THE SHIP THAT KEEPS ON GIVEN: LEGAL IMPLICATIONS OF THE SUEZ CANAL DEBACLE
On 23 March 2021, the container ship Ever Given ran aground in the Suez Canal, Egypt while en route to Rotterdam in the Netherlands, setting in motion a maritime, commercial and legal debacle that is set to have international consequences for years to come.
Background
The vessel, some 400m in length and weighing 200,000 tonnes, was carrying around 18,300 containers on board. The Ever Given is owned by a Panamanian subsidiary of Shoei Kisen Kaisha of Japan and operated by Taiwanese transport company, Evergreen Marine.
The blockage caused the transit of ships through the Canal from the Mediterranean Sea in the north, and the Red Sea in the south, to back up, delaying the passage of more than 400 ships. As a result, some of the major container lines began to divert ships round the Cape of Good Hope and warned that supply chain disruption could take months to unravel.
Specialist rescue teams and salvage operators, Smit Salvage, took six days to free the Ever Given. Since it was finally dislodged on March 29, 2021 it remains in a mid-way point in the Canal known as the Great Bitter Lakes. With only modest damage to the vessel, inspections and patching were undertaken there. Vessel surveys were completed by the American Bureau of Shipping on 4 April 2021 and a certificate of fitness was issued to allow the vessel to move from the Great Bitter Lake to Port Said in order to undergo re-inspection before completing her voyage to Rotterdam.
However, the interests of various stakeholders, such as the Suez Canal Authority (‘SCA‘), vessel and cargo owners, salvors and other users of the Canal, has given rise to a complex matrix of legal issues. Despite negotiations with stakeholders, the vessel was arrested by the SCA on 13 April 2021 and the vessel currently remains under arrest in the Great Bitter Lake within Egyptian jurisdiction.
The role and interests of the Suez Canal Authority
The Suez Canal is an area of compulsory pilotage, meaning that a local master mariner authorised to act as a marine pilot takes over the control of the vessel throughout the passage (Suez Canal Authority – SCA Rules of Navigation Section II Article 11 A). There were two marine pilots on board at the time of the incident. It was first thought that the cause of the grounding was due to unpredictably high gusts of wind, but the SCA has told reporters it may not be the only reason for grounding and investigations are continuing in relation to the cause of the incident. Vessel log books, the voyage’s data recorder, crew statements and contemporaneous on board communications will form vital evidence in the investigation and subsequent legal actions.
Vessel owners pay a fee to access the Canal and transit is open to all vessels subject to compliance with the conditions stated in the SCA Rules of Authority (‘SCA Rules‘) which include observing the requirement to have a pilot on board. Generally, marine pilots are immune in domestic legislation from any responsibility arising out of the act of their navigation. The SCA Rules specifically provide that ‘Masters are held solely responsible for all damages or accidents of whatever kind resulting from the navigation or handling of their vessels directly or indirectly by day or night’ (Section II Article 11A).
The SCA Rules require that during the transit, the Master or qualified representative should be present at all times on the bridge and must keep the pilot informed of
any individual peculiarities in the handling of the vessel so that the pilot might be in a position to give better advice to control the navigation and movement of the
vessel. The pilot puts at the Master’s disposal their experience and practical knowledge of the Canal, but the Rules expressly state that ‘he cannot know the defects or difficulties of maneuverability for every vessel, the responsibility falls completely upon the Master’ (Section II Article D (2)). The SCA also reserves the right to order the towage of vessels considered dangerous or troublesome to navigation in the Canal.
The SCA is pursuing a $US916 million compensation claim against the vessel owner and has arrested the vessel as a means of securing the payment of damages. The UK Club, the protection and indemnity insurer for the Ever Given said the SCA’s claim includes US$392 million as a ‘salvage bonus’ and US$392 million for loss of reputation. The SCA Chairman, Osama Rabie, said at one point Canal revenues were taking a $14m-15m hit for each day of blockage. However, the P&I Club speculates that the losses might be closer to US$200m. Regardless of the exact amount which may not be known for some time, the vessel currently remains under arrest. There are concerns for the 25 crew who remain on board as normal ship operations are obliged to continue.
An appeal against the arrest was filed by the vessel’s P&I insurers on 21 April 2021. This was on grounds which include the loss of supporting evidence for the claim for the US$300m salvage bonus, lack of reputation, lost revenue while the canal remained blocked and damage to the canal embankments when the ship became lodged.
The vessel owner’s appeal against the arrest of the vessel was heard on 4 May 2021. The Ismailia court of first instance in Egypt rejected the appeal and upheld its original order that the vessel can only be released upon the shipowner making payment of the claimed amount, rather than security being provided for the amount claimed. This is typically done by way of a Letter of Undertaking or Letter of Indemnity provided by the P&I Club which can be called upon to cover damages in the event they are found to be payable. P&I Club Letters of Undertaking are an important mechanism to allow vessels to continue to trade without fear of arrest, while at the same time providing an element of security for payment to those who have a legitimate claim. The owners of the Ever Given appealed to the Ismailia Economic Court, but that appeal was rejected on 22 May 2021 and the case has been remitted for further hearing on 29 May.
