the crew (if the K&R does not specifically cover crew aftercare) from a financial standpoint since they are responsible for their covered damages beyond the ransom.

To further complicate the principal-agency trust, K&R policies have confidentiality agreements that restrict the ship owner from talking about the ransom negotiations as well as the fact that the ship owner even has K&R insurance with anyone else, otherwise the insured will surrender coverage.[74] This allegedly serves the purpose of keeping pirate ransom demands reasonable, otherwise the pirates will know to aim high with an insurer responsible to pay millions of dollars for a ransom. However, this veil of secrecy may also protect the negotiator’s stalling tactics to drag out an attritional negotiation that imposes less cost on the K&R insurer than the pirates and other parties with interests in the return of the ship.

In sum, ship owners/charterers should prudently consider K&R insurance. If a ship is a high-risk target for pirate attacks,[75] the ship owner should highly consider K&R insurance whereas low-risk targets may choose to forego K&R to pursue traditional insurance packages including War Risk. There is a fog around how effective K&R negotiators are at representing the ship owner’s interests at this time so it may be best for a ship owner who is very conscientious about his crews and property to handle the negotiations himself (with his own hired consultant/negotiator).

Governmental Entities

“There is a bit of inconsistency: paying a ransom is legal under English law, yet the understandable stance of the Government is that they do not condone the payment of ransoms. Therefore, sometimes the message that goes out to other countries does complicate . . . the delivery of a ransom. The inevitable consequence is that it costs more, because we have to start again, and the crew end up spending more time stuck on the ship.” - Stephen Askins[76]

If the hostage negotiations were not complicated enough, some national governments need to stick their noses in it too. While the governments do not take an active part in the hostage negotiations,[77] there is current legislation that may criminalize ransom payments. These laws can cut the hamstrings of the shipping industry by preventing the most reliable means of recovering ships, cargo, and crew. In order to remain on the legal side of hostage negotiations, it is important to understand how these laws operate in relation to piracy ransom payments.

It should be noted that no nation has expressly criminalized ransom payments to pirates. However, no nation condones payments either. Laws have been drafted to draw a line between “legal” ransom payments and criminal funding. The United Kingdom has two areas of law that may restrict ransom payments: (1) Terrorism Act 2000; and the Proceeds of Crime Act 2002. The Terrorism Act criminalizes funds provided knowingly or with reasonable cause to believe that the funds would be used for terrorism.[78] At this time, since it has not been established that the pirate ransoms are being used to fund terrorist organizations in Somalia, ransoms have not been considered funds for terrorism. The other United Kingdom law that may criminalize ransom funds is the Proceeds of Crime Act which describes numerous offenses which involve the concealment, disguise, acquisition, transference, conversion, or criminal arrangement of monies/securities.[79] None of these offenses should apply to ransom payments because they deal with property that is already stolen or criminalized; ransom payments are legal funds that become criminal monies once the pirates take possession. Although the current United Kingdom law does not appear to ban ransoms, the legislation continues to evaluate and consider criminalizing ransom payments.[80]

The United States issued Executive Order 13,536 on April 12, 2010 for the purpose of cutting off funding to known “kingpin” pirates.[81] The order was greeted with widespread skepticism and confusion as to whether it banned all pirate ransoms or if the order only blocked ransoms that knowingly would reach the specified pirate kingpins. Executive Order 13,536 also provided no explanation whether parties would be liable if after making a payment to an ‘unknown’ pirate and later learning that the pirate was one of the annexed restricted pirate leaders. After two years, there have been no parties charged with violating the order and it has had very little effect on deterring ransom payments.[82]

In sum, the ship owner/negotiator leading ransom communications should take extra precautions to (not) know which pirate is being dealt with on the other side of the phone in the event that pirate is one of the specified leaders of a terrorist organization or on the Executive Order 13536. Providing those persons with ransom payments may open up criminal liability for the principals to the deal and can burden those persons with large fines and possible jail time. It is also important to be aware of ongoing legislation that may expressly prohibit ransom payments at some point.

