ADMIRALTY PRACTICE IN INDIA
Ship Arrest in India and Admiralty Laws of India
VOLUME 09 APRIL 2021 NUMBER 1
LEGAL IMPLICATION OF BLOCKING OF THE SUEZ CANAL
by Dr. Shrikant Hathi and Ms. Binita Hathi
Shipping & Arbitration Specialist
Partners at Brus Chambers, Advocates & Solicitors, India
A huge container ship that has been wedged in the Suez Canal since March 23, 2021 has finally been freed from the shoreline on March 29, 2021. The Ever Given is 400m-long (1,312ft) and weighs 200,000 tonnes, with a maximum capacity of 20,000 containers carrying 18,300 containers. The ship was manned by Indian crews, is operated by Taiwanese transport company Evergreen Marine and is one of the world's largest container vessels.
Widespread concern over the present Suez Canal crisis reflects the critical importance of major narrow "international" waterways in world commerce. The relative importance of each waterway as a navigable channel depends on the existence of a favorable trade pattern between areas connected by the way, the comparative inconvenience of alternate routes and the narrowness of the channel. All three factors combine to accentuate the vital position of the Suez Canal, whose recent blockage seriously disrupted an interdependent world economy.
Any plan for restoration of order in the canal zone, and hence in the Middle East, must include a full revision of the Constantinople Convention of 1888,' the major international agreement controlling the Suez Canal. This convention is ambiguous, unrealistic, antiquated and too narrow in scope and application. A fair, yet practicable, revision must reflect the needs and desires of the relevant interest groups, the efficacy of past and present legal controls, and the limitations as well as potentialities of such a convention as an instrument of peace. Legal principles will be derived primarily from treaties, customary law and unilateral regulations governing all canals of major importance as international waterways, viz, the Panama, Suez and Kiel canals.'
The Suez Canal is an artificial sea-level waterway in Egypt, connecting the Mediterranean Sea to the Red Sea through the Isthmus of Suez and dividing Africa and Asia. In 1858, Ferdinand de Lesseps formed the Suez Canal Company for the express purpose of building the canal. Construction of the canal lasted from 1859 to 1869 and took place under the auspices of the Ottoman Empire. The canal officially opened on 17 November 1869. It offers vessels a direct route between the North Atlantic and northern Indian oceans via the Mediterranean Sea and the Red Sea, avoiding the South Atlantic and southern Indian oceans and reducing the journey distance from the Arabian Sea to London by approximately 8,900 kilometres (5,500 mi), or 8 days at 24knts to 10 days at 20knts. The canal extends from the northern terminus of Port Said to the southern terminus of Port Tewfik at the city of Suez. Its length is 193.30 km (120.11 mi) including its northern and southern access-channels. In 2020, more than 18,500 vessels traversed the canal (an average of 51.5 per day).
The original canal featured a single-lane waterway with passing locations in the Ballah Bypass and the Great Bitter Lake. It contained, according to Alois Negrelli's plans, no lock systems, with seawater flowing freely through it. In general, the water in the canal north of the Bitter Lakes flows north in winter and south in summer. South of the lakes, the current changes with the tide at Suez.
While the canal was the property of the Egyptian government, European shareholders, mostly French and British, owned the concessionary company which operated it until July 1956, when President Gamal Abdel Nasser nationalized it—an event which led to the Suez Crisis of October–November 1956. The canal is operated and maintained by the state-owned Suez Canal Authority (SCA) of Egypt. Under the Convention of Constantinople, it may be used "in time of war as in time of peace, by every vessel of commerce or of war, without distinction of flag." Nevertheless, the canal has played an important military strategic role as a naval short-cut and choke point. Navies with coastlines and bases on both the Mediterranean Sea and the Red Sea (Egypt and Israel) have a particular interest in the Suez Canal. After Egypt closed the Suez canal at the beginning of the Six-Day War on 5 June 1967, the canal remained closed for precisely eight years, reopening on 5 June 1975.
