Suez Canal and the MV Ever Given - impact on the maritime and oil/gas sector

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(www.MaritimeCyprus.com) The Suez Canal opened in 1869. Along with the Panama Canal, it is one of the most important maritime “shortcuts” ever built. Today, the canal is 193km (120 miles) long and is one of the busiest waterways in the world. It allows vessels to avoid the additional 6,000 km required to round the Cape of Good Hope, connecting the Mediterranean to the Red Sea and providing the shortest sea link between Asia and Europe.

The importance of the Suez Canal was made plain this week. A 400m long, 220,000-ton, 20,000 teu container ship, the MV Ever Given, entered the canal passing northwards, bound for Rotterdam from China. She was at her capacity, with photographs from the scene evidencing containers were stacked high.

The vessel lost control, turned sideways in the canal and ran aground, blocking the waterway.

At the time of writing, there are concerns that the operation to re-float the vessel could potentially take weeks, particularly if the vessel requires unloading, and that the vessel’s weight may prove too great to be pulled loose by tugs.

There are already a number of significant impacts being felt across the oil & gas and maritime sectors.

  • The canal is a critical “choke point” for Persian Gulf oil; around 10% of total seaborne oil trade is estimated to pass through the canal.
  • According to oil analytics firm Vortexa, the approximate rate of backlog is around 50 vessels per day, and any delays leading to re-routings will add 15 days to a Middle East to Europe voyage.
  • U.S. benchmark May West Texas Intermediate crude rose 5.9%, to $61.81 a barrel, and May Brent crude rose by 6%, to finish at $64.41 a barrel. However, with stocks of crude remaining high as a result of the pandemic, it might be expected that a few days of delay in oil delivery will not swing the market in the medium term.

  • With around 12% of global trade flow of goods passing through the canal, multi-million dollar losses are expected, both in respect of the vessel and her cargo (P&I (potentially in excess of USD 100 million), hull and cargo claims) and for loss of revenue for other vessels and the canal authorities.
  • The re-routing and revenue loss claims are expected to be in the region of USD 10 million to 15 million per day, according to The Insurer.

  • At the time of writing there are in excess of 150 vessels waiting on both sides of the canal, with long tailbacks expected – it is expected that delays will continue for a time even after the vessel is re-floated.
  • Asia to Europe routes around the Cape of Good Hope will add on average two weeks to any journey.
  • It is estimated that USD 9.6 billion (GBP 7 billion) worth of goods is being held up by the blockage each day.

With those industry-wide effects becoming immediately apparent, attention now shifts towards the liabilities as between the parties to contracts of sale, among charterers, ship managers and owners, and between assured and their insurer.

There are a myriad of contractual issues that may arise from this incident, or others like it. In each case, it will require a careful analysis of the provisions of the (sale) contract, charter party and/or the policy of insurance (all of which may be relevant). For example:

  • Delay: most charter parties and their related sale arrangements will have detailed provisions addressing responsibility and liability for delay. For example, BIMCO’s GENCON is very much in favour of vessel owners, providing that the owners are only responsible for delays where caused by the fault of the owner or its personnel.
  • Product Sales: As this one incident led to a 6% rise in oil, it could present buyers with a ‘double-whammy’ if the cargo of oil cannot get through the canal: (i) the delivery will be late under the sale contract; and (ii) if there is a requirement to buy a replacement delivery, the cost of that replacement will have increased by 6%.
  • Cargo Damage Claims: Cargo insurance claims may be limited, as most policies exclude delay in delivery (generally), although exceptions may exist for cargo which might be expected to suffer the greatest loss, i.e. in perishable, time or temperature sensitive cargo (food etc.). However, if the cargo on-board is required to be unloaded in order to float the vessel, the expenses of this are likely to be recoverable as General Average, to which all the cargo interest will contribute.
  • Force Majeure: sometimes referred to as “Excluded Events”, or other provisions excluding liability on certain events: these provisions in charter parties and related sales arrangements should be examined carefully, and parties should consider:
    1. Whether the list of events is closed (“limited to the following”) or open (“including the following”). For example, in its ex-Ship LNG arrangements, BP uses an inclusive list, provided that certain criteria are met. This could be contrasted with Shell’s LNG time charter, which uses a narrow (and relatively short) list of events.
    2. Whether the event must “prevent” performance, or whether “delay” or “hinder” could also qualify.
    3. The precise language should be examined – would the blockage of the Suez Canal (or other event) be covered?
  • Vessel Management: many charter arrangements involving a cargo with a volatile price (such as oil) will insist on strict adherence to efficiency requirements. For example, many product sales arrangements in the oil and gas industry contain the following requirements, which will be under particular scrutiny at the current time:
    1. Queuing rules: where the vessel is making a canal transit and has a loss of queue position, or arrives late for an allocated transit slot, and such loss of position or late arrival is due to the owners’ negligence or vessel breakdown, then, the vessel will be off-hire from arrival at the canal anchorage until the vessel reaches the originally scheduled position in the queue or until the vessel is given the next available transit slot as stated by the canal authority (whichever is sooner); and
    2. Average speed requirements: these are designed to ensure the vessel conducts the voyage with reasonable dispatch. It is common for there to be exceptions for periods where the vessel is required to change route due to applicable laws or government requirements (query if a physical congestion in a canal would fall under this), or adjustments for the vessel waiting in congested waters.

  • The canal authorities are expected to bring a claim for loss of revenue, with most losses likely to fall on the ship owner of the Ever Given.
  • At the time of writing, there have been no reports of collisions, whether with the Ever Given or between any of the waiting vessels. It may be expected that the canal will be congested for some time, even after the vessel is re-floated, with vessels waiting in accordance with canal queuing rules and travelling in convoy to improve flow rates. Should a collision take place, the questions of civil liability become more complex, particularly as to the causation of the loss. Intervening negligence will break the chain of causation. For example, on 15 July 2018 the container ship Aeneas came to a halt in the southern section of the Suez Canal due to engine failure. The Aeneas was at the head of a convoy of eight southbound vessels and its breakdown caused a chain of events which resulted in multiple collisions and a degree of chaos in the canal. Mr Justice Teare, sitting in the Admiralty Court in London, found that the last vessel in the convoy, the Panamax Alexander, was wholly responsible for the collisions. Unlike the other vessels ahead of her, the Panamax Alexander had failed to moor in response to the breakdown ahead and, in doing so, had collided with the seventh vessel in the convoy, the Sakizaya Kalon. In turn, these two vessels had collided with the next vessel in the convoy, the Osios David.

The grounding of the Ever Given in the midst of one of the world’s busiest waterways is a reminder that delays to a voyage, or to a delivery, can be caused by unexpected, or rare occurrences. However, these unexpected or rare events can have significant consequences. Many contracts will not specifically cover “blockage” of key transportation routes, even though there may be extensive treatment of blockage within delivery or loading ports.

It serves as a reminder of the need for careful drafting in the allocation of delay risks in a contract, and the need to be alive to the specific provisions of existing contractual arrangements and insurance policies.

Source: CMS Cameron McKenna Nabarro Olswang LLP - Phillip S. Ashley, Eleanor Lane, David McKie, Emma Nierinck and David Rutherford

 

Read more on the M/V Ever Given Suez canal grounding HERE

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