Risks covered - Rule 41: General average

Rule 41 General average

The Association shall cover:

a the proportion of general average, special charges or salvage which a Member may be entitled to claim from cargo or from any other party to the marine adventure and which is not legally recoverable solely by reason of a breach of the contract of carriage. Where contributing cargo or any other contributing asset belongs to the Member, the Member shall be entitled to recover from the Association as if that contributing asset had belonged to a third party;

b the Ship’s proportion of general average, special charges or salvage not recoverable under the Hull Policies solely by reason of the value of the Ship being assessed for contribution to general average or salvage at a value in excess of the sums insured under the Hull Policies, provided that cover shall only be available under this Rule 41.b in any particular case if the Association shall in its absolute discretion so determine.

Guidance

For more detailed commentary see Chapter 10 of the Gard Guidance on Maritime Claims and Insurance.

General average
General average is a long-standing feature of shipping law which provides that sacrifices and expenses that are intentionally and reasonably made and incurred in order to save the ship, cargo, and other property¹ on board the ship, and any freight which is at risk from a common peril, are to be shared by those interests in proportion to their respective values at the end of the voyage. However, such sacrifices and expenses must be ’extraordinary‘ and made for the ’common benefit’ of the interests concerned, since ’ordinary’ costs and expenses are borne solely by the shipowner.² 

Rights and obligations in general average are usually based on the terms of the contract of carriage of the cargo or the charterparty which will, in the majority of cases, incorporate the York-Antwerp Rules (YAR), that apply the long-standing general average principles that have been agreed between the shipping and cargo industries.³ The YAR were first introduced in 1864 and have been, and continue to be, subject to periodic revisions that are currently administered by the Comite Maritime International (CMI).

Salvage expenditure that is incurred by a Member, whether pursuant to a salvage contract or otherwise, is recoverable in general average provided that the salvage operations were carried out in order to preserve the property that is jointly at risk in the common maritime adventure, i.e. the ship, cargo, containers, bunkers etc. In most cases, that share of the salvor’s remuneration that is to be borne by the cargo interests is paid directly by the cargo interests to the salvors, who are entitled under the salvage contract (such as Lloyds Open Form) to exercise a lien on the cargo before it is delivered unless security for the claim is provided voluntarily by the cargo interests. However, in some instances, the shipowner may be either legally obliged to secure and pay cargo’s proportion of the salvor’s remuneration as well as the Ship’s own proportion, or he may choose to do so for commercial reasons, e.g. a shipowner who is a container liner operator and who may not wish to delay delivery of his customers’ cargo, in which case, the shipowner may seek to recover cargo interests’ proportion from the cargo interests through the medium of general average. If, however, in the more typical scenario, the cargo interests pay their proportion of the salvage remuneration directly to the salvor, they will either have to bear that proportion themselves or seek an indemnity for it from the shipowner if it is proved that the incident that necessitated the salvage operation was caused by the shipowners’ breach of the contract of carriage. In the latter case, cover for such liability is available under the ’other responsibility’ provision of Rule 34. 

Special charges
Whilst general average applies only in circumstances in which expenditure or sacrifice is incurred for the common benefit of all the property that is at risk in the common maritime adventure, special charges are expenses that are incurred merely for the benefit of only one of the interests that is at risk in that common adventure. Special charges are usually incurred for the benefit of a cargo owner when cargo is being preserved by a carrier pursuant to a contractual or other legal obligation in circumstances where the common danger to the maritime adventure no longer exists but where the danger of loss or damage to the cargo still remains, e.g. costs which are incurred in storing cargo safely and securely ashore or on board ship until such time as it is on-carried or collected by the consignee. In such circumstances, the Member normally has the right under most systems of law to claim such special charges from the owners of the cargo or other property that has been saved, e.g. containers, bunkers etc., without the need to declare general average, and to recover such costs by the exercise of a lien over the cargo or other property. However, in most cases, claims for special charges are normally administered by an average adjuster as an integral part of the general average adjustment since claims for general average and special charges often arise as a result of the same incident. 