Conclusion

“Compromise, n. Such an adjustment of conflicting interests as gives each adversary the satisfaction of thinking he has got what he ought not to have, and is deprived of nothing except what was justly his due.” - Ambrose Bierce[83]

Returning to the question that lead to prior discussion: ‘What is the value of a ship when that vessel is intertwined with contractual obligations to various entities that have a stake in the property and persons onboard?’ This question applies to both sides of a pirate ransom negotiation: The pirates make their demands based on what they think the value is just as the ship owner’s negotiator has to assess the value of every aspect of the ship and call upon the charterer and insurer to establish an appropriate counteroffer ransom value. Although this analysis takes away from the humanitarian concerns for crew members, it is a comprehensive commercial approach that can speed recovery of property and persons by tugging at the purse strings of parties to the ransom negotiation rather than their heart strings.

Clear and open communication is vital to the success of the hostage negotiations. Before any numbers can be tossed back at the pirates, the ship owner must have a complete understanding of what each insurer is obligated to pay. Insurers may try to delay or hasten the negotiations based on their own covers. A shipowner should not only understand his insurance coverage thoroughly, but devise an emergency response plan that will help streamline communications with the interested insurance parties (this can either supplement or be replaced by a K&R policy). The underwriter community should become more involved in standardizing efficient communications between the various insurers prior to a pirate incident then leaving the problem in the hands of the ship owners.

Every person involved in resolving the pirate problem admits that the ultimate solution is a land-based strategy that empowers an authoritative and durable Somali national government. While this strategy needs to be at the heart of long-term reform, what might be a worthwhile option to consider is an integration of Somali pirates into the shipping industries’ fold as legitimate longshoremen. The Somali government may regain authoritative power with international assistance, but will need significant initial help rebuilding an economic infrastructure that can keep up with the fast pace of globalization. Ex-pirates are clearly capable seafarers whose criminal skills can certainly be converted into legitimate assets in the international shipping industry. Without those opportunities, both the public and private sector may only stall the next wave of pirating high seas “adventures.”

[1] Brendan Walsh & Jason Odgers, Piracy and Insurance. Don’t walk the plank without a parachute, BreakBulk Magazine 41 (May/June 2011).

[2] Dipendra Rathore, Experience: I was kidnapped by Somali pirates, The Guardian, June 10, 2011, www.guardian.co.uk/lifeandstyle/2011/jun/11/kidnapped-by-somali-pirates-experience.

[3] Anti-Shipping Activity Messages Database, National Geospatial-Intelligence Agency, http://msi.nga.mil/NGAPortal/MSI.portal?_nfpb=true&_pageLabel=msi_portal_page_65 (follow Query directions; select Date Filter indicating 1/1/2005 to 4/1/2012).

[4] Clarkson Research Services Ltd., Piracy Incident Data 4, World Fleet Monitor (Jan. 2012) available at http://www.igpandi.org/Piracy/Incident+Data.

[5] Financial Action Task Force, Organized Maritime Piracy and Related Kidnapping for Ransom 9 (July 2011).

[6] One Earth Future, The Economic Cost of Maritime Piracy 9-10 (Dec. 2010).

[7] Id. at 10-12.

[8] Foreign Affairs Committee, Piracy off the coast of Somalia, Report, 2010-12, H.C. 1318, at Ev 2 (U.K.) available at http://www.publications.parliament.uk/pa/cm201012/cmselect/cmfaff/1318/1318.pdf.

[9] Lassa Oppenheim, International Law: A Treatise, § 272, 325-26 (1905)(”[A] pirate was already considered an outlaw, a ‘hostis humani generis.’ . . . Piracy is a so-called ‘international crime’; the pirate is considered the enemy of every State, and can be brought to justice anywhere.”

[10] Michael Richards, Smarter Somali pirates thwarting navies, NATO admits, AFP, Jan. 14, 2011 available at http://www.google.com/hostednews/afp/article/ALeqM5hLBIueQsXrci2kCAB4CVWocxWn2g.

[11] Jason Staziuso, EU Anti-piracy military force to be more proactive, Pilotonline.com, Apr. 3, 2012, http://hamptonroads.com/2012/04/eu-antipiracy-military-force-be-more-proactive.

[12] Lauren Ploch et. al., Congressional Research Service, Piracy off the Horn of Africa 14­­ (2011).

[13] Thomas J. Schoenbaum, Admiralty and Maritime Law 672 (4th ed. 2004)(widespread use of standard form clauses in maritime contracts).

