Following the tragic casualty of 'Maersk Honam' it is timely, particularly for shippers and freight forwarders, to cover the dynamics and risks associated with General Average.

While the concept of General Average (GA) is widely recognised and as old as maritime transport itself, it is also a commonly misunderstood process. This principle of maritime law governs the process by which all stakeholders in a particular voyage share losses resulting from actions taken in an emergency.

What is GA & how does it work?

A GA event is defined in the York-Antwerp Rules as "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". A GA sacrifice might be jettisoning cargo to enable a grounded ship to refloat. Employment of salvage tugs where the ship suffers an engine breakdown would be GA expenditure.

Whilst the combined cargo value will often proportionally hold greater value than the ship itself, it is the Master technically who generally declares GA; inevitably, the Master is the one directly handling the "event" that is threatening the ''maritime adventure''. Consequently, the ship interests appoint the "Average Adjuster", who thereafter operates independently and on behalf of all parties. The Adjuster will compile the total value of the allowable sacrifice and expenditure, and establish the total value of the assets of all the interested parties that has been saved. Such assets 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 value of all the assets at the termination of the voyage. The GA contributions from each stakeholder together provide sufficient funds to cover the total value of the sacrifice or expenditure. This process, inevitably, takes a long time, typically several years.

Security

In order to ensure that payment will be received, the Adjuster requires each party interested in the voyage to provide a GA bond as security. Since this is done at the outset, before the full value of the sacrifice and expenditure is known, the Adjuster will necessarily estimate. A GA bond is a promise to pay whatever contribution is assessed, backed up by a GA guarantee from a bank or insurance company. Alongside this, the Adjuster will request landed values of carrying equipment, and bills of lading and commercial invoices detailing CIF¹ values for cargo in order to work out the contributions for all interested parties.

"the Average Adjuster requires each party interested in the voyage to provide a GA bond as security"

GA bond and guarantee documentation is distributed by the Adjuster to all known interested parties. Where a freight forwarder/NVOC² is identified on the ocean bill of lading, it is likely that this documentation, effectively intended for cargo interests, will be received; it should be forwarded to the cargo interests at the earliest opportunity. It is recommended a proof of postage/email receipt is retained, in the event of future dispute. Commercially, it can prove beneficial for the forwarder/NVOC to maintain close contact with the cargo customers to ensure the requirements are understood, and the necessary documentation completed and returned.

Of course, the client of the freight forwarder/NVOC may no longer be the cargo owner, under the terms of the sale contract, and therefore the documents will need passing on to his customer - the buyer or consignee.

Impact of cargo insurance

Where the cargo is insured, standard marine policies should cover the costs of GA contributions and the insurer will take over dealing with the Adjuster. Where a consignment is uninsured or the Adjuster is uncertain about the security being presented, a contributory cash deposit will be requested. Such cash deposits are held in escrow - no disbursements can be made from the account without the written consent of the Average Adjuster. This serves as a reminder of the importance from the cargo interests' perspective to ensure adequate cargo insurance is in place to cover any given shipment.

Without being concerned here about places of refuge or the logistics of on-carriage to the contracted destination port, only cargo and equipment for which GA bonds and guarantees have been received will be released; bills of lading permit the carrier to hold a lien over all cargo until satisfactory security has been submitted.

"only cargo and equipment for which GA bonds and guarantees have been received will be released"

Intermediaries should take care

For groupage/LCL³ movements, where several cargo interests are required to submit documentation, the freight forwarder/NVOC needs to exercise care. Until all cargo is secured, the container will not be released. Work with the Adjuster to identify outstanding guarantees; this not just ensures that all cargo interests fulfil their obligations in a timely fashion but also protects commercial relationships. Some freight forwarder/NVOC insurers may be willing to provide guarantees in these circumstances, facilitating the release of the remainder of the cargo, on an undertaking that the unsecured cargo is similarly held under the terms of the NVOC bill of lading.

Concluding comments

The Adjuster will ultimately conclude the calculations and formally issue the General Average Statement to all interested parties against their respective GA Bonds and Guarantees. All parties are legally obliged to pay the adjustment accordingly, thus concluding the process.

In the 21st century, where cargo ships are capable of carrying in excess of 21,000 TEU⁴, some argue for the replacement of GA as overly complex and disruptive. Nevertheless, GA currently exists - stakeholders need to understand it in order to manage the situation and set realistic expectations, including promoting insurance cover, especially for cargo all risks.

1. Cost, insurance & freight
2. Non-vessel operating carrier
3. Less than container load
4. Twenty-foot equivalent unit