The Egyptian government launched construction in 2014 to expand and widen the Ballah Bypass for 35 km (22 mi) to speed up the canal's transit-time. The expansion intended to nearly double the capacity of the Suez Canal, from 49 to 97 ships per day. At a cost of 59.4 billion Egyptian pounds (US$9bn), this project was funded with interest-bearing investment certificates issued exclusively to Egyptian entities and individuals. The "New Suez Canal", as the expansion was dubbed, was opened in a ceremony on 6 August 2015.
The Suez Canal Authority officially opened the new side channel in 2016. This side channel, located at the northern side of the east extension of the Suez Canal, serves the East Terminal for berthing and unberthing vessels from the terminal. As the East Container Terminal is located on the Canal itself, before the construction of the new side channel it was not possible to berth or unberth vessels at the terminal while a convoy was running.
On 23 March 2021, at around 05:40 UTC (07:40 local time), the Suez Canal was blocked in both directions by the ultra-large Golden-class container ship Ever Given. The ship, operated by Evergreen Marine, was en route from Malaysia to the Netherlands when it ran aground after strong winds allegedly blew the ship off course. Upon running aground, Ever Given turned sideways, completely blocking the canal. Although part of the length of the canal is paralleled by an older narrower channel which can still be used to bypass obstructions, this particular incident happened in a section of the canal with only one channel. The site was located at 30.01574°N 32.57918°E.
At the dawn of the incident, many economists and trade experts have commented on the effects of the obstruction if not resolved quickly, citing how important the Suez is to global trade, and the incident is likely to drastically affect the global economy because of the trapped goods scheduled to go through the canal following the incident. Among the products, oil shipments are the most affected in the immediate aftermath, due to a significant amount of them remaining blocked with no way to reach their destination. Referring to the European and American market, a few maritime experts have disputed the prediction of a drastic effect on trade, saying this "really isn’t a substantial transit route for crude" according to Marshall Steeves, energy markets analyst at IHS Markit, and "there are existing stocks" according to Camille Egloff of Boston Consulting Group and alternative sources of supply, noting that traffic has only slowed down and that this might only impact sectors with existing shortages such as the semiconductor industry. International Chamber of Shipping (ICS) estimates that up to $3 billion worth of cargo passes through the Suez Canal every day.
It was said the blockage would have an impact on cargo schedules around the world. Shipping companies were also considering whether to divert their ships along the much longer route around the Cape of Good Hope. The first container ship to do so was Ever Given's sister ship, Ever Greet.
On 29 March, the ship was re-floated, according to Inchcape, a maritime services provider. Within a few hours, cargo traffic resumed, slowly resolving the backlog of around 450 ships. The first ship to successfully pass through the canal after the Ever Given was successfully floated out of the canal was the YM Wish, a Hong Kong-based cargo ship.
About 12% of global trade, around one million barrels of oil and roughly 8% of liquefied natural gas pass through the canal each day. Data from Lloyd's List showed the stranded ship was holding up an estimated $9.6bn of trade along the waterway each day. That equates to $400m and 3.3 million tonnes of cargo an hour, or $6.7m a minute.
Looking at the bigger picture, German insurer Allianz said its analysis showed the blockage could cost global trade between $6bn to $10bn a week and reduce annual trade growth by 0.2 to 0.4 percentage points.
The cost of renting some vessels to ship cargo to and from Asia and the Middle East had jumped 47% to $2.2m. Some vessels have been rerouted to avoid the Suez Canal. That is adding around eight days to their total journeys. The Canal's revenues were taking a $14m-$15m (£10.2m-£10.9m) hit for each day of the blockage.
Prior to the pandemic, trade passing through the Suez Canal contributed to 2% of Egypt's GDP.
The wind speed at the time was recorded at 40 knots, this was not the only reason for the ship becoming stranded. An investigation would be needed to determine whether technical or human errors occurred, the authority added.
