The EVER-GIVEN Mela – II

This article is a continuation of our earlier article, “The EVER-GIVEN Mela”. We have since been advised that a) the engagement of Smit and Nippon Salvage was not on LOF basis,  b) the Average Adjusters have only sought an Average Bond from the uninsured cargo interests as the quantum of cash deposit is yet to be determined and c) an Average Guarantee from the cargo insurers for the insured cargo interests. Unfortunately, the saga continues as the appeal filed by P&I in the Egyptian Courts has been rejectedⁱ and with the next hearing scheduled on 20^th May 2021. However, the SCA has reduced its claim amount to a (though still substantial) USD 600 million. Our sympathies are with the Owners who are faced with this unfortunate incident. We wish to  highlight some issues faced in the container liner industry as we see it. While we are engaged by both container operators and their insurers, we have written this article keeping in mind the interests of all parties. The humble views expressed here together with all errors are entirely ours.

1. General Averageⁱⁱ:
   1. Quadrant Chambers conducted two webinars on this incident, EVER GIVEN a physical disruptor. The first webinar was conducted on 27^th April 2021 and one of the issues discussed was whether the grounding was a General Average (“GA”) incident (can be viewed at https://www.youtube.com/watch?v=XhD3Xb35GXg&t=981s). We do not wish to touch on this aspect as the Quadrant Webinar amply dealt with this aspect.
   2. We believe that the expenses (Contractual Salvage) and sacrificial damage to remove the vessel would properly fall for consideration under rule VI and VII of York Antwerp Rules 1994 (“YAR 94”)ⁱⁱⁱ. Additionally, Owners would be entitled to recover their expenses after the grounding whilst inspections are being undertaken to ascertain that the vessel is in a position to continue with the voyage under rule X and XI^iv of the YAR 94. We also believe that the costs incurred by Owners whilst the demands made for payment of the claim by SCA is negotiated / litigated would also fall for consideration under Rule F^v.
2. Security:
   1. Insured cargo interests:
      1. We understand that the Average Adjusters have sought a Average Guarantee to be signed by the Cargo Insurers. The wordings of the guarantee provide for it to be governed and construed in accordance with English Law and with the disputes to be dealt by Arbitration in London under LMAA^vi Rules.
      2. We understand that the Owners have elected not to collect Average Bonds from the Insured Cargo interests. This may be due to the Owners being satisfied on the adequacy of the Average Guarantee provided by the cargo insurers for the GA contributions on behalf of the insured cargo interests. This is indeed different from the usual practice^vii but should not raise any additional issues to the insured cargo interests.
   2. Uninsured cargo interests: Owners have sought an Average Bond to be signed by the cargo interests. We have not been able to sight a draft copy of the Average Bond and therefore are unable to comment on the provisions. However, if the Average Bond has similar provisions as the Average Guarantee, then it would provide for the contract to be governed and construed in accordance with English Law and with the disputes to be dealt by Arbitration in London under LMAA Rules.
   3. Contractual provisions: The vessel is operated by Evergreen Line and which is a part of the Ocean Alliance consisting of Cosco, OOCL, CMA-CGM and Evergreen. Accordingly, Bills of Lading (“B/L”) would be issued by these carriers for the carriage of cargoes shipped with them. As it is conceivable that the B/L terms would be different, we have reviewed the relevant terms and note the following:
      1. GA:
         1. Owners’/Operators terms: The Cosco^viii and CMA CGM^ix B/L’s provide that if the vessel is not operated by the Carrier, the General Average would be adjusted based on the operator’s option ( a carve out sufficient for it be on the basis of Owners option).
         2. Carrier’s terms: The Evergreenx^x and OOCL^xi B/L’s allow the Carrier to adjust General Average based on York Antwerp Rules 1994 (“YAR 1994”) according to the laws and usages in London.
         3. Carrier is defined in similar terms in the Evergreen Line^xii, OOCL^xiii, Cosco^xiv and CMA CGM^xv B/L’s as the Vessel provider/Carrier identified on the front of the B/L.
      2.  Jurisdiction:
         1. English Law and jurisdiction: The Evergreen Line^xvi and OOCL^xvii B/L’s provide for English Law to govern the contract with the jurisdiction of High Court of London to deal with any disputes for non-US trade.
         2. Other Law and jurisdiction:
            1. The Cosco^xviii  B/L provides for Chinese law as the governing law of the contract and provides for the exclusive jurisdiction of the Shanghai Maritime Court of PR China for non-US Trades.
            2. The CMA CGM^xix B/L provide for French law as the governing law of the contract and for the exclusive jurisdiction of the Tribunal de Commerce de Marseille.
