Luke Zadkovich, Partner at Zeiler Floyd Zadkovich LLP, gives insight into the law of General Average and offers advice on how to navigate the law and what shippers can do to protect themselves.
Historic iterations of the law of General Average date back to Justinian times and maybe even before that. Can you define General Average as it is now for people who may not be familiar with maritime law?
General average is a loss contribution doctrine. It requires shipowners, charterers and cargo interests to make a proportionate payment to fully reimburse those in the venture who sustained loss or damage to avert a peril and prevent the total loss of a vessel, crew or its cargo.
Consider two classic examples:
(1) A ship’s master justifiably throws certain cargo overboard to prevent the vessel from sinking. General average law will dictate that all the parties involved in the venture must make a proportionate payment to the parties whose cargo was destroyed.
(2) Due to heavy weather, a ship’s master justifiably puts into a port of refuge and incurs additional port charges to preserve the vessel and its cargo. General average law will require all the charterers and cargo interests to proportionately pay for these charges.
Cases of General Average can sometimes take years to resolve. Very early on in these situations, what information do investigative bodies look for?
After a general average act occurs, the parties will appoint an Average Adjuster who draws up the General Average Adjustment in accordance with the relevant rules governing how general average is to be calculated.
In the early stages of the process, the Average Adjuster is generally interested in three pieces of information:
(1) Whether any further acts were undertaken by any of the parties that could be deemed a general average act (i.e. an intentional and reasonable act that is done for the common safety for the purpose of preserving from peril the property involved in the common maritime adventure).
(2) Whether any further expenses were incurred in respect of the property, or any further losses or damage to the property occurred, after the general average act(s) were taken but before the end of the voyage. Common example of this include:
· Payments relating to salvage
· Towage expenses
· Replacement vessel expenses
· A subsequent accident which causes damage to the cargo
· Storage costs
(3) The market value of the vessel and the remaining cargo on board on the date that the voyage comes to an end. It will also need to be ascertained who owns the cargo on board.
How are General Average payments calculated? Relative to the cost of freight onboard, are these fees expensive?
General average payments are calculated pursuant to the relevant rules contained in the contract of carriage that governs the dispute. These are generally the York Antwerp Rules 1994, 2004 and 2016, the leading rules on general average contribution in the shipping industry.
In summary, these rules stipulate that general average payments are calculated by a three-step process.
First, the total expenses of the general average act(s) paid by any party, and any further loss or damage to cargo suffered by any party, is ascertained
Secondly, the total market value of the vessel, and the cargo remaining on board, at the end of the voyage is ascertained. It is then noted which party holds this value according to who owns the vessel and the respective cargo.
Thirdly, the proportionate payment to be made by each party is then calculated by dividing the cost of the expenses against the remaining value each party had at the end of the venture. Importantly, however, the notional benefit obtained by the party who suffered loss as a result of the general average act is also taken into account.
This is best understood by considering the following example.
Assume that cargo A worth $1,000 is sacrificed for the common safety. This expense is then apportioned over the values of the vessel and the arrived cargo (which are also $1,000). The calculation process would be as follows:
Payments to A for expenses ($)
Total Paid: 1,000
However, the problem with the above analysis is that B and C would lose $333 each, while A would receive a $1,000 payment and suffer no loss at all.
Therefore, A is also made to contribute the amount of the loss made good to him in the general average calculation. This ensures that each party’s contribution is identical. The relevant calculation would be as follows:
Payments to A for expenses ($)
Total Paid: 1,000
As to the actual cost of general average payments in each situation, this is hard to predict without knowing exactly what occurred. The greater the peril that was required to be mitigated against, the greater the cost of the general average act and the amount that will be paid as a general average contribution. However, the more parties that are required to contribute to the costs, the less likely the cost is going to be for each individual entity involved.
Legally, is there any way for shippers to proactively protect themselves from General Average security payments?
On the one hand, a shipper whose cargo is unaffected by the peril that was required to be averted clearly wants to limit the amount they must contribute. But on the other hand, wide general average contribution provisions are beneficial where a shipper’s cargo has in fact been lost or damaged. Therefore, the answer to this question is not simply for shippers to try to insert narrow general average provisions in their contracts, as this is not necessarily in their best interests.
The better way for a shipper to protect itself against general average security payments is to obtain all risks cargo insurance that covers all financial losses due to a general average claim. This will mean: (1) that the shipper need not be concerned if a bill of lading adopts wide general average contribution provisions, and (2) the insurer will be responsible for any litigation that ensues.
Based on real-life examples of General Average being declared, it’s obviously very complex and difficult to understand. What advice would you give to shippers when it comes to navigating that law?
There are three main points that shippers should keep in mind when trying to navigate the law on general average:
(1) There is a tendency on behalf of shipowners to overstate the level of risk involved in a situation that has arisen so that they can declare general average and mitigate their losses. When general average is declared by a shipowner, shippers should therefore immediately request the documentation that is said to support this finding and seek legal advice on whether there has in fact been a general average act.
(2) Although the Average Adjuster is an expert at calculating the amount to be contributed by each party, the law allows for the calculations to be challenged. Shippers should therefore keep this in mind if they believe that damage or loss that was caused to their cargo was not taken into account when the general average calculation was made.
(3) Shippers are also encouraged to obtain as much information as they can about the cause of the GA event and understand what actually happened. Lawyers will seek to do this as well, but it is good for shippers to know this is an important aspect in establishing whether there is any liability against the shipowners or defences to GA.
Luke Zadkovich, Partner at Zeiler Floyd Zadkovich LLP, is a New York attorney, English solicitor and Australia (NSW) solicitor. He can be reached at either +1 917 868 1245 or firstname.lastname@example.org.
Special thanks to Aiden Lerch, Associate, for assisting with preparing these answers.