Maritime Proctor Blog

Unless you are wholly checked out from watching the news (and, frankly, with what’s gone on in the past 18 months, we do not blame you if such is the case), you likely know that a large container vessel, the Ever Given, was, until Monday 29 March 2021,[1] stuck (for lack of a better lay term) in the Suez Canal.  While the Ever Given is now out of the Canal and on to her next port, the impacts of this incident on world trade will resonate, we predict, for several years.

Background

To understand the situation, one must know generally how the Suez Canal works, as well as its importance to not only the maritime industry, but also world trade as a whole. 

-1-        A Canal Without Locks

The Suez Canal connects the Mediterranean Sea to the Red Sea.  After several expansions, including a major project in the last 10 years, the Suez Canal is approximately 193 kilometers long, 205 meters wide, and 24 meters deep.[3]  It is a lockless canal (unlike the Panama and Erie canals), and seawater flows freely through it.  Approximately 10% of the world’s total trade[4] and 10% of the world’s oil trade flows through the Suez Canal each year.[5] 

Prior to the opening of the Suez Canal, any vessels in the Red Sea that wished to call on European Ports had to sail around the Cape of Good Hope on the southern tip of Africa.  Not only is this a sometimes perilous voyage, but it increases time and costs.  Reporting from the Wall Street Journal indicates the Cape of Good Hope route can add “15 days and costs of $450,000.00 to the voyage.”[6]

So, a shorter and safer route that saves time and money is obviously preferred.  But, even with the recent expansion of much of the Canal to separate northbound and southbound lanes (allowing for two-way traffic), there are portions of the Canal that are, for all intents and purposes, a single lane road only 300 feet (~91 meters), meaning vessel traffic can only flow northbound or southbound at a given time.[7]

-2-        The Particulars of the Ever Given

The Ever Given is an approximately 400 meter long container ship, built in 2018.[8]  By comparison, the Empire State Building is approximately 380 meters in architectural height.[9]  The vessel is, to the author’s understanding, owned by the Shoei Kisen Kaisha, Ltd. of Japan[10] and operated by the Evergreen Corp. from Taiwan.  The Ever Given flies the flag of Panama.  It has gross tonnage of 219079, and is ~59 meters in breadth, with a maximum draft of 15.9 meters.  In other words, it is a very large vessel. 

At the time she became stuck in the Suez Canal, the Ever Given carried ~20,000 loaded containers.[11]  As of March 28, 2021, there were 369 vessels stuck behind the Ever Given in the Canal.[12] A day later, the BBC reported the grounding of the Ever Given delayed approximately 450 vessels from their intended destinations.[13]

-3-        What Happened

On Tuesday, March 23, 2021, the Ever Given, proceeding northbound on a voyage to Rotterdam, allegedly encountered high winds measured at 40 knots.[14]  The vessel became grounded & lodged in the bank perpendicular to the direction of the Canal.[15]  According to the BBC, the high wind may not be the only cause of the grounding, which will require additional investigation.[16]  But, the allegation of high winds could be significant, as is discussed below.

Bernhard Schulte Shipmanagement used up to 11 tugboats, a specialty suction dredger, and other equipment to free the Ever Given.[17]  But, as Vivian Yee reported on March 29, it took an ”unusually high tide” created by a confluence of the moon and the sun to be able to free the Ever Given from the bank.[18]  Ms. Yee also reported the Ever Given succumbed to the “bank effect.”[19]

-4-        Prior Closures

However, this is not the first time or remotely close to the longest time the Suez Canal could not accommodate commercial vessels.  In 1956, Egyptian President Gamal Abdel Nasser nationalized the Suez Canal Company which, at the time, was a joint British-French effort.[20]  The resulting conflict, which encompassed several nation-states, closed the Suez Canal for over a year.[21]

Immediate Impacts

As stated above, as of Sunday there were approximately 370 vessels, transiting in both directions, that were stuck on either side of the Ever Given to pass through the Canal.  Each of those vessels is now likely delayed in arriving at its designated port for loading or discharge.  The Wall Street Journal quoted from a statement to its clients made by the world’s largest container vessel operator, A.P. Moller-Maersk A/S, that “For every day the canal remains blocked, the ripple effects on global capacity and equipment continue to increase.”[22]  Maersk predicted the delays would continue “well beyond the physical removal of the Ever Given.”[23]

Like oceanfront property or land inside Loop 610, there are only so many ports (and berths within those ports) in Europe that can accommodate the various vessels stuck behind the Ever Given. There will be short term delays in the loading and off-loading of cargo.  These delays will, in turn, affect both the delivery time and pricing of goods.  It may lead, as in some countries already, to fuel rationing.[24]

Long Term Impacts

It is a safe assumption that there will be litigation and/or arbitration over the grounding of the Ever Given for several years.  To understand the origins of these issues, one must have a basic understanding of the various types of contracts used in Admiralty and Maritime law to transport goods, and the protections that, as a matter of custom, routinely are present in those contracts.  For sake of discussion, we will divide these issues into two categories: Contractual Claims and Third Party Claims.

