LECTURE 13

General Average Claims
1.0 INTRODUCTION
• Illustrations of General Average Sacrifices and Expenditures
2.0 COMPUTATION OF GENERAL AVERAGE CONTRIBUTION
• Consideration of Fault
• Relevance of Fault under U.S Law
3.0 THE YORK-ANTWERP RULES (YAR)
• The Enforcement of General Average Contribution
• Non-separation Agreements
LGC | COMPENDIUM OF MARITIME CLAIMS | 10
4.0 INSURANCE
• Coverage for Cargo Insurers
• Coverage for Hull and Machinery Insurers
• Marine Containers Insurers
• Coverage by P&I Insurers
5.0 SPECIAL CHARGES
• Insurances for Cargo Special charges
• Coverage for Hull and Machinery Special charges
• Coverage ny P&I Insurers for Special charges
• Claims Management

 

GENERAL AVERAGE CLAIMS

• INTRODUCTION

General Average is an equitable concept designed to fairly distribute the financial burden of exceptional sacrifices or expenses undertaken to mitigate peril or rescue property imperiled throughout a voyage. General Average represents one of the oldest principles within maritime law and practice. This principle is automatically applied by legal standards, regardless of any contractual agreements. However, it is customary for carriage contracts to include the York-Antwerp Rules, which detail specific guidelines and regulations for determining the rights of the involved parties.

Rule A.1 in the York-Antwerp Rules provides a concise description of general average as follows: “There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in the common maritime adventure.”

Hence, when, for instance, cargo is deliberately discarded to avert potential difficulties in navigation, the proprietors of the discarded cargo have a legitimate claim to receive a contribution in a general sense from the proprietors of the vessel, fuel stores, containers, or any other assets onboard, towards compensating for the value of the discarded cargo. Similarly, if the vessel runs aground and requires the assistance of tugs or salvage operations to re-float the ship and safeguard valuable cargo, the ship’s owners can expect a general contribution from the cargo owners and any other assets at risk, to cover the expenses associated with the towing or salvage services. In situations of peril, the typical assets at risk encompass the ship, cargo, fuel stores, containers, and freight.

In order to meet the criteria for general average:

• There must be an extraordinary sacrifice or exceptional expenditure.
• The action should be taken in the interest of common safety to protect the property involved in the shared maritime venture from serious and imminent danger.
• The action must be deliberate.
• The action must be reasonable.
• The action must be successful.

Since general average is an equitable principle designed to safeguard the interests of all at-risk property, all concerned parties have the right, and the shipowner has an obligation to:

• Ensure that the general average is declared when appropriate.
• Obtain general average security from all property at risk before releasing it.
• Prepare a general average adjustment. If the shipowner fails to fulfill these responsibilities, they may be held accountable to other parties for any contributions that those parties should have received from other at-risk parties but didn’t due to the shipowner’s negligence.

ILLUSTRATIONS OF GENERAL AVERAGE SACRIFICES AND EXPENDITURES

General average sacrifices encompass the following scenarios:

• Discarding cargo on the deck or throwing cargo overboard.
• Harm to machinery or the ship’s hull, as well as equipment loss during attempts to refloat the vessel.
• Loss of freight due to jettisoning cargo at risk. Typically, general average expenditures consist of the following costs:
• Expenses related to salvage and necessary repairs.
• Lightening the vessel to facilitate refloating or repair.
• Costs incurred while entering, staying at, and departing from a refuge port.
• Raising the essential funds to safeguard the entire maritime venture.
• Payment of ransom to secure the release of detained ships and cargoes by pirates. However, losses or damages arising from delays are not considered in the context of general average.
• COMPUTATION OF GENERAL AVERAGE CONTRIBUTION

The process for calculating the right to contribute in a general average situation is referred to as the general average adjustment. This calculation is carried out by professional average adjusters appointed by the shipowner, following the terms specified in the relevant contract of carriage. In most cases, these adjusters are members (Fellows) of the Association of Average Adjusters, and the adjustment is typically prepared according to the Rules of Practice of the Association. It’s important to note that the general average adjustment is not legally binding and can be challenged by the involved parties, including the basis of the adjustment and the adjuster’s calculations.

CONSIDERATION OF FAULT

Initially, the general average adjustment is made without taking fault into account concerning the event that triggered the general average. However, once the adjustment is completed, and contributions from each property interest are established, any party required to contribute can contest the obligation to do so on the grounds that the event causing the general average resulted from their fault. This often occurs when cargo interests object to contributing to general average claims claims made by shipowners due to issues like the vessel’s unseaworthiness or the crew’s negligence in handling the cargo. It’s essential to note that the mere occurrence of the event due to a party’s conduct should not be equated with fault unless the contract of carriage explicitly exempts the party from liability for such conduct.

