THE ADDRESS

3. The Chairman’s Address 2021 – Salvage in the Desert

PHOTOGRAPHER: AHMED GOMAA/XINHUA/ZUMA PRESS

The year 2021 will be remembered for the 6 days blockage of the Suez Canal by m.v. EVER GIVEN from 23rd until 29th March 2021. The grounding itself was not that spectacular, but the massive impact on global trade, in one of the busiest shipping lanes, dominated the headlines in the world press reports. Over 19,000 ships per annum or about 53 ships per day pass through the Suez Canal, which equals around 15% of the world shipping traffic. The blockage created a backlog of over 400 ships awaiting transit through the Canal.

The Suez Canal Authority announced in July that the Canal revenue increased to a record of US$3bln over the first 6 months of 2021, despite the grounding incident of m.v. EVER GIVEN in March. One could conclude that its motto “The Suez Canal is Egypt’s gift to the world” also applies in the reverse that “The Suez Canal is the world’s gift to Egypt”.

What happened? The container vessel EVER GIVEN, operated by the Evergreen Group and owned by Panama-based Luster Maritime, a subsidiary of Japanese shipowner Shoei Kisen Kaisha Ltd, was scheduled to cross the Suez Canal on 23rd March as number 13 in the northbound convoy. She was laden with over 18,300 TEU containers and en route from Malaysia to Rotterdam. Reports were received of a sandstorm ahead, but this did not delay the departure of the convoy. Two pilots boarded the vessel and the convoy got underway. Shortly after departure, the vessel encountered steering problems due to strong winds pushing against the wall of containers on deck. The pilots ordered the vessel to steer the vessel first hard to port and then to starboard and increase the speed in order to maintain a straight course, but the vessel lost control and grounded on the Canal bank on her starboard side. The vessel with her length overall of 399.94 metres (just below the maximum authorized dimension of 400 metres to transit the Suez Canal without special arrangements) was wedged diagonally across the channel at an angle of 45 degrees in a place where the Suez canal is only some 200 meters wide. The vessel grounded with her bow and aft section on both sides of the Canal bank and this resulted in a total blockage of the Canal for six days. Suez Canal Authority (SCA) Any accidents occurring in the Suez Canal fall under the jurisdiction of the Suez Canal Authority. The SCA has a monopoly on salvage/towage operations within the Canal after a vessel goes aground. The Canal Rules of Navigation, August 2015 stipulate in art. 59 - Accidents:

When a vessel runs aground, Suez Canal Officials are alone empowered to order and direct all operations required to get the vessel afloat and if needed get the vessel unloaded and towed. All attempts on the part of other vessels to get off a vessel aground are strictly prohibited. When a vessel grounds or stops outside the Canal itself or if the grounding or stoppage is due to a collision, all charges for getting the vessel afloat, towing, unloading, etc. are paid by the vessel. When a vessel...... runs aground......either in the Canal itself or in one of its ports......and SCA deems it as an obstruction or a menace to navigation in Canal, the Authority has the right to take of its own accord such action as may be necessary for the purpose of removing or destroying the vessel......at the risk and expense of the owner, or the person responsible for the vessel. According to art. 55 - Towage and Escorting, tugs may be hired for mooring, towing and getting vessels afloat as per rates indicated in part IV. Art. 104 of part IV stipulates in that respect:

When a vessel stops in the Canal itself in consequence of an accident other than (collision, engine troubles, auxiliary and steering gear troubles), the SCA, in order to clear the way with all possible speed, and to get her underway, will assist by the necessary tugs to afloat her, free of charge. The wording of above navigation rules are somewhat confusing, but provided that the grounding in the Canal was not caused by a collision or steering gear troubles, it could be concluded that any tugs supplied by the SCA to refloat the vessel would be “free of charge”. Any other expenses to remove the obstruction appear to be at the risk and expense of the owner. The SCA immediately mobilised local tugs, dredgers and even an excavator on shore to remove as much sand and rock around the bow of the vessel. This last operation resulted in this iconic picture of a salvage operation 11

PHOTO: SUEZ CANAL HEAD OFFICE/DPA/ZUMA PRESS

in the desert. Smit Salvage The Japanese shipowners appointed Nippon and Smit Salvage to assist with this salvage operation. Prior approval must have been obtained from the SCA as explained above. The press release issued on 29th March by Smit’s parent company Royal Boskalis Westminster reads as follows:

Suez Canal unblocked: “we pulled it off!”.

Peter Berdowski, CEO Boskalis: “Shortly following the grounding of the Ever Given we were requested through SMIT Salvage to provide assistance with the salvage operation. I am excited to announce that our team of experts, working in close collaboration with the Suez Canal Authority, successfully refloated the Ever Given on 29 March at 15:05 hrs local time, thereby making free passage through the Suez Canal possible again.”