      3. Contractual incorporation in the Average Guarantee: As mentioned in 2ai above, Owners seek Average Guarantees which provide for English Law and Arbitration under LMAA Rules as the dispute resolution mechanism. The YAR 94 does not have any specific provisions to deal with disputes. This being the case, disputed claims for contribution in General Average should fall within the scope of the dispute resolution clause provided in the B/L’s^xx. While we have no comments on the use of English Law or LMAA arbitration, we must mention that as none of the B/L’s provide for arbitration and that two of the B/L’s  (Cosco and CMA CGM) provide for different laws to be the law of the contract, signing of such an Average Guarantee would result in varying the terms of the B/L contract.
      4. Valid security: Following a General Average, Owners are only entitled to seek reasonable security prior to releasing the cargo. Accordingly, a party may object to providing security on terms which override either the law and/or the dispute resolution process provided in their contract of carriage (B/L). Accordingly, we would recommend that, parties prior to providing either an Average Bond or Guarantee, consider the provisions of both law and dispute resolution clauses under their B/L and what is sought by Owners (either for the Average Bond or Guarantee) and then make an informed decision.
3. GA defences: 
   1. Rule D defence: This aspect has also been covered under the Quadrant Chambers webinar and which can be viewed at Quadcast Shipping Special: EVER GIVEN a physical disruptor: Part 1 – YouTube. Although security is provided by the cargo interests, given that the wordings of the security incorporate for “any contribution to General Average and/or Salvage and/or Special Charges which may hereafter be ascertained to be properly and legally due…”, the cargo interests would only become liable to pay if they have no defences against the contribution sought.
   2. In cases where the cargo interests are able to deny contribution, the Owners P&I Policy^xxi would engage to reimburse Owners for the unpaid contributions. Accordingly, it is in the interests of the Owners P&I Insurers that the GA contributions sought by Owners from the cargo interests succeed.
   3. Counter-security from Carrier Owners: Invariably, the adjustment of the GA would take time to accomplish running to a few years. If cargo interests are able to deny contribution to GA and wish to recover their expenses incurred for the provision of security (say cash deposit or average guarantee), they may be caught by the time bar provision under the contract of carriage and which is 1 year from the date of discharge of the cargo^xxii. This has also been discussed in our earlier article – Container Shipping – Separate York Antwerp Rules – Point 3(b). For this specific matter, we do not recommend cargo interests seeking counter security from Owners given that they (Owners) would have already incurred substantial expenses and further it may put immense pressure on Owners  leading them to abandon the voyage (see 6f below).
   4. With respect to the contribution for Hull, we submit that the Owners Hull policy would contribute irrespective of their being an actionable fault of Owners. If the Hull policy incorporates English Law and practice, Hull Insurers may be entitled to deny reimbursement if the Owners were aware that the vessel was unseaworthy and this being the cause of the loss^xxiii.
4.  Salvage:
   1. SCA Salvage:
      1. The latest reports indicate that the SCA revised their claim to USD 600 million. If SCA maintains its salvage claim to USD 300 million, on the basis of the estimated figures suggested in our earlier article, property interests would have to contribute say at approx. 40%  of the value (basis that the property on board the vessel is of approx. USD 755 million).
      2. We are not aware of the provisions of Egyptian law and whether it entitles SCA to pursue the  other property interests (cargo and Time Charters Bunkers) for their share of the salvage reward, but if it does, other property interests would have to contribute for their portion of the salvage directly to SCA.
      3. The other option is for Owners to make payment of the SCA Salvage claim and in turn incorporate it in the GA pot. Given the amounts in question and the value of the Owners vessel, we think that this is unlikely.
   2. Contractual Salvage: We understand that Owners engaged Nippon and Smit Salvage to assist in removing the vessel from the grounded position. The contractual rates paid by Owners would be a part of the GA pot and for which all of the property interests^xxiv would contribute.
5.  Shipowners Limitation of Liability:
   1. We understand that Owners commenced a limitation action on 01^st April 2021 in the Admiralty Courts in London. The size of the limitation fund as per the 1996 protocol of the 1976 Shipowners Limitation Convention (“76 LLMC”) is approx. USD 114 million. We understand that Egypt is also a signatory of the 76 LLMC but has not implemented the 1996 protocol.
   2. The 76 LLMC convention also entitles the Charterers (including slot Charterers) to limit liability^xxv – this aspect has been covered under the Quadrant Chambers webinar and which can be viewed at Quadcast Shipping Special: EVER GIVEN a physical disruptor: Part 1 – YouTube.
