Section 7 General Average

4.7.1 General

4.7.1.1 The York Antwerp Rules

The rules on general average introduced in 1890 are now contained in the York Antwerp Rules – the latest version being dated 2016.

Bills of lading and other freight contracts should include a clause to the effect that a general average occurring during the contracted carriage should be adjusted in accordance with the York Antwerp Rules. The absence of such a clause may jeopardise the Member’s cover under Rule 10 Section 2.

4.7.1.2 Definition of general average

The York Antwerp Rules define general average (“GA”) as follows:

“There is a general average act when, and only when, any extra ordinary 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.”

The following requirements must be satisfied for a loss to be recoverable in general average:

the ship and the cargo must have been threatened by a common danger
to avert the common danger a sacrifice must have been made or an extraordinary expense incurred
the sacrifice must have been real and intentional
the endangered property must have been saved by the sacrifice or extraordinary expenditure

4.7.1.3 Parties liable to contribute

The two interests most frequently involved in a common danger are the ship and the cargo. When saved by circumstances that constitute a general average, they are both liable to contribute. If the common danger constitutes an insured peril, the risk of having to pay such contributions is covered, for the ship, by its Hull insurance) and, for cargo, by the cargo insurance.

The party entitled to collect freight at risk (i.e. freight payable at destination) is also liable to contribute in general average. That risk can be insured.

The owner of the bunkers and other equipment such as the containers on board are also liable to contribute in general average if they are saved.

4.7.1.4 General average security

With the exception of those cases where cargo alone has been sacrificed to avert a common danger, it is usually the carrier who makes the sacrifice or incurs the extraordinary expense. The other interests saved owe him their respective contributions to be determined later by the general average adjusters.

As long as the cargo remains on the ship or under the carrier’s control, he has a lien which can be exercised over the goods. This means that the carrier can retain the cargo as security for payment of his contribution. In order not to jeopardise that security, the carrier should release the cargo against either a cash deposit or an average bond signed by the cargo owner and backed by a guarantee from his underwriter.

4.7.1.5 General average adjustment

General average is adjusted by an average adjuster. The place of adjustment should be set out in the appropriate clause in the contract of carriage.

In straightforward cases, and upon agreement by the parties, general average can be adjusted by their respective underwriters.

The initial intervention of the average adjuster is generally to assess and arrange the cash deposits or to collect the average bonds and guarantees.

The average adjuster will then proceed with the allocation of the sacrifice made and the extraordinary expenses incurred proportionally in line with the interests saved. This procedure generally takes time, especially when there are a large number of cargo owners to contribute on a general cargo or container ship.

When published, the general average adjustment contains a complete breakdown of each party’s obligation to compensate or entitlement to be compensated. The cargo interests’ obligations under the adjustment can be enforced against the general average bond and security which was posted prior to the release of the cargo.

4.7.2 Unrecoverable general average contributions

4.7.2.1 General comments on unrecoverable contributions

As indicated, the shipowner is mostly out of pocket in respect of general average expenditure whether in the form of sacrifices made or expenses incurred.

There may be several reasons for the inability to recover such contributions from cargo interests. This section defines the situations where unrecoverable general average contributions are compensated under the P&I Insurance.

4.7.2.2 Effect of fault

4.7.2.2.1 Cover where Member is liable for fault

A party who caused or contributed to the general average incident by its own fault, where such fault constitutes a breach of the contract of carriage, may not be entitled to contributions from the other parties. The fault must be an actionable breach of the party’s contractual obligations. As appears from the comments under 4.1.8, there are situations where liability for the carrier is excluded under the Hague or Hague-Visby Rules even if caused by the fault or negligence of the crew. In most countries, the carrier retains his right to contributions in such a situation.

However, in cases where a contribution from cargo interests is unrecoverable because the general average incident was caused by fault on the part of the crew for which the carrier is liable under the contract of carriage or by the carrier’s breach of its seaworthiness obligations, the Member’s loss is covered under this clause unless the relevant fault or breach is of such a nature that it is excluded from cover under these Rules.

Members should always inform the P&I Club where GA is declared in case it is argued at a later stage that GA contributions from cargo are irrecoverable on the basis that the vessel was unseaworthy at the relevant time.

