Suez Canal Crisis and its aftermath – a legal perspective

legal perspective - ever given - shipping and freight resourceThe fragility of trade routes which had been sorely tested by disruptions caused by Covid 19, shortage of containers and increased freight rates was once again exposed when the Ever Given ran aground while transiting the Suez Canal on the 23rd March 2021, lodging itself against both banks of the Canal.

The ship ran aground diagonally after losing the ability to steer amid high winds and a sandstorm. The ship ended up with its bow wedged in one bank of the canal and stern nearly touching the other.

The blockage of the Canal has caused vessels backed up in the Mediterranean to the north and the Red Sea to the south.

The Suez Canal is a crucial shortcut between Asia and Europe that saves ships from having to navigate the Cape of Good Hope around the southern tip of Africa which is a significantly longer journey.

Roughly 30 per cent of the world’s shipping container volume transits through the 193km canal daily.


It is estimated that the costs to global trade is estimated to be about US$400 million per hour based on the approximate value of goods that are moved through the Suez every day, according to shipping data and news company Lloyd’s List.

Lloyd’s values the canal’s westbound traffic at roughly US$5.1 billion a day, and eastbound traffic at around US$4.5 billion a day.

The effect on the global supply chain due to the incident will also result in insurance claims. The claims will not come only from cargo on board the Ever Given but from cargoes on ships which voyage will be delayed due to inability to transit the Canal.

Many of these ships face the difficult choice in waiting as the alternative route through the Cape of Good Hope is a longer and costlier voyage.

 

Cargo Insurance

The availability of recourse against marine cargo insurance policies is also not a given as most marine cargo insurance do not cover losses due to delays.

Delay will arise for vessels already near the entrances to the Canal where the vessels decide to wait for the Canal to clear. Vessels that decide to divert from their planned voyage to take the longer route through the Cape of Good Hope will traverse and longer route and arrive later than the planned schedule.

Most Cargo Insurance policies adopt the Institute Cargo Clauses issued by the Institute of London Underwriters Wordings. These wordings adopt the choice of English law and Practice.

Thus the terms of the UK Marine Insurance Act 1906 will apply. Most of these policies are of the all risks type, and delay is excluded, see Cls 4.5:

4.5 loss damage or expense caused by delay, even though the delay be caused by a risk insured against

Unless the policy is amended, by endorsement to remove this exclusion, which would be the reasonable prudent action for the assureds to do.

 

Salvage and General Average

The Ever Given can carry up to 20,000 TEUs on board. Unless the ship is freed the container cargoes cannot safely proceed to its final port in Rotterdam.

The efforts to refloat the ship and to undertake any repairs so that the ship and cargo can safely continue its voyage will form part of general average.

General average is part of the law of the sea founded on equity. It formed part of the Rhodian law, was based in earlier custom and existed many centuries before the existence of marine insurance. Rhodian law provided that, when cargo was thrown overboard to lighten a vessel, that which had been given for all had to be replaced by the contribution of all.

The most often cited legal definition of ‘general average’ is “all loss which arises in consequence of extraordinary sacrifices made or expenses incurred for the preservation of the ship and cargo losses within general average, and must be borne proportionately by all who are interested“.

The cargo insurance of these container cargo on board is covered by the Marine Insurance Cover using the English Forms, above see Clause:

  1. This insurance covers general average and salvage charges, adjusted or determined according to the contract of carriage and/or the governing law and practice, incurred to avoid or in connection with the avoidance of loss from any cause except those excluded in Clauses 4, 5, 6 and 7 below.

Lessons can be learned from the Malaysian Federal Court decision of Fordeco Sdn Bhd v PK Fertilizers Sdn Bhd. The Court held that four elements are essential to establish a contract of salvage (as opposed to a contract for the provision of towage, pilotage or the carriage of goods):

(i) there should be a recognised subject matter;
(ii) the object of salvage should be in danger at sea;
(iii) the salvors must be volunteers; and
(iv) there must be success by either preserving or contributing to preserving the property in danger.

In this case, the vessel was on a voyage from Ain Sukhna, Egypt to Lahad Datu, Sabah, carrying a cargo of about 22,000 metric tonnes of rock phosphate in bulk.

The vessel grounded on coral rocks, and both the vessel and the cargo were in peril. The cargo was owned by PK Fertilizers Sdn Bhd (‘the cargo owner’) who was the plaintiff in the High Court and the respondent in the Court of Appeal and before this Court.

The mode of rescuing the stranded vessel was to lighten it, so that it could be refloated, and continue on its journey. The lightening of the vessel in turn meant that cargo had to be offloaded.

