Going Overboard: A Crash Course in General Average
Written by Alison Cusack and Kerryn Woonings
The ancient principle of General Average has remained a mystery for many of the parties involved in a “maritime adventure”.
When the containers fell overboard the YM Efficiency earlier this year, there was a lot of doubt and confusion over whether there was a GA declared or not – even months after the incident. But no GA was ever declared. Why?
We thought this “near miss” GA event was a great opportunity to review the basic principles of GA, and remind cargo interests of the financial risks they are exposed to.
What is General Average and why do I care?
Commercial shipping (especially containerised shipping) has hundreds and thousands of interested parties in a single voyage. The largest sailing container ship at present is the CSCL Globe with a capacity of 19,100 TEUs.
If the vessel encounters a peril on this journey (grounding, fire etc) and extraordinary measures are required to be taken by the crew, say jettisoning cargo or incurring extraordinary costs to enable the vessel to finish its journey, who pays?
As the Cargo owners whose cargo remained intact and undamaged benefited from the loss of others (those whose cargo was jettisoned), it was deemed that those unaffected cargo owners and interested parties in the successful voyage should contribute to the other’s loss.
What this means, is that there is the potential for cargo owners to suffer a loss well beyond the value of their cargo.
How do you work out who pays what?
To combat multiple jurisdictions and applicable laws, a set of rules was developed known as the York-Antwerp Rules. The first incarnation of these rules was set down by the CMI in 1890. They have undergone several changes since then, and the latest set of rules is the York-Antwerp Rules 2016.
The York-Antwerp Rules set out the guidelines for a general average event, and the mechanisms for apportioning loss. An average adjuster follows these rules following a GA event, and determines what contribution each interest pays.
Elements of a GA
There are three basic elements to a GA event:
(1) the vessel must be in imminent danger;
(2) there must be an intentional, voluntary sacrifice of property by the crew or owners to avert that peril; and
(3) by that intentional sacrifice, the safety of the vessel, the remaining cargo, or the voyage must be secured.
So every time a container falls over board it’s a GA?
Not necessarily. As we see above, one of the elements is that it must be an “intentional” and “voluntary” sacrifice.
Who declares a GA?
The Shipowners will usually declare a GA following initial assessment by the Master of the vessel.
What does a GA declaration mean for me?
At a practical level, if you have cargo on board a ship that has declared GA, it means in the short term that your cargo is on hold. This is not to be confused with a lien issued by an ocean carrier in respect of an outstanding debt.
An average adjuster will be appointed to manage the GA event. They will require relevant documents and a GA bond from all interested parties to secure the release of cargo.
I don’t have insurance… is that bad?
Unfortunately, if you self-insure, you have no way of knowing what the final liability will be for your general average contribution in any particular GA event. You will be required to provide a bond, and then once the adjustment is finalised, the remainder of your contribution. This presents a potentially huge financial exposure for cargo owners.
Furthermore, depending on the specific event, general average adjustments can be heavily litigated. A most recent case, The Longchamp, took over nine years to settle.
This is where having cargo insurance is of great benefit – even in ordinary circumstances. The shipping of cargo is a risky business, and fraught with all kinds of financial exposures when it comes to cargo being damaged, lost or misdirected. So having insurance will provide a certain peace of mind in a GA event.
I have insurance that contains an “average” clause. Does this mean that I am covered for general average?
An “average” condition in a cargo insurance policy should not be confused with GA. This condition simply means that if you under-declare your cargo value at the time of taking out your insurance policy, when it comes time to be paid out your loss, it will be averaged in proportion to the amount under-declared.
GA is usually specifically and separately mentioned within the provisions of a cargo insurance policy.
So why wasn’t the YM Efficiency a GA event?
For the simple fact that the sacrifice (i.e. overboard containers) was not voluntary. Aside from that, the vessel sailed into port under its own steam (i.e. without assistance).
There is an element of intention required in GA. Therefore, not every adverse event that happens to a ship and its crew and cargo is a General Average event. There has to be a deliberate decision made to voluntarily sacrifice cargo and/or equipment to preserve the vessel/voyage.
Because the containers on board YM Efficiency were not thrown overboard, but simply fell overboard, and the vessel was still able to complete the voyage, the vital elements for declaring GA were not met.
By Alison Cusack & Kerryn Woonings