[14] A Journey into Piracy - Meeting the Somali Pirates 39m:35s (Steen Herdel 2009), http://www.cultureunplugged.com/documentary/watch-online/filmedia/play/4770/A-Journey-into-Piracy—Meeting-the-Somali-Pirates.

[15] Ted Dagne, Congressional Research Service, Somalia: Current Conditions and Prospects for a Lasting Peace 14­­ (2011).

[16] Id. at 15.

[17] Horand Knaup, The Poor Fishermen of Somalia, Spiegel Online International, Trans. by Christopher Sultan, Dec. 4, 2008 available at http://www.spiegel.de/international/world/0,1518,594457,00.html.

[18] Kaija Hurlburt, One Earth Future, The Human Cost of Somali Piracy 25-26 (2011).

[19] United Nations Convention on the Law of the Sea, Dec. 10, 1982, Article 101, 1833 U.N.T.S. 3.

[20] Terrorism has not been officially defined at an international level but the United Nations has established a political element to terrorism: "Criminal acts intended or calculated to provoke a state of terror in the general public, a group of persons or particular persons for political purposes are in any circumstance unjustifiable, whatever the considerations of a political, philosophical, ideological, racial, ethnic, religious or any other nature that may be invoked to justify them." G.A. Res. 49/60, ¶ 3, U.N. Doc. A/RES/49/60 (Dec. 9, 1994).

[21] Somali Pirates cut ransoms to clear hijacked ships, Reuters (Mar. 13, 2011) available at http://www.reuters.com/article/2011/03/13/somalia-piracy-idUSLDE72C0EG20110313; see also Carol Huang, Somali pirates release ship after just a week, TheNational (Apr. 3, 2012) available at http://www.thenational.ae/news/uae-news/somali-pirates-release-ship-after-just-a-week.

[22] Julian Borger, Piracy and ransom payments: Risky business - safe transactions, The Guardian (Nov. 18, 2008) available at http://www.guardian.co.uk/world/2008/nov/19/piracy-somalia1.

[23] Somali piracy ‘boosts Puntland economy’, BBC News Africa (Jan. 12, 2012) available at http://www.bbc.co.uk/news/world-africa-16534293.

[24] L’Estrange v F. Graucob Ltd. [1934] 2 KB 394 (U.K.).

[25] Sheldon A. Gebb, The Demise Charter: A Conceptual and Practical Analysis, 49 Tul. L. Rev. 764 (1975).

[26] Id.; also see Ahmad Kassem, The Legal Aspects of Seaworthiness: Current Law and Development 19 (2006)(unpublished Ph.D. dissertation thesis, Swansea University) (on file with University College London Library).

[27] Marine Insurance Act, 1906, 6 Edw. 7 ch. 39, § 4 (Eng.). In over one hundred years, the Marine Insurance Act has not been altered and remains in effect as a leading body of law for maritime insurance industries.

[28] Marine adventures are always exposed to “maritime perils.” Id. at ch. 41 § 3. “Maritime perils” include “perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seisures, restraints . . .”(emphasis added). Id.

[29] See generally Mark Huber, Tanker operations: A Handbook for the Person-In-Charge (PIC) 214 ch. 9 (Cornell Maritime Press 2001).

[30] Kerr-McGee v. Ma-Ju Marine Servs., Inc., 830 F.2d 1332, 1338-39, 1343 (5th Cir. 1987) (time charterer liable only for negligence in its capacity of control over commercial activities rather than the condition of the vessel).

[31] See Marsh Global Marine Practice, Charterparty Piracy Clauses and Maritime Insurances (2009) for a quick reference of numerous insurance policies that may trigger a charterer’s liabilities if a pirate attack occurs.

[32] Baltic and International Maritime Council, BIMCO Piracy Clause for Time Charter Parties 2009, BIMCO Special Circular No. 2 (Nov. 2009).

[33] COSCO Bulk Carrier Co., Ltd. v Team-Up Owning Co., Ltd [2010] EWHC 1340 (Comm.). This United Kingdom case ruled on the issue whether a ship remains “on-hire” when captured by pirates based on the wording of an “off-hire” clause exception. It is vital to consider the particular wording of these clauses and the BIMCO Piracy Clause tends to clarify this issue by capping charterers’ liability at ninety days.

