Whether for its size and status as one of the largest container ships in the world or because it was famously termed as a “boat that was stuck in a canal”, the Ever Given will remain in people’s minds..
It will remain in people’s minds either as a memorable incident (to those who worked to free it) or as a haunting incident (to the ship owner, ship operator, ship crew and soon maybe the customers)..
For those who may have been oblivious to what happened (if that is possible), the Ever Given a 24,000 TEU capacity container ship
- owned by Japan based Shoei Kisen Kaisha,
- operated by Taiwan based Evergreen Marine Corp,
- managed by German based Bernard Schulte,
- insured by UK based UK P&I Club and
- crewed by 25 Indian seafarers,
- jammed itself diagonally across the Suez Canal in Egypt for 6 days
- while on its way from Far East to Europe blocking traffic on both sides of the canal
How’s that for globalisation..!!
The vessel was subsequently freed and shifted to the Great Bitter Lakes area within the jurisdiction of the Suez Canal Authority (SCA) where it remains till date under arrest by the SCA who are seeking a payment of $916 million for their claims including $300 million as salvage bonus, and $300 million for loss of reputation..
Last week, the vessel owners have reportedly filed an appeal against the arrest with the Ismalia court in Egypt as they and the UK P&I Club failed to reach a deal with the SCA on its compensation claim..
The UK P&I Club said the appeal which was filed on 22nd April 2021 to be heard on 4th May 2021, was necessary as “it has not been possible to resolve this matter without the continued involvement of the Egyptian courts”..
It added that “the appeal against the arrest was made on several grounds, including the validity of the arrest obtained in respect of the cargo and the lack of supporting evidence for the SCA’s very significant claim”..
Muthu Jagannath of NAU Pte Ltd., provides relevant and pertinent information about the Ever Given, its arrest, the implications of the arrest, insurance and counter claims in this article originally published on their website..
Arrest of the vessel
- The vessel is presently under arrest by SCA and who seek payment of their claims. The estimated values of property on board the vessel is as follows:
- Vessel Value: Approx.: USD 125 million
- Cargo Value: Approx.: USD 500 – 600 million (although some have estimated that the value of cargo may well exceed USD 1 Billion)
- Container Value: Approx.: USD 30 million or so
If we add up all these values, the value of property is approximately USD 675 million to USD 775 million. The claimed sums by SCA exceed the total values of property on board the vessel.
- We understand that the P&I Insurers of Ever Green have challenged3 the validity of the cargo being detained at the courts and if their challenge succeeds, it will pave the way for cargo to be discharged from the vessel and continue with the voyage. We understand that the appeal on this issue is scheduled on 04th May 2021. We hope that the court rules in the favor of allowing the cargo to be separated and this may diffuse the situation allowing all parties to focus on the values involved in the adventure.
- Egypt is a signatory to the Shipowners Limitation of Liability Convention4, and which entitle Owners to limit liability based on the tonnage of the vessel. However, the user agreement with SCA provides for the Owners to be liable without the benefit of any limitation. Additionally, Article 3 of the 1976 Convention exempts salvage or general average from limitation.
- In normal circumstances and on provision of acceptable security, the arresting party would allow the vessel to be released. However, on the basis of various reports, it appears that SCA require payment of their claim prior to releasing the vessel. While this may be a negotiation strategy to force Owners to deal with the claim, given the amounts involved, we do not believe that Owners and their Insurers will simply settle the claim unless they have complete details. We will have to wait and watch to see how this incident develops further.
- The vessel is presently under arrest by SCA and who seek payment of their claims. The estimated values of property on board the vessel is as follows:
Cause of the incident
We understand that the investigations are ongoing as to the cause of the incident and which may be a combination of the weather conditions, engine failure and other causes. It does appear that the vessel was sailing at a higher speed than that allowed under the Suez Canal5. If the excessive speed is a causative link to the incident, then Owners may be held liable for this incident.
Detailed investigations would reveal on why the vessel was indeed travelling at speeds exceeding what was allowed in the Suez Canal. However, given that Pilots were on board the vessel and that the SCA would have been monitoring progress of the vessel, we submit that any apportionment of blame due to excessive speeds cannot be solely for the account of Owners but also that SCA must share in the blame.