General average adjustment
When a shipowner declares general average and/or claims special charges, he will usually take steps to obtain security for the future payment of the general average or special charges contributions that are payable by the owners of the other property that is at risk through the medium of an average adjuster that he will appoint. Such steps are taken prior to the discharge of the cargo or other property by demanding, as a pre-condition for the delivery of the cargo,⁴ general average bonds⁵ from the relevant cargo receivers together with guarantees ’if applicable’ from their cargo insurers or, in the case of other property, a similar form of security from the owners of that property. By providing such security documents the guarantors promise to pay general average and/or special charges contributions when subsequently adjusted and found due by the general average adjusters. It is important that Members should make sure that the adjuster has obtained satisfactory security before the cargo or other property is released, since as explained below, cover is not available for a failure to recover that proportion of general average contribution that is due from the other parties that are at risk because of inadequate or insufficient security.⁶ Furthermore, cover is not available if the guarantor becomes insolvent and it is proved that, but for such insolvency, the Member would have been able to recover contributions from the other parties that are at risk. Furthermore, cover is not available if contributions are not recoverable solely because the guarantee or other security that has been provided is unenforceable. Therefore, Members should pay close attention to the law and jurisdiction to which the general average bonds and guarantees are subject since the insertion of suitable clauses (typically those providing for English law and for the jurisdiction of the English court) will often be key to the satisfactory enforcement of such securities. 

The decision whether or not to declare general average is normally taken by the shipowner, although other parties to the venture can, and may, decide to do so themselves. However, the Member has a continuing duty under Rule 82 to take such steps as are may be reasonable and necessary to minimise the liability of the Association. Consequently, it is common practice for shipowners to discuss this question with their insurers because such a decision has an impact on both their Hull Policies and P&I cover. For example, if the Member does not declare general average, the amount that the Association may be asked to pay, i.e. for sacrificial damage to cargo, may be greater than that which they would be obliged to contribute if general average had been declared and the hull insurers and other parties to the venture had, consequently, been obliged to make contributions thereto (see also (F) below).

(A) The Association shall cover…the proportion of general average, special charges or salvage…which a Member may be entitled to claim…(Rule 41.a)
The cover that is available under this Rule is not for the liability that the Member has to other interests to contribute Ship’s proportion of general average, special charges or salvage but is for the amounts that the Member wishes to recover from such other parties by way of general average, special charges or salvage but which are not recoverable by him for the reasons outlined in (B) below. 

In order to recover from the Association, the Member must, firstly, prove that the claim is one which he is entitled in principle to recover from the other contributing interests (which is normally achieved in the case of general average by establishing that the claim falls within the scope of the York Antwerp Rules (YAR)), and by satisfactorily proving the sacrifices and expenses that form the basis of the claim for contribution. However, although the Member is also normally entitled to claim interest on the amounts that he is entitled to receive from the other contributory interests, the cover that is available for interest under Rule 41 is limited to that which is allowed in the adjustment according to the relevant YAR, but which is not recoverable from other parties for the reasons outlined in (B) below. Therefore, cover is not available for the interest that may be claimable by the Member because those parties have failed to pay their adjusted contribution when it became due since that type of interest cannot be considered to be a “proportion of general average etc.” for the purposes of the Rule.⁷. 

Furthermore, cover is not available for general average sacrifices or expenses that the Member has recovered (or for which he has a prima facie right to recover) under his Hull Policies or any other insurance,⁸ e.g. for damage that has been caused to the Ship as a result of a general average sacrifice such as the jettison of cargo, or the over-working of the main engine in order to re-float the grounded Ship. Therefore, if the hull underwriters compensate the Member in full under the terms of the hull insurance for losses that have been caused by Ship sacrifices, but subsequently fail to recover contributions from other parties to the adventure due to the fact that the shipowner/assured are in breach of the contract of carriage, they are not entitled to receive compensation under the assured’s (i.e. shipowner’s) P&I insurance. Although the hull underwriters may have acquired a right to claim by way of subrogation, cover is not available to the shipowner under Rule 41 for losses that are covered under the Hull Policies with the result that cover cannot be made available for the hull insurers’ claim in subrogation. Rule 71.1.a makes it clear that P&I cover is not available for liabilities, losses, costs and expenses that are covered by the Hull Policies. 