[34] Lars Gorton, The Liability for Freight, 38 Stockholm Inst. for Scandinavian Law 481, 494 (1999).

[35] Loss of hire covers damages that result as a ship being taken out of operation while at sea. Ship owners will often pay for their own insurance to cover maritime perils including piracy, but may require charterers to pay any additional premium increases that occur while voyaging. Co-assured agreements are options for charterers to be jointly insured under the ship owner’s insurance plan.

[36] See Comité Maritime International, Questionnaire-Charterer’s Right to Limit Liability (2007) for a quick reference for some major shipping nations’ laws regarding limiting liability for charterers.

[37] Foreign Affairs Committee, Piracy off the coast of Somalia, Report, 2010-12, H.C. 1318, at Ev 2 (U.K.) available at http://www.publications.parliament.uk/pa/cm201012/cmselect/cmfaff/1318/1318.pdf.

[38] International Risk Management Institute,Glossary (2012) available at http://www.irmi.com/online/insurance-glossary/terms/s/sue-and-labor-clause.aspx.

[39] See William Tetley, General Average Now and in the Future (2003) available at https://secureweb.mcgill.ca/maritimelaw/sites/mcgill.ca.maritimelaw/files/genaverage.pdf.

[40] York-Antwerp Rules, Rule A (2004).

[41] See Raymond T. C. Wong, Piracy-Does it give rise to a claim for General Average?, 87 Seaview 30 (Autumn 2009); see also Ik Wei Chong & Derek Hodgson, Piracy, Ransom, and General Average Risk (Dec. 12, 2008) available at http://www.forwarderlaw.com/library/view.php?article_id=537.

[42] Royal Boskalis Westminster NV v. Mountain [1999] QB 674 (U.K.).

[43] The Institute Time Clauses Hulls drafted by the Institute of London Underwriters and is a significant document in H&M insurance. The Hulls clause establishes war-related and ship captures are not covered excepting pirates under § 23.1. This cover may overlap with War Risk covers that expressly cover ship losses caused by piracy. Institute Time Clauses Hulls, §§ 23.1, 23.2 (1983).

[44]See Jardine Lloyd Thompson Limited, Piracy Coverage and Response 5 (Dec. 2009) for a discussion regarding whether to pursue piracy covers under War Risk or H&M insurance.

[45]See Rene L. Siemens, Joshua J. Pollack & Jessica J. Freihart, Piracy’s Impact on Insurance, 56 Risk Management Magazine (Sep. 2009); see also Jardine Lloyd Thompson Limited, Review of the Marine Hull Insurance Market (Aug. 2010).

[46] Institute Time Clauses Hulls, § 6.1.5 (1983). Note that the American Institute Hull Clause excludes piracy as a named peril so it would be necessary to purchase War Risk insurance. American Institute Hull Clauses, cl. 326 (2009).

[47] Foreign Affairs Committee, Piracy off the coast of Somalia, Report, 2010-12, H.C. 1318, at 16 (U.K.) available at http://www.publications.parliament.uk/pa/cm201012/cmselect/cmfaff/1318/1318.pdf; see also Julie Cohn, Terrorism Havens: Somalia, Council on Foreign Relations Backgrounder (June 2010) available at http://www.cfr.org/somalia/terrorism-havens-somalia/p9366#p4.

[48] See Baltic and International Maritime Council, BIMCO War Risks Clause for Voyage Chartering, BIMCO Special Circular No. 5 (Dec. 2004); see also INTERTANKO Piracy Clause - Voyage Charterparties (2008).

[49] See Stella Sakellaridou, Maritime Insurance & Piracy (Presentation), National & Kapodistrian University of Athens’ Law School (Sep. 2009).

[50] Elborne Mitchell, United Kingdom: Piracy Whose Risk is it Anyway? London Insurers Should Rethink Piracy Policies, Mondaq.com: Transport (Mar. 12, 2009).

[51] Marsh Global Marine Practice, Piracy-the Insurance Implications (2009).

[52] Id.; see also International Group of P&I Clubs, Piracy-FAQs 3-6 (Sep. 2011) available at http://www.igpandi.org/downloadables/piracy/Piracy_FAQs.pdf; see also Nick Riddle, Piracy, Maritime Security Review (Feb. 10, 2011) available at http://www.marsecreview.com/2011/02/piracy/.

