general average
'General Average - proposals for revision'
by
John Martin, Gard (HK) Ltd
Royal Hong Kong Yacht Club, Wednesday 19th May 2004
On Wednesday 19 May 2004 John Martin, of Gard (HK) Ltd., presented a talk on the subject of the impending review of General Average and possible reform of the York-Antwerp Rules at the CMI (Comite Maritime International) conference in June 2004.
General Average is a form of mutuality that existed long before Marine Insurance was brought into use. It is mentioned in the Justinian Code of about AD 530, in a reference to even earlier Rhodian Law, and is said to be as old as the oldest commercial sea voyages.
It is a method of allocating, among those parties who benefit by ship and cargo being saved, the costs of losses and expenses intentionally incurred in order to prevent a greater loss from a marine casualty. The costs are borne by the different interests involved pro rata to the value of the property saved.
Claims in General Average fall into two categories:
i) Losses and sacrifices for the common safety; for example extinguishing water damage to ship and cargo in a fire or salvage.
ii) Expenses incurred for the common benefit to safely complete the voyage including those at ports of refuge such as cargo handling expenses, port dues, wages and maintenance and substituted expenses, but excluding the cost of repairing accidental damage to the ship.
Since the early 19th century, English law and practice largely recognised only the common safety allowances as general average. European countries and the USA favoured the inclusion of claims for the common benefit. To ensure a uniform approach, the York-Antwerp Rules (formulated in 1890, and most recently updated in 1994) are incorporated into Bills of Lading and other contracts of carriage. Up until now, these have accepted in full the concept of both common safety and common benefit allowances.
Even after a General Average incident has been declared, all related payments are now commonly made by insurers. In advance of the CMI conference, the International Union of Marine Insurers (IUMI) has made the following criticisms of the way in which GA operates.
It is overly complex as it involves the division of expenses amongst many interests;
There are correspondingly high costs of adjustment, and adjustments can be slow to prepare;
The method of dealing with salvage creates duplication;
The system is open to abuse by Shipowners who operate old, poorly maintained ships;
The system is not suitable for modern Shipowners, particularly container operators with thousands of cargo interests;
The system is therefore costly and inefficient
IUMI claims that 10% of GA costs are the costs of adjustment charges; that 80% of incidents arise from the faults of ships or shipowners; but that 67% of costs are borne by cargo insurers. Now that insurance is commonly held by ship owners, IUMI believes that losses (including the costs of salvage) should lie where they fall to a greater extent than at present, and has pressed for the adoption of a more pragmatic scheme that would retain the allowance of cargo handling and other related expenses under York-Antwerp Rules X and XII while abolishing the allowance of crews’ wages and maintenance, fuel and stores, as well as port charges under YAR XI. It believes the emphasis of General Average should be common safety rather than common benefit. Expenses and sacrifices would only be admissible if they are made or incurred while the ship and cargo are “in the grip of a peril”. Thus, General Average allowances would cease as soon as the vessel attains safety, and none would be made for further temporary repairs, or during repairs necessary for the safe prosecution of the voyage.
The reforms suggested by IUMI have been criticised, chiefly by shipowners, because of the uncertainty they would create, and the consequent increase in delay in cargo delivery after an incident. The reforms do not address the problem of the high cost of collecting GA security, establishing values, and effecting settlements, in situations involving a large number of cargo interests. And who can define exactly when “safety” has been achieved?
John Martin introduced to some of those in the audience the concept of General Average absorption clauses. These shift a larger proportion of GA onto ship interests, simplify adjusting procedures, and reduce costs. The use of these clauses has become widespread and is still growing, and the limits available under these clauses are increasing.
For further information, John recommended visiting the CMI web-site www.comitemaritime.org/home.htm