General Average

General Average

General Average goes back to the ancient Greeks and Rhodian law, a time before the introduction of insurance to cover risks, when it seemed a reasonable and practical proposition for all parties to the marine adventure to have solidarity with one another. It is defined for insurance purposes in the Marine Insurance Act 1906 and has been defined by the English courts as "any extraordinary sacrifice or expenditure 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".

Thus goods may be jettisoned to lighten a grounded vessel or may be damaged by water used to put out a fire aboard. The party who has suffered a sacrifice or incurred expense for the common good is compensated in proportion by all the other parties and the account is put together by an average adjuster. When General Average is declared, each shipper must put up security for its proportion of the loss, or show that it has adequate insurance cover in the form of a bond.

Complaints by shippers about general average are not new. In the middle of the 19th century, one knowledgeable observer commented that "General Average is a remnant from a primitive age, and at the present time it seems to be entirely out of harmony with the conditions of modern commerce. Ships are much larger and carry larger cargoes and the expense, trouble and time wasted upon General Average statements is well known and out of all proportion to the benefit achieved". Other 19th century observers were even more vitriolic, commenting that "any damage that can by hook or by crook be twisted into the shape of voluntary sacrifice is made the occasion for a voluminous and costly General Average adjustment" or describing GA as a "nest of fraud and abuses, a lurking place for peculation and waste".

It is still unfortunately with us, though the case for continuing with such an expensive system is shown to be weaker and weaker. A report for the IUIMI in 1994 showed that almost 40% of GA involved mechanical breakdown of the carrier's engines and machinery and almost 22% consisted of grounding of vessels, both of which may be regarded as an abuse of the system even if legally recoverable. GA mainly involved poorly maintained, flagged-out vessels. GA costs industry some $300 Million per annum of which nearly 25% represents the various costs of the adjustments themselves, without taking account of shippers' lost management time. Average adjustment is a process which frequently takes years to complete.

Typical bill of lading terms on General Average

"General Average shall be adjusted according to York-Antwerp Rules 1974 as amended in 1994 at any port or place at the option of the carrier whether declared by the carrier or a subcontractor of the carrier. This provision shall cover all goods whether carried on or under deck as well as deck cargo and live animals."

Thus the goods in italics, for which the carrier often takes no responsibility whatsoever, must nonetheless contribute to GA.

"The merchant shall deliver such cash deposit and/or other security as the carrier may deem sufficient to cover the estimated General Average contribution of the goods before delivery if the carrier requires, or, if the carrier does not require, within three months of the delivery of the goods whether or not at the time of the delivery the merchant had notice of the carriers lien"

"If the carrier delivers the goods to the merchant without claiming any average bond or other security for contribution to General Average the merchant, by receiving the goods, becomes personally liable for the contribution up to the CIF value of the goods, provided the carrier notifies the merchant within three months after receipt by the merchant of the goods of his intention to declare General Average"

 "The merchant undertakes, if so requested by the carrier to disclose the CIF value of the goods and the name and address of the underwriter. Unless the merchant provides the carrier with an undertaking from such underwriter to pay General Average contribution the merchant shall give the carrier such other security as he may approve"

In the United States a carrier may have difficulty in recovering GA unless the bill of lading contains a "New Jason Clause" so these habitually appear in most bill of lading terms. The clause states:

"General Average to be payable according to York-Antwerp Rules 1994 but where the adjustment is made in accordance with the law and practice of the Unites States of America, the following shall apply: In the event of accident, danger, damage or disaster before or after commencement of the voyage, resulting from any cause whatsoever, whether due to negligence or not, for which or for the consequences of which, the carrier is not responsible , by statute, contract or otherwise, the goods, shippers, consignees or owners of the goods shall contribute with the carrier in general average to the payment of any sacrifices, losses or expenses of a general average nature that may be made or incurred, and shall pay salvage and special charges incurred in respect of the goods. If a salving ship is owned or operated by the carrier, salvage shall be paid for as fully as if such salving ship or ships belonged to strangers. Such deposit as the carrier or his agent may deem sufficient to cover the estimated contribution of the goods, and any salvage and special charges thereon shall, if required be made by the goods, shippers, consignees or owners of the goods to the carrier before delivery"

Position under international conventions

General Average is at present not specifically governed by any international convention.

