Risks covered - Rule 49: Confiscation of the Ship

1. The Association may, in its discretion, authorise payment, in whole or in part, of a Member's claim for loss of the Ship following confiscation of the Ship by any legally empowered court, tribunal or authority resulting from smuggling or the infringement of any customs laws or customs regulations, but only provided that:

   1. the amount recoverable from the Association shall under no circumstances exceed the market value of the Ship without commitment at the date of the confiscation;

   2. the Member shall have satisfied the Association that all such steps as appear to the Association to be reasonable to avoid the giving rise to the confiscation was taken;

   3. no such claim shall be considered by the Association until such time as the Member has been permanently deprived of its interest in the Ship;

   4. the Association shall be under no obligation to give reasons for its decision.

In exceptional circumstances, a Member may encounter a situation where the authorities of a country decide to enforce a claim against the Member for smuggling or infringement of customs laws or customs regulations by taking the draconian measure of confiscating the Ship. In such circumstances, Rule 49 allows the Association to exercise its discretion to authorise payment of a Member’s claim for the loss of his Ship.

(A) The Association may, in its discretion, authorise payment, in whole or in part… (Rule 49) The Member is not entitled as of right to receive compensation for loss of the Ship by confiscation. The loss of a Ship is an excluded loss pursuant to Rule 63.1.a ‘except to the extent that it forms part of a claim recoverable under Rule 49 (Confiscation of the Ship).’ Compensation is payable under Rule 49 only if and when the Association, which in this context means the Board of Directors,² exercises its discretion to cover such loss following the application of the Member. In exercising such discretion, the Board will have regard to the factors outlined in Rule 49. 

It is unusual for a Member to make a claim on the Association for loss of a Ship since such loss is usually insured under the marine or war Hull Policies. If the loss is recoverable under the Hull Policies, cover is not available from the Association.³ However, the confiscation of a Ship as a result of smuggling or the infringement of customs laws or customs regulations may not be an insured peril under standard marine Hull Policy terms and it is unlikely that smuggling or the infringement of such laws or regulations will be considered to be a war peril for the purpose of a war Hull Policy. Therefore, if the loss of the Ship as a result of confiscation is uninsured under such policies, the Member may request the Association to make a discretionary payment under Rule 49. 

The Association has the discretion whether to compensate the Member in full or in part in such circumstances. When assessing the merits of the Member’s application, the Association will have regard to all the facts of the case, as well as the provisions of paragraphs a, b, c and d of Rule 49. The Association’s decision may also be influenced by whether the Member had knowledge of the circumstances of the smuggling or that caused the infringement of the relevant customs laws or customs regulations, and by circumstances such as those that are outlined in Rule 74, i.e. has the Ship been employed on or in an unlawful, unsafe or unduly hazardous trade or voyage. In this regard, the Member is obliged to provide the Association with all relevant information and documentation and to render all assistance that may be required by the Association for the investigation of the claim.⁴ 

(B) …confiscation...by any legally empowered court, tribunal or authority… (Rule 49) ‘Confiscation’ occurs when private property is appropriated by, or forfeited to, the government of a country.

Discretionary cover is available under Rule 49 only if the Ship has been confiscated by a legally empowered court, tribunal or other authority. In other words, the act must be one that is both official and legitimate under the laws of the country and not the unlawful act of persons who merely purport to have authority to confiscate the Ship, such as a group of rebels that may wish to acquire the Ship for other reasons.

(C) …resulting from smuggling or the infringement of any customs laws or customs regulations… (Rule 49) Cover is available under Rule 49 only if the confiscation of the Ship is the result of smuggling or the infringement of customs laws or customs regulations.

The term ‘smuggling’ refers to the offence of importing prohibited articles, or of defrauding the revenue by the introduction of articles into consumption, without having paid the duties that are chargeable upon them. The term shall be interpreted in the same way here as under Rule 47, cf. the Guidance to Rule 47 under item H.

Past experience has shown that vessels may be confiscated due to smuggling which does not fall within the category “infringement of any custom laws or customs regulations”, and in such situations discretionary cover pursuant to Rule 49 may be available. However, discretionary cover pursuant to Rule 49 in general, and in respect of confiscation resulting from smuggling in particular, will only be extended in exceptional circumstances and where the Member has taken all reasonable measures to prevent the incident. The application of the Rule is not intended to work as a disincentive to Members from doing their utmost to avoid the events which may give rise to the confiscation.