For the refloating of the 224,000-ton container vessel approximately 30,000 cubic meters of sand was dredged to help free the vessel and a total of eleven harbour tugs and two powerful seagoing tugs (Alp Guard and Carlo Magna) were deployed. The harbour tugs were engaged by the SCA and Smit contracted the 280 bollard pull tug Alp Guard and the 152 bollard pull tug Carlo Magno. The Alp Guard arrived on Sunday 28th March, just in time for a favourable high tide resulting from full moon that night. Her tow line was connected to the EVER GIVEN in the early morning of 29th March and after a couple of hours towing, the aft ship moved from her grounded position towards the middle of the canal. The EVER GIVEN was still aground with her bow and after the Carlo Magno had made fast aft, all tugs attempted to pull the vessel’s bow from the bank. Attempts were stopped due to the

low tide but after 2,000 tons of ballast water had been added to the vessel’s stern in order to create an upwards pressure to the bow section, a new attempt was undertaken and the vessel was finally freed from her grounded position. The refloating news travelled around the world and had a direct positive effect on the financial markets. It remains unclear on what terms the salvage assistance by Smit was rendered. Smit offered to carry out their salvage services under Lloyd’s Open Form, but this appears to have been rejected by the Japanese shipowners at that time. I have not seen any report that salvage security was collected by the salvors after the successful refloating of the vessel, which would normally be the case under an LOF salvage. The words of CEO Berdowski that they worked in close cooperation with the SCA would indicate that they were not engaged as subcontractor of the SCA. The settlement agreement which had been concluded between the interests in the EVER GIVEN and the SCA (see below) might well not include a deal with Smit Salvage for their services rendered during this successful salvage operation. Suez Canal Authority claim According to Art. 4 – Responsibilities of the Rules of Navigation, the owners, operators and/or charterers of the vessel are responsible for any damage and consequential loss caused either directly or indirectly by the vessel to SCA properties, personnel or obstruction of navigation in the Canal. It also states that the owners and/or operators cannot limit liability for such loss or damage. Whether the word charterers is left out intentionally is unclear from this text. The rest of the wording of this article is presumably somewhat lost in translation, even though it does contain some relevant provisions, such as: • The vessel is wholly responsible for that damage, unless otherwise proved by evidence that this damage was not made on purpose or by mistake or negligence • The vessel guarantees to indemnify the SCA in respect of any claims for any damage whatsoever caused to third parties • The vessel waives the right to claim from the SCA for any damage caused by third parties that she sustained on the Canal • Owners, charterers and/or operators bind themselves responsible for any mistakes resulting from pilot’s advice or arise by SCA personnel According to art. 11 - Pilotage:

Masters are held responsible for all damages or accidents of whatever kind resulting from the navigation or handling of their vessels directly or indirectly by day or night. The pilot is not held responsible for any damages sustained during transit owing to his advices since the master or his deputy is the sole responsible for the ship. Clearly enough ammunition for the legal profession to fight any resulting claims arising from this unfortunate grounding during the upcoming years, despite a settlement with the SCA – see below. Shipowners have established a limitation fund in London at £84 million ($116 million) under the LLMC Convention. Claims for salvage and contributions in General Average are however excluded from limitation as per art. 3 of the convention.

After the successful refloating of the vessel, the SCA arrested the vessel on 13th April in the Great Bitter Lake and filed a claim against the shipowners for over US$900 million, comprising of a salvage bonus of US$300 million, US$272 million unsupported expenses and US$344 million damages for loss of reputation.

The claim was rejected by the shipowners and their P&I Club and resulted in legal proceedings in the Ismailia court. During the hearing on 22nd May, the lawyer representing the shipowners submitted the voyage data recording at time of the grounding to the public, which revealed that the instructions from the pilot to the master and between the 2 pilots had been chaotic and contradictory, which contributed to the subsequent grounding. Further negotiations between the SCA and shipowners with their insurers representatives resulted in a final confidential settlement agreement. This settlement allegedly includes the purchase of a 75 bollard pull tug for the SCA.

The EVER GIVEN was released from her arrest and finally sailed on 7th July from the Great Bitter Lake towards Port Said after a great bitter experience in the Suez Canal. She arrived in Rotterdam on 29th July. Lloyd’s List dated 9th July Speaking to Lloyd’s List following the ceremony that saw the EVER GIVEN leave the Canal’s Bitter Lake anchorage after three months of protracted negotiations, the Canal Authority chairman Osama Rabie said lessons had been learned, investments in safety and salvage infrastructure had been made and the estimated US$550 million settlement deal reached between all parties had in the end been “fair”. “It was human error of course, other factors could have affected such an incident such as the wind speed, for example, but we know the wind speed was not decisive in this incident, it was the problem of the pilot, of the vessel, of the master of the vessel. And the final decision is always with the master of the vessel.” He also said the company would fund a new tug as part of the deal - a mere fraction of the overall investment being made to upgrade salvage and rescue infrastructure in the wake of the incident. The SCA’s old fleet of tugs with a bollard pull of 75-150 pounds were shown to be no match for Ever Given, so a new fleet with double the power is now being purchased, along with a new supply vessel and multi-purpose cranes that would have the capacity, according to Adm Rabie, to lighter the cargoes of any vessel in similar incidents in the future.

