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Article: If General Average is declared...

11 July 2019

Author:

Amy O’Neill
Managing Director Marine Adjusting,
Richards Hogg Lindley
T +44 2151 235 5557
E amy.oneill@rhl-ct.com

In practice, the principles of GA are the same whether the ship is a bulk carrier with one consignment of cargo or a container vessel carrying 20,000 TEU of containerised goods. The practical issues do, however, increase in scope depending on the scale and complexity of the casualty and number of interests involved. 

The concept of General Average (GA) dates back to Rhodian sea law of 800BC; however, it has never been more relevant to marine insurance than it is today. Over time, it has been put under scrutiny and its relevance to modern-day commercial shipping questioned. In spite of issues being raised about the GA process, particularly in respect of its practical application in large multiple bill of lading GA cases, it remains the key framework for dealing with losses, sacrifices and expenditure made or incurred at a time of peril during a common
maritime adventure. This is particularly relevant in the context of large box ship casualties, many of which have featured in the press in recent years.

Casualty scenario

Consider the example of a cargo fire on board a ship with 15,000 TEU of containerised cargo during a voyage from Europe to Asia. The shipowner’s priority will be to extinguish the fire as quickly as possible to minimise damage to the property involved and prevent the total loss of the ship and cargo at sea.

Once immediate action is undertaken, there are many other
practical issues to consider:

  • availability of salvors and equipment
  • possible ports of refuge that can accommodate a vessel of this size and handle any distressed cargo operations, deal with the disposal or treatment of any extinguishing water, undertake suitable repairs, and discharge and transship cargo
  • co-operation of local authorities.

The shipowner will also incur large amounts of expenditure and losses that are over and above any contractual obligations.

Why declare GA?

The key benefit of GA to all parties to the adventure is that it provides a framework that allows for the shipowner to take immediate action at a time of real peril to attempt to save the property involved, with the reassurance that, in due course, once the danger has subsided, these expenses and losses will be assessed by an independent expert and those allowable as GA will be contributed to by all parties involved on the basis of their arrived values at destination. This is not only for the benefit of the shipowner, it is also of vital importance to the cargo interests whose cargo may have suffered sacrifice damage (such as extinguishing water damage) and who are due credit in GA for any amounts made good. This is clearly of mutual benefit to all involved in the common maritime adventure and is the fundamental principle of GA. 

It should also be mentioned that under English law and the York Antwerp Rules, the adjustment of GA and the consequences of fault are kept separate, leading to necessary action being taken at a time of peril, after which the GA adjustment is drawn up leaving any parties to dispute fault as they feel necessary at a later stage. 

It is important in any casualty situation for the shipowners to consult with an average adjuster at an early stage so that expert advice can be provided, all options available can be explored and consideration can be given as to whether a GA declaration is required. This depends on the specific circumstances of the case, including the level of GA expenditure incurred by the parties to the adventure and the GA sacrifices made, the insurance coverage in place and whether there are any alternative ways for interests to recoup their expenses. 

If it is established that GA should be declared, the shipowners will appoint the average adjuster to act on behalf of all the parties as an impartial expert in the law and practice of GA, and to perform the GA security collection and, in due course, produce the GA adjustment specifying which amounts are due to which interests. 

The GA process

Upon declaration of GA, the cargo interests will be asked to provide an average bond, signed by the owners of the cargo, along with an average
guarantee, signed by the cargo insurers. These documents provide an undertaking that the party will pay any GA contribution ultimately due
from them under the final adjustment. Shipowners have a possessory lien
on cargo for reasonable GA security, which they are required to collect on
behalf of all parties to the adventure, including those cargo interests who have sustained GA sacrifice. The adjuster will work to collect and process this security. It is important that the demand for security is made as soon as possible, as many cargo interests delay providing security until the cargo is approaching destination. Cargo should not be released until full security is in place, so clear communications and updates are vital to minimise delays at destination.

Where cargo is insured, the process is straightforward. Cargo insurers and representatives are familiar with the requirements. As such, they are generally comfortable with providing the standard security documentation, which provides an undertaking to pay any amount ascertained to be properly payable by their interests in GA in due course. One of the complications when handling large GA security collections is the level of uninsured cargo on board container vessels. The latest estimates suggest that uninsured cargo accounts for approximately 10% to 15% of cargo on board. Where there is no insurance, the cargo interests will be requested to pay a percentage of their cargo value as a deposit in respect of their ultimate GA contribution and the GA adjuster will calculate a suitable amount using the facts available. On a mega box ship, the number of cargo interests will be larger and therefore the time taken to contact each will be greater. As a wider issue, it is important that cargo owners insure their cargo against such losses in order to avoid such requests for cash security. 

Once the GA security collection is completed and the cargo is delivered, the average adjuster will work to collect all GA expenditure incurred by all parties to the adventure and make appropriate allowances in GA in accordance with the relevant York Antwerp Rules incorporated into the contract of affreightment. They will calculate and agree the contributory values of all property involved, including reviewing cargo claim documents and making allowances for GA sacrifice. The GA is then apportioned over the values of the property, with each party due to pay a percentage of their contributory value in GA. Credit is then given for GA expenses or losses (sacrifices) paid or incurred by the party, the final result being each party is due to pay or receive an amount in GA under the GA adjustment. These amounts are then collected and distributed by the adjuster in accordance with the adjustment, thereby completing the process.

Conclusion

Container ships remain the lowest cost option for transporting cargo globally
and it is relatively rare to lose cargo in a serious casualty, so the popularity of this mode of transport is predicted to continue to grow, along with the sizes of the ships involved. When casualties do occur, given the costs involved, there seems little option but to declare GA. The principles of GA
remain the most effective and mutually beneficial way of dealing with such
cases and there is yet to be suggested any suitable alternative process.

As container ships continue to grow in size, GA and the process itself
will continue to develop to meet the increased demands. This is particularly evident in the security collection process, which has been adapted to meet the large number of interests involved, which will only grow. Advances in technology and IT developments will continue to play an increasingly important role in aiding these processes and assisting the experts in their
handling of these cases. It appears that until any suitable alternative is proposed, GA is here to stay.