The use of vessels to transport goods over navigable waters generally falls into two types of relationships: a common carrier relationship or a private carrier relationship.  In the former, the vessel owner holds itself out to the “general public as engaged in the business of marine transport for compensation.”[25]  The “essence” of the latter category, according to Professor Schoenbaum, is the charter party.[26]  For our purposes, we will focus on private carriers.

-1-        Maritime Contractual Claims

A charter party is a contract to lease a vessel.  There are three basic types:

-a-        A demise, or bare boat charter. This is where the charterer (the person leasing the vessel) wholly rents or leases a vessel from the vessel owner.  The charterer pays the insurance, crews the vessel, and is usually solely responsible for all operations, maintenance, repairs, and damage to the vessel during the time it is under demise.[27]  This is akin to renting a car.

-b-        A time charter.  The charterer essentially hires some or all of a particular vessel (or fleet of vessels) for a given time period, during which the vessel is crewed and insured by the owner, but the charterer selects the ultimate destinations of the vessel.[28]  This is akin to hiring a driver for a night on the town.

-c-        A voyage charter. This is a charter under which a certain type and/or quantity of goods is carried between two (or more destinations) for one voyage of the vessel.[29]  This relationship is akin to hiring an Uber or Lyft driver for a single trip.

Bills of Lading play a large role in the function of charter parties.  Gilmore and Black describe bills of lading as both “an acknowledgment by a carrier that it has received the goods” and as a “contract for carriage.”[30]  If the bill of lading also acts as a negotiable instrument, it not only can serve as title to the goods under it, making it “one of the indispensable documents in financing the movement of commodities and merchandise throughout the world.”[31]

Depending on how the parties draw up the charter, there are various international treaties and national statutes that can create a basic framework of obligations, warranties, rights, and liabilities as to each party to the transaction. And, the bills of lading can modify and even supersede the terms of the charter.

As an example, the default statutory framework for an oceanic carriage of goods contract in the United States is the Carriage of Goods by Sea Act (“COGSA”).  Another example is the Rotterdam Rules, negotiated over a period of approximately 11 years to replace the Hague, Hague-Visby, and Hamburg Rules.[32]  However, parties are free to contract around any of these statutes and/or conventions (for the most part), and many choose to do so for a variety of reasons. 

Given the flexibility afforded to parties entering into charter parties, the basic starting point in evaluating rights, obligations, and potential exposure under a charter party is to identify if the parties stated the applicable law under which any disputes arising under or relating to the Charter shall be resolved.  Other relevant clauses involve forum selection and limitation of liability, which can include waivers of consequential – which vary from jurisdiction to jurisdiction – damages.

However, most time and voyage charters contain penalties against the cargo owner (the charterer in most instances) and the vessel operator if adherence to a schedule does not occur.  As to the former, the penalty is normally found in demurrage charges.  As to the latter, it is best characterized as damages for deviation or delay.

Demurrage is “a liquidated penalty owed by a charterer to a shipowner for the charterer’s failure to load or unload cargo by a certain time.”[33]  Some charters may cap contractual demurrage, but Admiralty courts can also award non-contractual demurrage damages, which are also called damages for detention.[34]

In contrast deviation damages can arise (again, depending on the wording of the charter/agreement) against the vessel owner/operator if there is a requirement of adherence to a fixed route, and/or a standard/warranty in the charter that the vessel owner/operator guarantees its master and crew will use due diligence (or some variant thereof) to ensure timely delivery of the goods.  There are many different possibilities for such deviation/delay damages, based on the particulars of each shipping relationship.

As is the norm with contracts, the actual words of the agreement matter most.  But, it is relatively safe to predict that there will be a multitude of demurrage/delay claims, as well as insurance claims, between the charterers/cargo owners and the vessel interests present in the various maritime transportation contracts governing the armada of vessels impacted by the Ever Given. 

The Wall Street Journal reports that up to $3,100,000,000.00 in liability coverage is potentially available through various P&I Clubs to claims against the Ever Given.[35]

-2-        Extra-Contractual Claims

However, many of those negatively impacted by this situation have no contractual privity with the vessel that actually caused their delay.