However, the Hague-Visby Rules state that nothing shall prevent "the insertion in a bill of lading of any lawful provision on General Average". This leads to some interesting questions of interpretation of what is lawful. For example if the carrier is at fault under Hague-Visby for failure to make the ship seaworthy, he may be ineligible to declare GA, though this may not be immediately apparent in bill of lading terms or in the York-Antwerp Rules on GA. However, if the negligent navigation defence applies, the carrier may still try to claim GA (but the ISM code may now make this more difficult). It should be noted that a shipper may not claim GA where there has been fault on the part of its servants or agents!

The Hamburg Rules do not "prevent the application of provisions in the contract of carriage by sea or national law regarding the adjustment of general average". However they open up a still smaller window for GA as they do not contain the old Hague Rules defence of negligent navigation and specifically state that where the carrier is liable for cargo loss under Hamburg Rules, it may not claim GA contribution. Wider application of the Hamburg Rules would probably hasten the demise of GA.

The Comite Maritime International (a significantly carrier orientated organisation) is the guardian of a set of contractual rules on General Average known as the York-Antwerp Rules which are periodically revised, the latest set having been approved in 2004. However the 2004 Rules were agreed in the teeth of opposition from sea carriers and their introduction in place of the even more onerous 1974/94 system is expected to be resisted in practice in bill of lading terms. In most countries, the parties must agree to incorporate York- Antwerp Rules in their contracts before they become operative.

The common law position over General Average in the UK is quite restrictive of ship owner rights, limiting GA to matters of common safety. Successive versions of the York-Antwerp Rules gradually gave many extra contractual rights to the ship owner, which he would not otherwise have enjoyed, notably in relation to expenses at a port of refuge and crew wages. This reached a climax in the 1950 version, since when GA is slowly reverting to its original purposes.

Rule D of the York-Antwerp Rules purports to allow the ship to recover GA even when there is fault on the part of the carrier. This offends against English common law and is thought to offend against the United Nations ISM code, which places stringent obligations on ship owners with regard to seaworthiness and safety management and may in future threaten many claims in relation to machinery and stranding.

There is a possessory lien for general average contributions in most countries and because of the failure to implement successive conventions on maritime liens, this remains a national rather than international domain. Bill of lading terms generally seek to augment the circumstances of lien, even to a time when the carrier is no longer in possession of the goods. They do this by contract, subject to any national laws that may apply.

While it may not be possible to abolish GA altogether without legislation, as it is such an ancient aspect of maritime law, it may prove possible to eliminate it in practice. The process of abolition has actually been initiated by ship owners themselves for those General Averages that do not yield any real benefit to themselves. Shippers may now continue the process by seeking to eliminate those GAs that do not benefit themselves.

Protective measures by shippers

Contract stage

It is the view of some commentators that General Average will die because more and more reputable carriers will cease to bother with it. In the liner container trade there are already carriers who have ceased to declare many General Average losses (maybe as many as 50%), recognizing that the collection costs often exceed the actual sums redistributed. They have arranged "absorption clauses"" with their hull insurers that, where the ship might notionally benefit from a GA declaration, the hull insurer will nonetheless deal with the carrier's damage claim. As the present system is largely based on contract, it should be possible for shippers to hasten the ending of General Average by encouraging this trend.

Contracting out of General Average liability on an individual basis by shippers could have revolutionary effects. The whole system is based on implied solidarity and will be weakened if that solidarity is broken by one of the parties to the adventure. It is hard to see the system surviving in the long term without some statutory intervention which could not be justified today on any logical grounds. GA is a uniquely maritime concept. Other sectors manage to insure losses of a GA nature without recourse to a general average system.

If contracting out of GA clauses altogether is not acceptable for whatever reason, then adoption of the least onerous system of GA could be the next negotiating position. This could include limiting contribution to that under English common law or adopting the York-Antwerp Rules 2004. It is interesting to speculate how a single event would be adjusted where different shippers have contracted for different regimes of adjustment.

Claim stage

Claims are almost invariably passed to insurers, where shippers have agreed to contribute to general average losses. It will be apparent from the above, that GA is an unusually complex subject and that even the basis for declaring GA is subject to controversy. It may be helpful to defeat dubious claims for GA if the facts of the incident are carefully obtained and studied. The onus of proof is on the party seeking contribution and this is most frequently the ship, in the first instance. Not only may the circumstances not qualify at all for a general average declaration, but sometimes individual elements of claim can be resisted.