4.7.2.2.2 New Jason Clause

Under U.S. law, the shipowner is unable to recover contributions from the other parties if he or his servants caused the general average by negligence regardless of whether that negligence entailed liability or not.

To avoid that effect, the contract of carriage should contain a New Jason clause according to which the cargo owner shall contribute to any general average whether due to the carrier’s negligence or not. Under Rule 10 Section 2, there will be no cover for contributions unrecoverable because the contract of carriage lacked a New Jason clause.

4.7.2.2.3 Payment of compensation

The shipowner is mostly out of pocket for cargo’s proportion in GA and he remains so until that proportion has been assessed and collected. That may take time and the amount may be considerable. Still, it is not the purpose of the cover under this section to provide the Member with a loan until the contributions have been collected. The section states that the cover is for those contributions which are unrecoverable for the reasons discussed above. It should be applied accordingly.

Compensation is generally allowed by application of the following principles. A final GA adjustment should have been issued, and it should be reasonably clear that the contributions are refused or otherwise not forthcoming. Reasonable efforts should have been made by or on behalf of the Member to investigate and overcome those objections in order to recover the contributions. The Club should be informed and given the opportunity to advise and assist the Member. When efforts have failed or a favourable result is unlikely or expected to involve considerable delay, the Member may claim compensation under this section.

For any compensation paid, the Club is subrogated to the Member’s rights against the contributor by application of Rule 14. Against payment of the contribution, the Club may ask the Member formally to assign his rights against cargo and to post any necessary security for the return of the advance if that situation should arise.

It is not possible to define exactly the moment when compensation is due. It will be judged on a case-by-case basis. However, a minimum of six months must have passed from the date of the issuance of the GA adjustment. No more than 80 percent of the outstanding contributions will be advanced. The balance will be paid when it has been accepted that the contributions are indeed unrecoverable.

4.7.2.3 Effect of deviation

If a general average incident is caused by an unjustified deviation, the other parties may refuse to contribute. What constitutes an unjustified deviation appears from the comments under 4.8.2.

According to Rule 4 Section 8, liabilities arising out of an unjustified deviation are not covered. Consequently, there is no cover for general average contributions which are unrecoverable because of an unjustified deviation.

4.7.2.4 Obligations to complete the contracted carriage and its effect on liability and cover

4.7.2.4.1 General comments on obligations to complete the contracted carriage

A casualty to the entered ship does not automatically terminate the contract of carriage. The carrier’s obligation to complete the voyage continues until it is reasonably clear that performance of the carriage is impossible. Such decisions are difficult to take and the liability consequences serious if the voyage is wrongfully abandoned. Therefore, Members should avail themselves of the Club’s advice and recommendations in such situations.

4.7.2.4.2 Abandonment

If the damage to the ship is extensive or if it is otherwise impossible to continue the voyage, the contract of carriage may be frustrated. The question of whether and when a contract is frustrated must be determined on the basis of the particular facts and the situation in each individual case as presented at the material time and without the exercise of hindsight. A contract may become frustrated by an event which makes it physically or commercially impossible to continue the voyage. The carrier’s decision can be challenged by the cargo interests.

If the contract of carriage has become frustrated, the carrier is entitled to treat the voyage as terminated on the grounds that it is incapable of further performance. The voyage ends at that point, wherever the ship and cargo may be located. The carrier retains the basic obligation to take reasonable steps to care for the cargo as circumstances permit and to release it to its rightful owner.

The Member is covered under these Rules for the actual duration of the voyage up to the point when the cargo is released following termination and the Member should co-operate closely with the Club and its representatives in order to make suitable arrangements to minimise liability.

4.7.2.4.3 Transhipment

4.7.2.4.3.1 General comments on transhipment

Even if the damage to the ship is not serious enough for the contract of carriage to become frustrated and cause the abandonment of the voyage as described under 4.7.2.4.2, it may not be possible to complete the voyage without extensive repairs. In order to affect such repairs, the cargo may have to be discharged. The duration of the repairs, lack of storage facilities or the nature of the cargo may necessitate the transhipment of the cargo to its destination by another ship or other means of transport.