Assume hypothetically that under a strictly worded time charter the charterer of the fictional vessel M/V Appendix[36] owed some contractual penalty to the vessel owner of the Appendix, irrespective of the reason for the delay.  It is unknown whether the laws of Egypt (locality of the incident), Taiwan (residence of the operator), Japan (residence of the corporate owner), and/or Panama (the law of the flag of the Ever Given) would allow for the charterer of the Appendix to bring a claim against the Ever Given as an in rem action and/or an in personam claim against the owner and/or operator.  However, this is a hypothetical that would make for an excellent conflict of laws examination question in law school.

But, if these hypotheticals manifest themselves in real life and the damages are significant enough, it is likely that some third parties may attempt to either arrest the Ever Given in a favorable jurisdiction.  Under U.S. law, the Ever Given (or any sister vessels) could also be exposed to potential arrest and/or attachment under the Supplemental Rules for Certain Admiralty & Maritime Claims.

If the Ever Given ran aground in the United States (hypothetically blocking the Houston Ship  Channel) and was a U.S. flagged vessel (instead of a Panamanian-flagged vessel), the owners of the Ever Given could also, in theory, file a Limitation of Liability action under the Limitation of Liability Act (“LOLA”) 46 U.S.C. § 30501-30512 in an attempt to mitigate its losses, or at least obtain a concursus of claims related to the voyage at issue.  The next Maritime Proctor Blog Post will use this hypothetical as a primer of the rights and remedies available under the LOLA for similar situations in the United States.

In light of these potential hypothetical situations, we also predict that many involved in ocean transportation of goods will likely revisit their operative agreements to allow for increased flexibility in the event of a similar situation in the future.  While there are many forms available on-line that can be used to create a legal framework for the carriage of goods, it is always prudent to have an experienced Admiralty and Maritime attorney

A Note on the Importance of Dredging/Waterway Maintenance

To a casual observer of the news in the United States, politicians seem to talk a lot about spending federal money on infrastructure (rebuilding roads, bridges, and maintain/improving waterways) every few years.  The idea of political leaders “re-investing” in their country through infrastructure spending is not unique to the United States. 

Egyptian President Abdel Fattah Al Sisi made similar promises when he took office, which included widening the Suez Canal.[37]  But, as reported by Jared Malsin in the Wall Street Journal, Egypt did not dredge a second lane in the Suez Canal in the area where the Ever Given ran aground because the government “decided doing so wouldn’t be worth the extra investment.”  The source for this quote in Mr. Malsin’s article is Ahmed Darwish, a former Egyptian official who led the Suez Canal Economic Zone.

One hopeful short and long-term impact is that normal citizens realize the importance of continual dredging of America’s waterways.  Imagine a scenario where the Houston Ship Channel was blocked for a significant period of time, meaning that no petrochemical products could get to or from refineries via vessel traffic.  A sneak preview of this occurred in February 2021 when record low temperatures essentially incapacitated the entire State of Texas for a week.[38] 

According to the Greater Houston Partnership, the 10 refineries in the Houston metro area alone constitute 45.1% of Texas’ refining capacity and 13.8% of the entire refining capacity in the United States.[39]

The Ever Given situation, combined with the successful expansion of the Panama Canal, makes clear that continued maintenance and expansion of our nation’s waterway system is not only in the interest of the Maritime/Shipping industry.  Rather, it is arguably an issue of national import, and, depending on the circumstances, an issue of national security.

[1] Jaclyn Diaz and Scott Neuman, ‘She’s Free’: Giant Container Ship Blocking Suez Canal Underway After Days, npr.org, March 29, 2021.  https://www.npr.org/2021/03/29/982174644/ever-given-partially-afloat-as-salvage-teams-race-to-reopen-suez-canal#:~:text=The%20Ever%20Given%20is%20among,became%20lodged%20on%20March%2023.

[2] https://static01.nyt.com/newsgraphics/2021/03/25/suez-evergreen-locator/e4ab50a48889496e6b59b81da06f7b756fe3af75/evergreen-locator-Artboard_1.jpg

[3]https://earth.esa.int/web/earth-watching/change-detection/content/-/article/suez-canal-egypt#:~:text=The%20canal%20is%20single%2Dlane,with%20the%20tide%20at%20Suez.

[4] Camila Domonoske, Ship Happens: Coffee, Livestock, Ikea Furniture Among the Objects Stuck at the Suez, npr.org, March 29, 2021.  

