HM Insights

Pinch point - insurance and liability in the Suez Canal

We often hear the words "pinch point" in business. It is the coming together of many moving parts in a machine or project or transport route that can hold up progress or, in manufacturing, cause operator injury. Pinch points can rarely be avoided. They need to be identified and handled with care and they do not come any bigger than the Suez Canal.

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In terms of global trade, the Suez Canal is the mother of all pinch points. The risk it poses to the smooth movement of goods around the world was brought into focus on 23 March 2021 when the 400ft long MV Ever Given got stuck and blocked the waterway for six days. Around 12% of global trade passes through the Canal each day equating to around £7bn worth of goods[1]. The Ever Given itself was carrying 18,300 shipping containers and as of 25 May 2021, it remained in Egypt, no doubt trapping thousands of the latest style of sports shoes bound for teenagers in Europe.

A question of insurance and liability

The Ever Given incident raises many questions relating to insurance and liability, how risk is allocated among buyer, seller and shipper and contingency planning. At an average speed of 16.43 knots, a ship travelling from Taiwan to Rotterdam will take around 50% longer to get to its destination if it has to travel around the Cape of Good Hope rather than through the Suez Canal. Many businesses may now be considering whether the extra time is worth the additional wait and cost for added certainty and Japanese shippers are wondering if avoiding the Canal entirely is the way forward[2].

Those businesses affected by the blockage will be unpicking their insurance coverage and considering their supply contracts and shipping documentation and some will be getting a nasty shock realising that risk was with them and not their carriers or suppliers.

The Incoterms® of the International Chamber of Commerce (the "Terms") are the internationally recognised trade terms used for shipment by land, air and sea and their latest incarnation is the 2020 terms. Invoices or other contractual documentation should make reference to which version of the Terms the parties are referring to but often they omit this, leaving it for their lawyers to argue about if things go awry. 

Incoterms ® have three letter acronyms which indicate how responsibility for delivery arrangements, cost and risk is allocated between the parties. The Terms are helpful shorthand for commerce but only cover certain elements of the relationship and are only legally binding when properly incorporated into a contract. The supply contract is also still required to deal with other critical issues such as when title to goods passes and pricing. Here are some examples of Terms which can apply to carriage by sea and which show the range of options parties can consider:

EXW – Ex Works

From a seller's perspective, this option presents the least risk but particularly in international trade, buyers may not have the expertise or local advice to be able to accept it. The seller makes the goods available to the buyer at the seller's premises and the buyer takes responsibility for all export and import costs, arrangement of carriage, export and import formalities and all risks from the point of collection. When using EXW, the seller's place of business should be named on shipping documentation.

CFR – Cost and Freight

Here the seller deals with the export formalities and takes the burden of the cost of delivery to the named port of destination. Risk passes to the buyer once the goods are on the ship and the buyer assumes responsibility for import formalities and costs from arrival. Arrangement of insurance at sea is the buyer's responsibility. The port of destination is named on the contractual documentation or invoice.  

CIF – Cost, Insurance and Freight

This is similar to CFR but the seller takes responsibility for arranging insurance at sea. For a buyer, this sounds attractive but the seller's insurance obligations may not go as far as the buyer may want. Here also, the port of destination is named on the contractual documentation or invoice.  

DDP – Delivered Duty Paid

At the other extreme from EXW, under DDP the seller assumes responsibility for costs, risks and customs formalities to a named destination which will be the buyer's (or its agent's) premises.

Sitting behind the acronyms is a set of detailed rules which lay out exactly what is expected of the parties for each trade term. With that in mind, parties to supply contracts should seek advice before agreeing terms.

The Ever Given keeps on giving when it comes to legal challenges. The Egyptian authorities have been allowed by the local courts to continue to hold the vessel and its cargo while arguments continue over who was at fault. The Suez Canal authority seeks recompense for the loss of revenue caused by the blockage running into hundreds of millions of dollars. The vessel owners' claim the ship should never have been allowed to enter the Canal in bad weather and their insurers have had to pay fines and charges which they are now seeking to recover from those businesses with goods on board. Who ultimately will pay those costs may well come down to which three letters from the Incoterms ® are on the shipping documents.

[1]  Source: https://www.bbc.co.uk/news/business-56559073
[2]  Source: https://www.aljazeera.com/news/2021/5/9/japan-mulls-alternatives-to-the-suez-canal

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