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Suez Canal Ship Blockage Could Trigger Wave Of Claims

Mike Burns comments on the Suez Canal blockage in Law360

This article was first published on Friday 26 March 2021 by Law360

Written by Martin Croucher

The giant cargo ship that has blocked the Suez Canal will probably be a source of numerous lawsuits in the coming months, with potentially hundreds of millions of dollars on the line over loss of cargo, extra fuel charges or disruption to global supply chains.

The Ever Given became grounded on Tuesday against a bank in the narrow North African shipping artery. The 400 meter-long vessel blocked hundreds of ships and has been sitting in the way of what shipping experts Lloyd's List estimates to be $9.6 billion in goods traffic every day. 

The ship's owner, Japanese company Shoei Kisen, said high winds caused it to run aground as the vessel sailed north through the canal on its way to the port of Rotterdam, in the Netherlands. Experts said it was not possible to predict how long it will take to re-float the massive vessel, but said that investigations will focus on culpability as a basis for legal action on several fronts.

"It's very high-profile, and somebody somewhere is going to sue," said Marcus Baker, global head of marine and cargo cover at insurance broking giant Marsh. "I don't think there's any question about that."

But Baker said it would be difficult to estimate the cost of damages, which would not become clear until the vessel was re-floated and traffic in the waterway resumed. "It could be stuck there for months," he added.

David Smith, head of hull and marine liabilities at insurance broker Mc Gill and Partners, said the losses to the shipping industry, the Suez Canal Authority and insurers could be substantial.

"The disruption will come with a hefty price tag, a figure of $100 million has been mentioned by some in the industry," he said. "However, the final bill — which will be made up of compensation for delays, loss of revenue for the canal authority, potential damage to cargo and the cost of refloating the ship — is likely to be even more expensive."

London-based marine insurer UK P&I Club, which holds Ever Given's policy, said on Thursday that Smit Salvage, a Dutch company, has been appointed to re-float the vessel. All efforts were being made to ensure marine traffic in the canal could resume, UK Club said, although it did not predict how long it could take to dislodge the vessel.

"The UK Club is working with all relevant parties including the canal authorities, salvors, hull and machinery underwriters, legal representatives and others to help facilitate a safe and speedy conclusion to this incident," the insurer said in a statement.  

"It is not appropriate for the UK Club to comment on any confidential insurance or potential claims relating to this incident," it added.

The Suez Canal is a 120-mile long artificial waterway, connecting the Mediterranean Sea to the Red Sea. It was opened 162 years ago, and now approximately 10% of global trade flows through the 200-meter wide passage.

The Suez Canal Authority has counted more than 50 ships lining up to enter the canal every day. Some experts predict that many shipping lines might soon opt to divert around Africa's Cape of Good Hope, adding to fuel costs and delaying delivery schedules,  if the blockage drags on for weeks.

Mike Burns, marine specialist and partner at law firm Weightmans, said it would be difficult for owners of vessels facing disruption to claim against either Shoei Kisen or its insurer.

"Those other vessels don't have any contract with the [Ever Given], so their owners would have to look at another legal basis for formulating a claim," he said. "Normally, if a vessel becomes stuck and other vessels have to wait, it's just part and parcel of the risks of maritime trade. Other vessels, except where there is a collision, don't owe each other duties of care."

Another avenue for potential claims could open up for owners of cargo on board the Ever Given or other vessels. Experts say that most cargo contracts typically do not provide compensation for delays but sometimes offer cover for damages or expiry of perishable goods.

But Burns said that, even then, there are often exclusions in a contract for "force majeure" events, which lie outside the shipper's control.

"Even if there was an error in navigation of the vessel, that is also a defense to carrier interests," he added. "Just to say the vessel is stuck on a bank doesn't necessarily present an easy position for cargo owners."

That would probably change, however, if an accident resulting from  negligence in re-floating the vessel caused the Ever Given to topple over and destroyed most of its cargo. In those circumstances, the insurer of the vessel would be able to limit its liability through international treaties, in particular the 1976 Convention on Limitation of Liability for Maritime Claims.

The convention, drawn up by the International Maritime Organization and signed by 54 governments including Egypt, limits marine insurers in how much they are required to pay out for major claims, using a sliding scale of maximums based on the tonnage of the vessel.

That would mean a potential claim for several hundred million dollars would be reduced to tens of millions, Burns said.

The only case in which the convention would not apply would be if there was willful negligence: if a pilot had deliberately driven a ship into the canal bank, or if the owner was reckless in maintaining safety standards on board the vessel, for example. But experts say it is extremely rare for the limitation to be breached in that way.

A final source of insurance claims, and potentially the most likely, would be disputes between the Suez Canal Authority and the ship owner and its insurer over the cost of freeing the ship from the canal bank.

But Baker, of Marsh, said that there was unlikely to be litigation over that. He predicted that the authority and the UK Club would come rapidly to an agreement over costs.

Vessels do become stranded from time to time in the Suez Canal. Shipping company Buxus Seaway filed a lawsuit last year against its insurer AIG and its petroleum supplier after one of its vessels encountered steering problems in the canal and became grounded.

Mark Sachs, who has worked on claims involving collisions in the Suez Canal, said the Ever Given incident was not unusual in maritime history.

"There is disruption in supply chains, but rerouting via Cape Horn is already taking place," he said. "This isn't going to have an enormous impact in the market, either in insurance or claims, if the vessel is re-floated as expected — even if that takes a few weeks."

--Editing by Ed Harris.


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