[5] Benoit Faucon, Sarah McFarlane, and David Hodari, Energy Industry Is Hit By Fallout, The Wall Street Journal, March 26, 2021 at A6.

[6] Id.

[7] Costas Paris and Benoit Faucon, Fears of Suez Canal Delays Mount, The Wall Street Journal, March 26, 2021, at A1, A6.

[8]https://www.marinetraffic.com/en/ais/details/ships/shipid:5630138/mmsi:353136000/imo:9811000/vessel:EVER_GIVEN

[9] https://www.esbnyc.com/about/facts-figures

[10] Benoit Faucon, Ever Given Mangled German Ferry in ’19, The Wall Street Journal, March 29, 2021 at A6.

[11] Rory Jones, Costas Paris, & Phillip Wen, Ships Turn to Longer Routes as Jam at Suez Canal Drags On, The Wall Street Journal, March 27/28 2021, at A1.

[12] Mary-Ann Russon, The cost of the Suez Canal blockage, BBC News, 29 March 2021 (“Russon”).  https://www.bbc.com/news/business-56559073.

[13] Id.

[14] Mary-Ann Russon, The cost of the Suez Canal blockage, BBC News, 29 March 2021, as found at https://www.bbc.com/news/business-56559073.

[15] Id.

[16] Id.

[17] Vivian Yee, Marc Santora, and Rick Gladstone, ‘We pulled it off!’ After days of arduous labor, a ship is free, and salvagers are triumphant, The New York Times, March 29, 2021.  https://www.nytimes.com/2021/03/29/world/suez-canal-ship.html

[18] Vivian Yee, Ship is Freed After a Costly Lesson in the Vulnerabilities of Sea Trade, The New York Times, March 29, 2021, p. A12.  https://www.nytimes.com/2021/03/29/world/middleeast/suez-canal-ever-given.html.

[19] Id.

[20] https://history.state.gov/milestones/1953-1960/suez.

[21] Yelena Dzhanova, The Suez Canal has a contentious history and has been blocked and closed several times since opening, Business Insider, March 28, 2021. https://www.businessinsider.com/the-suez-canal-blocked-and-closed-several-times-since-opening-2021-3. 

[22] Benoit Faucon, Costas Paris, and Jennifer Smith, Shippers Reroute, Lose New Business In Crisis, The Wall Street Journal, March 29, 2021 at A7 (“Shippers Reroute”).

[23] Shippers Reroute, at A7.

[24] Chloe Weiner and Rachel Treisman, Race to Free Giant Ship From Suez Canal Continues After Failed Refloating Attempts, npr.org, March 28, 2021.  https://www.npr.org/2021/03/27/981958889/race-to-free-giant-ship-from-suez-canal-continues.

[25] Thomas J. Schoenbaum, Admiralty & Maritime Law, §10-3, p. 777-78 (5^th Ed. 2011)(Practitioner Treatise Series)(“Schoenbaum”).

[26] Id.

[27] Grant Gilmore & Charles L. Black, Jr., The Law of Admiralty, §4-1 at 194 (2d Ed. 1975) (“Gilmore & Black”).

[28] Gilmore & Black, §4-1 at 194.

[29] Gilmore & Black, §4-1 at 193.

[30] Gilmore & Black, §3-1 at 93.

[31] Gilmore & Black, §3-1 at 93.

[32] Michael F. Sturley, Modernizing and Reforming U.S. Maritime Law: The Impact of the Rotterdam Rules in the United States, 44 Tex. Int’l L.J. 427 (Spring 2009).

[33] Black’s Law Dictionary, 444 (7^th ed. 1999).

[34] See Gilmore & Black, §4-8 at 212 (2d Ed. 1975); see also Black’s Law Dictionary, 444 (7^th ed. 1999).

[35] Leslie Scism and Benoit Faucon, Insurers Face Host of Claims on Delays, The Wall Street Journal, March 29, 2021 at A6.

[36] i.e., it doesn’t matter.

[37] Jared Malsin, Sisi’s Global Structure Is At Stake, The Wall Street Journal, March 27-28 2021, at A7.

[38] Swati Verman Erwin Seba, and Jennifer Hiller, Texas deep freeze hits energy sector, Houston ship channel shut, Reuters.com, February 16, 2021, as seen at https://www.reuters.com/article/us-energy-texas-weather/texas-deep-freeze-hits-energy-sector-houston-ship-channel-shut-idUSKBN2AG1PK

[39] Greater Houston Partnership, Gulf Coast Refining Capacity, updated June 2018, as seen at https://www.houston.org/houston-data/gulf-coast-refining-capacity