Meanwhile, the vessel remains under arrest, the crew detained on board, the cargo undelivered and the maritime journey incomplete. How, then, are other stakeholders affected by the incident?
[T]he vessel remains under arrest, the crew detained on board, the cargo undelivered and the maritime journey incomplete. How, then, are other stakeholders affected by the incident?
The owner of the Ever Given under siege
Typically a vessel owner will hire its vessel by way of a contract known as a charterparty. The charterparty may be for a specific voyage, for a specific time or for a specific service. The charterparty is just one contract of many in the maritime adventure which will be relevant in these circumstances. There are a number of International Conventions which play a significant role in the management of maritime claims which sit above the contractual bargains of interested parties. Of relevance in this case is the International Convention on Limitation of Liability for Maritime Claims 1976 (‘Limitation Convention‘). The Limitation Convention enables vessel owners, in certain circumstances, to limit their overall liability (based on the tonnage of the vessel) by applying to constitute a limitation fund and protecting other vessels in their own or surrogate ownership from arrest.
Owners commenced limitation proceedings before the Admiralty Court in London on 1 April 2021. The value of the limitation fund would be approximately US$114 million calculated according to the gross tonnage of the vessel. By constituting the limitation fund, the shipowner hopes that it will obtain the benefit of there being a bar to limitable claims commenced otherwise than against the limitation fund. The amount of the limitation fund is obviously significantly less than the amount being sought by the SCA (International Convention on Limitation of Liability for Maritime Claims 1976, Article 13).
The type of claims which are limitable will include damage claims to the waterway itself and consequential losses arising from this (International Convention on Limitation of Liability for Maritime Claims 1976, Article 2). The fund will serve as a pot of money to satisfy any valid claims for loss or damage to property.
However, claims categorised as payments for loss and damage to the canal, loss of revenue and any fines imposed will fall for payment by the P&I insurer. Evergreen vessels, as regular users of the Canal, may be reluctant to simply abandon the vessel not only for ongoing commercial reasons but because other vessels in its fleet may be exposed to a threat of arrest.
Cargo owners remedies and responsibilities
While the vessel remains under arrest, approximately 18,300 containers and their contents remain on board. Typically, these would contain freight of all kinds including refrigerated or other perishable cargo. Transhipping or offloading the cargo has been investigated but considered logistically difficult. An interesting development has arisen which will impact heavily on those with cargo on board. On 1 April 2021, the same day the application for the limitation fund to be constituted was made, the vessel owner declared ‘‘General Average’’. The most cited definition of General Average is ‘all loss which arises in consequence of extraordinary sacrifices made or expense incurred for the preservation of the ship and cargo comes within general average, and must be borne proportionately by all who are interested’ (Birkley v Presgrave (1801) 1 East 220). In other words, the owners of the cargo in the containers, as participants in the maritime voyage which has struck trouble, will be liable to share all of the costs of refloating the vessel according to the value their cargo bears in proportion to other cargo on board. The process of making this assessment is conducted by Average Adjusters who will be appointed to assess the value of each shipment on board and apply a formula that determines the amount to be contributed by each owner. The bills of lading will provide evidence of the contents of the containers held on board and will help in informing an assessment of the value of the cargo.
The final average adjustment will take some years to complete as it traverses what is recoverable and the respective contributions payable. While the losses arising from the grounding such as damage to the canal will not be recoverable from General Average, claims for losses arising from the refloating would be recoverable. Pending the final adjustment, General Average Security provided, for example by way of a general average bond from cargo insurers, will need to be provided in order to release the cargo. However, where no insurance arrangements are in place, cargo owners would need to post a General Average guarantee in order to secure the release of the cargo. Significantly there is no limit on the amount of the contribution which may be sought and no doubt some cargo owners will abandon their cargo (For more information in relation to General Average see F. D Rose, General Average Law and Practice, Informa Law, 2017 (3rd Edition)).
Vessels blocked from transiting the canal
What of the owners of other cargo on board vessels which waited to transit the Canal or deviated via the Cape of Good Hope? On any one day, 12 per cent of global trade, around one million barrels of oil and 8 per cent of liquefied natural gas pass through the canal.
Cargo owners will typically hold marine insurance to cover against the risks of transit, including damage to the goods or non-delivery. However, the availability of recourse against marine cargo insurance policies is not a given as most marine cargo insurances do not cover losses due to delays. The carrier may also be able to rely on a reasonable deviation defence in order to avoid liability for any loss occurring by reason of the deviation (see the amended Hague-Visby Rules 1968 Article IV (4)).
While the backlog of vessels has largely cleared, the Ever Given itself once stuck and then re-floated now remains detained by the SCA. The claims between stakeholders remain very much alive while investigations into the incident continue. The legal consequences of the Ever Given will resonate for some years to come as the complex array of legal claims and challenges unravel across multiple jurisdictions.
Alexis Cahalan, Partner
As publishes in the NSW Law Society Journal June 2021