(B) …not legally recoverable…by reason of a breach of the contract of carriage…(Rule 41.a)
Cover is available under Rule 41.a for claims that the Member has for contributions to general average, special charges or salvage that would be recoverable by the Member from the cargo interest or any other party to the marine adventure but for the fact that the incident has been caused by the actionable fault of the Member, i.e. by a breach of the contract of carriage by the Member as carrier.⁹ In many cases, the relevant breach is a breach of the Member’s duty as carrier under the Hague, Hague-Visby or Hamburg Rules to exercise due diligence to make the ship seaworthy before and at the beginning of the voyage, or to properly load, stow, care for etc., cargo during the voyage. 

Therefore, if the cause of the incident is one for which the carrier is exempted from liability under the terms of the contract of carriage or the applicable law, there is no ’actionable fault’ which entitles the contributing interests to refuse to make such contributions and, consequently, cover is not available under Rule 41.a. However, since it is often difficult to establish clearly whether or not there has been actionable fault on the part of the Member, the legal costs that the Member may incur in pursuing a claim against the cargo interests for contributions are normally recoverable under Rule 44. A classic example is when the general average incident has been caused by a ship collision or grounding due to the negligent navigation or management of the ship which entitles the carrier to a defence under Article IV Rule 2 (a) of the Hague or Hague-Visby Rules.¹⁰ However, where the contract of carriage is a charterparty or some other agreement to which the Hague or Hague-Visby Rules do not apply compulsorily, the carrier may be entitled to rely on other defences. In such cases, cover is not available under Rule 41.a unless the Member is found liable despite the fact that he has sought to avail himself of all available exemptions and limitations to the maximum extent permitted by the applicable law. Similarly, cover is not available under Rule 41.a if the Member has waived exemptions or other rights of protection in the contract of carriage which are designed to protect him against liability with the result that the cargo and other interests have the right to refuse to contribute in general average unless the Association has previously approved the relevant terms or similar terms.¹¹ 

Appendix VII of the Rules recommends that the New Jason Clause is inserted in all charterparties, bills of lading, waybills and other contracts containing or evidencing the contract of carriage used in international trade. This is required to preserve owners’ entitlement to claim general average contributions from cargo interests, who would otherwise under US law be able to avoid contributing where there has been faulty navigation or management of the ship. Rule 55 makes it clear that cover is not available for losses that result from the fact that the Member has omitted to use such recommended terms. Therefore, should Members have any doubt about the effect of contractual terms they are strongly advised to consult the Association before agreeing such terms. 

Cover is not available for liabilities, losses, costs or expenses that the Member cannot recover from other parties to the marine adventure in general average but which would have been recoverable if the unamended York Antwerp Rules had been incorporated into the charterparty or the contract of carriage. The 1994 version of the YAR is the one that has traditionally been found most commonly in contracts of carriage and the YAR 1994 and the more recent YAR 2016 are considered by the shipping industry to strike a fair balance between the rights and obligations of the parties to the common adventure.¹² The YAR 2004¹³ , on the other hand, are more favourable to cargo and other interests and it is not considered to be in the interests of the membership as a whole to make cover available in such circumstances. 

