Ever Given: Legal and Insurance Implications

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, as 12 percent of global trade is carried on board ships using the canal.

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.

Cargo insurance

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:

2. 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 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.

Philip Teoh 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 and KCAB, among others.