Maritime disasters aren’t as rare as you might think. A major containership fire breaks out every 60 days on average, reports say. In such a life-threatening event, the ship’s master might take certain drastic steps to safeguard the vessel, its cargo and crew. These measures might result in losses to some or all of the parties to the voyage. When the master takes such emergency action, they do so under a provision of maritime law called general average. When a general average is declared, it means the carrier and each cargo owner is responsible, in part, for damage to or loss of cargo or the ship itself. Here, the cargo owner might be the exporter or importer, depending on who holds ownership of the goods at the time of the incident.   

As an importer or exporter, you might find yourself in a situation where general average is declared. This blog aims to help you understand how such a situation arises and what you can do to safeguard your interests. Read on to know:

• What is general average and when is it declared?
• What is its purpose?
• How is general average calculated?
• How does general average affect you?
• How can you stay protected?
• Some case studies

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What is general average and when is it declared?

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The York-Antwerp Rules, a set of maritime guidelines, defines a general average act as one “when, and only when, any extraordinary sacrifice or expenditure is intentionally made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure”.

Let’s put this in perspective with an example: A container ship is caught in a storm and runs aground in shallow water. The only way to get it unstuck is to lighten its load. So, the ship’s master decides to jettison (throw overboard) some cargo into the water. And the ship reaches its destination with a lighter load. Now, due to the master’s actions, all cargo owners must come together to compensate for the losses and expenses incurred. Each one’s contribution depends on the net landed value of their cargo at destination. Remember, the liability to pay rests on the cargo owner and not on any intermediary, even if they might have made the booking with the carrier.     

It must also be noted that general average covers only direct losses linked to the material value of the cargo carried or of the ship. It doesn’t cover indirect losses arising from the delayed voyage, including loss of market.        

Common mishaps where a general average can be declared include:

• Ship fire
• Storm at sea
• Mechanical breakdown
• Vessel running aground

Common general average acts resulting in loss of property and additional expenses include:

• Jettison, discharge, storage and re-loading of cargo
• Loss of/damage to cargo due to the use of water/fire extinguishers
• Towing of a ship that has had a mechanical breakdown
• Use of salvage services (any assistance received by a vessel or any other property in danger)
• Calling at a port of refuge   

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What is the purpose of general average?

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The provision of a general average clause in maritime law is primarily to allow carriers to take immediate action at a time of real danger in order to save lives and property. They do this safe in the knowledge that the losses and expenses incurred as a result of their actions will be evaluated and compensated by all those who were a part of the voyage. Furthermore, they will not face accusations of taking faulty decisions because the York-Antwerp Rules treat general average contribution and the consequences of fault separately. This is not only beneficial to the carrier but also to cargo owners whose goods might have been damaged, lost or sacrificed for the greater good. They will, thus, be compensated by the other parties.       

How is general average calculated?

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After the initial emergency action is over, the carrier typically consults an average adjuster (usually a firm) who specialises in the law and practice of marine insurance and general average. Acting independently and impartially, the adjuster calculates and determines the contribution each party must pay. One of their first jobs is to decide if an incident qualifies as a general average act or if there are alternative ways for the parties to make up for their losses. They do this by going through the case details, especially the sacrifices made and expenses incurred. If a general average is declared, this is the process that follows:

1. The adjuster asks each cargo owner to provide an/a:

• Average bond, which is an undertaking signed by the cargo owner that they will pay the contribution upon its finalisation
• Average guarantee to back up the bond, issued by the insurance company
• Cash deposit, in the case of uninsured cargo. This is calculated as a percentage of the value of the cargo owner’s goods 
• Commercial invoice

2. If third-party salvage services were required, the adjuster collects a salvage security from cargo owners, which is used to pay the salvors. A salvage security is signed by the insurer

3. Once all bonds/securities have been collected, the cargo is released

4. The adjuster then starts calculating the general average contribution for each party, making allowances for sacrifices and expenses

5. After final calculations, they collect and distribute this amount among the parties involved, thereby completing the general average process  

The entire process can take months, sometimes even years, to complete. 

‍How does general average affect you?

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As cargo owners, importers and exporters are affected by general average in various ways:

• They might end up with damaged cargo or no cargo at all
• Even if their cargo is safe, they have to deal with extreme delays
• Delays affect businesses in many ways. They can result in the imposition of fines/penalties or lead to a chargeback (reversal of funds) from final customers  
• Cargo owners are obliged to post an average bond, without which cargo won’t be released. If the average bond is calculated as a percentage of the CIF (cost, insurance and freight) value of the cargo, then the deposit required for a large consignment can be significant
• In an LCL (less than container load) consignment, if just one cargo owner fails to cough up the average bond and security, the entire consignment is held back  
• Cargo owners must also ultimately pay their general average contribution, which is based on the total value of the ship and all the cargo it held. So, even if their cargo’s CIF value is low, they  might end up paying a high price       

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What to do to stay protected

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Getting marine cargo insurance is the surest way of protecting yourself. Just make sure it covers a general average situation. How does insurance help?

• It saves money. With insurance, your contribution is taken care of by the insurance firm
• It saves time and effort. You can just hand over your documents to the insurer and they will take care of all aspects of the general average process     

Unfortunately, 10%-15% of cargo on a vessel is uninsured on average, according to latest estimates. This is an improvement from previous years though. In 2007, for example, 40% of the cargo on board the MSC Napoli, which went down in a storm, was reportedly uninsured.  

General average case studies

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While general average incidents are considered rare, a recent surge in maritime mishaps and the number of containers lost at sea indicates that shippers cannot be too careful. Five mishaps between November 30, 2020, and January 31, 2021, resulted in the loss of 2,675 containers. This included the 750 containers lost by the Maersk Essen when it encountered a storm off Hawaii on January 16. General average is likely to be declared in this case. 

Here, we take a look at major general average incidents in the past five years:

• Maersk Honam: On March 6, 2018, a blaze on board the Maersk Honam off the coast of Oman killed five crew members. The fire raged for months and the ship could only be towed to a port of refuge (Jebel Ali in Dubai) in mid-May. A Maersk statement said an investigation inconclusively pointed to “the decomposition of dangerous cargo generating intense heat”. The general average deposit was fixed at 11.5% of the cargo value and salvage security at a high 42.5%. Additionally, cargo owners with undamaged goods were expected to pay an additional $750 per 20-foot container or $1,250 per 40-foot container towards transporting and berthing costs at Jebel Ali. The International Union of Marine Insurance considers this to be the largest general average loss in history.                 
• Yantian Express: Another major container ship fire that led to a general average being declared was the January 3, 2019, blaze on the Yantian Express in the North Atlantic. With strong winds, rain and cold temperatures hampering firefighting operations, it took 23 days to put out the fire. The ship was towed to Freeport in the Bahamas, where it remained for months. The damage included 202 containers that were a complete loss. Five months after the fire, carrier Hapag-Lloyd reported that a third of cargo owners had yet to make their general average and salvage security contributions, which meant that the ship was stuck in Freeport. A misdeclared consignment of charcoal is said to have caused the fire.            
• Hanjin Aqua: On December 4, 2015, the Hanjin Aqua ran aground in shallow waters off Indonesia while trying to avoid colliding with a passenger vessel. A salvage team managed to refloat the ship a month later by discharging some of the containers. Carrier Hapag-Lloyd said salvage security had been fixed at 27% of the cargo value and general average deposit at 5%.
• ‍Northern Jupiter: Ocean Network Express (ONE) declared a general average after a main engine fire on board the Northern Jupiter on January 4, 2020, which was en route from Singapore to Malaysia.