The grounding of the Evergreen Line containership Ever Given in the Suez Canal in March created a massive legal and insurance dispute that could take months, if not years, to resolve. In this conversation with SupplyChainBrain Editor-in-Chief Bob Bowman, Joe Klobus, claims and insurance manager with global freight forwarder OEC Group, discusses how the incident brought to light the concept of general average, a centuries-old law that requires shippers to share the losses from such an event.
SCB: What is general average?
Klobus: In short, it’s the equitable sharing of a loss between the vessel owners and cargo interests. When the vessel encounters a peril that fits within the York Antwerp Rules, the vessel owners are able to declare general average, which would spread that loss across the cargo interests.
SCB: In what kind of situations has this previously been invoked?
Klobus: General average is often invoked for vessel fires or containers going overboard as a sacrifice. However, it's not commonly known that it doesn't apply to just that limited scope of events. It can also apply to salvage, to towing expenses, and for seeking refuge in a port or harbor. It's much broader than people typically know.
SCB: So in a hypothetical situation where the carrier is found to be at fault, it couldn’t invoke general average?
Klobus: That's not true. If the carrier is at fault for a situation and it fits within the realm of the York Antwerp Rules, it can declare general average. And, generally speaking, the carriers aren’t responsible when they do declare general average. Of course, this can lead to lengthy litigation, but the law generally supports their stance.
SCB: Is Evergreen invoking it in the Suez incident?
Klobus: It's actually the owners of the vessel who invoked general average — Shoei Kisen Kaisha Ltd.
SCB: Is it a common clause to be invoked these days, considering the many recent incidents of containers falling overboard?
Klobus: You're right in saying that it's becoming more and more common. With these types of losses becoming more frequent, we’re seeing general average declared more and more often.
SCB: Based on precedent, does Evergreen stand a good chance of prevailing on this claim?
Klobus: Yes, this does fit directly within the York Antwerp Rules. The types of expenses they're looking to pursue are towing and dredging. This involved over a dozen tugs, and there was a backlog of 400 ships stuck for six days. So it's not exactly clear what expenses they’ll look to recover, but there’s no shortage of claims being made right now. I think the latest total from the Egyptian authorities was $900 million. A lot of it has been unsubstantiated, as far as we know. It's going to take quite a bit to sort out.
SCB: What does this mean for Evergreen specifically?
Klobus: Evergreen's in a very interesting position because this is a very public event. You see it in all mainstream media, in places where it wouldn't normally be published. So it's going to be interesting to see how they react. They may be forced to pay some of those fees despite not technically being liable, and it will be interesting to see if they try to pass those along in the general average process.
SCB: Is that $900 million figure just for the Ever Given, or does it cover other ships that were also delayed in the canal?
Klobus: I believe $300 million of that was for a salvage bonus. I don't know how they're substantiating that. Another $300 million was for, I think, loss of reputation. And then Egyptian authorities are claiming another $100 million for loss of fees for the other ships that they had to refund. I'm not sure that those are exact figures.
They placed a lien over the vessel and arrested it. I believe it was being held in the Great Bitter Lake, right off the Suez, until the Egyptian authorities’ payment demands are met. From what I know, the Ever Given's insurer, the UK Club, made an offer to settle this, but it was swiftly rejected by the Egyptian parties.
SCB: What about the owners of all the other vessels that were delayed in the canal as a result of this incident? Might they also be in a position to declare general average?
Klobus: That's a really good question. I don't believe so, because delay doesn’t fit within the York Antwerp Rules, and is therefore not a recoverable expense. However, it doesn't prevent the vessel owners from attempting to.
SCB: Does the right of a carrier to invoke general average get included in contracts for carriage with shippers?
Klobus: The rules for declaring it are laid out in the York Antwerp Rules. However, general average is also addressed in things like the Carriage of Goods by Sea Act and the Hague-Visby Rules. And those codes say that the carrier isn’t responsible for compensating cargo interests in the general average situation.
SCB: So knowledgeable shippers going into a contract with a carrier are aware of this clause being out there?
Klobus: I would say that a knowledgeable shipper should be aware that general average does exist. However, many people don't understand the concept in its entirety. Like I mentioned earlier, it's something that people think about when cargo falls off the boat, when it's a sacrifice. However, there's a wide array of circumstances that carriers can declare general average for, and that's not commonly known.
SCB: What might be the impact on consumer prices as a result of the charges levied against the Ever Given and other ships in the canal?
Klobus: It's possible that this is rolled into landed costs because there were substantial delays, and it's yet to be seen when this will be resolved. I can give you some interesting figures on previous general average situations. Two of the recent situations that we've seen, the Maersk Honam and Yantian Express, were both vessel fires. In those circumstances, the general average security that was required for deposit in order to release the cargo or the containers was over 50% of the cargo's value. For example, if you have a container valued at $100,000 on that vessel, in addition to what you've already paid your shipper, you're going to be responsible for paying another $50,000 in order to have that cargo released.
SCB: So a lesson for shippers is to be aware of this possibility.
Klobus: You're right in saying so — it is something to be aware of. It's becoming more and more of a common risk, and one of the best ways to protect yourself is to ensure that your cargo insurance covers it.
Timely, incisive articles delivered directly to your inbox.