General Average. “Average” means “partial loss” in this context. “General Average” is closely connected to marine insurance today but actually originated many years before the idea of marine insurance was born.
The main principle behind general average is that when a sacrifice is made to save the interests of all the parties involved in a maritime adventure, the party who makes the sacrifice must be compensated by all the parties who stand to benefit from the sacrifice of expenditure.
This idea of compensation and the nature of general average was best stated in Birkley v. Presgrave, 1801, where the judge said:
“All loss which arises in consequence of extraordinary sacrifices made or expenses incurred for the preservation of the ship and cargo comes within general average, and must be borne proportionately by all who are interested.”
The principles and fairness of GA have been adopted by maritime nations for thousands of years. However, although general average was so ancient, by the late 19th century there were substantial differences in the law and practice related to GA in different parts of the world. This led to the York- Antwerp Rules being devised as an attempt to achieve uniformity.
Evidence of the close association between general average and marine insurance is found in the fact that a statutory definition of general average is given in the British Marine Insurance Act 1906, section 66(2). A similar definition is to be found in Rule A of the York-Antwerp Rules 1990. (The YAR are a voluntary code adopted by shipowners because of the many differences in the various national laws governing the adjustment of general average.)
“RULE A – 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 a common maritime adventure.”
When all these essentials are present, there is said to be a general average act, and the loss is to be made good by the contribution of all concerned when the adventure is saved. In confirmation of this, section 66(3) of the Marine Insurance Act 1906 states:
“Where there is a general average loss, the party on whom it falls is entitled, subject to the conditions imposed by maritime law, to a rateable contribution from the other parties interested, and such contribution is called a general average contribution.”
Essential features of general average:
(a) In a time of peril the common adventure must be in peril. The danger must be “real” and it must be “imminent”.
For example, smoke may be seen coming from a cargo hold. Water is pumped into the hold to extinguish the expected fire. The cargo is damaged. On arrival, no evidence of fire is found, and it may be held that because there had been no actual peril there could be no general average sacrifice.
This requires that action is taken for the common safety, not merely as a precautionary measure. For example, a vessel with a serious machinery breakdown in the middle of the ocean would be in peril and expenses to preserve it from peril may be allowed as GA. However, if the master heard weather forecasts that indicated stormy conditions ahead and called into a port for safety, this may not be accepted as GA. When the vessel entered the port it was not already in peril.
The imminence and degree of danger must be a question of fact. For example, where a ship is stranded, but not in danger and peril is not imminent, sacrifices or expenses made or incurred in trying to lighten and refloat the ship will not be admitted as general average.
(b) The general average act must be voluntary and intentional, not inevitable. An example would be the throwing overboard of cargo (“jettison”) to lighten a waterlogged vessel. The sacrifice is allowed as general average. If property is already lost, it cannot be considered to be sacrificed and would not be admitted as general average. For example, Rule IV of the York Antwerp Rules 1990 states that the cutting away of wreck or parts of a ship which are effectively lost by accident are not allowed as general average. This can be seen as meaning that inevitable loss is not allowed as GA.
(c) The act must be reasonably made. The sacrifices or expenditures must be reasonable and any sacrifice must be advisable or prudent.
(d) The loss must be extraordinary in nature and not merely connected with the contract of carriage of goods. For example, a vessel may meet rough weather. The use of extra fuel to make a scheduled call at the destination would not be allowable as general average.
Increase of an ordinary charge, e.g., crew’s wages, is not an “extraordinary” loss. Similarly, the loss of ship’s gear when used for the purpose for which it is intended cannot be considered “extraordinary”. Straining of a ship’s engines when the ship is aground and in a position of peril, in trying to force her off the ground, is “extraordinary” damage but if the vessel is afloat, any damage caused in working the propelling machinery is not allowed as general average (Rule VII of the York-Antwerp Rules 1990). When the vessel is ashore the use of the machinery would be an “abuse” and therefore extraordinary. Use of the machinery when the vessel is afloat is normal, even though there may be peril and any damage to the machinery would not be allowed as GA.
In one case, heavy weather caused a leak, which necessitated excessive pumping. This caused the bunkers to run low and ship’s stores were burnt as fuel. These stores were allowed in general average as an extraordinary sacrifice in time of peril.
(e) The object of the loss must be the general safety and the preservation of the whole adventure. Losses incurred for the benefit of individual interests are not general average.
For example, the expenses of lightening a vessel by the removal of cargo to enable her to refloat is general average but if cargo is removed from the vessel (merely for the cargo’s own safety) and forwarded to destination by another vessel, this expense is not allowed as general average.
(f) The adventure must be saved. The general average is obviously futile if the adventure becomes a total loss later, as the essence of general average is sacrifice by one person to save all. Moreover, the arrived value of the property saved is counted in the total general average contributions that must be made. If some property is not saved, there may be no fund from which the contributions can be made.
