Are shipowners entitled to seek piracy ransom payment from cargo owners?

In October 2010, the 2005-built, LR1 tanker Polar was hijacked by pirates. The vessel was released following a ransom paid by the shipowner, Herculito Maritime Limited (Herculito). Herculito then brought a claim in General Average (GA), to recover the expenditure incurred.

In defence of the GA claim, Gunvor argued that Herculito’s only remedy was to recover under their Kidnap and Ransom and War Risks insurance policies, the terms of which were incorporated into the Bills of Lading (Bills). Pursuant to the charterparty, the premium for these policies was payable by the charterers.

In the arbitration, the Tribunal was asked to rule on two preliminary issues:

Were the War Risks provisions in the charterparty incorporated into the Bills? If so, do these provisions form a complete “code” whereby Herculito had agreed to look only to their War Risks insurers, and not cargo owners Gunvor, as holders of the Bills, to recover the ransom? The Tribunal answered “yes” to both questions. The owners appealed to the English High Court.

Sir Nigel Teare, presiding in the High Court, agreed with the Tribunal’s answer to the first question but took a different view regarding the second question. On this second point, the Court held that the “code” included an agreement by Herculito not to seek contribution for piracy losses, but only as against its charterers. The Court agreed with the Tribunal that Herculito and its charterers had agreed for the charterers to pay the premium and, in return, Herculito would look to its insurers and not the charterers for losses covered by the insurance. Indeed, this was the benefit received by the charterers for paying this additional premium.

“Parties should be mindful to word relevant provisions carefully”

The Court held that there was no such code or agreement as between Herculito and cargo owners Gunvor and disagreed with the Tribunal’s findings. Crucially, Sir Teare held that Gunvor had not agreed to pay for the premium. In the absence of that agreement, there were no words in the Bills which established an insurance “code” or said that Herculito had agreed to look only to its insurers and not claim against Gunvor for its contribution in GA. The Court therefore rejected Gunvor’s defence.

BDM Law comment

Although this judgment relates to piracy, it has wider application to many involved in the shipping, insurance and trade sectors. In particular, this decision is relevant to any agreement by charterers to pay insurance premiums for any types of losses and how this affects the liabilities of a bill of lading holder in respect of losses falling within the relevant insurance policy. In light of this decision, and as always, parties should be mindful to word relevant provisions carefully to reflect the agreed risk allocation between the parties.

The decision is being appealed.