The term ‘customs laws or customs regulation’ means any law or regulation that may be enforced by the customs authorities in the country in question. If the Ship is confiscated for any reasons other than smuggling or the infringement of customs laws or customs regulations, e.g., for the non-payment of port dues or sheriff’s expenses (which constitute grounds for arrest in many jurisdictions), the Association is not entitled to exercise its discretion to provide cover for the loss of the Ship under Rule 49.

However, it is not a pre-requisite for the provision of cover under Rule 49 that the Ship that has been confiscated is the one involved with the smuggling or the infringement of the customs laws or customs regulations resulting in the confiscation. The Ship that has been confiscated may have had no such involvement, but the relevant authorities may, nevertheless, confiscate it if it is deemed by them to be the property of the party who is responsible for the infringement in question. However, see (F) below.

(D) …the amount recoverable from the Association shall under no circumstances exceed the market value of the Ship without commitment at the date of the confiscation… (Rule 49 proviso a) Rule 49 permits the Association, in its discretion, to reimburse the Member for the loss of his Ship. Consequently, the Association is not entitled to pay more than the value of the Ship. The Ship’s value is assessed on the date that the confiscation occurs, and the relevant value is the Ship’s market price⁵ assessed by reference to a ship of the same specifications, age and condition, but without taking into account its current and future employment. 

(E) …the Member…took all such steps as appear to the Association to be reasonable to avoid the event giving rise to the confiscation… (Rule 49 proviso b) The Member is expected to be familiar with the customs laws and customs regulations and with the laws prohibiting or restricting the introduction or importation of goods (smuggling), that are usually enforced in most country(ies) to which the Ship will normally trade. However, the Member cannot be expected to be familiar at all times with the individual, and perhaps unusual, requirements of all countries. The laws and regulations of some countries may permit confiscation where prohibited or undeclared goods are found to be on board, regardless of whether the shipowner was aware of, or privy to, the offence. Whilst Rule 49 is designed to offer protection to the Member, at the discretion of the Association, in such circumstances, discretionary cover is not available where the Association is of the opinion that the Member did not take all reasonable steps to avoid the smuggling or the infringement of the relevant customs laws or customs regulation.

When considering the exercise of its discretion to authorise payment, the Association will wish to be satisfied that the Member has taken all reasonable steps to prevent the infringement that has resulted in the confiscation. Such steps include but may not be limited to:

a the establishment and maintenance of an adequate system of supervision for the preparation of Bills of Lading, inward and outward cargo manifests and other shipping documents;

b giving the master and Crew proper instruction and training as to how to prevent illicit goods, especially drugs, being brought on board;

c putting out conspicuous notices warning the Crew etc., of the anti-smuggling or anti-drug laws that can be expected in forthcoming ports of call; and

d the maintenance of an adequate number of guards on the Ship whilst in port. 

(F) …no such claim shall be considered by the Association until such time as the Member has been permanently deprived of his interest in the Ship… (Rule 49 proviso c) The initial seizure of the Ship by the authorities is not considered to be ‘confiscation’ for the purposes of Rule 49. Such seizure may be temporary at that stage, and the Member may have the right to appeal against the decision or otherwise to have the seizure lifted. Discretion can be exercised under Rule 49 only when the confiscation has become final and the Member is ‘permanently deprived of his interest in the Ship’. This is considered to have occurred when the Ship has become the property of the confiscating authority and the Member has no further right of appeal to avoid or revoke the confiscation. Therefore, it would be premature for the Member to make any application for compensation for the loss of the Ship pursuant to Rule 49 before the confiscation is final and no longer subject to appeal. Consequently, the Association will not consider an application for compensation before that time. Furthermore, the Association will not provide bail or other security for the release of the Ship before making a final decision in relation to the confiscation.⁶ 

(G) …the Association shall be under no obligation to give reasons for its decision. (Rule 49 proviso d) The decision of the Board of Directors is final and the Board need not give any reasons for its decision. By agreeing to the Association’s Statutes and Rules, Members have agreed and confirmed that claims made pursuant to Rule 49 are to be decided by the Board of Directors of the Association as the sole and highest decision-making authority of the Association.