Therefore, if a collision occurs because of the master’s negligent navigation, and subsequently, the ship must be intentionally grounded to prevent sinking, the shipowner is likely entitled to claim contributions from the owners of the at-risk cargo to cover the costs of towing or salvage necessary for refloating the ship. This is because a carrier is typically not liable for negligent navigation, as per the Hague or Hague-Visby Rules, which usually govern the contract of carriage. However, if the contract of carriage is subject to the Hamburg Rules, the carrier may not have a defense against claims for negligent navigation. It is always important to pay attention to this distinction during claims.

RELEVANCE OF FAULT UNDER US LAW

Under U.S. law, a party whose negligence causes an event leading to general average is generally not entitled to general average contributions, even if the contract of carriage includes a clause exempting them from liability for such negligence. Nevertheless, parties can include clauses in contracts allowing for general average contributions, despite the claimant’s negligence. It’s common to insert the “New Jason Clause” into U.S. contracts of carriage, which permits parties to claim general average contributions, irrespective of whether the event resulted from their negligence.

In many cases, it may become evident well before the adjustment is finalized that the party ultimately claiming contribution is at fault for the general average event. Nonetheless, adjusters typically proceed with their calculations, as any contributions lost may still be covered by insurance, and it will be necessary to distinguish between the obligations of various insurers in due course.

• THE YORK-ANTWERP RULES (YAR)

The pertinent general average principles are delineated within the York-Antwerp Rules, which were initially introduced in 1864 and have undergone periodic revisions since then. These Rules possess the force of law only in select countries, yet they are routinely incorporated by mutual agreement into nearly all shipping contracts and charterparties. Presently, there exist three active versions of these Rules – YAR 1974, YAR 1994, and YAR 2004. It is crucial to determine the applicable version under the relevant contract of carriage, as there are notable disparities between these various iterations. Notably, under YAR 2004, salvage payments made by the involved parties are generally not subject to re-adjustment in the context of general average, except when one party has compensated another for their proportion of salvage costs. It should be noted that YAR 2004 has not universally received a favorable reception within the industry, with several P&I clubs and BIMCO advising against its use. Nevertheless, the Comité Maritime International (CMI) has convened a Working Group to conduct a comprehensive review of the YAR to assess whether any amendments are necessary.

The YAR can be divided into two parts:

The first part, comprising seven lettered rules, outlines the general principles mentioned earlier. For instance, Rule A offers the fundamental definition of general average:

“A general average act occurs when an extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety, with the aim of preserving the property involved in a shared maritime endeavor. The cost of general average sacrifices is to be distributed among the contributing interests according to the prescribed basis.

” The second part, which consists of 22 numbered rules, delves into the specific types of sacrifices or expenses that qualify for general average treatment. These numbered Rules are quite intricate and detailed, necessitating a thorough examination in the event of an incident to ascertain whether the costs incurred are eligible for contribution in general average from the other involved interests. In case of any conflicts, the numbered Rules take precedence over the lettered Rules.

THE ENFORCEMENT OF GENERAL AVERAGE CONTRIBUTION The enforceability of general average contributions arises when the cargo is delivered at the final port of discharge, or if the voyage is prematurely terminated, when the shared maritime venture concludes due to such an interruption. However, the final determination of the general average adjustment typically occurs at a later time. Consequently, the shipowner has a responsibility to secure the necessary security from the relevant parties for any general average contributions that the adjusters may later assess as payable.

To facilitate this process, the shipowner typically has the right to exercise a lien on the property to either compel payment of general average contributions or obtain the appropriate security. However, in practice, the exercise of a lien is often unnecessary, as the general average adjuster typically secures the necessary security from the owners of the other at-risk property on behalf of the shipowner, typically in the form of a cash deposit or a general average bond supported by a general average guarantee from their insurers. These documents include a commitment by the signatory to make the requisite contributions once the adjustment is finalized. However, if the cargo is uninsured, a cash deposit may be required.

Contributions related to the freight at risk are apportioned either to the shipowners and their insurers or the cargo owners and their insurers, depending on whether the freight is payable upon the voyage’s completion or after loading. If the freight is payable upon voyage completion, it falls under the responsibility of the shipowners and their insurers. Conversely, if it is paid in advance after loading, and is non-refundable (whether the ship or cargo is lost or not), the cargo owners and their insurers bear the responsibility, with the freight value included in the cargo value, and freight contributions are not separate.

NON-SEPARATION AGREEMENTS

The fundamental principle behind the concept of general average is that all property owners involved in a shared venture bear the risks collectively from start to finish. Typically, this joint venture begins at the loading port and concludes at the unloading port. However, complications may arise if the shared adventure is abandoned at an interim refuge port, but the cargo is transported and delivered at the originally intended destination port by another vessel.

