February 6, 2009 5:12 PM
Seward & Kissel Lawyers Help Negotiate Deal with Somali Pirates
Posted by Brian Baxter
It was the day after Thanksgiving and James Christodoulou found himself in an impossible situation.
The CEO of Stamford, Conn.-based Industrial Shipping Enterprises (ISE) had just received word that a band of Somali pirates had boarded and hijacked one of his tankers--the Liberian-flagged MV Biscaglia--in the Gulf of Aden.
With a 28-man crew and a load of palm oil, the Biscaglia had left Indonesia several weeks earlier destined for Spain. Now it had a new destination: the coastal waters near the Somali pirate town of Eyl, which sits in the northeast corner of a country unified in name only.
Christodoulou immediately turned to his company's longtime outside counsel at Seward & Kissel for assistance. The first partner to get the call: Lawrence Rutkowski (right), the head of the firm's maritime and transportation finance group, who serves as a self-described "consigliere" and outside general counsel to ISE.
"I realized pretty quickly that this matter would be different from the normal ones that I advised on," Rutkowski says.
The two men put their heads together to try and figure out ways to resolve the situation. Rutkowski brought in Seward & Kissel litigation partner Bruce Paulsen to handle insurance issues and communicate with stakeholders of the Biscaglia's cargo and their underwriters. In the end, the entire drama played out without either lawyer having to venture too far from home.
"The most exotic place I had to put foot down on this case was a Sheraton in Weehawken, N.J.," Rutkowski says. While it wasn't exactly the headquarters of the Somali gang's U.S. operations, it was where Christodoulou assembled a crisis management team to advise the company on its options. (The Wall Street Journal profiled Christodoulou's efforts to rescue his crew and save his ship in a January 31 story.)
While three security guards hired to protect the Biscaglia during its voyage through the pirate-plagued Gulf of Aden had jumped overboard during the initial attack (they were rescued by an international naval coalition patrolling the area), there was the ship's cargo and the lives of 28 other people to consider.
Rutkowski says counselors were needed to conduct communications with the families of the remaining Biscaglia crew--25 Indians and three Bangladeshis--and their respective consulates. An individual with prior experience in kidnappings and hijackings was also hired, as was a media relations company to ensure that details of the negotiations didn't leak to the press.
The group created the nom-de-guerre of "Gus" to refer to Christodoulou during the process, Rutkowski says. It was just one part of the high-stakes standoff that would unfold over the next two months, with each member of the crisis team fulfilling his or her own specific role.
Rutkowski took the lead on coordinating discussions with ISE's lenders, who were understandably concerned given that the small company had only two profit-generating assets: the Biscaglia and a sister ship the Daffin. And the Biscaglia wasn't generating any profit while under the control of Somali pirates.
Paulsen (left) was tasked with dealing with those that had an economic interest in delivering the palm oil cargo to Spain. "Their cargo was hijacked along with the crew and the vessel," Paulsen says. "And there were also numerous regulatory issues that had to be considered with respect to making a payment to pirates."
The Foreign Corrupt Practices Act and U.S. Treasury Department's Office of Foreign Assets Control loomed particularly large in Paulsen's mind. If ISE were to pay the Somalis a ransom, it would have to be in cash, come from outside Somalia, and presumably be carried over international borders.
"You can imagine the possibility of red tape in connection with all of that," Paulsen says. "And we were in a situation where we needed to move quite quickly."
Unlike other ships hijacked by Somali pirates, Rutkowski says, the Biscaglia was the first one owned by an American shipping company. Rutkowski says that Seward & Kissel itself thus became the first U.S. firm to advise on a hostage negotiation with Somali pirates. (The Wall Street Journal has reported that an increase in pirate attacks has kept lawyers at British firms like Stephenson Harwood and Holman Fenwick Willan busy.)
A phone on the ship allowed the lead Somali negotiators--known only as Abbas and Hussein--to contact Christodoulou directly. Rutkowski says that using force to retake the Biscaglia was quickly ruled out because of the likelihood that it would result in the deaths of crew members. Instead it was decided that a ransom would be negotiated.
