Commercial and Legal Implications of the Suez Canal Blockage
Earlier this year on 23 March, the Ever Given, a 400m-long cargo vessel, became grounded in the Suez Canal, blocking the narrow shipping route in Egypt for six days and creating a backlog of more than 350 cargo vessels at both ends of the canal.
News outlets around the world immediately began airing live coverage of the 'rescue mission', turning the incident into a global spectacle and triggering countless memes showing a tiny bulldozer's helpless attempt at digging out the giant vessel. The commercial and legal implications of the incident, however, are significant.
Six days may not seem significant to some, but this was the longest closure suffered by the canal in almost half a century since the eight-year shutdown that began as a result of the Six-Day War in 1967.
The importance of international shipping trade and the canal's role in it should not be underestimated – according to the Organisation for Economic Co-operation and Development, around 90% of international trade by volume is transported by sea. It is estimated that 10 to 12% of international trade flows through this very narrow artificial waterway that connects the Red Sea to the Mediterranean Sea on any given day. The oil tanker tracking firm Kpler estimates that approximately 1.74 million barrels of oil go through the canal each day.
According to Lloyd's List (regarded as the most authoritative shipping journal in the world), approximately US$ 9.6 billion of goods are transported through the canal each day. The potential daily loss during the six-day blockage will be greater still, as most of the containers on affected ships likely contained goods that form part of long supply chains.
As an example, the Ever Given is said to have been carrying 20,000 containers at the time of its stranding, with many containers carrying perishable goods and materials that form part of just-in-time supply chains.
It is difficult to quantify the loss suffered by the global economy as a result of the incident with any level of accuracy. There are many layers of affected parties, for example: marine insurers; underwriters; shipping lines; manufacturers; oil producers and consumers; ship owners; charterers; beneficial cargo owners; and third parties relying on the goods in transit. Some of these may not feel the actual impact and any loss for some time.
Who is to blame?
The Suez Canal Authority (the SCA) brought a US$ 916 million claim against Shoei Kisen Kaisha, the Japanese company that owns the Ever Given, to cover costs of the salvage operation, stalled canal traffic, lost transit fees and reputational damage. The SCA later lowered the claim to US$ 550 million, and finally reached a settlement in principle with Shoei and Shoei's insurers. The details of the settlement remain undisclosed, but it is probable Shoei agreed to a settlement in order to facilitate the release of the Ever Given, which the Egyptian government had detained after it was re-floated.
Shoei has publicly admitted that it expects to be hit with "many hundreds or thousands" of legal claims. In anticipation, Shoei and Evergreen applied for, and obtained, an order from a London Court to stay any potential claims against them for two months. Shoei's position is that it needs time to gather information to defend the growing number of claims, and that it is not liable for the incident or its consequences: the Ever Given was being led by SCA pilots at the time it became grounded and, as recordings allegedly show, the Ever Given's control centre had protested the SCA pilots' decision to enter the canal during bad weather conditions.
The owners/ charterers of the other vessels (that were either stuck for six days waiting for the Ever Given to be re-floated or forced to reroute and circumnavigate Africa (which adds around 15 days and hundreds of thousands of dollars in fuel costs to the journey)) the owners of the cargo aboard those other vessels and other affected parties (in particular insurers and reinsurers) will no doubt look to bring claims against Shoei or the SCA.
There are a myriad of jurisdictional and other legal issues that parties need to consider before initiating claims arising out of the incident. For example:
- The 1976 Convention on Limitation of Liability (of which Egypt is a signatory) limits the amount marine insurers could be made to pay out in major claims. The Convention sets limits dependent on tonnage of vessels, which do not always reflect the value of the goods being transported;
- Cargo contracts often allow for compensation for damage to goods (including expiry of perishable goods) but not for delays. Further, not all contracts contain Force Majeure provisions, and even those that do often contain a list of specific Force Majeure events, which may or may not cover the blocking of the canal. The absence of helpful contractual provisions will complicate a claim; and
- Complex jurisdictional issues are part and parcel of maritime disputes. As Lloyd's List states, the jurisdiction "will depend on where the goods were headed and where the assured are incorporated", at least in the absence of an agreed governing law and jurisdiction clause.
The incident is a stark reminder of the vulnerability of the infrastructure of international trade and the potential threats that are always around the corner for economies that rely heavily on international trade. Our team of experts across our offices in the MENA region, the UK and Malaysia have extensive international expertise and experience in representing our clients in complex multi-jurisdictional disputes. Please contact Matthew Showler (firstname.lastname@example.org) to discuss our experience and how we can assist with the quick and cost-effective resolution of your claims arising out of the incident.