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The Association shall cover extra costs and expenses, in excess of the costs and expenses which would otherwise have been incurred:
a in handling and discharging cargo where the extra costs and expenses are necessarily consequent upon damage to the cargo or damage to the Ship which would have been covered by the Hull Policies had the Ship been fully insured on standard terms without deductible;
b in discharging or disposing, including storing, of cargo which has been rejected, by the person entitled to delivery,
provided that there shall be no recovery under this Rule 35 of extra costs and expenses which:
i the Member is able to recover from any other party; or
ii are excepted from cover under Rule 46(a), or
iii form part of the daily running costs and expenses of the Ship.
Cover is available under Rule 35 for extra costs and expenses incurred by the Member himself in handling, discharging or disposing of cargo in certain circumstances. In many cases, the same incident that gives rise to liabilities which are recoverable under Rule 34 will also give rise to extra costs and expenses which are recoverable under Rule 35. However, Rule 34 applies when the extra costs and expenses are incurred in the first place by a third party claimant who then seeks an indemnity for such expenditure from the Member whereas Rule 35 applies when the expenditure is incurred by the Member himself, i.e. the Member pays himself for the discharge, disposal etc., of the cargo. Rule 35 may also apply even if the Member does not face liability for cargo loss, damage, shortage or delay, e.g. because an incident has caused damage to the Ship that necessitates the handling and/or discharging of sound cargo to facilitate Ship inspection and repairs. Furthermore, it should also be noted that there is no reference in this Rule to there being cover for ’losses’, e.g. for a Member’s lost freight, hire or demurrage, arising as a result of incidents that have occasioned extra handling costs. Such losses are excluded in accordance with the provisions of Rule 63.1.
(A) ...extra costs and expenses... (Rule 35)
Cover is available only for costs and expenses which are ‘extra’, i.e. in excess of the costs and expenses that would have been incurred in order to handle and discharge the cargo had there been no damage to the cargo or the Ship. Therefore, when making a claim against the Association, the Member must provide written evidence of the amount of extra costs and expenses incurred, and provide written evidence of the costs and expenses that would have been incurred in any event but for the damage to the cargo and/or Ship. The Association is entitled to deduct such ‘normal’ or ’usual’ costs and expenses from the claim if the Member has not already done so when presenting the claim.
The words ‘necessarily consequent upon’ in Rule 35 mean that the additional costs and expenses must have been directly caused by the damage to the cargo and/or damage to the Ship and must have been necessary as a consequence. For example, if a heavy newsprint machine stowed on a tweendeck is dropped onto the deck during the course of discharge, thereby causing the tweendeck to collapse and the newsprint machine to fall down into the lower hold, cover is available for the additional costs and expenses incurred in subsequently discharging the newsprint machine safely by the use of a bigger and more expensive shoreside crane including any extra labour costs that may be necessary in order to do so. Cover is also available for extra costs and expenses incurred in handling or discharging sound cargo in circumstances where such costs and expenses are necessarily incurred in handling and discharging damaged parts or parcels of cargo. For example, if salt water ingress were to cause damage to a cargo of grain in the forward part of a hold, cover is available for the extra costs and expenses incurred in segregating sound cargo from damaged cargo in that hold, as well as for the extra costs and expenses (if any) that may be necessarily incurred in handling and discharging the wet damaged grain.
The extra costs and expenses must have been incurred by the Member in order to entitle the Member to recover under Rule 35. However, in some instances, a third party that has incurred such costs, e.g. a charterer who is the carrier of the cargo under the Bill of Lading, may simply deduct such costs from the hire, demurrage etc., that is due to the shipowner Member. If the Association is satisfied that the Member is ultimately responsible to bear such costs, the Association may consider that the costs so deducted from hire, demurrage etc., are in effect costs that have been incurred by the Member. In other words, rather than obliging the Member to incur the costs of pursuing the charterer for a wrongful deduction from the hire, demurrage etc., the Association may be content to cover the Member under Rule 35 for costs that otherwise qualify for cover under the Rule.
