TT’s latest StopLoss briefing, produced in collaboration with FIATA and the Global Shippers Forum, provides a straightforward summary of the topic, along with essential good practice advice.
Introduction
GA is widely recognised in all maritime jurisdictions and is as old as maritime transport itself. Modern standards and technology make it a comparatively rare event; conversely, containerised trading, compounded by growing capacity of ships, have made the operation of GA far more complex. As a result, freight forwarders, NVOC’s, logistics operators and BCO’s need to be acquainted with the dynamics and associated risks
presented by a declaration of GA.
The York Antwerp Rules (YAR’s) govern GA events and are typically incorporated into contracts of carriage. Their objective is to promote international consistency in handling GA cases and to ensure that the process is commercially effective. It should be noted that the YAR’s are updated periodically to ensure that they remain relevant and fit for purpose. While York-Antwerp Rules 2016 is the latest version, parties are at liberty to incorporate earlier versions of the rules such as 1994 and 2004 into the contract of carriage. It is prudent therefore to understand which version applies in any given contract.
A GA event is defined in the YAR as “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”.
An example of a GA sacrifice would be jettisoning cargo to help the ship refloat following a grounding incident. An example of GA expenditure would be the employment of tugs if the ship suffers an engine breakdown. Following an incident, the Master of the ship will make an initial assessment and inform ship owners. Provided the incident meets all the required attributes, GA may be declared.
Where applicable, contribution to salvage operates on similar principles and frequently any award due to a tug owner for his tug’s assistance in saving a ship can eventually form part of the GA expenditure (subject to the contracted version of YAR and the terms on which salvors are engaged). However, in many cases where salvage services are rendered the salvor will also demand separate salvage security.
In this information sheet, “General Average” is used to cover both GA and Salvage. Common scenarios While the definition of a GA incident has been broadly outlined, in the modern container supply chain, the following scenarios commonly give rise to GA declarations:
– Grounding
– Ship fire (cargo/engine room)
– Collapse of container stow/Heavy weather damage
– Mechanical breakdown
Process
GA losses arise whenever property involved in a voyage is voluntarily sacrificed or extraordinary expenditure is incurred to enable the ship to recover from a casualty and thereby complete the voyage. While the combined cargo value (rather than the ship) will often proportionally hold the greatest value, it is the Master, via owners/charterers who will generally “declare” GA (although, under English law at least, there is no requirement for GA to be formally “declared” as such); owners/charterers are usually the party
directly handling the “event” that is threatening the “maritime adventure”. In such circumstances it is the owners that therefore appoint an average adjuster, who thereafter operates independently and in the interests of all parties.
The average adjuster will compile the total value of the sacrifice and expenditure that are allowable, and establish the total value of the assets of all the interested parties that has been rescued or saved. The assets will include not just the ship and cargo, but also bunkers and stores, as well as containers and related equipment. Contributory values are calculated against the net arrived value of all these assets at the termination of the voyage – this is known as the contributory value. The various parties will then contribute proportionally based on these contributory values. Owing to the amount of documentary information from a large number of interested parties, this process can take some time
to complete.
The circumstances surrounding a declaration of GA are often dynamic, insofar that in many cases GA will be “declared” before the incident has reached conclusion. A declaration could be reviewed by the ship owner and retracted as circumstances develop. Similarly, a party with an interest on board, might contest a GA claim if they feel that the circumstances do not merit a GA event. While each incident has to be assessed on its own merits, BCOs often argue that the ship owner had failed to exercise due diligence in making the ship seaworthy before and after the commencement of the voyage, as required by the contract of carriage and Articles III r.1 [3] and IV r.1 [4] of the Hague-Visby Rules, such that they do not have to contribute in GA.
In practice, however, the party contesting the GA would ordinarily still need to deposit the required bond/ guarantee (or provide a cash deposit) and then wait for the GA adjustment to be issued. In doing so the BCO/asset owner would avoid unnecessary delay in the release of the cargo/asset. The time between lodging the bond/guarantee and the issuance of the final adjustment could be several years.
GA cases are generally very complex. The circumstances in some incidents dictate that the resolution to the immediate situation and consequently the release of the cargo can take several months, even where satisfactory GA security has been duly lodged. While
such delays can give rise to frustration, provided that the prospect of saving the voyage remains, then GA will remain relevant. Time and delay do not, based on historic cases, add any relevance to the GA declaration and required contributions. This simplified infographic illustrates the practical application of GA, highlighting the key interested parties alongside a calculation of the total allowances. In this scenario, a container ship has grounded and costs are incurred to refloat the ship including lightening efforts jettisoning cargo.
The sum of GA expenditure to refloat the ship of US$2,900,000 (incurred only by the ship and BCOs in this scenario) is apportioned in relation to the contributory values for each interested party. As the total contributory value is US$29,000,000, each interested party must make a GA contribution of 10%.
