Compensation from the Ever Given

Ahmed Abdel-Hafez, Thursday 8 Apr 2021

Letters of guarantee and shipping insurance contracts are awaiting the outcome of investigations into the Ever Given grounding in the Suez Canal

Compensation from the Ever Given
Compensation from the Ever Given

The saga of the six-day Suez Canal shutdown and the associated standstill of global shipping has ended, leaving 400 stranded ships at the northern and southern end of this key global waterway free to make their way through the canal.

However, as they resume their voyages to their destinations, they will likely arrive later than planned, putting the global, and not just the Egyptian, insurance sector in a difficult position.

Ever Given is insured for more than $100 million by its mother company, but this only covers the vessel’s hull in case of accidents such as the cost of dredging, tugging, and floating carried out by the Egyptian administration of the Suez Canal. It also covers any damage or losses on either bank of the Suez Canal during the tugging and floating processes.

Sadeq Hassan, head of Misr Life Insurance, a subsidiary of the Insurance Holding Company, said that the Suez Canal Authority (SCA) had every right to ask the Ever Given company for compensation for lost revenues caused by the shutdown of navigation, whether because some ships were delayed, or because others were rerouted away from the Suez Canal to avoid traffic problems.

He said that maritime law regulates such incidents, including compensation and the cost of rescue. The law states that when a ship is in crisis and sends out a distress call, the rescue team that responds receives a percentage of the ship’s value in exchange. This percentage increases if the ship is in distress but does not send out a mayday signal.

He added that Egypt had extensive global experience on such technical and legal matters, concentrated at the Marine/Hull Insurance Committee at the Egyptian Insurance Federation.

Procedures were waiting on the investigations with the ship’s crew, he said, and insurance companies in Egypt and around the world that were impacted by the canal shutdown would take steps as soon as the investigation was over and a decision was taken on whether the ship’s crew were responsible for this incident and to what extent bad weather had exacerbated it.

“We must bear in mind that any ship is in the custody of its captain, who is fully responsible for it during the voyage,” he noted.

The Suez Canal closure seriously disrupted world trade. On the third day of the crisis, the price of fuel rose by five per cent, and on the fifth day, the auto industry in the US announced it was entering a serious crisis, due to the delay of two ships in the Suez Canal carrying essential components from China and Thailand on their way to the US.

“Once investigations are complete, the process of assessing the damages and negative impacts of the episode will begin, in order that each party shoulders its responsibility,” Hassan explained.

The crisis also spread further. Lebanon declared it was on the verge of a serious crisis, partially due to a delayed fuel shipment destined for its electricity generation plants. The blockage of the Suez Canal had led to losses in global trade of about $400 million per hour, according to the London-based Lloyd’s List.

Amr Kamal, an expert on letters of guarantee at the International Chamber of Commerce in Paris, stated that letters of guarantee in the Suez Canal incident were less vulnerable compared to insurance contracts.

Letters of guarantee are provided by a supplier to the party receiving goods and commodities. If the supplier does not deliver on time, or the goods do not meet the agreed specifications, the receiving party has the right to demand the liquidation of the letter of guarantee as a result of the supplier’s non-compliance with the conditions of contract.

Kamal explained that letters of guarantee were issued based on completing a task within a certain timeframe. Letters of guarantee to ensure delivery by a deadline are different from those focused on specifications of goods, but both types are unaffected by the Suez Canal shutdown because it would be difficult to demand the cancellation of the letters since the supplier, transporters, and shipping were subject to force majeure beyond their control.

“The letters of guarantee that are vulnerable to liquidation in the recent incident are those based on a contract between two parties that does not clearly stipulate taking into account compelling circumstances beyond the control of either party and that prevent them from meeting their obligation to the other,” Kamal said.

Only in such cases could the recipient of the letter of guarantee demand its liquidation for the failure to meet contractual obligations.

He noted, however, that even if there was a clause in a letter allowing for force majeure and the parties agree not to use their right of recourse, the two can still agree to extend the letters of guarantee to ensure the completion of their contract until the end of the force majeure period.

*A version of this article appears in print in the 8 April, 2021 edition of Al-Ahram Weekly

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