When Canals Clog

As I write this on April 1, 2021, the world has just spent the past week witnessing one of the most dramatic marine events in modern history, resulting in this often-forgotten industry making headline news. After six days trapped in the Suez Canal where it blocked the passage of hundreds of waiting containerships, bulk carriers, and tankers, Ever Given has now re-floated on the spring tides.

It appears the vessel was not significantly damaged, and, at this point, it seems likely that it will continue on its voyage. The immediate impact will be felt by the shipowner, the Suez Canal Authority (SCA), and those with cargo on the ship. In the long term, there is no doubt that it will continue to draw public attention as investigations unfold, claims are made, and many and varied repercussions are felt by the marine industry, global supply chain, and consumers.

The Nightmare Avoided

An estimated 10-15% of the world’s trade passes through the Suez Canal. Drawing on my experience of dealing with over 300 maritime casualties, the worst-case scenario could have had a very large cost, which also highlights the concentration of risk on these mega-vessels.

If the vessel, beached at the fore and aft ends, was to have broken its back, we would expect much of the cargo—with an estimated value of around $500 million—would be sent to salvors, albeit at a very significant cost to cargo insurers. The ship—with an estimated value of $120 million—would probably become a constructive total loss for its hull and machinery (H&M) insurers.

Perhaps more importantly, there is an open-ended exposure for pollution from the substantial quantity of fuel on board, and the wreck removal for a ship that is as long as the Empire State Building is tall. By way of illustration, the removal of the Costa Concordia wreck took many months and cost over $1 billion.

Moreover, the SCA would suffer substantial revenue losses to the tune of $10 million per day during a wreck-removal operation that likely would have taken several months. No doubt those losses would be claimed against the owners and related protection and indemnity (P&I) insurers of the Ever Given, who would face interesting legal questions about limitations of liability.

Additionally, freight rates are already under pressure and capacity is limited. Availability of container shells is also a pinch-point at present. Freight costs tend to rise substantially at times of short supply, so if the Suez Canal was closed for an extended period, the additional time taken for vessels to deviate around Africa could be expected to result in a significant rise in freight rates as well as a lengthening of supply chain times. This would have knock-on effects in all of the many industries that depend on physical supplies of goods.

The Bad Dream That Could Be

Returning to the Ever Given, substantial costs have already been incurred to re-float the vessel. At this point, it remains to be seen whether its owners will absorb the salvage costs in the first instance and attempt to recover much of them from cargo insurers in the general average, or whether the salvors will simply claim them directly against all the salved property and their insurers. Beyond that, the Ever Given owners will be expected to pay the SCA for the assistance rendered to the vessel, the damage to the canal bank, and any fines levied against them.

It is difficult to quantify at this point, but we anticipate this event could have significant insurance implications. To date, we have received many questions on a wide range of liability issues, with countless angles to explore. The immediate interests and concerns with this incident will be owners, charterers, H&M and P&I insurers, cargo owners, cargo insurers, salvors, and the SCA. Here are some of the issues we are discussing right now.

Backlog of Vessels and Shipping Delays. As Ever Given blocked the canal, it resulted in a significant backlog of vessels that were waiting behind and in front of it. In all, more than 400 ships were impacted by the delay, and a number took the decision to re-route. There are a large number of ships and cargoes whose delays will have an impact on the availability of goods under sales contracts, freight payable, and legal disputes arising between parties involved in these various maritime adventures. There is certain to be a knock-on effect in the supply chain, especially when “just in time” is so prevalent.

There is potential for many other claims to arise in relation to the ships and cargoes that are either caught up in the congestion or re-routing to avoid the canal. There may be disputes involving cargo owners arising out of the delay as well as claims for additional expenses, such as fuel costs and additional freight. There may also be a shortage of vessels available as a result of the delays, leading to higher freight rates or claims arising out of missed fixtures. There will be legal questions about duty of care and remoteness, but the potential impact could be wide-ranging.

Damage to the Suez Canal. Clearly, the impact and the re-floating efforts have caused damage to the canal itself. On the whole, the damage looks modest, but a significant amount of material was moved to free the vessel. The canal is an expensive place to operate in, and if the flow of traffic through it is interrupted because of repairs, it has the potential to be very costly.

We expect there will be a full investigation into the underlying cause of this incident to determine what factors led to the vessel grounding in this way. Depending on the outcome of those investigations, further safety measures may be introduced that could impact the ongoing costs of using the canal.

The Potential Litigation Picture. Any maritime casualty of this nature has the potential to be a very significant source of litigation. The outcome of investigations will be a factor that determines how many claims will arise and how those claims will manifest. Much more information is needed regarding the circumstances surrounding the incident and what the underlying causes of the grounding turn out to be.

Moving ahead, because cargo insurance is spread widely, many underwriters may be affected. It is not unusual for large firms to act for 100 or more cargo insurers on a large containership casualty.

In this case, we can envisage claims for salvage being brought against all the salved property, for general average to be brought by ship against cargo, and for canal blockage/damage to be brought against the ship by the SCA. It is reported today that the SCA is claiming $1 billion in losses as a result of the blockage.

There are also possible claims and litigation potential between owners and charterers of other ships delayed or diverted around the Cape of Good Hope, and disputes arising if charters are cancelled.

Delay/Business-Interruption Claims. Delays in the shipping industry and in the carriage of goods by sea are not unusual. The claims that arise as a result of that delay very much depend on what losses the delay gives rise to and any contractual terms.

In relation to other ships, clearly they do not have any contractual relationship with the owners of the Ever Given, and they will have to establish a basis upon which to make a claim (and against whom). They must also identify what law and jurisdiction may apply to that claim.

“Delay” is generally excluded from cargo insurance policies, but we have seen some bespoke policies that respond to delays. On a wider business-interruption policy front, coverage could be triggered depending on the terms and conditions of cover.

Nothing Is a Given

As for the Ever Given itself, damage is still being assessed but it looks like it will be modest. It will be up to the Classification Society to decide whether the vessel is fit to sail. If not, the vessel would usually have to discharge all of its cargo, then go for repairs. That is a significant problem in that (less likely) scenario because there are few ports sufficiently deep enough to take the vessel, and there is very little spare capacity on other containerships to forward on the cargo removed.

The regular passage of ships through the Suez Canal will soon be back to normal, but the impacts of this incident will take longer to work through. From the impact on availability of imported goods to the flood of claims related to the general average, salvage, and disruption, the legal fallout of Ever Given-related casualty claims may continue to unfold for years to come.