[53] See Piracy pushes up insurance premiums for ship owners, The Financial Express (Mar. 12, 2012) available at http://www.financialexpress.com/news/piracy-pushes-up-insurance-premiums-for-ship-owners/761293/0; see also Maritime London, Piracy: A tax for shipping?, LondonMatters (June 29, 2009) available at http://www.maritimelondon.com/london_matters29june09.htm#1.

[54] Institute Cargo Clause (A), §6.2 (2009).

[55] American Institute Cargo Clauses, cl. 13(a) (2009).

[56] Institute Cargo Clause (A), §4.5 (2009). It is notable that under U.K. law, a claimant must establish that there is virtually no way to recover property in order for it to be considered an actual total loss. “[A]n assured is not irretrievably deprived of property if it is legally and physically possible to recover it (and even if such recovery can only be achieved by disproportionate effort and expense).” Masefield AG v Amlin Corporate Member Ltd [2010] EWHC 280 (Comm) (U.K.)

[57] Jonathan Saul & Renee Maltezou, Somali pirates capture oil tanker bound for US: Higher oil prices ahead?, The Christian Science Monitor (Feb. 9, 2011) available at http://www.csmonitor.com/World/Latest-News-Wires/2011/0209/Somali-pirates-capture-oil-tanker-bound-for-US-Higher-oil-prices-ahead.

[58] See Piracy: Concerns and Cargo Insurance, CargoCover (Mar. 2011) available at http://www.cargocover.com/news_Piracy.html.

[59] See generally Skuld, An Introduction to P&I Insurance for Mariners 6-37 (2009).

[60] Nigel Carden, Piracy and P&I Insurance, International Group of P&I Clubs, 11-14 (Presentation) (March 2010) available at http://ec.europa.eu/transport/maritime/events/doc/2010_03_03_piracy/2010_03_03_igp-i.pdf.

[61] Jon Guy, Underwriters still want P&I Piracy Involvement, reinsurance (July 20, 2011) available at http://reinsurancemagazine.com/articles/underwriters-still-want-pi-piracy-involvement; see also Pirate Focus on Crews Will Force P&I Clubs to Pay Ransoms, InterManager (Oct. 17, 2011) available at http://www.intermanager.org/2011/10/pirate-focus-on-crews-will-force-pi-clubs-to-pay-ransoms/.

[62] Jonathan Gilman, Piracy II - Shipowners’ and Charterers’ Concerns Insurance Issues, London Shipping Law Centre Maritime Business Forum 4-5 (Mar. 15, 2010) available at http://www.shippinglbc.com/content/uploads/members_documents/piracy_i.pdf.

[63] See BIMCO publishes much anticipated GUARDCON Contract, BIMCO Press Release (Mar. 28, 2012).

[64] Nikos Roussanoglou, Shipping market to remain volatile says North P&I Club, Hellenic Shipping News Worldwide (Feb. 6, 2012).

[65] Leslie Edwards & Jon Lee, Somali Piracy - Crew Fatalities, Compass-Risk Management (Oct. 2011) available at http://www.compass-rm.com/pdf/Somali%20Piracy%20Fatalities%2010%20Jun%2011.pdf.

[66] See Maritime Piracy-Humanitarian Response, Good Practice Guide for Shipping Companies and Manning Agents for the Humanitarian Support of Seafarers and their Families (Nov. 2011).

[67] Thomas Brown, Marine K&R Insurance Frequently Asked Questions, 2 Seacurus Insurance Bulletin (March 2010) available at http://www.espadaservices.com/news_pr/Seacurus_Issue_02_V5.pdf.

[68] Zack Phillips, Increase in pirate attacks draws more K&R capacity, 44 Business Insurance ( Sept. 6, 2010).

[69] Iro Theophanides, Who pays the Piracy Bill?, AllAboutShipping.co.uk (Jan. 30, 2012) available at http://www.allaboutshipping.co.uk/2012/01/30/who-pays-the-piracy-bill/.

[70] See Yiannis Magdalinos, Piracy at Sea - reflections from a Charterer, The Charterer 10-12 (January 2012) available at http://exclusivelyforcharterers.com/docs/MIC_Charter_Jan12_web.pdf; see also Sitanshu Swain, Kidnap & ransom insurance new buzzword among companies, The Financial Express (Sept. 30, 2011) available at www.financialexpress.com/news/Kidnap—ransom-insurance-new-buzzword-among-cos/853690/.