- LOF Salvage: Owners of Ever Given engaged Nippon and Smit Salvage for salvage under LOF. Once the vessel is in a position of safety (we believe that the vessel is presently in a position of safety at Great Lakes), salvors would require provision of adequate security from the interested parties prior to handing over the vessel. Given that the vessel is presently under arrest, interested parties may await release from the arrest and then provide security. Subsequently, the salvage award would be determined by arbitration and which would consider, amongst others, the value of property saved and the difficulty of operations, etc. We do not expect the LOF salvage award to be substantial vis-à-vis the salvage bonus sought by the SCA.
- SCA Salvage: The SCA aided during the refloating of the Ever Given by providing Tugs and dredging the channel. We understand that the usual practice is for SCA is to charge a tariff rate for the use of the tugs. As SCA sought a salvage bonus of USD 300 million, it does appear that the costs of tugs and assistance provided by SCA may be included in this figure. The question would be whether the SCA’s demand of Salvage bonus should be paid by all the property interests on board the vessel. Given that SCA initiated legal action in the Egyptian Courts, we would prefer for this issue to be dealt by the courts.
- Owners of the vessel had declared General Average following this incident and engaged Richards Hogg Lindley as the Average Adjusters. We understand that the Average Adjusters have sought security by way of an Average Bond and Average Guarantee. However, given that the vessel is presently under arrest by SCA, cargo interests may first await the release of the vessel and only then consider the requirement to provide security.
- We are not aware of the contractual terms between Owners and Charterers and in particular the relevant edition of the York Antwerp Rules. However, given that Ever Green Line B/L6 provides for York Antwerp Rules 1994, we believe that the adjustment of the GA would be accomplished on this basis. With respect to the General Average, we believe that Salvage Award / Bonus and the various expenses incurred under Rule VII, Rule X and Rule XI of York Antwerp Rules 1994 would fall for consideration under GA.
- While property interests would have to contribute to any GA or salvage, this does not preclude their right to claim from the party at fault and which is provided under Rule D of YAR 1994. This being the case, the results of the investigation on the cause of the grounding would be important to ascertain if there was any actionable fault on the part of Owners such that the GA contributions may be denied. In such instances, the Owners P&I Insurers policy7 would be triggered to respond to the payments of the unrecoverable general average contributions. As Owners have filed a limitation action in the Admiralty Courts at London, it does appear that this may be to cap Owners exposure up to the limitation amount.
- Following a maritime incident, it is invariably the crew who are often blamed as being responsible for the incident even though they may well be innocent. Previous cases such as The Hebei Spirit in which the Capt and the Chief Officer spent 540 days in captivity come to mind. We hope that the SCA and the Egyptian authorities do not use the “crew” as a bargaining chip in this incident.
- In one of the webinars we attended, we posed a question to mariners as to whether they and their unions would consider a ban to trade into “dangerous” areas. We were advised that given the economic situation, the crew or their unions would not be taking this drastic step. We believe that this issue would, in any event, have to be considered by the Vessel Owners as they would bear primary responsibility for the crew.
- Hull & Machinery: The vessel is insured for the Hull in the Japanese market. We estimate the value of the hull to be around USD 125 million. We understand that the vessel would also have suffered damages during the grounding, and which would fall for consideration under the Hull policy. With respect to any eventual salvage and general average, Hull Insurers, if insured for its full value, would contribute based on the property values at the time of the completion of adventure (for salvage, when the vessel is being tendered back by Salvors in a position of safety).
- P&I: Owners are entered with UK P&I Club and who provide cover to the Owners for their Legal Liability. P&I Insurers will first have to ascertain if a legal liability exists for the claims submitted by SCA and the potential defenses. Additionally, if cargo interests and charterers can successfully deny general average contributions together with any payment of salvage contributions, the P&I policy would be triggered to respond to deal with them. Given the amounts involved, it would be difficult for the P&I Insurers to agree to any commercial settlement particularly as the other participants may be unwilling to contribute on this basis.
- Charterers P&I: Evergreen Line are operating the vessel and they would have, in addition to bunkers, have fittings for the containers on board the vessel. Accordingly, they would contribute based on the property on board the vessel. Additionally, Owners would be entitled to pursue Evergreen Line, as charterers, based on their contract. We await to see if Owners make any counterclaim Line together with the basis of the counterclaim.