As of March 28, 2021, there were 369 ships stuck in a tailback waiting to pass through the 193km (120-mile) canal on either side of the blockage.
As the saga of Ever Given and the salvage efforts continue to unfold, the longer term effects bear examining.
The fragility of trade routes - which have been sorely tested by disruptions caused by Covid-19 and a shortage of containers - were once again exposed when the large container ship Ever Given ran aground while transiting the Suez Canal on March 23, lodging herself against both banks.
The ship is about 400 meters in length, roughly equal to the height of the Empire State Building, and she is capable of carrying about 20,000 TEU. She is owned by Shoei Kisen Kaisha (a subsidiary of Imabari Shipbuilding) and time chartered and operated by Taiwanese container line Evergreen Marine. Ever Given is registered in Panama and technically managed by the German ship management company Bernhard Schulte Shipmanagement.
The ship’s large size has covered the entire width of the canal, holding up vessel traffic for days. This is causing knock-on effects on the movement of cargoes globally.
The blockage has caused vessels backed up in the Mediterranean to the north and the Red Sea to the south. It is estimated that the costs to global trade is estimated to be about $400 million per hour, based on the approximate value of goods that move through every day, according to Lloyd’s List.
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 will be delayed due to inability to transit the canal. Many of these ships face a difficult decision over whether to wait or to divert around the Cape of Good Hope, which is a longer and costlier voyage.
The availability of recourse against marine cargo insurance policies is also not a given as most marine cargo insurance does 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 blockage to clear. Vessels that decide to divert from their planned voyage to take the longer route through the Cape of Good Hope will arrive later than their planned schedules.
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. This means that 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, per Cls 4.5:
4.5: loss damage or expense caused by delay, even though the delay be caused by a risk insured against
This would apply unless the policy is amended by endorsement to remove this exclusion, which would be the reasonable and prudent action for the assureds to take.
Salvage and General Average
The Ever Given can carry up to 20,000 TEU of cargo 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, as above. See Clause:
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 any of the Clauses.
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 the 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, and 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 in the bills of lading of the carrier. As the efforts are still continuing, the legal and claim issues will come to fore later, after the ship is freed. It is clear that the saga of Ever Given will continue long after the canal is cleared.
One of the biggest issues currently being assessed by analysts is the risk that the blockage could lead to rising inflation.
Although there has been little direct impact on the energy market so far, partly as a result of the time of year, if the blockage were to last for two weeks, around one million tonnes of liquid natural gas could be delayed for delivery to Europe.
A study by German insurer Allianz Global published suggested the blockage could cost global trade $6bn-$10bn a week.
The study also found that each week of immobilisation knocked around 0.2 to 0.4 percentage points off annual trade growth, which has already been suffering as a result of the Covid-19 pandemic.
"The problem is that the Suez Canal blockage is the straw that breaks global trade's back,". "Suppliers' delivery times have lengthened since the start of the year and are now longer in Europe than during the peak of the Covid-19 pandemic."
The impact of the Short blocking of the Suez Canal upon Charterparty's and Bill of Lading's
A short delay is unlikely to “frustrate” C/P’s
There is the ‘potential’ for damages to - in principle - be owed to Cargo Interests due to delays caused by the Suez Canal Blockage
o an implied obligation upon Owners to start the approach voyage punctually, i.e. her proceeding to the load port (usually repeated as express terms in voyage charters, such as proceeding “with all convenient speed”); and
o law implies a term that the owner will commence and proceed (after loading) upon the voyage with reasonable despatch and without deviation (see §9.4 of Voyage Charters, 4th Edition) and this is often repeated in express terms in the C/P’s.