[71] See Skuld, Kidnap & Ransom Insurance (informational sheet) (Feb. 2010); see also The Cavell Group, Private Intelligence and Crisis Management (informational website) (Feb. 17, 2012); see also Travellers & ASI Global, Piracy for ransom: the full story and the hidden costs (Spring/Summer 2009).

[72] For a unique perspective arguing that the maritime insurance industries are using pirate attacks as a pretext to significantly increase premiums and that K&R insurers operate to instill fear in the maritime market, see Mikhail Voitenko, The Economics of Piracy, 62 Society (June 2011) available at http://en.novayagazeta.ru/society/46872.html; see also Manu, Who is really getting rich from Somali piracy?, Board of Innovation (Aug. 29, 2011) available at http://www.boardofinnovation.com/2011/08/29/whos-really-getting-rich-from-somali-piracy-business-model/.

[73] Note that with the sudden increase in K&R policies, ships have been held captive for longer periods of time. Pirate hostages held twice as long as in 2009, Associated Press (Nov. 18, 2010) available at http://www.foxnews.com/world/2010/11/18/pirate-hostages-held-twice-long/. While mainstream media sources indicate that it’s the pirates who are holding out on these negotiations, the pirates have issued statements wanting to lower ransom demands for faster ship turnovers [FN 21].

[74] BWD’s Assurances, Kidnap & Ransom Insurance: The Best Kept Secret in the Business (11th ed., 2008).

[75] See generally Best Management Practices for Protection against Somalia Based Piracy, Version 4 (August 2011) for an assessment of high-risk targets and how to significantly reduce chances of capture by pirates.

[76] Foreign Affairs Committee, Piracy off the coast of Somalia, Report, 2010-12, H.C. 1318, at Ev 8 (U.K.) available at http://www.publications.parliament.uk/pa/cm201012/cmselect/cmfaff/1318/1318.pdf.

[77] Some seafarers have called upon their governments to take an active role in negotiations to expedite the return of citizen mariners. Kerala: Long wait for justice for abducted sailors’ families, IBN Live (Mar. 26, 2012) available at http://ibnlive.in.com/news/kerala-long-wait-for-justice-for-sailors-families/242763-62-126.html; see also SaveOurSeafarers Campaign available at http://www.saveourseafarers.com/.

[78] Terrorism Act 2000 §§ 15-18 (U.K.).

[79] Proceeds of Crime Act 2002 cl. 29, pt 7 (U.K.).

[80] International Shipping Federation, ICS Responds to UK-Hosted Piracy Conference (Feb. 27, 2012) available at http://www.seafarersrights.org/2012/03/ics-responds-to-uk-hosted-piracy-conference/.

[81] See Bruce G. Paulsen & Ellen Lafferty, Hijacked: The Unlikely Interface Between Somali Piracy and the U.S. Regulatory Regime, 85 Tul. L. Rev. 1241 (2011).

[82] See David Clarke and Mohamed Ahmed, Exclusive: Somali pirate ransoms skirt U.S. directives, Reuters (Aug. 8, 2011); see also Davide de Bernardin, Pirates put a value on seafarers lives, but what about the governments?, OceanusLive.org (Sept. 15, 2011).

[83] Ambrose Bierce & Roy Morris Jr., The Devil’s Dictionary 28 (1999).

Biography


F. Peter Phillips is a commercial arbitrator and mediator with substantial experience providing consultation on the management of business disputes to companies around the globe.

A cum laude graduate of Dartmouth College and a magna cum laude graduate of New York Law School, Mr. Phillips served for nearly ten years as Senior Vice President of the International Institute for Conflict Prevention and Resolution (CPR Institute). During that time, he earned a reputation as an author, teacher, industry liaison, and systems designer for the avoidance, management and resolution of complex and sophisticated business conflicts.

In 2008, Mr. Phillips formed Business Conflict Management LLC (BCM) in order to offer his direct services as a neutral and a consultant. Through BCM, Mr. Phillips also continues his career as a highly sought-after public speaker, facilitator and instructor.



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