Alternatively, if another party, such as the charterer or receiver, is contractually obliged to meet extra handling costs in the first instance but refuses to do so, the Member may think it preferable to incur such costs himself rather than continue to dispute the other party’s refusal to do so since such action might merely aggravate the situation and result in further damage and costs. However, whether such action will be considered by the Association to be “necessarily consequent upon the damage to the cargo etc.” will depend upon the facts of each particular case. For example, if it can be shown that the Member would ultimately be liable under the contract to meet such costs, i.e. obliged to reimburse the other party if that party had incurred the costs in the first instance, the Association may consider the Member’s decision to be logical and reasonable, especially since they would thereby be able to control the level of costs. However, consideration should also be given to any rights that the Member may have to limit his liability particularly if the Member would not be able to credit his own costs against package or global limitation.
(B) ...necessarily consequent upon damage to the cargo... (Rule 35.a)
The phrase ‘damage to the cargo’ is to be given a wide meaning. Therefore, provided that the discharge or handling of the cargo has been made more difficult or expensive, cargo can be considered to be ‘damaged’ for the purpose of Rule 35.a, e.g. if it is congealed, hardened, wetted or mixed with other cargo with the result that it requires additional heating, breaking up, drying or segregation. For example, a liquid cargo that has been contaminated is considered ’damaged’ for the purposes of Rule 35.a even if the damage can be rectified, e.g. by filtering out the contaminant. Furthermore, so long as the cargo is damaged in the sense just described then, subject to the provisos of Rule 35, it does not matter what has caused the damage. For example, cover is available for moisture damage caused by hatch leakage or bad ventilation but, because of proviso ii (and the provisions of Rule 46.a),1 it is not available if the damage was caused by incorrect stowage of the cargo. Nevertheless, the nature and extent of the damage may be relevant in assessing the extent of the extra handling that has been undertaken, i.e. was it a necessary consequence of the damage?
Even if there has been a change in the physical character of the cargo because of the inherent vice of the cargo, the cargo may, nevertheless be considered to be ’damaged’ for the purposes of Rule 35.a if the residual value of the cargo has been affected. For example, a cargo of iron ore fines that has liquefied during the carriage because the cargo was in fact unsafe on loading as a result of its excessive moisture content may result in additional discharging costs. However, if the cargo, once discharged and allowed to dry, has more or less the same residual value as a cargo that was not unsafe on loading, the cargo cannot be considered to be ’damaged’ for the purposes of Rule 35.a.
Cover is available only when such extra costs and expenses have been incurred as a result of damage to the cargo or the Ship. Consequently, cover is not available if the extra handling costs and expenses have been incurred before the cargo and/or the Ship have been damaged and in order to prevent such damage. For example, cover is not available for extra costs and expenses that have been incurred in order to re-stow and secure timber carried on deck that has broken loose during the voyage as a result of heavy weather, and which could consequently damage the Ship’s railings and be lost overboard.2 Even if it can be said that there has been some minor or nominal damage, the extra handling costs are not in reality the necessary consequence of that damage but expenditure that has been incurred in order to avoid possible future damage/loss of greater significance.
(C) ...necessarily consequent upon damage to...the Ship which would have been covered by the Hull Policies had the Ship been fully insured on standard terms without deductible; (Rule 35.a)
‘Damage to the Ship’ means damage to the hull, machinery, equipment or such other similar items of the Ship that would give the Member a right of recovery under the Ship’s Hull Policy provided that the Hull Policy had been concluded on standard terms and would cover, for example, physical damage accidentally caused by a marine peril such as fire, collision, striking or grounding. Provided that the damage is of that nature, cover is available even though the Member cannot recover in fact under the Hull Policy because the hull damage is within the deductible. However, cover is not available if the damage to the Ship does not give rise to a right of recovery under a standard Hull Policy, e.g. because the damage is attributable to a construction defect, wear and tear, lack of maintenance3 or to a war peril.
Nevertheless, it should be understood that the cover that is available under Rule 35 is subject to the general exclusion of cover in Rule 71 which provides that cover is not available for “costs or expenses which are covered by the Hull Policies” or would have been covered if the Hull Policies had been on specified terms. Therefore, cover is available under Rule 35 only if:
a the extra costs and expenses are by their nature those that are necessarily consequent upon the kind of damage to the cargo or damage to the Ship that would have been covered by the Hull Policies had the Ship been fully insured on standard terms without deductible;
b are costs and expenses that are not in fact recoverable under Hull Policies of the kind specified in Rule 71.