"It's fairly well-known by now that this has become a business for Somali pirates," Rutkowski says. "And part of their code is that 'thou shall not harm thy captives.' It's both religious-based and part of the realization that if they do, then the full weight of somebody's military is going to come down on them."
Paulsen says that it was also important to make sure that any damage to the vessel was relatively minor--unlikely in the event of a pitched battle on the Biscaglia's deck.
"Unless you're a criminal lawyer representing death row inmates, which we're not, we never really deal with life-and-death issues in litigation or negotiation," Paulsen says. "But here, despite the fact that there was a track record of no kidnap victims of Somali pirates being harmed, the threat was always there."
Rutkowski says negotiations with Abbas and Hussein did get contentious at one point after a naval patrol ship came too close to the Biscaglia for the pirates' liking. The Somalis quickly rang "Gus" to determine whether this was a part of ISE's negotiating strategy.
It wasn't. Christodoulou, Rutkowski, Paulsen, and the rest of the team assured the Somalis that they had no control over international naval operations. Paulsen says the Somalis were adamant about keeping military forces on the sidelines. One of the final conditions for the release of the Biscaglia was that the plane arriving with the ransom not have military personnel aboard.
"One of the more interesting things I've done in my career as a lawyer was sit in my living room reviewing a contract for the delivery of a ransom," Paulsen says. "It was actually a very straightforward contract, but it was the subject matter that was just jaw-dropping."
Paulsen says ISE contracted with a local company to arrange the airdrop by a small plane over the Biscaglia. The cash was placed in a tube with a parachute on it and dropped into the Indian Ocean, which Paulsen says the Somalis picked up in seconds using the skiffs they had first used to hijack the Biscaglia nearly two months earlier.
It's all part of the natural rhythm of Somali hijackings, says Paulsen, noting that the average ship seizure lasts between six to eight weeks. As the ship begins to run out of certain things--like fuel--pressure ratchets up on the pirates to reach a deal. But the ship's owner also is under pressure to provide new supplies of fresh water necessary for the crew and to operate machinery that heats the cargo.
After the Biscaglia's release on January 24, Paulsen says the ship limped to Oman, trying to conserve scant fuel. (The Biscaglia's crew, who were unharmed, have since returned home to their families; the ship itself is now in the port of Fujairah in the United Arab Emirates undergoing some slight repairs.)
Rutkowski and Paulsen won't disclose how much Christodoulou paid in ransom to secure the release of the Biscaglia--The Wall Street Journal reported a figure north of $1 million, paid in $100 bills--nor will they say if ISE is covered by insurance. They have a good reason.
"If you search for information about K&R insurance--kidnap and ransom coverage--you'll see that it's highly confidential because kidnappers of all sorts would obviously change their tactics," Paulsen says. "It's also an indemnity policy, so ransom has to be paid before there is any coverage."
Paulsen does say that the increase in pirate attacks along the Horn of Africa has led to a commensurate increase in new K&R policies being offered by brokerage firms in London and New York. But he adds that the policies themselves are not unique: international companies in other industries have seen their workers targeted for kidnapping all over the world.
At the same time, Rutkowski says, it's important to note that not every ship that passes through the Gulf of Aden is hijacked. But a prudent ship owner must consider the risks, he says, especially the financial ones.
"Time is money--each additional day a vessel operates costs several more thousand dollars--and ship owners are in a difficult position," says Rutkowski, adding that instructing a vessel to sail around the Cape of Good Hope to avoid Somali waters does not make good business sense.
As a result, more governments are getting involved in anti-piracy efforts. Japan announced last week that it would send warships to participate in international convoys and protect not only its own ships, but those carrying Japanese cargo. And a Ukrainian freighter carrying military equipment was finally released on February 5 after four months of negotiations with Somali pirates.
Rutkowski jokes that he won't be touting a piracy practice at Seward & Kissel anytime soon, but says that his maritime clients now know that if an issue arises, the firm is more than equipped to help handle it. He credits the collegiality within the maritime business for a willingness to share experiences on how best to deal with such a difficult situation.
For now though, both lawyers are happy to be done with the high seas buccaneering.
Says Paulsen: "It's been a pleasant return to normalcy."