However, Shipowners are usually protected against the risks/liabilities arising from events occurring outside of their control due to industry standard Exceptions clauses
o “17. GENERAL EXCEPTIONS CLAUSE. (a) Neither the Vessel nor the Master or Owner shall be or shall be held liable for any loss of or damage or delay to the cargo or for any failure in performing hereunder arising or resulting from: …from any other cause arising without the actual fault or privity of the Owner.”
o “19. GENERAL EXCEPTIONS CLAUSE. The Vessel, her Master and Owner shall not, unless otherwise in this Charter expressly provided, be responsible for any loss or damage, or delay or failure in performing hereunder, arising or resulting from:- …any other cause of whatsoever kind arising without the actual fault or privity of the Owner.”
o Article IV(2)(q) “Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from— …Any other cause arising without the actual fault or privity of the carrier, or without the fault or neglect of the agents or servants of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception to show that neither the actual fault or privity of the carrier nor the fault or neglect of the agents or servants of the carrier contributed to the loss or damage.”
o “29. EXCEPTIONS (a) Vessel, Master and Owner shall not, unless otherwise expressly provided in this Charter, be responsible for any loss or damage to cargo arising or resulting from: any act… of Master, pilots, mariners or other servants of Owner in the navigation… of Vessel… unless caused by the personal design or neglect of Owner”
o “32. (1) The vessel, her master and Owners shall not, unless otherwise in this Charter expressly provided, be liable for any loss or damage or delay or failure arising or resulting from any act, neglect or default of the master, pilots, mariners or other servants of Owners in the navigation …of the vessel… unless caused by the actual fault or privity of Owners”.
*The ExxonMobil and Shell forms is very pro-Charterers and so do not include the usual ‘catch all’ of “any other cause arising without the actual fault or privity of the Owners” in their exclusions clauses.
Cargo Interests are likely to adopt a “Wait and See” approach
Potential for Claims against the Grounded Vessel itself for causing Losses
o Any act or omission which falls short of a standard to be expected of “the reasonable man”. For a claim in negligence to succeed, it is necessary to establish that:
(1) a duty of care was owed by the defendant to the claimant - Applied to the current situation: one vessel to another vessel in a canal, yes such a duty of care must surely arise;
(2) such a duty was breached - Applied to the facts: this is more difficult as the grounding was seemingly caused by circumstances outside of the control of the vessel, rather than an intoxicated Master at the bridge, for example, so proving the breach by the Owners may be difficult;
(3) such a breach of the duty caused the claimant’s losses - Applied to the facts: this also may be difficult and would be subject to the claimant’s obligations to mitigate their losses. Therefore we must query what level of the claimant’s losses would, in fact, be sustainable; and
(4) such losses fell within the defendant’s scope of duty and was a foreseeable consequence of the breach of duty - Again, there is a wrinkle here on the foreseeability point as delay to a 3rd party vessel causing consumption of more bunkers is a pretty easy to see as a consequence of queued up vessels, but market pricing movements on a cargo whose identity is unknown to the Owners of the Grounded Vessel may be more difficult to fit within the scope of reasonable foreseeability from the viewpoint of the Owners of the Grounded Vessel.
TAGS: Suez Canal; Cargo Claims; Charter Party; Bills of Lading; Seafarers Right; Shipping Litigation; Arbitration; International Arbitration; Shipping Arbitration; Ship Arrest; Dispute Resolution; Brus Chambers; Shrikant Hathi; Binita Hathi; Solicitors; Law Firms; Advocates; Vessel; Ever Given; Evergreen; Taiwan; Shoei Kisen Kaisha; Imabari Shipbuilding; Time Chartered; Bernhard Schulte Shipmanagement; Cargo Insurance; Underwriters, Protection and Indemnity Club; Salvage; General Average; Grounded Vessel, Cargo Interest; Maritime Claim; Admiralty Jurisdiction; High Court; Limitation of Liability; Manoeuvre; Negligencia; Accident; Negligent; Loss or Damage Caused by the Operation of a Vessel; Loss or Damage to or in Connection with any Goods; Agreement relating to the Carriage of Goods;