The carrier remains responsible for the cargo as under any other transhipment. Within the options available, the carrier has to be selective in the choice of oncarrier in order not to expose the cargo to unnecessary risks. The transhipment should be undertaken on a contract of carriage which does not impose terms upon the Member which could result in the exclusion of cover under Rule 10 Section 2.

4.7.2.4.3.2 Non-separation agreement

The York-Antwerp Rules 1994, (also 2004 and 2016), Rule G, makes it unnecessary for the shipowner to obtain a non-separation Agreement from the cargo owner or his underwriter. The Member should make sure that the York-Antwerp Rules 1994 are included in all bills of lading and charterparties.

4.7.2.4.4 Insurance of general average disbursements

When the contracted voyage is resumed, whether after transhipment or by the original vessel, the ship and the cargo may have claims for compensation in general average against each other for which the value of those interests constitute the security. During the continued voyage, new events may occur which reduce or eliminate the contributory value of those respective interests.

If the cargo is damaged or lost, the carrier may be left without any or with insufficient security for cargo’s proportion in the general average. A loss caused by a reduction of the contributory value of the cargo is neither covered under the Hull nor the P&I Insurance.

Similarly, the cargo owner’s liability in general average might increase if the ship’s contributory value is adversely affected by an event occurring after the general average incident.

4.7.2.4.5 Insurance of discharged cargo

The cover afforded to the Member by the insurance of average disbursements against a reduction of the cargo’s contributory value is terminated when the general average ends viz. when ship and cargo separate at the ultimate discharge port.

If the cargo is not promptly received by the receiver at the discharge port against an average bond or other security for its general average contribution, the carrier should insure the cargo against fire, theft or other damage. The insurance will, in effect, replace the cargo as security for the general average contribution, should it be damaged or destroyed while in storage pending delivery to the receiver.

As a loss caused by the reduction of the cargo’s contributory value is not covered under either the Hull or P&I Insurance, a Member should check that insurance of the cargo discharged is arranged by the Hull underwriter or arrange such cover himself.

4.7.2.5 Member owns the cargo or other contributing assets

If both the ship and cargo involved in a general average incident are owned by the Member, the cargo is supposed, for the purpose of these Rules, to be covered by separate insurance against normal risks amongst which is the obligation to pay cargo’s contribution in general average. This follows from Rule 11 Section 6.

Should the cargo interests have legal grounds to contest the obligation to contribute, these Rules apply to the cover for a loss sustained by the Member as a result thereof, regardless of the fact that the cargo belongs to the Member.

The same principle applies to other contributing assets with the exception of the ship, such as freight at risk and bunkers.

4.7.2.6 “Special charges or salvage”

The words “special charges or salvage” in the first part of this section refer to expenses incurred on behalf of the cargo owner for the safety and preservation of the cargo in compliance with the obligation of the carrier to care for the cargo. Where those expenses are incurred solely in the interest of cargo and not of the ship, it lacks the requisite element of a sacrifice incurred in respect of a common danger and as such does not qualify as a general average expense.

Such expenses when incurred are treated as cargo’s particular average and should be paid in full by the cargo interests or their underwriter. Should the cargo interests have valid grounds to refuse payment on the grounds that the particular average was caused by the carrier’s breach of the contract of carriage, the Member’s loss may be compensated under this section.

4.7.2.7 “Not legally recoverable”

4.7.2.7.1 General comments on unrecoverable contributions

As mentioned in the comments under 4.7.2.2.1, a Member is covered under this section for a loss sustained when a contribution is unrecoverable because general average was caused by actionable fault or breach for which the Member is liable.

There are other situations where a contribution is legally recoverable but a Member is unable to recover it. Those situations are not covered.

4.7.2.7.2 Insolvency of cargo owner

Cover under this section requires the Member to obtain adequate general average security. There is only one exception from that obligation commented on in 4.7.2.7.5.

If the Member has obtained security which, when obtained, seemed to be adequate, and the party behind the security goes bankrupt, becomes insolvent or is otherwise unable to pay the contribution, the loss sustained by the Member is covered.

Before the loss is compensated, the Member should take reasonable steps to recover the loss. It may, for instance, be possible to offset the contribution against outstanding freight.