   3. Article 3 of the 76 LLMC excludes any claim for salvage, special compensation under Art 14 of the International Convention on Salvage 1989 (“Salvage Convention”) or contribution in GA. This being the case, Owners of Ever-Given would not be entitled to llimit liability for their claims for Salvage and GA. However, this does not bar Owners to limit liability for any recovery claims by 3^rd parties for salvage / GA claims  i.e. if 3^rd parties have paid salvage / GA claims, their claims against Owners would fall within the limitation amount and will rank as provided in LLMC. Accordingly, it appears to us that tactically, Owners should direct the Salvage claims of SCA to be dealt directly by the property interests instead of it being first paid by Owners and then adjusted in the GA pot.
   4. We understand that Egypt is a signatory of the 1952 arrest convention^xxvi and which does not permit for multiple arrests if the security provided is inadequate. If Owners fail to provide security for salvage as demanded by SCA, given that the vessel is already on arrest, SCA would not be entitled to arrest another vessel of Owners in Egypt. This we believe would be an useful right available to Owners.
6. Owners Exposure:
   1. General Average and Salvage: The extent of exposure to Owners should be on the value of the vessel post incident given that contributions for both Salvage and GA are based on the value of the property. As the value of the vessel is approximately USD 125 million, we submit that this should be the Owners exposure.
   2. Art 14 Special Compensation of the Salvage Convention: In addition, Owners are liable for any special compensation which may be awarded to the salvor for their expenses incurred to avoid environmental damage provided the salvor has failed to earn any reward up to at least his expenses. We are not aware of any environmental damage arising out of this incident and therefore it appears that this provision would not apply to this incident.
   3. 76 LLMC with 96 Protocol: Owners are entitled to limit liability for all of the other claims up to the limitation amount of approx. USD 114 million.
   4. SCA Contractual Claims: As mentioned in our earlier article, Owners are bound by the terms of the user agreement with SCA and which would override any defences which Owners may have (including the limitation defence under LLMC). The question would be whether the SCA Claims are valid or excessive. If valid, the SCA claims would have to be paid irrespective of whether they breach the limits of the 76 LLMC with 96 Protocol. However, this does not bar Owners in bringing the amounts paid to SCA subject to them being not salvage, to rank within the limitation available to them under LLMC.
   5. On the basis of the above, Owners exposure for the above incident should be in the region of say USD 229 million. As Owners insurance program (Hull and P&I) is on this basis (they would be entitled to the defences available under law), we believe that Owners Insurers would wish to cap their exposure to these limits. We do not have any answers on Owners option should SCA continue to insist compensation at say USD 600 million (USD 300 million for Salvage Bonus and USD 300 million for other claims) and which may result in continued detention of the vessel. Accordingly, we would have to wait and watch developments and whether the SCA and other parties are able to resolve the claim at a more digestible amount.
   6. Frustration: Although we have no case law to reinforce our position, we submit that Owners are entitled to abandon the voyage if the costs and expenses incurred exceed the value of the vessel (a Constructive Total Loss) and the liability as provided under the applicable law. This would then lead to the other interested parties (cargo interests / Operators, etc.) to step in and decide as to whether they would wish to negotiate with SCA and fund the further conduct of the voyage.
7. Cargo Interests:
   1. Contract of Carriage:
      1. The Bills of Lading issued to the cargo interests would invariably provide for the Hague Rules or the Hague Visby Rules either by force of law or by incorporation by the Clause Paramount. Both the Hague and Hague Visby Rules have provisions under Article 8 entitling Carriers to limit liability under the Shipowners Liability Conventions i.e. either under 1957 of the 1976 convention. While cargo interests may certainly try and deny Owners entitlement to Limitation, we submit that it would be very difficult, particularly under the 76 LLMC which provides for higher limits and requirement of “reckless behavior^xxvii”. The 76 LLMC also entitles the Charterers to be entitled to limitation. If a carrier does not fall within the definition of Owner or Charterer of the 76 LLMC, then they would fall outside the entitlement to limit liability under this convention (however, they would be entitled to exclude / limit liability as provided under the Hague or the Hague-Visby Rules).
      2. Additionally, both the Hague and Hague Visby Rules allow for contractual provision to deal with GA^xxviii. Accordingly, if the provisions in the BL have a carve out for the GA to be dealt by Owners, we submit that cargo interests would have to deal directly with the Owners instead of dealing with the contractual carriers .
   2. Cargo Insurance: We recently chanced upon an article by Bob Ronai where he touches on the exclusions on the Institute Cargo Clauses (“ICC”) for “capture, seizure, arrest…”.^xix While we do agree that a claim for these costs incurred whilst the vessel is detained by the SCA should be excluded under the ICC policies, we believe that the amounts involved would not be substantial and therefore this may be well be ignored by the cargo insurers. In any event, the major claim by the cargo insured’s would be for the other issues such as SCA Salvage and GA and therefore the prejudice suffered, if any, will be minimal.