For example, the extra costs and expenses that are incurred in handling or moving cargo in order to obtain access to a part of the Ship that requires repair may be recoverable under the Hull Policies as a necessary repair expense, in which case, cover would not be available for such costs and expenses under Rule 35.
Where there is damage to the Ship, it is not also necessary, for the purposes of a claim under this Rule, that the cargo should also have been damaged. For example, if the Ship’s cranes have become damaged as a result of an accident, and it is necessary to incur extra costs and expenses to hire shore or floating cranes in order to discharge the cargo, cover is available.
A container does not fall within the definition of Ship for the purposes of the Rules. Therefore cover is not available for the cost of de-stuffing and re-stuffing the contents of a damaged container (perhaps in another container).4
(D) ...in handling and discharging cargo... (Rule 35.a)
The word ‘discharging’ includes all operational activities that are necessary to move the cargo from its stowed position in or on the Ship to shore in order to perform the contract of carriage. The nature of the activities will differ depending on the type of cargo, type of Ship, how the Ship is equipped, and the layout of the port, berth or terminal.
The word ‘handling’ must be read in conjunction with ‘discharging’ and encompasses cargo operations other than discharging that have become necessary as a result of the damage to the cargo or the Ship. This can include the shifting of cargo on board, whether within one hold, between holds, from hold to deck or vice versa, or to and from a working barge, or from Ship to shore as a temporary measure. It can also include work that is needed in order to remove damaged cargo from the holds, e.g. water-damaged cement or other solidified cargoes, or in segregating sound from damaged cargo in order to avoid (further) contamination, and any necessary reloading and re-stowage on board of cargo that it has been necessary to move as a result of damage to the cargo or the Ship.
Although the words ’handling’ and ’discharging’ can be considered separately they also form part of one phrase, i.e. ’handling and discharging’ and are therefore, intended to apply to a variety of circumstances in which it is necessary for the Ship to deal with cargo in an unexpected and uncontemplated way as a result of damage to the cargo and/or Ship. Consequently, the phrase is given a broad construction and is deemed to incorporate a variety of extra costs and expenses provided that they are reasonably and necessarily incurred in ’handling and discharging’ cargo as a result of damage to the cargo or Ship. In most cases, the necessary operations can be carried out at the planned locations where the Ship is to load or discharge. However, that may not always be possible and it may be necessary for the Ship to shift to another berth or other location and even, in some, cases, to shift to another port. Similarly, if the necessary operation cannot be carried out unless the Ship is provided with additional fuel, stores, equipment etc., and these cannot be provided at the location where the operation is to be carried out and cannot be delivered to the Ship at that location, the Ship may have to proceed to another location to take delivery of such fuel, stores etc. In such situations, cover may be available under Rule 35 for the extra costs and expenses that are incurred by the Member in shifting or diverting the Ship. However, in all such cases, the Member will need to satisfy the Association that such costs and expenses were reasonably and necessarily incurred. Furthermore, the phrase ’costs and expenses’ refers to expenditure that is incurred by the Member to other parties whilst performing the “handling and discharging” operations and does not include the Member’s own ’internal’ administrative costs5 or loss of time6 unless cover is otherwise available under Rule 46.
Furthermore, costs that the Member has incurred in connection with handling the cargo after it has been discharged from the Ship, such as storage, shifting, sorting, re-arranging, forwarding and disposal costs, are not covered under Rule 35.a but cover may be available for such costs under Rule 46.
(E) ...in discharging or disposing, including storing, of cargo which has been rejected, by the person entitled to delivery (Rule 35.b)
...cargo which has been rejected, by the person entitled to delivery
Cover is available under Rule 35.b only if the cargo is rejected by the person that is entitled to take delivery of it, e.g. the lawful holder of a negotiable bill of lading, and the Member, consequently, is obliged to incur extra costs and expenses in order to discharge or dispose of it. However, there is deemed to be rejection for the purposes of Rule 35.2 only if it gives the carrier the right (which may sometimes amount to an obligation) to dispose of the cargo.7 Provided that the cargo is rejected by the person entitled to take delivery of it, cover is available, subject to provisos i-iii and any other restrictions which apply under the Rules, regardless of the reason for the rejection.