It could not simply be jettisoned because that would give rise to marine pollution. The cargo had to be offloaded onto other vessels in order to lighten the load on the vessel.

The master could not refloat the vessel without assistance. He notified the vessel owners. The owners declared general average and took steps to refloat the vessel.

This was done by discharging a part of the cargo on board the vessel onto two other vessels one of which belonged to the defendant, until the vessel could be refloated.

In order to procure the lightening of the load on board the vessel, the owners’ agents, sought the assistance of a tug boat operator. When the Cargo was unloaded at a port in Sabah, a portion of the Cargo was found to be wet and contaminated with debris. The Plaintiff brought a claim in bailment and/or negligence against the Defendant.

The Plaintiff contended that the Defendant was a sub-bailee of the Cargo and thus the Defendant had a duty to deliver the Cargo in the same condition as the Defendant had received the Cargo – rather than wet and contaminated with debris.

The Defendant, on the other hand, contended that the operation was one of salvage and not a contract of carriage of goods – thus, it was not in breach of any obligation to the Plaintiff.

The Questions of law which the Federal Court following the leave to appeal which had been obtained included:

Where a vessel had run aground on the high seas and the owners of the vessel had declared general average in respect of the cargo, whether the rescue operation to save so much of the cargo as possible by other vessels hired for that purpose would in maritime law be classified as a salvage operation?

The Court held there was no dispute that general average was declared, accepted and that the cargo owner voluntarily contributed towards general average.

It follows therefore that the cargo owners agreed and accepted that there was a common jeopardy or misadventure that affected the common interest of the parties involved, warranting the incurring of expenditure beyond the agreed contractual duties.

The next issue that falls for consideration is whether, general average having been declared, it would follow definitively that the contract for the rescue and refloatation of the vessel through the discharge and transport of the cargo on the vessel carrying the cargo, was one of salvage, rather than towage or carriage of goods

The adjustment of general average will proceed under the procedures set out in the York Antwerp Rules which will apply through incorporation of the Bills of lading of the Carrier.

The Salvors and contractors will offer their services through their salvage contracts most of which will be based on the Lloyd’s Open Form of Salvage Contract.

 

Claims by Cargo

The Carriage of the containers by the vessel Ever Given is regulated by the bills of lading issued by Evergreen. For cargoes loaded at the Port of Tanjung Pelepas, Johor Malaysia, the terms of the bill of lading will attract the application of the Hague Rules as applied by the Malaysian Carriage of Goods by Sea Act.

The Hague Rules provide several defences under Article IV Rule 2 which will make recovery against the Carrier difficult:

(a) act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship;  (c) perils, dangers and accidents of the sea or other navigable waters; (d) act of God.

As the efforts are still continuing, the legal and claim issues will come to fore later, after the Ever Given is freed. It is clear that the saga of Ever Given will continue long after the Canal is cleared.

 

About the author 

Executive Insights - Shipping and Freight Resource - Philip Teoh

Philip has been in legal practice in Singapore and Malaysia for the past 31 years handling both contentious and non-contentious areas.

He is the Partner heading the Shipping, International Trade, Insurance Practice in Azmi & Associates Malaysia. He is an Arbitrator with the key International Arbitration Centres of LMAA, SCMA, EMAC, ICC, LCIA, AIAC, KCAB and others.

He is on the Expert Advisory Panel of the Malaysian Competition Commission and a member of ABLM the Legal Sub-committee of FIATA.

He is also the author of key Practitioner Texts eg in Equity, Conflict of Laws, Sale of Goods and the Shipping Titles.

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2 thoughts on “Suez Canal Crisis and its aftermath – a legal perspective”

  1. The definition which I like and prefer to use for general average is:
    “There is a General Average Act, WHEN and ONLY when, any EXTRAORDINARY SACRIFICE or EXPENDITURE is INTENTIONALLY and REASONABLY made or incurred for THE COMMON SAFETY for the purpose of PRESERVING FROM PERIL the property involved in a COMMON MARITIME ADVENTURE”.
    It must also be remembered that there are various versions of the York-Antwerp Rules and the bill of lading will indicate which version will be applicable.
    The author has mentioned the Hague Rules for cargo loaded in Malaysia. Cargo loaded in other ports plus depending on the destination of the cargo, the Hague-Visby or Hamburg Rules may apply. In articles of this nature it is not possible to cover every scenario for all cargo on board such a large vessel. so the author has covered the situation extremely well.

    Reply
  2. The statement “Roughly 30 per cent of the world’s shipping container volume transits through the 193km canal daily” is absurd and clearly wrong.

    Reply

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