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General Average… everyone chips in… whether you like it or not!

If you ever saw The Perfect Storm, or All is Lost, or The Finest Hours, not only you may have seen a good production, but you also saw what in real life could be part of a General Average Declaration.

The law of general average is a principle of maritime law whereby all stakeholders in a sea venture proportionately share any losses resulting from a voluntary sacrifice of part of the ship or cargo to save the whole in an emergency. The principle of general average can be traced in maritime law as far back as the Code of Hammurabi and the Phoenicians.  When faced with imminent adversity at sea, throwing cargo overboard during a storm to increase the chances of survival of a ship and its crew, was a real practice. During this kind of emergency, there was no time to determine what cargo was ok to keep and what was ok to toss, thus, once all was “calm” and the ship was back to port, to keep things “equitable”, those merchants whose cargo made it safely would be required to contribute a share or percentage to the merchants whose freight was tossed overboard to avoid the entire vessel from sinking.  Nowadays, General Average law is codified in the York-Antwerp Rules (“YAR”, latest revision made in 2016). The YAR rules clearly identify the conditions and actions allowed under General Average.

The Allianz 2023 Safety and Shipping Review concludes that in 2022, 38 vessels of 100 gross tons or more were declared a total loss, which is 36% less than in 2021, and it is part of a continuous decreasing trend in the past decade. This trend is the result of improvements on ship design, technological advances, and increased focus in safety measures, risk management practices, and regulations.  Still, other risks such as changes on type of cargo (i.e., fires caused by batteries); geopolitical incidents (i.e., overcrowded water ways, and piracy) and major weather-related events (i.e., storms and running aground); still push the scale in the opposite direction.

What happens if a general average is declared? At the time the voyage is completed, the level of loss is determined. Ship owners with the help of their average adjusters, will usually call for security from cargo interests. Each cargo owner’s contribution is calculated on a percentage of the cargo owner’s interest. Ship owners have a lien on the cargo until each cargo owner’s contribution or security is satisfied. If a shipment is secured with all-risk marine cargo insurance policy, the insurance provider will provide an Average Bond. This average bond acts as a guarantee that the cargo-owner will pay their contribution to the general average once the average adjuster has determined that amount. If the shipment is not secured with insurance, the cargo owner will be required to post their contribution or security in cash before their cargo can be released.  If securities are not posted within the allotted free time, the cargo owner will also incur detention, demurrage, and storage costs.  As you may imagine, “Cash Deposits” are not insignificant; to give you an idea, in the case of the much televised “Ever Given” that ran aground in the Suez Canal in 2021, the cash deposit was set at 25% of the cargo values.

Why should you care about this? Imagine that a vessel carrying 1,500 containers (one of them is yours) collides with another vessel. The vessel carrying your freight sustains damage and requires repair at a port of refuge before it can proceed with the intended voyage. Due to the extraordinary costs incurred, ship owners declare general average. At the intended discharging port, the cargo can only be released to receivers once the cargo owner’s security is posted or satisfied. In this case, they are assessed at 12% of the “Commercial Value and Freight” value of each cargo interest.  Not only you would be dealing with severe delays on getting your freight, but you will also have to face claims costs, and possibly, detention, demurrage, and storage costs; general average could be the “perfect storm” for your cargo.

As discussed in our imaginary example, when dealing with a general average declaration, the financial consequences can be very significant; in fact, it would not be unusual for the expenses to be higher than the value of the cargo itself.  Still, when arranging for transportation, shippers tend to focus their attention on freight rates and transit times, while risk in many cases is not even mentioned.  Some shippers assume they have insurance that have it all covered, which in the case of maritime transport insurance is a not a good assumption to make.  Other shippers think that because their freight is not valuable, there is no need to worry about risk; not understanding that the risk of loosing the freight is not their worse case scenario. And other shippers assume that their forwarder arranging for the transport has all risks matters covered, which a forwarder can certainly handle, but only at the express and detailed request from the shipper.

Contributor: Amparo Elizondo



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