A cargo may be rejected for many reasons, e.g. because it is damaged or does not comply with the description contained in the contract of sale or Bills of Lading.8 Furthermore, even if the person that is entitled to take delivery of the cargo is obliged to take delivery of the cargo in its damaged condition under the law that governs the contract of carriage, local law and practice may entitle, or even oblige, that person to refuse to do so. Alternatively, the cargo may be rejected by that person for reasons which are totally unconnected with its quantity, condition or time of delivery. For example, it may be rejected as a result of a dispute between the seller and the buyer or their banks under the cargo sale contract or because the consignee has been prevented from taking delivery by the local authorities (see further below).
Cover is available under Rule 35.b only in the event of a rejection of the cargo by the person entitled to take delivery of it. Therefore, if the cargo has not been rejected by that person in the manner described below, cover is not available. Cargo can be deemed to be rejected by the person entitled to take delivery of it either as a result of a positive statement or act (express rejection), or as a result of a continuing failure on his part to take delivery of the cargo at and/or after the time that he is obliged to take delivery of it under the terms of the contract of carriage (de facto rejection). However, cover is not available under Rule 35.2 if the failure to take delivery of the cargo is caused by the insolvency of the person that is entitled to take delivery of it. Cover is excluded in such circumstances pursuant to Rule 77.
Cover is available under Rule 35.b only for those extra costs which are incurred by the Member after the time that the person that is entitled to take delivery of the cargo is deemed to have rejected it. However, the Rule does not apply merely when the cargo is rejected after arrival at the contemplated port of discharge. The rejection of the cargo may occur at any stage during the carriage. For example, the person that is entitled to take delivery of it may decide, following a casualty that has occurred during the laden voyage, that the damaged cargo is not worth forwarding and may decide to reject it whilst the Ship is at a place of refuge.
Even if the Member is obliged to incur costs before rejection, which will often be the case because of a continuing duty to care for the cargo, cover is not available for those costs under Rule 35 but cover may be available pursuant to Rule 46, and a carrier may wish in any event to consider exercising a lien on the cargo in order to recover such costs. For example, the discovery of impurities in samples taken from a cargo of foodstuffs prior to discharge may cause the relevant local food and health authority to refuse to grant a discharge permit, which may make it impossible for the person that is entitled to take delivery of the cargo to take delivery of it in accordance with the terms of the contract of carriage. Consequently, that person may consider that he has no other option but to reject it. Cover is available in such circumstances only for those extra costs and expenses that are incurred by the Member in discharging or disposing of the cargo after the time that such a person is deemed to have rejected the cargo, and not from the time (if earlier) when the local authorities intervened, or the time when any other circumstance which prevented the discharge of the cargo occurred.
The determination of exactly when a cargo has been de-facto rejected, i.e. as a result of a continuing failure to take delivery, may not be an easy exercise. The carrier’s contract of carriage may contain relevant provisions but it cannot be guaranteed that these provisions will be enforceable in the place where the cargo is to be delivered and there may be no provisions of the local law that specify exactly when a carrier is entitled to dispose of uncollected cargo. If there is no guidance from the local law, or failing that, from the terms of the contract of carriage, the cargo is normally deemed to have been rejected if despite the fact that the Member has given the consignee notice that he has failed to take delivery and that consequently, the Member intends to dispose of the cargo, the consignee has failed to respond to such notice within a time that would suggest to a reasonable person that the consignee does not intend to take delivery.
In some cases, the identity of the person that is entitled to take delivery of the cargo may be in doubt. For example, the intended person may fail to take delivery of the cargo as a result of a dispute under the cargo sale contract with the result that the Bills of Lading have either not been transferred to him or have been withheld by, or returned to, the shipper. The crucial question is whether the cargo has been rejected by the party entitled to take custody of it, regardless of whether this is the party named as consignee in the contract of carriage. Provided that the cargo has been rejected by this party, cover is available under Rule 35 for the extra costs and expenses that have been consequently incurred, subject to any other restrictions that apply under the Rules and the contract of insurance. For example, if rejection arises as a result of the fact that the cargo is unlawful or subject to a sanctions regime, then cover may well be excluded pursuant to the provisions of Rule 74.9
Because cover is subject to such restrictions, each case must be considered on its merits, and it is important to ascertain exactly why the cargo has been rejected. In some circumstances, the person that it is believed to be entitled to take delivery of the cargo may state quite clearly that he will not take delivery of it and also give the reasons for such rejection, whereas, in other circumstances, he may not do so. In any event, when cargo is expressly rejected, the Member should always require the person doing so to explain his position in writing since it may be possible to persuade that person either not to reject the cargo or to challenge the legal validity of the rejection. If a cargo is damaged, the person that is entitled to take delivery of it may have a valid right to reject it if it is no longer suitable for trading. However, a Member should always try to ensure before taking steps to dispose of rejected cargo to obtain written confirmation from the relevant cargo interests that they abandon all interest in the cargo and that they agree to the Member disposing of it as the Member deems fit. Such confirmation is important in order to avoid any later allegation of conversion on the part of the Member since P&I cover is not available for claims and liabilities that arise as a result of cargo being disposed of unlawfully.10 Consequently, the Member should contact the Association for advice regarding the remedies available to, and the legal obligations of, the carrier under the applicable law before taking any steps to discharge, dispose or store the cargo ashore.