8. Further thoughts:
   1. Arbitration Clause : We had in our article “Container Shipping – Separate York Antwerp Rules?” suggested for some mechanism in the YAR to provide for law and jurisdiction clause. If it is preferred for Arbitration to be the dispute resolution process, then this should be provided in the YAR instead of it being imposed upon the cargo interests post event and who may be prejudiced given their asymmetric relationship.
   2. Suez Canal: While the Suez Canal is an important link between the east and west, the question to be asked is whether it is safe to transit through the canal, particularly for large vessels. Given the extra-ordinary exposures, Owners of large vessels may wish to take an informed decision should they be asked to transit through the Suez Canal.
   3. Issues with GA: We chanced on the reasoned article by Jose Guerrero on GA. While we do agree that the GA process can be fine tuned and made more effective, we believe that GA still retains its place in Shipping. In particular:
      1. The hull values of Ocean Vessels are generally lesser than the cargo values. In other modes of transport, say air, it would generally be otherwise.
      2. Air Casualties would seldom result in cargoes being undamaged. However, this may not necessarily be the case for all shipping casualties.
      3. It is ultimately an allocation of risk. If it is desired that the Owners / Carriers should be responsible for such losses, then this should be agreed and contracted on this basis. At present, Ocean Carriers  contract on the basis of compulsorily applicable conventions or contractual provisions which entitle them to various defences including entitling them to exclude and limit liability.
         We would however suggest that the industry at large seriously consider the points raised and deal with these issues.
9. Conclusion: We await to see how this incident pans out and whether better sense prevails thus allowing the vessel to continue with her voyage. Otherwise, this saga may result in losses to all parties and may also change the development of shipping trade in the future.

^i. https://www.reuters.com/world/middle-east/egyptian-court-rejects-appeal-against-detention-ship-suez-canal-source-2021-05-04/  
^ii. Quadcast Shipping Special: Ever Given a physical disruptor – Part 1 and Part 2.
^iii.  The Ever Given is operated by Ever-Green Line and which is a part of the Ocean Alliance (Cosco, OOCL, CMA-CGM and Ever Green). The Bills of Lading issued for the alliance partners provide for General Average to be adjusted on the basis of York Antwerp Rules 1994.
^iv. The allowance under rule X and XI would be minimal given that the vessel is fit to sail with her cargo and has been pointed out by Juergen Hahn of Stichling Hahn Hilbrich GmbH. .
^v.  See The Longchamp [2017] UKSC 68, [2018] 1 All E.R. 545.
^vi.  https://lmaa.london
^vii. https://www.steamshipmutual.com/publications/Articles/MMO0813.htm
^viii. See Clause 24(1) of the COSCO Bill of Lading.
^ix.  See Clause 14(2) of the CMA CGM Bill of Lading.
^x.  See Clause 27 of the Evergreen Line Bill of Lading.
^xi. See Clause 22 of the OOCL Bill of Lading
^xii. See Clause 1(2) of the Evergreen Line Bill of Lading.
^xiii. See Clause 1 of the OOCL Bill of Lading.
^xiv. See Clause 1 of the Cosco Bill of Lading.
^xv.  See Clause 1 of the CMA CGM Bill of Lading.
^xvi. See Clause 29(1) of the Evergreen Line Bill of Lading.
^xvii. See Clause 30 of the OOCL Bill of Lading.
^xviii. See Clause 27(1) of the Cosco Bill of Lading.
^xix.  See Clause 30 and 31 of the CMA CGM Bill of Lading.
^xx.  See Para 30.31 of Lowndes & Rudolf, Fifteenth edition which discusses on similar terms for Arbitration Clauses and General Average.
^xxi.  See Rule 2 Section 19 on Unrecoverable General Average Contributions of the UK P&I Club 2021 Rulebook.
^xxii.  See Art III Rule 6 of the Hague / Hague Visby Rules.
^xxiii.  See S 39(5) of the English Marine Insurance Act 1906.
^xxiv. We do not believe that any freight is at risk given that Liner Bills of Lading invariably provide for the freight to be earned on loading.
^xxv.  See The MSC Napoli – Metvale Limited v Monsanto International SARL [2008] EWHC 3002 (Admlty).
^xxvi.  See page 125 of Ship Arrests in Practice and which deals with Ship Arrest in Egypt and which can be viewed at Cover-Page-12th-Ed.jpg (1240×1753) (shiparrested.com).
^xxvii. See Art 4 of the LLMC 1976
^xxviii.  See Art 5 of the Hague / Hague Visby Rules “ …Nothing in these Rules shall be held to prevent the insertion in a bill of lading of any lawful provision regarding general average”.
^xxix.  Clause 6 of the Institute Cargo Clauses 1/10/82 or 1/1/2009 “capture seizure arrest restraint or detainment (piracy excepted – only applicable for A clauses), and the consequences thereof or any attempt thereat”.