The role of the General Average adjuster
As highlighted, GA is a complex topic. While numerous actors are inevitably involved in such cases, it is the General Average adjuster who arguably maintains the greatest levels of expertise in this field of maritime law. As noted above, it is usually the owners and/or charterers that appoint the GA adjuster. However, any party with a claim for sacrifice/expenditure can submit this directly to the adjuster. The adjuster will then collate all of this information to prepare an average adjustment, identify any loss or
expenditure and assess whether the same would be allowable in GA.
Ultimately, the average adjuster will calculate the amounts due from all contributing interests. To ensure that payment will be received, the average adjuster will require each party interested in the voyage to provide a GA bond as security, prior to release of anything from the voyage. Along with this, the average adjuster will request arrived values of carrying equipment, bills of lading and commercial invoices detailing CIF (cost, insurance, freight) values for cargo in order to work out the contributions for all interested parties. Since this is done at the outset of the calculation, before the full value of the sacrifice and expenditure is known, the average adjuster will estimate the amounts. A GA bond is effectively a promise to pay whatever contribution is assessed, backed up by a GA guarantee from a bank or insurance company.
The average adjuster will distribute GA bond and guarantee documentation to all known interested parties identified through the issued bills of lading. It is not uncommon that such documentation will be sent to the freight forwarder, where the freight forwarder is identified on the ocean bill of lading, even though the BCO interests are intended to be addressed.
Such documentation should be forwarded to the BCO interests at the earliest opportunity. It is recommended to secure a proof of postage/email receipt in case of a future dispute. Commercially, it can prove beneficial to follow up with the BCO interests to ensure they have understood the requirements, completed the necessary documentation and returned it to the average adjuster. Of course, the freight forwarder’s client may no longer be the BCO, under the terms of the sale contract, and therefore the documents will need passing on to their customer – the buyer or consignee. The correct BCO will be determined by the incorporated INCOTERMS, which might not be accurately reflected on the bill of lading. Where the cargo is insured, standard marine policies cover the costs of GA contributions, and the insurer will take over dealing with the average adjuster.
In the event that a consignment is uninsured, or the average adjuster is uncertain about the security of the insurance company, a contributory cash deposit will be requested. Such cash deposits are held in a first class, interest earning bank account – no disbursements can be made from the account without the written consent of the average adjuster. If a cargo is found to be under insured, the cargo insurer will only reimburse the proportion of the guarantee applicable to the insured value.
This serves as a reminder of the importance from a BCO’s perspective to ensure adequate cargo insurance is in place to cover any given shipment. In some cases it is considered more expedient to forward the cargo to the final discharge port onboard another vessel. In these cases a ‘non-separation agreement’ will be incorporated within the GA documentation. This provides for the cargo to be forwarded to the original port of destination, in return for payment of their contribution, as if the cargo had remained aboard the original ship. Upon arrival at the destination port, only cargo and equipment for which GA bonds and guarantees have been received will be released.
Bills of lading will contain GA and lien clauses, under which the carrier will hold a lien over all cargo; where bonds and guarantees have not been submitted, the shipowner
will continue to hold a lien over the goods and assets. A potential issue for the freight forwarder or NVOC may arise in connection with “less than container load” (LCL) shipments, where several BCO interests are required to submit documentation. Until all have been submitted, the container and cargo will not be released. In such circumstances, it is recommended that the freight forwarder follow up with all BCO
interests to ensure they have fulfilled their obligations. The average adjuster can be contacted to identify outstanding guarantees. Being proactive can assist
in alleviating unnecessary delays and subsequent damage to commercial relationships. Some NVOC insurers may be willing to provide guarantees in these circumstances, on an undertaking by the NVOC that such cargo is similarly held under lien within the terms of the NVOC bill of lading. This can facilitate the movement of the remainder of the
LCL cargo.
Each case is calculated on its own merits, however GA contributions can be significant and should not be an underestimated risk. Demands may exceed 60% of contributory values, which emphasises this point.
Required action
NVOC/freight forwarder
The general position is that GA claims will not be made against a freight forwarder because a freight forwarder will not typically own property in the venture. Only those who have a property interest are ordinarily required to contribute in GA. Therefore the situation should not arise where GA demands are being made of a freight forwarder.
That said, if such demands are received, or made because of the peculiarities of the legal system within a foreign jurisdiction, then it would be prudent to verify whether industry recognised standard trading conditions, such as those of FIATA or other national forwarding associations have been duly incorporated into the contract with your
customer. These standard trading conditions should enable you to seek an
indemnification for any such liabilities.
If you appear on the ocean bill of lading as the shipper, don’t panic, you are not liable for the GA contributions in respect of the cargo: that is a matter for your clients, the BCO, and their insurers. Similarly, if you are using the shipping line’s equipment (containers), you have no responsibility for GA contributions assessed on the value of the containers themselves.
