Commercial Contract Law as a Counter-Piracy Measure

Kyle Best

1,288 days. This is the unfathomable amount of time that 11 crewmembers of the MV Albedo were held hostage since Somali pirates hijacked their vessel in 2010. News of their release surfaced earlier this month, and is accompanied by footage of the crew going on an African safari, an excursion that they had initially planned in 2010 before they were taken hostage. As they traverse the planes of Africa, the expressions on their faces are ones of excitement and elation, expressions that stand in stark contrast to the enduring pain that these individuals suffered for almost four years prior.

MV Albedo Crew, following release. source: http://www.marsecreview.com/2014/06/albedo-crew-and-families-aftercare/

Crew of the MV Albedo, following their release. Source:http://www.marsecreview.com/2014/06/albedo-crew-and-families-aftercare/

The plight of these seafarers provides a human face to the problems that arise from maritime piracy, however, this human element is not always sufficient to elicit a timely response. This was true for the crewmembers of the MV Albedo. The owner of the ship, believed to be uninsured, abandoned his efforts to pay for the release of the crew early in the negotiations (link). While this type of abandonment is not uncommon in hostage situations, many ship owners nonetheless prioritize crew safety. However, even under the guardianship of such a responsible owner, ships are often chartered by larger corporate entities with a financial interest in sending that ship through an area at risk of piracy. Thus, seafarers are left in a particularly vulnerable state, and the question remains as to how they can be protected from piracy. One possible solution may reside in an unexpected area: commercial contract law.

Consider for a moment the CONWARTIME 1993 clause, known within the industry as a “piracy clause”. This is a standard contractual clause drafted by the Baltic and International Maritime Council (BIMCO), and can be applied when a vessel is ordered to travel through an area that threatens the safety of ship and crew. In short, this clause creates a legitimate means by which an owner of a ship can protect his or her crew when commanded to travel through an area at risk of piracy. Indeed, the clause was recently invoked to protect seafarers in the case of Pacific Basin IHX Ltd v Bulkhandling Handymax AS, heard at the Commercial Court of the High Court of Justice in England.

In this case, Pacific Basin IHX Ltd. chartered a vessel from Bulkhandling Handyman AS, and ordered them to sail through the Gulf of Aden, which was the fastest route to its destination. However, Bulkhandling did not wish to sail this route due to the increased reports of piracy in the area, notably one in which a vessel had been hijacked and its crew taken hostage the previous month. Faced with this legitimate concern, the owner of the Bulkhandling ship was forced to choose between putting workers at risk of being attacked, and going against the orders of its charterer. Bulkhandling chose to protect its workers, and sailed instead through the Cape of Good Hope, incurring an extra cost of $462,221.40 USD. Pacific’s claim in court was that Bulkhandling should incur this cost because it acted against Pacific’s orders. These costs are significant and, under such financial pressure, it is conceivable that Bulkhandling might risk traveling through an area of noted piracy. However, Bulkhandling countered Pacific’s claim by invoking the CONWARTIME 1993 clause, demonstrating how commercial contract law stands to protect seafarers.

The Court’s ruling on this matter provides significant guidance as to when an owner can invoke this clause, and reject his or her charterers’ order to travel through an area affected by piracy.

1)    The owner must first judge that there is a real likelihood that the Vessel will be exposed to acts of piracy.

2)    Secondly, the owner must judge that there is a real likelihood the acts of piracy will be “dangerous” to the Vessel, her cargo, crew or other persons on board the Vessel

3)    The owner’s judgment must be “objectively reasonable”, and the owner is required to make all necessary enquiries before deciding to avoid the risk.

While these requirements are abstract and somewhat meaningless in isolation, a closer look at how the Court interprets the term “real likelihood” provides some clarity. A “real likelihood” risk of piracy would include something that has less than 50% chance of occurring, however the chances of it occurring must be greater than a “bare possibility”. This standard is not overly stringent, and in practice it provides owners with considerably greater leeway to invoke piracy clauses than the comparably rigorous standard of “more likely than not” (which requires greater than 50% chance of occurring). Beyond this, it is crucial, when invoking this clause, to prove that the area in question is in fact “dangerous”, a point that has been noted by BIMCO in its 2013 revisions of the piracy clauses.

Most significantly, this case confirms the possibility to invoke piracy clauses as a means to protect seafarers at risk of an attack. Indeed, a recent case heard by the same Court confirmed an owner’s right to invoke a piracy clause, and further removed a debilitating requirement that precluded certain claims. Despite this progression, the legal community has noted that there is likely to be further judicial development on the subject.[1][2] As the courts move forward on this issue, concerns relevant to the plight of the seafarer include:

  • Piracy clauses require owners to make a decision to ignore a charterers’ order, a decision that courts must deem “objectively reasonable.” However, Oceans Beyond Piracy has noted that there are continuing challenges in both reporting and information sharing with regards to piracy. Such an environment obfuscates both the owner’s ability to make this decision, and his or her ability to prove its objective reasonableness in court.
  • Piracy clauses serve as a strictly preventative tool. Providing owners with this discretion may reduce the possibility of an attack, but it does not eliminate the risk.
  • Owners, not seafarers, exercise the discretion granted by piracy clauses. In an industry where the cost of transportation often amounts to significant sums, financial pressures exerted by charterers stand to outweigh some owners’ concern for the safety of their crews.

Footnotes:


[1] http://www.steamshipmutual.com/publications/Articles/conwartime-1993.htm

[2] http://www.nortonrosefulbright.com/knowledge/publications/59912/the-threat-of-piracy-deviation-and-conwartime-1993-war-risk-ruling-to-be-reassessed

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