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Introduction:

The Suez Canal is a 193-km (120 miles) long artificial waterway running across Egypt's Isthmus of Suez connecting the Mediterranean Sea to the Red Sea. It is 205 metres wide and 24 metres deep. The Suez Canal substantially reduces the sailing distance as well as sailing time from Europe to Asia. The shorter distances save time and operating costs of the shipping lines. It is the artery of trade between Europe and Asia and currently the shortest, safest and most used route. It handles about 12 to 13 per cent of the global trade in various goods and commodities. The water underwent an expansion in 2015. The expansion brought the transit time down from 18 hours to 11 hours making it the fastest arterial trade route between Europe and Asia.  Before the expansion, the original canal handled 7 per cent of global sea-borne trade. Now 30 per cent of the world’s container vessels transit through Suez Canal.  It was then estimated that the expansion project would double Suez Canal’s capacity and nearly triple annual revenues to over US$13 billion by 2023. SCA has reported having generated a revenue of about $5.61 billion and recorded the crossing of 18,829 ships with a total net tonnage of 1.17 billion in the year 2019, being the second-highest annual tonnage in the history of the Suez Canal.  About 5 per cent of the world’s seaborne crude oil, 10 per cent of oil products and 8 per cent of LNG passes through the Suez Canal. 90 per cent of the world’s international trade depends on the movement of goods through the sea. The sea-borne trade costs 1/3rd of the air-borne trade. However, the sea-borne trade is froth with complexities and unique risks. Given that, the law of the sea (comprising of various conventions), various contracts such as charter party, bill of lading and insurance contracts and the law of insurances under which various insurance obligations of insurers for the covered risks (called as perils of the sea) are enforced, is of great significance.    

Incident:

On March 23, 2021 morning, the container ship MV Ever Given, registered in and bearing the of Panama reportedly ran aground diagonally blocking the Suez Canal about 6 kilometres (3.7 miles) north of the southern entrance near the city of Suez. In particular, she ran aground reportedly after losing the ability to steer due to high winds and poor visibility caused by a sandstorm storm. She tilted sideways and the bow of the ship got lodged into sandy clay of the Suez Canal bank blocking the traverse of other ships from both directions of the Suez Canal. The incident caused a 6-day blockage of the Suez Canal caused by Ever Given in the last week of March 2021. A further period of about 5 to 6 days was required to clear the other ships clogged at the Suez Canal after she was re-floated by SMIT Salvage, the subsidiary of Royal Boskalis Westminster N.V., a Dutch company that was involved in the Suez Canal expansion. The crisis had disrupted the supply chain causing a ripple effect on international trade for some time to come. Ever Given is under a time charter with Ever Green Marine under a charter party agreement with Shoei Kisen Kaisha, the Japanese company which owns Ever Given.  Shoei Kisen Kaisha is a subsidiary of 120-year-old privately owned Japanese shipbuilder Imabari Shipbuilding. Imabari Shipbuilding is the largest shipbuilder both in terms of tonnage and sales revenues. She was carrying goods worth US$3.5 billion in about 18,300 containers and a 25 member crew of Indian nationality.  Two pilots from Suez Canal Authority (SCA) were on board. It is mandatory under SCA’s navigation rules to have pilots from SCA on board.  Ever Given is categorised as an Ultra Large Container Vessel (ULCV). She weighs 2,00,000 tonnes and measures about 1300 feet (400 metres) in length, which is more than the width of the Suez Canal.

Controversy Regarding Cause of Incident:

Reports state that Ever Given started from the anchorage early morning at about 5 am with 8 knots and its last recorded speed was 13.5 knots as against the speed limit of 7.6 knots to 8.6 knots. It is also reported that there was a wind of 30 mph as well as a sandstorm. The SCA, which owns, manages and operates the Suez Canal, has said that aside from the high winds and poor visibility caused by a sandstorm storm, technical and human errors cannot be ruled out. However, Bernhard Schulte Ship Management ruled out human or technical errors. Some experts opine that incidents such as this cannot be attributed to a single cause. A series of events or a chain of events need to be assessed leading to the cause of the incident.  The probe into the causes of the incident is a joint investigation between Egypt, Taiwan and the International Maritime Organization (IMO), an agency of the United Nations. Investigators’ examination may focus on what happened on the bridge of the ship when she ran aground. Investigators may examine the ship’s safety record, including recent inspections of engine and steering gear such as the rudder.  Investigators may make inquiries with the crew and the master. Investigators may also demand access to the voyage data recorder, which is similar to the aircraft’s black box to find out what happened on the ship’s bridge.  The outcome of various investigations into the causes of the collision of Ever Given is awaited. 

Impact on Global Economy:

Reportedly, the global economy loses an estimated US$400 million for every hour that the Ever Given blocked the Suez Canal. Maersk, the leading shipping line which holds 1/5th of the market share stated that the blockage has already triggered a series of further disruptions and backlogs in global shipping that could take weeks, possibly months to unravel.

Impact on India:

Reportedly, about US$200 billions of India’s trade flows with Europe, North America and South America had been at risk due to the blockage of the Suez Canal. And the Department of Commerce, Government of India had intervened to work out an action plan to cope with the crisis, including possibly re-routing ships through the Cape of Good Hope. The Suez Canal crisis has worsened the situation for Indian exporters and importers and their freight forwarders due to the lack of availability of containers and growing freight rates.  