In recent years, some major charterers have tried to introduce clauses into their charterparties that prevent a shipowner from apportioning in general average the cost of preventative measures that are taken (usually by the shipowner) to avoid or minimise pollution despite the fact that the YAR 1994 and YAR 2016 permit such costs to be so apportioned in certain circumstances, with the result that the full cost of such measures will be borne by the shipowner. Cover is not available under Rule 41.a in such circumstances and, consequently, it is strongly recommended that Members do not accept such clauses. However, should Members, nevertheless, consider that they have no alternative for commercial reasons but to accept such clauses, alternative cover for such liability may be available on payment of additional premium under the Association’s Comprehensive Carrier’s Liability Cover.¹⁴ 

Since the Member must satisfy the Association before cover can be made available under Rule 41.a that the cargo and/or other interests are entitled to refuse to contribute by reason of the Member’s breach of the contract of carriage, and that the Member has taken all reasonable endeavours to try to obtain payment of the contributions, Members are strongly advised not to take any steps that could result in a waiver of their right to claim general average contribution or any such potentially prejudicial steps without having first consulted the Association since the Association and other insurers will usually wish to work closely with the general average adjuster.¹⁵ 

Once the general average adjustment has been published, the adjuster will call on the various interested parties to pay their contributions. However, if the cargo interests, or those that have an interest in any other property, refuse to pay on the basis that the event that caused the need for the adjustment has arisen as a result of a breach of contract on the part of the Member, the Association will normally assist the Member to enforce payment and cover is available under Rule 44 for any legal or other costs that may be incurred in doing so. However, should the other interests refuse to pay for other reasons then cover for the legal and other costs that may be incurred in dealing with such other disputes is not available under Rule 44 since the failure to pay has not arisen “solely by reason of a breach of the contract of carriage”. Examples of such disputes would be situations in which the other interests dispute the inclusion of a particular item in the adjustment, or where the dispute concerns the enforcement of the security that has been provided by, or on behalf of, the other interests. However, cover for legal or other costs that have been incurred by the Member in such situations may be available under Part IV (Defence Cover). 

It is not the function of the adjuster to comment on whether or not the adjustment has been necessitated by a breach of contract on the part of the Member, However, the adjuster will need, when drawing up the adjustment, to have documents such as survey reports that explain what has happened, and such documents may be included in the adjustment, or details from them may be included as part of the adjuster’s narrative. Since such information will thereby become available to the other interested parties, it is important that the Member should consult the Association before deciding what documentation should be provided to the adjuster and that the adjuster should be asked to provide the Member with a draft final adjustment before it is formally published. 

(C) …solely by reason of a breach of the contract of carriage… (Rule 41.a)
If the Member is unable to recover contributions to general average, special charges or salvage for reasons other than as a result of a breach of the contract of carriage, cover is not available under Rule 41.a. Therefore, for example, cover would not be available when contributions are irrecoverable for the following circumstances:

i a failure by the Member to obtain adequate security, e.g. cash deposits or general average bonds and guarantees from cargo owners/insurers prior to relinquishing possession of the cargo;

ii a failure by the Member to protect his legal rights to lien the cargo under the applicable law;

iii a failure by the Member to protect any relevant time limit which may be applicable to his claim for contributions;

iv the insolvency of the cargo owner and/or cargo insurer;

v the failure of an agent or bank to whom contributions have been paid to account to the Member for such monies; and

vi the diminution or loss of the value of the contributions as a result of currency devaluations or exchange regulations. 

Although the 1994 and 2016 versions of the YAR impose procedural time limits for the notification of claims and the provision of supporting evidence, these time limits are often disregarded and it can take many years to prepare and complete a general average adjustment. Furthermore, the process of collecting contributions can be further delayed by litigation if the adjuster’s conclusions are challenged by one or more of the interested parties. Therefore, if, three months after the issue of the final general average adjustment, the Association is satisfied that the Member is actively pursuing his right to recover contributions from cargo and/or other interests, but that such efforts are unlikely to be successful without considerable delay, the Association may, upon receipt of an application from the Member, exercise its discretion to advance funds to him by way of a loan as an interim measure. However, it must be understood that if the Association does so, it does so purely in order to alleviate any cash flow difficulties that the Member may be experiencing pending the final determination of the Member’s right to claim a recovery under the Rules and does not represent any acceptance by the Association at that stage of the Member’s right to recover under the Rules. Therefore, if it is determined in due course that the Member either has no right to recover from the Association, or that such right is for an amount that is less than the amount that has been advanced, the Member is obliged to repay that proportion of the loan that is in excess of the amount that is recoverable from the Association under Rule 41.a and the terms of entry. In normal circumstances, the Association will not grant a loan for a sum that is in excess of 80 per cent (net of ship’s sacrifices) of the sum that the cargo and/or other interests are required to contribute less any contributions that have already been paid to the Member and any contributions for which cover is denied or disputed because they fall outside the scope of cover, such as those stated in C (i) – (vi) above. 