...in discharging or disposing, including storing, of cargo which has been rejected...
Cover is available under Rule 35.b not only in respect of extra discharging costs (which include the activities described in (D) above) but also in respect of post discharge costs that are inevitable or necessary in order to dispose of the cargo. The word ’disposing’ is not defined but may encompass a salvage sale or destruction of the cargo and may also include costs incurred in order to comply with any applicable environmental requirements. The exclusion in Rule 62 for waste incineration, disposal operations and landfills would not apply in these circumstances since the exclusion does not apply in the case of operations that are carried out as an incidental part of other commercial activities. However, if disposal involves the sale of the cargo, perhaps for salvage, the net proceeds of sale must be deducted from any compensation that is payable pursuant to Rule 35.2 in amount corresponding to the benefit obtained in accordance with the provisions of Rule 54.11
Cover is also available for extra costs and expenses that are incurred in storing the cargo. If cargo is rejected it will often be necessary to incur storage costs of some sort before a cargo can be disposed of properly since it may take some time to identify the best/most cost effective means of disposal. The cargo may need to be sorted, re-arranged and transported so that it can be disposed of, and cover is available for such costs provided that they are reasonably incurred. However, storage costs that have needlessly been incurred before a cargo is disposed of as a result of the culpable inaction of the Member are not deemed to be ’extra costs and expenses’ for the purposes of Rule 35.2 to the extent that they exceed the extra costs that would otherwise have been incurred had the cargo been disposed of in a timely fashion.
(F) ...the Member is able to recover from any other party... (Rule 35 proviso i)
Firstly, it is important to note that the exclusion in Rule 35 proviso i applies even if cover would otherwise have been available under Rule 35.a or b.
In some circumstances, it may be possible for the Member to recover the extra costs and expenses that he has incurred from a third party such as a consignee or a charterer and, therefore, proviso i makes it clear that if the Member is able to recover such costs and expenses from any other party, cover is not available under Rule 35. However, in order for the proviso to be applicable, it must be proved that the Member has the legal right to make such a recovery pursuant to the applicable law and has the legal means to enforce that right. In such circumstances, the Member is deemed to be “able to recover from any other party” and cover is not available. However, cover is available if the Member has no legal rights of recourse or is not able to enforce recovery from the relevant party as a result of the bankruptcy or insolvency of that party, or as a result of other difficulties in tracing and/or attaching sufficient assets belonging to that party against which recovery can be enforced. When considering whether the Member is able to recover from any other party the Association will consider all relevant facts and will wish to be satisfied that the Member has taken all reasonable measures to pursue his legal rights. Therefore, if the Association is of the view that, in all the circumstances, a recourse claim is so plagued with complication and the uncertainty of the relevant legal process that to pursue it will only result in the incurring of disproportionate costs and risks, it may well conclude that cover should be made available rather than oblige the Member to pursue such an uncertain process.