In such scenarios, it is customary for the contributory values to be determined based on the worth of the involved properties at the moment when the original carrying vessel and the cargo part ways at the interim port. Consequently, to facilitate the onward carriage of the cargo, it is usually a requirement for a Non-Separation Agreement to be provided, in addition to other specified forms of security, as mentioned earlier. The Non-Separation Agreement typically stipulates that the general average shall be calculated as if the onward transport had not occurred. Consequently, this means that the shipowner will still be entitled to receive contributions from the cargo interests for expenses like crew wages, fuel, and port charges incurred during repairs. However, any extra costs associated with forwarding the cargo to the intended destination on a different vessel, which exceed the expenses that would have been incurred had the damaged ship completed the voyage itself, can be claimed as general average expenses under YAR Rule F. This is allowed only to the extent that such forwarding saved the general average expenditures that would have otherwise been incurred.

• INSURANCE COVERAGE FOR CARGO INSURERS

Typically, standard cargo policies like ICC clauses cover general average contributions from cargo, and cargo insurers are usually willing to provide security for such claims when requested by general average adjusters.

COVERAGE FOR HULL AND MACHINERY INSURERS

Standard hull and machinery policies generally cover general average contributions from ships, and hull and machinery insurers are typically prepared to provide security for such claims when requested by general average adjusters. However, in cases with numerous cargo receivers or small claims from individual cargo receivers or property owners (e.g., freight, bunkers, containers), the cost of pursuing a general average adjustment and collecting individual contributions may not be economically viable. Consequently, it has become common for hull and machinery policies to include General Average Absorption Clauses, allowing the insured to request underwriters to absorb, up to an agreed amount, a claim the insured shipowner has against other parties for general average contributions. These clauses also expedite proceedings at discharge ports where general average securities are negotiated and provided. They are frequently used in the container trade and typically set a mutually agreed threshold (usually exceeding USD 100,000) for the absorption of general average claims.

MARINE CONTAINER INSURERS

Specialist insurers offer coverage for container owners’ liability to pay general average contributions according to standard clauses like the Institute Containers Clauses-Time 1/1/87 or the Institute Container Clauses – Time Total Loss, General Average, Salvage, Salvage Charges, Sue and Labour 1/1/87.

COVERAGE BY P&I INSURERS

P&I insurers generally provide coverage for the following claims:

– General average contributions that cannot be recovered from cargo or other interests due to the shipowner’s breach of the contract of carriage.

– General average contributions from the ship that cannot be recovered under the hull and machinery coverage of the ship (including any excess liability policy) because the ship’s valuation for general average contribution purposes exceeds the sum insured under such policies. However, the availability of such cover may be subject to the P&I insurer’s discretion in specific cases.

Given that preparing a general average adjustment (and subsequent litigation) can take several years, P&I insurers may have the discretion to advance funds to shipowners in suitable cases when shipowners’ efforts to recover contributions have been unsuccessful or are expected to face significant delays. Shipowners typically need to provide countersecurity in case the insurers are entitled to recover the advance later.

• SPECIAL CHARGES

Special charges refer to expenses incurred in safeguarding or preserving property when there is no common danger to the maritime adventure. As a result, the York-Antwerp Rules do not apply to them. An example is the initial expenditure incurred by shipowners to store damaged cargo ashore. These charges are not shared among other participants in the maritime adventure and are ultimately the responsibility of the cargo owner. However, if special charges result from a breach of contract by the carrier, cargo owners may have the right to refuse payment. Special charges can sometimes be incurred after a general average incident, and in situations where it is not clear whether the expenditure constitutes a general average expense or special charges, the general average adjustment typically distinguishes between the two. Shipowners usually have the right to impose a lien on the cargo to either enforce payment of special charges or obtain the appropriate security. In practice, when general average adjusters assess whether the expenditure is a general average expense or special charges, the general average securities they obtain from cargo interests typically secure payment of special charges as well.

INSURANCES FOR CARGO SPECIAL CHARGES

Claims for special charges on cargo are typically covered by standard cargo policies such as ICC clauses, and cargo insurers are usually prepared to provide security for these claims when requested by shipowners or general average adjusters.

COVERAGE FOR HULL AND MACHINERY SPECIAL CHARGES

Coverage for special charges on the ship depends on the nature of the charges and the terms of the standard hull and machinery policies

COVERAGE BY P&I INSURERS FOR SPECIAL CHARGES

P&I insurers generally offer coverage for claims related to special charges that cannot be recovered from cargo or other interests due to the shipowner’s breach of the contract of carriage.

CLAIMS MANAGEMENT

In appropriate circumstances, shipowners have a duty to declare general average and appoint qualified adjusters. Failure to do so may result in liability to other parties and may affect the shipowners’ insurance coverage. Therefore, shipowners should ensure that their carriage contracts include suitable general average clauses and that their ship’s crew follows the guidance outlined in the Gard Guidance to Masters. Additionally, failing to take necessary steps to protect shipowners’ rights in general average, such as obtaining necessary security from cargo interests before releasing the cargo, can lead to uninsured losses and expenditures.

 

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