Should the Association decide to exercise its discretion to grant such a loan it can do so subject to such terms and conditions that it considers to be appropriate including, for example, the execution of a loan agreement in a prescribed form, the provision of adequate counter-security covering any future obligation of the Member to repay all or any part of the loan, or a legal assignment to the Association of any subsequent recovery of contributions from cargo and/or other interests. 

(D) …special charges or salvage… (Rule 41.a)
Special charges and salvage charges should normally be payable by the owners and/or insurers of the cargo or other property that is at risk. However, shipowners are sometimes compelled, for various reasons, to pay such charges and to subsequently claim reimbursement from such other interests. However, if the cargo or other property interests are entitled to refuse reimbursement for the reasons discussed in (C), cover is available for the Member under Rule 41. 

Cover is available under Rule 42 for the special compensation that is paid by a Member as shipowner to a salvor under the Special Compensation P&I Clause (SCOPIC), in circumstances where the salvage services are unsuccessful but there is a threat to the environment. 

(E) …Where…any…contributing asset belongs to the Member… (Rule 41.a)
For the purposes of Rule 41.a, cargo, bunkers or other property that is owned by the Member, or freight that is at the risk of the Member, is treated as if it was owned by, or at the risk of, a third party. Therefore, in order to obtain reimbursement from the Association, the Member must prove that, had his cargo or other contributing asset been owned by a third party, he would not have been able to recover a contribution from that third party solely by reason of his (i.e. the Member’s) breach of contract. 

(F) …Ship’s proportion of general average, special charges or salvage not recoverable under the Hull Policies by reason of the Ship being assessed…at a value in excess of the sums insured under the Hull Policies, provided that cover shall only be available under this Rule 41.b in any particular case if the Association shall in its absolute discretion so determine (Rule 41.b)
Normally, the Ship’s proportion of general average is payable by the hull insurers under the Hull Policy and the Member is required to keep the Ship fully insured on standard terms for whatever the Ship’s market value may be from time to time. Therefore, losses that the Member incurs as a result of his failure to do so are normally not considered to be losses that should be shared by the other mutual Members particularly since, all other factors being equal, the Member would normally benefit in such circumstances from a reduction in the premium that he would pay under the Hull Policy. However, it may not be possible for the Member to ensure in all circumstances that the Ship is insured for its true market value e.g. if market values increase rapidly. Consequently, the Board of Directors of the Association is given a discretion under Rule 41.b to reimburse the Member for any shortfall in the amount that he is entitled to recover under the Hull Policies for the Ship’s proportion of general average, special charges and salvage as a result of the fact that the Ship’s actual value is higher than the sum insured in the Hull Policies. However, when exercising its discretion, the Board is likely to want to closely examine whether the Member has acted prudently in keeping the market value of the Ship under review, and, when necessary, increasing the sum insured. The Member will usually be asked to explain which procedures he has (or had) in place in order to monitor the Ship’s market value and to make any necessary value adjustments. The Board is unlikely to exercise its discretion in the Member’s favour if it is not satisfied that the Member has been vigilant in his value adjustment procedures, e.g. he has not adjusted the value since the last hull renewal even though he ought to have known that the market value had increased substantially in the interim period and there had been ample time since the renewal to adjust the insurance value. 