An example could be where cargo is sacrificed by jettisoning to prevent total loss of the vessel, and later, during the same voyage, the vessel is destroyed by fire, with all the remaining cargo on board. There is no general average.
For the same reason, if a further general average act should become necessary on the voyage, the second general average must be adjusted first, as without it the first would have had no real effect.
(g) The loss must be directly caused by the general average act. Consequential losses are not a direct result of a general average act and are not admitted as GA. But where cargo is jettisoned, and during the actual operation water enters the hold and damages cargo therein, the water damage is a sacrifice equally with the cargo actually jettisoned, despite the water damage being a consequential loss. Other consequential losses, e.g., demurrage and loss of market, would not be admitted as general average.
The action taken by the master can have many alternatives. For example, a fully loaded container vessel may go aground. By order of the master some containers are jettisoned and the vessel is refloated. The options open to the master include the hiring of a salvage tug to pull the vessel off the ground but this may have caused further damage to the vessel and possibly to the cargo. The master may also have decided to strain the main engine and use the anchors and cables with the possibility that these could be lost or damaged, in trying to pull the ship off the ground. In each case, different interests are sacrificed or suffer a loss. There may be a conflict of interest. For example, the cargo owners may prefer that the master hire a lighter or barge into which to discharge the containers but this requires the availability of a barge and also suitable equipment on board the vessel. The cargo owner may also have preferred that cargo belonging to another cargo interest was jettisoned. However, the master has the complete but reasonable discretion to act as he sees fit for the safety of the ship and cargo as a whole.
Examples of general average: The following are examples of extraordinary sacrifices intentionally and reasonably made for the common safety and allowed as general average:
(a) A vessel is aground and her engine and equipment are damaged in efforts to refloat the vessel.
(b) A fire occurs in the hold of a vessel and a hole is cut in another of her holds to gain access to the fire and put it out. The cargo not on fire may also be damaged.
(c) Cargo is jettisoned for the common safety in time of peril.
(d) Cargo burnt as fuel (e.g., fuel oil in the ship’s tanks) if there is a shortage of bunkers.
(e) Cargo not on fire is damaged by water being used to extinguish other cargo, which is on fire.
If cargo is lost and as a result the shipowner cannot collect the freight which is payable at destination, the freight is sacrificed equally with the cargo and is allowed as GA.
The following are examples of extraordinary expenditure intentionally and reasonably incurred for the common safety:
(a) The expense of hiring lighters for storing cargo in which efforts to refloat a vessel take place.
(b) The expense of hiring a tug with fire-fighting equipment to extinguish a fire on board a vessel.
(c) Port of refuge expenses.
(d) Salvage charges (as established in the 1990 amendment to the York Antwerp Rules).
Port of refuge. A port of refuge is a port at which general average repairs and expenses are incurred and are not restricted to a port to which a ship may call for stress of weather. The phrase can also apply to a port in which the vessel calls for loading, discharging or bunkering if general average is declared. Of all the various kinds of general average expenditure, the most common is port of refuge expenses. A vessel usually has to enter a port of refuge in consequence of a casualty or because of general average damage to the ship.
Under English common law if a vessel enters a port of refuge because of general average damage, the following expenses may be allowed in general average, on the principle that the expenditure is in consequence of a general average act:
Cost of entering the port, i.e., inward port charges, pilotage, port dues, etc.
Cost of discharging cargo, if necessary, to effect the repairs. Warehouse rent whilst repairs are being effected.
Cost of reloading the cargo.
Outward port charges, pilotage, etc.
However, if the vessel enters the port of refuge because of accidental damage, then only the cost of entering the port and the cost of discharging cargo to effect repairs are allowed in general average, on the principle that general average ceases as soon as safety is achieved. The warehouse rent is treated as a special charge on cargo, and the cost of reloading and the outward port charges are special charges on freight.
The law of other maritime countries and also the York Antwerp Rules do not make this distinction when dealing with port of refuge expenses, all the expenses being allowed in general average, irrespective of the reason for entering. The view of English law is that the measures are for the purpose of attaining safety, after which their general average nature ceases. Most foreign laws, including the York Antwerp Rules, take the broader view that general average measures are taken to ensure the completion of the adventure. They allow a far wider treatment of what charges may be regarded as extraordinary and allowable in general average. English law is very strict in its exclusion of what may be termed “consequential” expenses.
Steps to be taken after a casualty. Upon receipt from the master or other sources that the vessel has been involved in a casualty the shipowners should notify their average adjusters. In cases where general average and/or salvage are involved this is essential as, usually, only the specialists can envisage the probable development of the situation and the different steps to be taken. For example, they can advise whether the shipowners’ solicitors and/or P. & I. Association should be alerted in the early stages or the attendance of a cargo surveyor in the general interest is desirable. General average is “declared”’. Usually, the vessel is the largest interest and it is the shipowner who causes average to be “declared”.