(G) ...are excepted from cover under Rule 46.a... (Rule 35 proviso ii)
Cover is available under Rule 46.a for ‘extraordinary costs and expenses reasonably incurred’ by a Member in order to avert or minimise any liability on the Association, but excludes certain costs and expenses from recovery. The same exclusions apply to the cover which is available under Rule 35.12
For example, cover is not available if the extra handling and discharging costs have been, or could have been, minimised by reasonable use of the Ship’s Crew and equipment. If it would have been reasonably possible for the Ship’s Crew to re-stow and secure the cargo en route following damage to the cargo, the Association may not be able to reimburse the Member for extra costs arising as a result of a deviation to a nearby port in order to carry out such re-stowing and securing since all Members have a duty to take reasonable measures to minimise costs and expenses which they may wish to claim from the Association.13 Similarly, cover is not available under Rule 35 for extra handling costs and expenses incurred for the purpose of making the Ship seaworthy for the reception of cargo.14
Rule 46 also excludes cover for “costs and expenses relating to the Ship being overloaded or the cargo being incorrectly stowed”. If the Member was responsible for the overloading or the incorrect stowage, cover is not available for the reasons given in the guidance to Rule 46. However, cargo may not be considered to be improperly stowed if the reason why the cargo shifted during the voyage was the result of unforeseen or unexpected circumstances (such as weather/seas) that occurred during the voyage. If the stowage was the responsibility of another party, e.g. a charterer, the shipowner Member may be able to bring a recourse action to recover the extra costs and expenses from such other party. Nevertheless, even if the Member is not able to recover from another party for the reasons discussed in (F) above, cover is still excluded pursuant to proviso ii for costs and expenses relating to “the Ship being overloaded or the cargo being incorrectly stowed”.
Rule 46 also excludes cover for “costs and expenses claimable in general average”. If it becomes necessary to discharge and temporarily store the cargo at a place of refuge so that the ship can be repaired and cargo re-loaded for on-carriage, then the costs of those cargo operations will usually be allowed in general average (GA).15 The costs of transhipping the cargo can also usually be allowed in GA as a substitute expense if they are less than what it would otherwise have cost to store the cargo during repairs. If the cost of forwarding is not allowed in GA and the Member is obliged to bear the cost himself then Rule 46 would determine whether any cover can be made available. However, if the cargo interest or charterer incurs the cost in the first place and then seeks to recover that cost from the Member, cover may be available under Rule 34.
(H) ...form part of the daily running costs and expenses of the Ship. (Rule 35 proviso iii)
Cover is not available for costs and expenses which form part of the daily running costs and expenses of the Ship, as these are considered to be normal or usual operational expenses which are for the Member’s own account and not costs and expenses to which the membership as a whole should contribute. Such costs and expenses may be extra port charges incurred as a result of a prolonged stay in port to handle and discharge cargo, or wages payable to the Crew although they may not be involved in the handling and discharging of the cargo.
1 See (D) of the Guidance to Rule 46.
2 Furthermore, cover is not available for such costs under the heading of ‚measures to minimise loss’ in Rule 46.a since such costs are likely to be considered to be costs, resulting from measures that either have been or could have been accomplished by the Crew or by reasonable use of the Ship or its equipment’. See Rule 46.a.iii.
3 The P&I cover is designed to supplement the Hull Policies. If the damage to the Ship is recoverable under the Hull Policies, the hull insurers will pay for the repair of the Ship, including replacement parts and any necessary towage costs to a suitable yard. The hull insurers will not necessarily cover the costs of handling and discharging of cargo even if such steps are necessary to facilitate the repair of the Ship. However, if such costs are recoverable under the Hull Policy, cover is not available under Rule 35 (See the Guidance to Rule 71).
4 See also the guidance to Rule 63.1.b.
5 See the Guidance to Rule77.
6 See the Guidance to Rule 63.2.
7 Whilst this will normally be the case the Member may need to obtain legal advice to ascertain his rights and obligations in such circumstances. Such advice may be necessary to establish his rights and obligations under the law of the country where the cargo is intended to be discharged and delivered, as well as under the law which governs the contract of carriage. In certain circumstances, the Member may need to obtain a court order or some other form of permit from a competent body in order to have the authority to dispose of the cargo.
8 Cover is not available under Rule 34.i.ix if the description of the cargo or of its quantity or condition contained in the Bill of Lading is incorrect, and this was known to the Member or the master at the time of issue. See Rule 34.1.ix.
9 See the Guidance to Rule 74.
10 See also the Guidance to Rule 72
11 See the Guidance to Rule 54.
12 See the Guidance to Rule 46.
13 See the Guidance to Rule 46.a.iii.
14 See the Guidance to Rule 46.a.iv.
15 See the Guidance to Rule 46.a.i.