When the loss is clear, the Club will consider compensation. It follows from Rule 14 that, by compensating the Member, the Club is subrogated to the Member’s rights against the cargo interests and can rely on the Member’s co-operation in making any recovery action.

4.7.2.7.3 Insolvency of others

A Member may be deprived of a contribution because it is paid to an agent or a bank which goes bankrupt or embezzles the money. As the contribution was in fact paid, it is not unrecoverable. It follows from Rule 11 Section 2 (m) that such a loss is not covered.

4.7.2.7.4 Loss or reduction of contribution by currency or exchange regulations

Occasionally currency or exchange regulations may affect the payment or transfer of contributions paid by cargo interests in such a way that a loss arises for the Member.

Transfer may be allowed only in local currency where an unfavourable rate of exchange reduces the amount received by the Member.

Transfer of the contribution may be denied completely and the Member left to spend the amount locally.

Devaluations may occur before the amount is due for payment, which will reduce the value of the contribution.

Although such losses have to be considered for compensation based on the circumstances of each case, they are, in principle, covered under this section as unrecoverable contributions.

Before being compensated, the Member may have to accept a reasonable part of the contribution to pay for bunkers, stores, wages or repairs locally to reduce the final loss. The Club acquires the right to the part of the contribution compensated and may spend it on claims settlements or disbursements within the country concerned.

4.7.2.7.5 Failure to obtain average bonds

As appears from the comments under 4.7.1.4, the carrier’s right to contribution in general average is protected by a lien on the cargo. The lien is effective only as long as the cargo remains in the carrier’s custody. To replace the cargo as security for the contribution, the carrier should release the cargo only against a cash deposit or an average bond signed by the cargo owner and backed by a guarantee from his underwriter.

For commercial or other reasons, carriers sometimes refrain from obtaining an average bond or other security. In such a case, there is no cover under these Rules if no contribution is subsequently paid by the cargo interests.

According to the first part of this section, a Member who fails to obtain adequate general average security, is covered only if he can prove that, at the time the cargo was released to the receiver and the security should have been obtained, he neither knew nor ought to have known that there had been an occurrence of a general average nature during the voyage. There might, for example, have been reason to believe that cargo thrown overboard was worthless and, therefore, did not constitute a sacrifice.

Ignorance, however, that general average requires the collection of average bonds or other security is no excuse.

The regulations contained in this section emphasise that a Member should act in co-operation with the Club and obtain its advice when a casualty is known to have occurred in relation to the entered ship.

4.7.2.7.6 Payment of compensation

See the applicable parts of the comments under 4.7.2.2.3.

4.7.2.8 Time limit for general average contributions

The time limit for the parties involved in general average to claim contributions varies from country to country. Not only does the length of the time vary, but also the date from which the time starts to count. In some countries, the time starts from the date of the casualty; in others, from the date of the average adjustment.

It is recommended that Members consult their Hull underwriter or the Club for advice in this respect.

4.7.3 Ship’s proportion in general average

When general average is adjusted, the ship’s value on which her contribution will be based, may be assessed at a sound value in excess of the value insured under the Hull policy.

According to Rule 11 Section 6, it is a condition for cover under these Rules, that the entered ship has Hull insurance for an amount which at any time is the market value without commitments. The implication of this regulation is commented on in 11.6.2.4.

Provided that this condition is met, there is cover under this section where the ship’s contributory value is subsequently assessed at an amount in excess of the Hull insurance value.

4.7.4 Loss covered under other insurance

Among the exclusions which may apply to the cover under this section are those in Rule 11 Section 2 (l) and Section 6.

As mentioned in the comments under 2.3, the cover under these Rules is for third party liability. Losses sustained by the Member to his own property and to the entered ship are covered only when it is explicitly stated in the Rules.

Sacrifice of the entered ship or any part thereof is generally not covered especially as such loss is probably compensated under the Hull policy (see comments under 11.6.2.3) which the vessel is obliged to have in accordance with Rule 11 Section 6.

GA contributions to be paid by cargo for damage to the propeller sustained during refloating attempts will be compensated under the Hull insurance if unrecoverable.

P&I Rules and Exceptions

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