Occasionally, an average adjuster will demand a GA bond in respect of any freight that was payable at destination. If this happens you may be liable to sign the GA bond yourself, but before doing so you should consult your liability insurer.
Despite not having any direct liability for GA contributions, it would be prudent to inform your liability insurer of your involvement in the incident if something unexpected occurs.
– Do not sign the GA bond or GA guarantee forms.
– Let your clients know what ha happened and send each of them a copy of the letters from the adjuster.
– Explain that they have responsibility for the GA contributions. If due to the terms of sale they are no longer the legal owner of the cargo, they should pass the letters onto the BCO.
– Make clear to your client that cargo will not be released by the shipping line until the guarantee has been returned and accepted. Your agent at destination may be able to assist in obtaining the declarations and guarantees.
– You may request that a copy of the signed guarantee be returned to you for your records.
Where LCL consignments are concerned, if you find that one or more clients have not signed the guarantees (or are refusing to sign), it would be prudent to notify your liability insurer. Your liability insurer may be able to help get the container released so that other
parties can collect their cargo. Any guarantee provided by your liability insurer in respect of cargo is likely to be given strictly on your undertaking not to release the specific consignment until an acceptable guarantee has been provided – ensure that your agent does not release any cargo for which signed guarantees from cargo interests have
not been obtained.
If there is any indication that cargo may have been damaged in the incident leading to GA and/or salvage, contact your liability insurer immediately. Arrangements can be made for the cargo to be surveyed, possibly at the port of refuge or on arrival at destination.
Container/equipment owner
If you own or lease equipment that was on board you will have a liability for the contributions on the value. The calculation for carrying equipment is based on a predetermined and agreed “arrived” value for each type of container.
– Notify your insurer of the incident immediately and forward any GA guarantee request received.
– Your insurer should thereafter take steps on your behalf to complete the required paperwork and send to the average adjuster.
– Once the guarantee has been placed by the insurer, the container(s) can be collected once discharged from the ship (subject to security having been provided by any BCOs).
Beneficial cargo owner (BCO)
If cargo insurance is in place. Standard marine cargo policies cover the costs of GA contributions and the insurers will take over the detailed work of providing the guarantee and dealing with the average adjuster. The required GA contribution will be calculated against the CIF value of the goods being shipped.
– Notify your cargo insurer immediately and forward any GA guarantee request received.
– Your insurer should thereafter take steps on your behalf to complete the required paperwork and send to the average adjuster.
– Once the guarantee has been placed by the cargo insurer, the cargo can be collected once discharged from the ship (provided any applicable container/equipment contributions have been lodged).
If the cargo is found to be under insured, there is a risk that the cargo insurer will
not place the full value of the guarantee sought, in which case the cargo owner
will be required to place a guarantee for the difference in value.
If cargo insurance is not in place
Do not simply ignore the request from the average adjuster. Your cargo will not
be released without a suitable guarantee being in place. Taking no action may result in the shipping line holding a lien over your goods and ultimately exercising the right to selling them to cover outstanding costs.
– Engage with your freight forwarder who may be able to assist you in understanding your obligations.
– Where the cargo is uninsured, the evidence of the value and guarantee will need to be signed by an appropriate guarantor, such as a bank.
– A bank guarantee may satisfy the average adjuster’s requirements; alternatively, you may be requested to place a cash equivalent deposit with the average adjuster to secure the release of the cargo at destination.
One unintended consequence of GA cases can be that the goods being shipped are abandoned by the BCO. Circumstances will influence this – the cargo may have missed its intended market, lost significant value or the costs of regaining control become unviable. Abandoned cargo is a continuous challenge for supply chain stakeholders, resulting not only in considerable costs on container demurrage, detention, storage and disposal costs, but also increased safety and regulatory risks. Aside from these identified risks, incidents of abandoned cargo demand a significant management resource to resolve and
have the potential to impact commercial relationships.
Summary & checklist
In summary, GA is the mechanism by which extraordinary additional expenditure incurred during a voyage because of a defined incident can be recovered from all parties involved in the maritime adventure on a pro rata basis against the ‘arrived’ value of goods and other property aboard. While in practice GA has been an effective mechanism to resolve such issues, there are those who argue that over the last 20 years, particularly as the size of container ships has increased rapidly, that GA is no longer fit for purpose or that an alternative solution should be developed. That said, experience shows that the system does work and remains an effective means of dealing with large and complex casualties.
In the 21st century, where cargo ships are capable of carrying in excess of 23,000 TEU and continue to grow, a GA adjustment is likely to be an extremely complex calculation and the administrative burden placed on the interested parties is significant. It is essential that all freight forwarders understand GA to efficiently manage matters and set realistic expectations towards their respective clients and BCO interests following such an event. Equally, BCOs need to understand their obligations, particularly where they have chosen not to purchase cargo insurance.