Impact on Destination Ports

It is predicted that the destination ports and handling facilities will be strained as the ships are likely to arrive soon.

Increase in Insurance Premiums:

The crisis may likely require the insurance and reinsurance companies to increase the insurance premiums.

Primary Liability:

All liabilities will be channelled to the owner of Ever Given, Shoei Kisen Kaisha and its insurers. Reportedly, there is a US$ 3 billion of insurance cover for the liabilities against the ship’s owner. However, it is estimated that given the number of ships blocked and rerouted (about 360) and the claims from the cargo owners, the cover might not be sufficient. 

Potential Claim for Damages:

Earlier, it was reported that SCA is seeking to claim US$1 billion towards loss of revenue due to blockage, damages incurred during dredging and salvage of Ever Given. Now it is clear that SCA has reported lodged a US$916 million compensation claim against Shoei Kisen Kaisha, the owner of Ever Give and for the arrest of the ship. It is said that SCA’s claim includes U$300m for salvage and U$300m for loss of reputation. The UK P&I Club, Even Given’s insurer appears to have rejected SCA’s claim and had made a counteroffer to the SCA. SCA’s claim reportedly does not include salvor’s claim for the salvage services. It is expected that salvors will make their claim to Shoei Kisen Kaisha and its hull underwriters separately. Besides, owners of cargo on board of Even Given, who will suffer damages either due to delay in delivery of goods or total loss of goods (perishable goods) may also make claims. Buyers will claim liquidated damages from sellers for the delay in delivery of goods in cases where the delivery at the destination port is the seller’s responsibility. Whether the blocked ships were beyond the point of return would also be questioned in each case. 

General Average and Limitation of Liability

On April 01, 2021 morning, Shoei Kisen Kaisha declared General Average as predicted by the experts. Shoei Kisen Kaisha also appointed Richard Hogg Lindley as the adjustor. The law of general average is a principle of maritime law that dates back to the Law of Rhodians made in the 6th Century. It became statutory law of England when the Merchant Shipping Act was enacted in 1906.  Under the law of general average upon the declaration of general average by the master or the shipowner, all stakeholders in a sea venture proportionately share any losses resulting from a voluntary sacrifice of part of the ship or cargo to save the whole in an emergency. Shippers who have insured the cargo would receive their cargo first. Un-insured shippers need to deposit the full costs to obtain release due to lack of insurance. Thus, the cargo that is insured can speed up the cargo release process by posting the general average guarantee to meet the cargo owner’s contribution and facilitate the faster release of the cargo.  Shippers will have to submit certain documentation to the adjustor for release of the cargo such as a copy of the cargo invoice, a copy of the bill of lading, average bond by cargo owner, and average guarantee form by cargo owner’s insurer. Cargo owners are required to coordinate with their respective insurers to obtain average guarantees. Shippers who have not insured the cargo will have to deposit cash as advised by the adjustor instead of the inability to provide an average guarantee due to lack of insurance. Shoei Kisen Kaisha’s English solicitors have issued a limitation of liability claim in the English Admiralty Court under the Convention on Limitation of Liability for Maritime Claims (Limitation of Liability Convention). Under the Limitation of Liability Convention, the shipowner is entitled to limit his liability for maritime claims up to a maximum sum regardless of the actual amount of the claims. The limitation of liability reduces the ship owner’s legal liability to a pre-determined limit based on the gross registered tonnage (GRT) of a ship but historically based on the value of the ship after the liability causing the incident.  Based on the 219079 GRT, the limit of liability would be SDR 81.15 million (US$ 116.4 million at an SDR-US$ exchange rate of 1.42).  The right of a shipowner to limit its liability in respect of certain claims according to the tonnage of his ship has been for a long time been recognised by international conventions.

Settlement Discussions

The SCA is negotiating a financial settlement with Shoei Kisen Kaisha, the owner of Ever Given. However, the negotiations between SCA and Shoei Kisen Kaisha have not materialised after two weeks. The insurers of Shoei Kisen Kaisha, the vessel owner had rejected the SCA’s claim of about US$300 million on account of loss of reputation out of the total claim and made a counteroffer. The insurers have controverted SCA’s claims being extraordinarily large and largely unsupported.   

Ship Arrest

The SCA had earlier made its intentions clear to not release the ship until the compensation for damages and expenses suffered by it are paid. Now the SCA has ceased the ship following the orders from the Egyptian Court for the arrest of the ship. An arrest is detention or restriction on the removal of a ship by order of a court to secure a maritime claim. 

Ever Given’s Crew

There is also uncertainty as to when the 25 members Indian crew will be released and will return home.

Ever Given’s Cargo

It is predicted that the shippers and freight forwarders will have to wait for a longer time for the release of cargo on the Ever Given. Ever Green Marine, the operator of the ship is not only urging the stakeholders to settle the matter, but it is also reportedly weighing options of the release of cargo. However, experts are unsure of the possibility of such segregation. 

Notes: The source of this research-based memorandum are various newspaper articles, blogs and press releases. Due to a huge number of resources, it is not possible to list them.  This memorandum is a product of research and labour and being resulted into creation of original work of authorship is protected by copyright in favour of authors.  

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