- Cargo Insurers: The values of cargo on board the vessel trumps all other interests. The indications are that none of the cargo was affected due to the grounding. We believe that a sizeable portion of the cargo would be uninsured (say 30-40%) with the balance being insured with various insurers. We understand that various marine insurers are trying to grapple with their exposure for this incident as they would have to provide both salvage and general average guarantees. We understand that the cargo book of business is seeing reduced profitability and therefore we believe cargo insurers would certainly seek justification prior to making any payment of claims on behalf of their insureds. While the various Insurers would contribute to the claims depending on the coverage provided, it will certainly impact future premiums in that such extra-ordinary risks would have to be factored in the calculations i.e. there would be an increase in premiums in the already hardening marine insurance market.
- As mentioned in 1 c above, Owners are bound by the terms of the user agreement with SCA and therefore this would override any defences which the Owners may have. However, the other parties involved in the Ever Given are not signatories of the user agreement and, arguably, would be entitled to pursue the SCA should their demand for security is either denied or found excessive.
- We chanced on a article published in the Splash where the author discusses on the possibility of a class action against SCA. We do not believe that the cargo and other interested parties would be able to initiate a class action in the Egyptian Courts. This being the case, the issue would be whether any other jurisdiction would be willing to hear the action, particularly when the SCA would be considered as an emanation of the state. If any jurisdiction is indeed willing to hear the matter, then cargo and other interests indeed have an opportunity to pursue SCA for their losses.
Suez Canal – link between East and West
- The Suez Canal is one of the most important canals8 linking the east with the west and allowing more than 10% of sea trade to pass through. Use of the Suez Canal to proceed from Asia to Europe would result in a reduced transit by at 8-10 days9.
- The use of the Suez Canal does entail costs payable to the SCA, and which would depend on the size/tonnage of the vessel. Unfortunately, we are not aware of Ever Given’s Suez Canal Net Tonnage (“SCNT”) to estimate10 the costs for the Northwards and Southwards transit. We have however informally checked with operators and understand that the increase in costs say for a 15,000 TEU vessel (includes charter rate, bunkers, piracy related costs, etc.) for going around the Cape of Good Hope would be around USD 1 million each voyage. Accordingly, if a vessel is carrying approx. 15,000 TEU’s, the increase in costs per TEU would be approx. USD 67 per container and which is not a substantial increase given the prevailing freight rates. We believe that the time required to reach Europe / Asia via the Cape of Good Hope could be reduced further by trimming the port pairs.
- Shipping is a derived demand and therefore participants including the SCA should ensure that they do not kill the goose which lays the golden eggs i.e., what participants should do is to facilitate the trade so that there are more trade flows instead of creating hurdles or seeking an advantage from a casualty. Otherwise participants, as a form of risk management procedure, will consider alternatives to avoid outages as what is presently happening to the cargoes on board the Ever Given.
We believe that irrespective of how this incident develops, it will definitely be recorded and consigned to the history books for all to study to grapple with the various issues arising out of such an incident. While this incident is developing, we would urge parties to work together to try and find a workable solution. We do not believe that a solution could be found based on the claims submitted by SCA (we would however be happy, if a solution is found). Otherwise, this incident may well result in changes in the way trade process / transits are planned and which would affect all parties including the SCA.
References and sources
4. Owners would be entitled to limit liability to approx. USD 114 million under the 1976 Limitation Convention.
6. Clause 27 of the Evergreen Line B/L which can be viewed at https://www.evergreen-line.com/static/html/EGLV_BLClause2020.pdf
7. See Rule Rule 2 Section 19 on Unrecoverable general average contributions under the UK P&I Club 2021 Rules and which can be viewed at https://www.ukpandi.com/news-and-resources/rulebook-2021/
9. The time taken to transit the Suez Canal would be approximately 12-16 hours as suggested in https://en.wikipedia.org/wiki/Suez_Canal
Each and every aspect is been meticulously explained by Mr. Muthu Jagannath Sir.
Very well written, Hariesh.
Thank you, but credit is to Mr.Muthu Jagannath of NAU.. 🙂