General Average The shipowners of the EVER GIVEN declared General Average on 1st April after completion of the successful refloating operation. A P&I Club representative of Skuld already suggested that this could be the largest General Average case in history. Lloyd’s List referred to it as potentially the most complex General Average case of all time.

The complexity of this General Average will be more likely focused around the question of the proportion of expenditure within the confidential settlement sum that is in the nature of General Average and can be apportioned over the contributing interests in the common maritime adventure. The shipowners and their insurers have financed/guaranteed the settlement sum of the SCA claim in full, which includes an alleged salvage bonus. No separate arrangements have been made between the SCA and cargo interests to contribute to this salvage bonus. It is for that reason that the shipowners have declared General Average in order to obtain cargo’s contribution to General Average, which will mainly consist of the salvage remuneration paid by shipowners and/or their insurers. The first question that needs to be investigated by the appointed adjuster is which York-Antwerp Rules are applicable to the carriage contract in order to establish whether the salvage would be allowable in General Average. This is normally not the case under the York-Antwerp Rules 2004. Under these rules any salvage 14

payments shall lie where they fall and shall not be allowed in General Average, except where one party has paid the salvage in full, in which case the unpaid salvage contribution from the other parties shall be credited to that party in the General Average adjustment. Assuming that the carriage had taken place under the standard terms of the Evergreen Bill of Lading, then the York-Antwerp Rules 1994 are applicable, which would allow the salvage remuneration paid in General Average as per Rule VI. Since the salvage remuneration appears to have been paid/secured in full by the shipowners and their insurers, salvage can be allowed in General Average and it is in that respect immaterial which YorkAntwerp Rules are applicable. The next task of the adjuster is to identify whether the expenditure claimed is in the nature of salvage before it can be allowed in General Average. We know that the original claim presented by the SCA included reference to a salvage bonus of US$300 million. Whether that sum has been reduced in the ultimate settlement agreement is unknown, but will need to be clarified by the shipowners to the adjuster. This might be a legal challenge considering that the settlement agreement is strictly confidential and all parties involved signed non-disclosure agreements. If the reported cargo value of US$780 million is correct and we add say US$120 million as the ship’s sound market value, the total salved value would be in the region of US$900 million. Would a 33% salvage bonus as initially claimed by the SCA be too much for a rather straightforward 6 days salvage operation, which did not involve any special salvage equipment, a dangerous firefighting operation or pollution prevention measures, but only consisted of the involvement of harbour tugs, dredgers, barges and excavators from shore? The fact that the world was monitoring the salvage operation and that the number of vessels blocked increased by at least 50 each day would not make the salvage operation itself more complex. Mr Rabie’s interview with Lloyd’s List revealed that the salvage operation carried out by the SCA was not suitable to deal with groundings of such large container vessels, since he admitted that the salvage infrastructure in the Suez Canal required an upgrade for this purpose. An additional complicating factor appears to be the fact that the salvage bonus paid to the SCA does not appear to include any salvage award earned by Smit Salvage for engaging the two large ocean going tugs, which ultimately “pulled it off”, in the words of CEO Berdowski quoted above. The task of an adjuster is sometimes unfairly complex, certainly when he/she needs to make a judgment whether the salvage remuneration claimed can stand the test of the Rule Paramount, which appears in the York-Antwerp Rules as from the 1994 edition:

“In no case shall there be any allowance for sacrifice or expenditure unless reasonably made or incurred.”

The burden of proving that the expenditure was reasonably made and incurred lies upon the shipowners, as was held by Mr Justice Teare in The Cape Bonny [2018] 1 Lloyd’s Rep.356. How can the adjuster subsequently establish whether that burden has been successfully lifted by the shipowner? In the Rules of Navigation part IV art.104, it is stipulated that the tugs refloating a vessel in the Suez Canal are free of charge. Would the claimed salvage bonus then only relate to the dredgers, barges and excavators engaged by the SCA? It is possible that the SCA denied that this rule applies to the current case and that the claim bonus also included the involvement of the harbour tugs.

Shipowners will always try to negotiate any award down to the lowest figure, but if they are being faced by a powerful national authority, which has arrested the vessel, the cargo and the crew for 3 months until the matter is resolved, their negotiation skills will be substantially reduced. Should any settlement agreed between the parties then be re-adjusted based on hindsight arguments that the burden of reasonableness has not been lifted by the shipowner? Mr Justice Teare appears to give an answer to that question in the above case, when he concluded that “owners and managers are also entitled to the benefit of the doubt if the circumstances are such that a prompt decision to obtain towage assistance is required. There is no reason why in such circumstances hindsight should be taken into account.”

I wish the appointed average adjusters all the wisdom and skills in completing the adjustment in the usual impartial and professional manner. I am pleased to report that the appointed adjusters are members of the AAA and an impartial adjustment will therefore be guaranteed for all parties involved in this common maritime adventure, which concerned a salvage operation in the desert rather than on the high seas.