As stated in (C) above, the general average adjustment and contribution process can be complex, time-consuming and commercially sensitive and the Member may be out of pocket for a substantial period of time pending completion of the adjustment and any subsequent attempts to recover contributions. This may be an unattractive prospect if the cost and time of proceeding in this manner are disproportionate to the sums that are at stake. Consequently, it has become common for some shipowners to include a general average absorption clause in the Hull Policies, the purpose of which is to give the owner a right to recover all general average sacrifices and expenditure up to the amount agreed without the need for a general average adjustment. If such clause is invoked, the Member does not have the right to make a claim under Rule 41. 

Finally, some Hull Policies give the assured the right to recover from the hull insurers that part of the contributions that cannot be recovered from the cargo or other interests due to a breach by the assured of the contract of carriage. Such right can be for an agreed sum and/or limited to ship sacrifices forming part of the general average or some other factors. Since P&I cover is subsidiary to any other insurance that covers the same risk or loss, cover is not available under Rule 41.b to the extent that cover is available under the Hull Policy¹⁶ and the Member has a duty to inform the Association about any other insurance relating to the Ship that may affect his right of recovery under the P&I insurance.¹⁷ 

Appendix VII of the Rules recommends that the New Jason Clause is inserted in all charterparties, bills of lading, waybills and other contracts containing or evidencing the contract of carriage used in international trade. This is required to preserve owners’ entitlement to claim general average contributions from cargo interests, who would otherwise under US law be able to avoid contributing where there has been faulty navigation or management of the ship.

1 For example, bunkers, containers and cargo securing material owned by the time charterer of the Ship.
2 The assessment of sacrifices and expenses to be accounted for in the general average, as well as the contributions payable by each contributing party, will usually be set out in a general average adjustment prepared by a professional average adjuster appointed by the shipowner.
3 Some countries also apply the YAR by force of law: see for example, Article 461 of the Norwegian Maritime Act of 1994.However, there are many different versions of the YAR and regardless of whether such Rules apply by force of law, Rule 63.1.i emphasises that cover is not available for «liabilities, losses, costs and expenses which would have been recoverable in General Average if the unamended York Antwerp Rules had been incorporated into the charter party or the contract of carriage». See the Guidance to
Rule 63.1.i.
4 The carrier has security for future payments of general average contributions by way of a possessory lien on cargo in his custody that is owned by parties liable to contribute to the general average.
5 Cash security may be required if a general average bond cannot be legally enforced in the relevant jurisdiction.
6 See the Gard Insight article entitled “When it’s gone, it’s gone – The importance of including a law and jurisdiction provision in general average guarantees”.
7 See Also the Guidance to Rule 83.3.
8 See the Guidance to Rule 71.
9 Rule D of the York-Antwerp Rules preserves the rights of the parties against whom contribution is claimed to refuse to contribute if ‘actionable fault’ is proved on the part of the party claiming contribution (usually the shipowner). A test of ’actionable fault’ is whether the person claiming contribution would have been legally liable for damage which may have occurred to the property of the person from whom the contribution is claimed if the general average act had not been performed.
10 However, if the carrier cannot rely on such exemption under applicable law, e.g. under the Hamburg Rules, contributions to general average may be recoverable.
11 See Rule 55. One example is the so-called Exxon GA Clause regularly imposed by ExxonMobil as time charterer of oil tankers, which serves to shift more of the general average risk onto the shipowner than would follow from the YAR 1994.
12 See Rule 63.1.i. and P&I circular number 8/98: General Average/Charterparty clauses (November 1998) at: http://www.gard.no/ikbViewer/go/target/62929.
13 The YAR 2004 is not in widespread use. See the article entitled “York-Antwerp Rules 2004” in Gard News 176, 2004 at: http://www.gard.no/ikbViewer/web/updates/content/53071/york-antwerp-rules-2004
14 See http://www.gard.no/ikbViewer/Content/67474/Comprehensive%20carriers%20liability%20cover%202013.pdf.