Some countries, for example, in Europe, require a master’s note of protest to be made before GA can be declared.
General average adjustment. This is a very complicated task because of the many interests that may be involved. Average adjusters are appointed before or after GA is declared and they proceed with adjustment. This includes the obtaining of security from the various interests. Adjustment means that calculations are made for the contributions of all the interests. The adjustment is bound by the law of the port of destination of the vessel and cargo unless the contract of carriage provides that adjustment is to be made under the York Antwerp Rules 1990 (or the 1974 version if the form of the contract has not been amended). The adjuster may also take into account other clauses in the contract of carriage such as the New Jason clause which allows a shipowner to claim general average contributions from a cargo interest despite the vessel being negligently navigated and suffering a casualty, the consequent repairs being normally allowed as GA. The reason for the clause is to avoid any problems if general average is adjusted in the United States. The firm of average adjusters may also be bound by the “Rules of Practice of Average Adjusters” which lay down accepted procedures.
General average security is required by the shipowners from other interests, mainly cargo, before releasing their lien on the property. This security is against general average sacrifices, disbursements and expenses incurred and settled by them and, in certain circumstances, for salvage services performed without a contract having been signed.
The shipowners will require security in the following form from the consignee, called the “Concerned in Cargo”, before the delivery of each consignment at port of discharge:
(a) Signature of consignees or duly authorised representatives to the usual form of Lloyd’s Average Bond.
(b)A cash general average deposit from consignees in such amount advised to ship’s agents or consignees by the shipowners and/or their adjusters. This can be required additionally to the average bond.
(c) The alternative to a cash deposit from consignees, where goods are insured, is the cargo underwriter’s signature to an unlimited average guarantee.
Where the shipowners require a cash deposit as security, the ship’s or charterer’s agents entrusted with collection of security will be advised of the amount required. This is usually expressed as a percentage of the sound arrived or commercial invoice value of the goods.
Upon receiving a cash deposit from the consignees a general average deposit receipt must be given in exchange. These deposit receipts are “bearer” documents and therefore are not issued in duplicate.
The deposits, as and when received by the agents, are placed with a first class bank in an interest earning account in the joint names of the ship’s agents and local Lloyd’s agents or such other party nominated.
Cash deposits collected cannot be used to settle disbursements or any other expenses incurred unless special authorisation instructions are received from the adjusters.
Subsequently the agents may receive instructions to remit the total deposits collected by them to the adjusters and they will be held in an interest earning account in the joint names of the shipowners and adjusters pending final adjustment.
In addition to the average bond, guarantee or cash deposits the shipowners and/or their adjusters will require .the consignees or receivers of the goods to complete a “Valuation Form”. When completing that form the consignees should attach a copy of the commercial or shipping invoice as the contributory value of the goods will be based on this value in accordance with York Antwerp Rules 1990. Present average bonds have valuation forms attached.
When average is adjusted, all property that is at risk and saved by the general average act or sacrifice or expenditure contributes to GA according to its “arrived value” at the termination of the adventure, normally the end of the voyage. Cargo loaded after the general average act or discharged before the general average do not contribute. Cargo on board which is required to be delivered at a port of refuge does not contribute if the general average expenses arise after the vessel reaches the port, because for that cargo the voyage is completed and the safe prosecution of the remainder of the voyage is not the concern of that cargo owner.
The marine adventure is terminated on completion of discharge of the cargo at the destination. However, if the voyage is abandoned at an intermediate port, the adventure terminates at that port. The cargo may be discharged and forwarded to its destination. The value of the cargo would normally be calculated on arrival at the intermediate port. However, an internationally accepted “non separation agreement” is generally used and attached to the general average security documents.
This provides that the general average is treated as if the forwarding did not occur.
There are many other fine issues related to the average adjustment and these cannot be looked at in this volume. Readers are directed to larger textbooks on “General Average” and “Marine Insurance”.
However, a simple, sample calculation may assist with understanding adjustment.
A vessel may go aground. Some cargo is jettisoned and some is discharged into lighters to float the vessel. The vessel may strain her machinery in attempting to refloat. The vessel may eventually be refloated by salvage tugs.
General average and marine insurance. Under section 66 (4) of the Marine Insurance Act 1906, where the assured has incurred a general average expenditure he may recover from the insurer a proportion of the loss to him. In the case of a general average sacrifice, the assured may be indemnified for the whole loss. Under section 66(5) the assured may also recover a general average contribution that he has made. Indeed, both these sections are subject to express provisions in the policy document and in fact, the various policies for cargo and for hull and machinery provide for recovery for such losses.