Somali pirates: how far away from us?

On 19 October 2009 the Chinese bulk carrier De Xin Hai, with 25 crew on board, was hijacked by Somali pirates in the Indian Ocean. This once again drew the world’s attention to the danger of pirate attacks. According to statistics from the International Maritime Bureau, the number of pirate attacks worldwide in the first half of 2009 reached a record high of 240, more than double the number in the same period in 2008. Pirate activities are particularly rampant off Somalia. Since the beginning of 2009, there have been more than 150 pirate attacks in the waters of Somalia and the Gulf of Aden, involving more than 30 hijacked vessels, more than 500 crew members being taken hostage and dozens of casualties. Pirate attacks have become a serious threat to international maritime safety.

A poor domestic political and economic environment and constant fighting since the outbreak of civil war in the early 1990s have all contributed to the rise of piracy in Somalia. Merchant ships traveling to and from the Suez Canal must go through Somali waters. This vital geographical location provides a large “stage” for pirates. Somali pirates have extended their activities to the south of the Red Sea in the west, Oman in the north, Madagascar in the south, and the vast waters more than 600 nautical miles away from the Somali coastline in the east.

Aiming for potentially handsome ransoms, Somali pirates do not usually harm crew members or damage vessels or cargoes. As Somali pirates have not yet been found to be backed by any political organizations or to have collaborated with any terrorist groups, it is generally considered not to be illegal for a ship owner to pay a ransom to them in order to have a ship (including the crew and cargo) released. The owner has right to claim insurance under relevant insurance contracts (hull insurance, piracy under war risks insurance or other special coverage such as kidnap and ransom insurance).

A number of Chinese-registered vessels have been hijacked by Somali pirates since the end of 2008. In order to safeguard Chinese merchant ships, the Chinese government has sent warships to the waters of Somalia and the Gulf of Aden. From 6 January 2009 all Chinese-registered ships entering those waters can ask for an escort from the Ministry of Transport through the China Shipowners’ Association.

General average

In the event of a pirate hijack, can a ship owner ask the shippers and time charterers to share any ransom he may be forced to pay? This involves a unique concept in maritime law – general average. General average refers to the extraordinary sacrifice or expenditure intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the ship, goods or other property involved in a common maritime adventure (Article 193 of the PRC Maritime Code). Whether a ransom paid by a shipowner in order to have a ship released is an “extraordinary expense” under the law of general average is not clear in Chinese law or judicial practice.

Charterparties

According to the International Maritime Organization, about 22,000 vessels travel through the Gulf of Aden each year, carrying 8% by volume of global trade. Whether or not to travel through the Gulf of Aden has become a perpetual headache for charterparties.

A typical scenario is that a charterer loads cargo in China, then instructs the ship owner to travel through the Suez Canal to a port in Europe, but for security reasons the ship owner refuses to travel through the Suez Canal. In case of a time charter, the ship owner will usually provide two options to the charterer: first, the ship may re-route via the Cape of Good Hope in South Africa. This will extend the journey time by around two to three weeks and thus lead to a significant increase in fuel and other costs. The second option is for the ship to risk travelling through the Gulf of Aden, but the ship owner may request the charterer to bear the additional insurance premiums (mainly for kidnap and ransom risks), crew bonuses and the additional cost of any anti-piracy measures.

Whether a ship owner has the right to reject the instructions of a charterer depends on the contractual terms agreed. For example, a common time charter contract usually contains a war risks clause. Currently, the most commonly used is Conwartime 2004, recommended by BIMCO (the Baltic and International Maritime Council). “War risks” in this clause covers “acts of piracy”. Under this clause, if a ship owner or the master reasonably determines that there may be a risk of war in a region (which includes a pirate attack), the ship owner shall have the right to refuse to travel through that region. If the ship owner chooses to travel through the region, it can take out relevant (or additional) insurance, and the costs incurred shall be borne by the charterer.

However, whether the BIMCO “war risks” clauses can offer protection depends on many factors, such as whether the so-called “reasonable judgment” of a ship owner or master is reliable (whether the judgment is reasonable to a large extent is a matter of fact related to the condition of the vessels involved, including their size, speed, freeboard height and anti-piracy facilities); pirate activities during the relevant period; and whether the vessel is escorted by warships. In addition, if the risk of pirate attacks is known when a contract is made, whether a ship owner can be regarded to have taken the risk on a voluntary basis without having to pursue this clause also remains an unresolved issue. Whether the charterer is still obliged to continue to pay the hire fees during the time the vessel is hijacked by pirates is also prone to controversy.

In order to clarify the legal relationship between the parties to a time charter and minimize the incidence of disputes, BIMCO introduced a detailed “Piracy Clause for Time Charter Parties” on 9 March 2009. But this clause arguably offers one-sided protection for the interests of ship owners, which is obviously to the disadvantage of charterers.

Conclusion

Despite the international community’s mounting efforts to combat piracy in Somalia, in the foreseeable future it is difficult to see a substantially reduced risk of pirate attacks in Somalia and the Gulf of Aden. International shipping will continue to be beset with this problem; and disputes between ship owners, charterers, cargo owners and insurers will continue. The best way to avoid or minimize disputes may be to devise detailed and specific terms in the contract in connection with piracy-related issues, such as the trading limits, risks and expenses involved.

Weidong Chen is a partner of LC & Co. Rui Pan is a lawyer at LC & Co.