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General Average

10 September 2017
– 5 Minute Read


Mr Smith is fed up with all of the rain in Ireland and decides to return home to sunny Durban. He ships all of his household goods in a container carried on board a ship and expects his goods to arrive safely. However, when the vessel arrives in Port, Mr Smith receives notice that the ship was caught in a huge storm at sea, which caused the vessel to be driven into shallow water where it grounded. In order to proceed safely to Port urgently, the vessel had to be lightened, which resulted in a number of containers being jettisoned overboard by the crew. Mr Smith is pleased to learn that the container carrying his goods is still on board the ship, but extremely confused when he is advised that he will be obliged to put up security before the container accommodating his goods is released to him. Mr Smith is unaware of the principles of General Average, which was incorporated in the contract of carriage for his shipment.

As defined in the York-Antwerp Rules, “There is a General Average act when, and only when, any extraordinary sacrifice or expenditure is intentionally made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.”

A General Average act may be sacrifice or expenditure or both. It is an action taken to preserve all the interests involved in a maritime adventure when the adventure is threatened by a common peril. Provided that the action is successful, it is required that the owners of the sacrificed property and/or the people who incurred the expenditure shall be reimbursed by all parties involved in the adventure on the grounds that, but for the General Average act, the adventure would have been lost.

Whatever measures are taken by way of sacrifice and/or expenditure, they must be successful. If they are not successful the adventure is lost and the resultant losses suffered by the interests involved rest where they fall; since if no property survives then there can be no contribution from their part for any sacrifices or expenditure incurred.

When a General Average act occurs on a voyage and the ship subsequently arrives safely at the port where the adventure is terminated, the ship is said to be “under average.” Apart from the ship owners personal interest in respect of any General Average damage to the ship/ expenditure incurred, they are also responsible for ensuring that any General Average damage sustained by cargo interests is made good. Generally an average adjuster will be appointed by Owners.

The average adjuster is tasked with collecting all necessary details and documentation relating to the adventure to reach the General Average adjustment. The adjustment is the statement showing the contribution each party with an interest in the voyage must make towards the General Average. The main contributors are generally the ship, cargo, and often freight.

The total of the General Average amount (damage/loss + expenditure incurred) is known as the “amount to be made good” and each interest’s contribution is referred to as its “General Average contribution.” The amount of each General Average contribution is based on the value of the interest concerned, or the “contributory value.” The adjuster must determine the total amount to be “made good” and then apportion this figure over the contributory values of the interests involved in order to establish the General Average contribution of each interested party.

The contributory value of each interest is that interest’s net arrived value at the place where the voyage ends. Clearly then, the owner of a container carrying high value products will be expected to contribute more than the owner of a container carrying low value products. It is noteworthy that even the owner of the cargo which was lost is obliged to pay in towards General Average as the loss must be shared between all parties common to the adventure. The owner of the lost cargo will ultimately receive compensation out of the General Average fund for his losses.

Once the vessel has arrived at a safe port and General Average has been declared, the ship owner has a lien over the goods which have been saved. In the circumstances, the ship owner may legally refuse to release the goods to their owner until such a time as security for the interest’s contribution to General Average has been provided.

Generally, the security required by the ship owner to release the goods will be a General Average Bond as well as one of a bank guarantee, underwriters guarantee or General Average deposit. The General Average Bond is signed by the receivers of cargo or other interest and the ship owner and confirms both parties agreement to the General Average and the adjustment being carried out. Additionally, the interest agrees to provide security as ship owner may require. A bank guarantee that the General Average Contribution will be paid on the completion of the adjustment is also required, or alternatively an Underwriters guarantee (under standard conditions of marine cargo insurance the underwriter is liable for the General Average contribution of the assured). If guarantees are unacceptable (or unobtainable, if, for example, the cargo is uninsured) the shipowner may require the cargo receiver to pay a deposit into a General Average fund.

In exchange for the contribution, a deposit receipt is given to the cargo owner / other interest. When the adjustment is finalized, the holder of the General Average deposit receipt will be paid the difference between the deposit and the actual contribution.

While General Average events do not occur very often, the sums involved when such an event does occur are generally very significant.  A prudent shipper of goods will ensure that they have appropriate insurance cover in place for all of their shipments.

* This article first appeared in the Sunday Tribune