From time to time, you have to wonder whether you are really as modern as you think and would like to be. Sometimes, the winds of change blow for reasons beyond our control. At such times, if you have sound experience to lean on, you can face the new and unfamiliar with curiosity and an open mind. We who work at Marine Cargo are facing such a change: the challenge of applying one of the oldest sets of rules and regulations to the needs of today.
The rules for general average can be traced far back in time. In the 6th century, Emperor Justianius compiled the principal laws of the Roman Empire into a code that we know by the name of "Corpus iuris civilis". Freely translated, the law on general average states that "if cargo is thrown overboard to make a ship lighter, what has been given for all shall be compensated with contributions from all."
The Swedish Maritime Act has incorporated the York-Antwerp Rules (YAR) and its definition of general average. The first edition of YAR was issued in 1890, with several updates made since. The last amendment was made in 2004 (taking effect in 2005) and initiated by the International Union of Marine Insurance, IUMI, which examined 1,700 cases in 1994-1997 in which general average was declared. The study focused partly on the expenses and partly on how they were divided between the parties involved. In other words, the rules relating to this instrument are ancient and well tested, having been applied for at least 1,500 years and developed and adjusted along the way.
The question is this: have they been adjusted to suit the large container vessels used today? The largest container vessels, so called Ultra Large Container Vessels (ULCV), have the capacity to load more than 8,000 TEU, some as much as 14,000 TEU (one TEU equals one 20" container). In 2007 alone, more than 120 vessels with a capacity of more than 12,000 TEU were hired.
The principle is that all who have a financial interest in seeing the maritime adventure happily completed will contribute with a proportionally equal slice. This means that the owners of the ship and the owners of the cargo must present what kind of a financial stake they have in the vessel or the cargo. The average adjuster is responsible for collecting this information and distributing the shared expenses.
Who owns the cargo and what is it worth?
The average adjuster must find out who owns the cargo on board the vessel and how much it is worth. This may sound an easy assignment, but it can be a very time- consuming task. The average adjuster must look for the information in the charter parties that the ship owner has signed. In easy cases, the owner of the cargo has agreed on the transportation with the ship owner. However, that is seldom the case these days. The ship owner usually employs several freight forwarders as its contractual parties who, in turn, have sold transportations on to several different freight buyers. Some of these freight buyers may have large volumes of cargo on board a vessel, but the majority has cargo that has been jointly loaded into one container.
Upon the request of the average adjuster, the ship owner will contact the freight forwarders who, in turn, will get in touch with their contracting parties, the freight buyers, who may or may not be the owners of the cargo. The freight buyer is either the seller or the buyer, and who owns the cargo is determined by the bill of sales. The choice of delivery clause in the bill of sales determines which party, the buyer or the seller, holds the largest interest in the cargo and is hence liable to contribute to the general average. Moreover, the owners of the cargo may be located anywhere in the world, and it is the average adjuster's task to contact them all.
If the freight buyer has cargo insurance, it would be wise for it to contact the insurer. Otherwise, the freight buyer itself must submit this information to the average adjuster.
The ship owner has lien of the cargo while it is onboard the vessel. To receive the cargo when the vessel has arrived at the port and is ready to unload, the owner of the cargo or its cargo insurer must be able to guarantee that it will pay the general average contribution that will be ascribed to it later on. By signing the guarantee (a so-called General Average Guarantee and General Average Bond), the cargo owner/cargo insurer undertakes to provide the average adjuster with all available information on the cargo and its value. In return, the cargo owner receives access to its goods.
In order to complete this undertaking, the cargo-owner/cargo insurer submits the Bill of Lading (B/L) and invoice to the average adjuster along with the Guarantee and the Bond. With the help of all B/Ls issued prior to a maritime adventure, the average adjuster can determine what cargo was onboard the vessel. The invoice states the value of the cargo at the time of loading the vessel.
Note that for each B/L issued for a maritime adventure, at least four (4) separate documents will be collected in a case of general average. Even today, most average adjusters require that the General Average Guarantee and General Average Bond be submitted to them in the original. Copies of the invoice and the B/L can be submitted as long as the reverse side of the B/L is also copied, since it contains contractual text.
When the average adjuster has all of the required documents, he or she must divide the expenses for the general average proportionally from the saved values. This means that cargo owners who find that their cargo has been damaged as a result of the general average can adjust the value upon which their general average contribution will be based. The easiest way for the cargo owner to confirm the adjusted value is to send in an inspection report to the average adjuster. The completed division of expenses is called a general average statement, and it is not uncommon for a couple of years to elapse before the above work is completed and the general average statement written.
If one ULCV vessel with 10,000 TEU declares general average, the average adjuster may have to handle at least 40,000 documents – providing that only one B/L has been issued for each container, i.e. that none of the containers are joint loaded. In practice, some B/Ls cover several containers while many containers have been jointly loaded, with several B/Ls issued for one and the same container. This is an administrative challenge that is thrown into the bargain nowadays for the average adjuster.
Can general average be avoided?
It is often argued that the rules of general average are uneconomical and result in unjustified amounts of work for the average adjuster in terms of the collection of guarantees and other documents. As a result, the expenses for the general average statement may constitute a significant portion of the total average costs that are to be divided.
For the ship owner, another disadvantage with declaring general average is that the vessel risks having to lie in port for a long, expensive time while unloading its cargo. If the ship owner does not receive confirmation from the average adjuster that a guarantee has been submitted, the ship owner will not unload the vessel as its lien to the cargo expires when the cargo has been unloaded. When the guarantee has been submitted, the ship owner must identify in which container the cargo is and where on the vessel the cargo is located. If the container is joint loaded, all cargo owners must submit a guarantee before the container can be unloaded.
To meet the demands on time and cost efficiency of today's ship owners, the pressure on hull insurers, to offer an alternative insurance to YAR and the rules associated with general average, is increasing.
For a few years already, many hull insurers have offered an Absorption Clause that ship owners can attach to their hull insurance. The clause may be worded in many different ways by different insurers, but the basic idea is that the clause applies if the ship owner chooses to refrain from declaring general average. The clause thus offers the ship owner the right to compensation under the insurance, equalling the amount of the general average contribution otherwise paid by the cargo owners. The clause applies with a maximum sum insured, jointly agreed on by the insurer and the ship owner.
Should the ship owner require additional insurance, it can take out a General Average Insurance instead of an Absorption Clause. This insurance covers the ship owner’s costs in the same way as the Absorption Clause, but with higher compensation.
For very large container vessels in particular, ULCVs, being able to refrain from declaring general average and, instead, submitting a claim to an insurer, should be a great advantage. The ship owner can thus avoid particularly long lay-up periods in port and expenses related to hiring an average adjuster to administer the general average.
It remains to be seen whether this new alternative is as work-load and cost efficient as it was intended to be when it was introduced. I hope that the IUMI can follow up on its survey from 1994-1997. It would be interesting to see how successful the new insurances have been and at what TEU cargo limit the insurance can be successful.
Before there is an official investigation or report, we at If Marine Cargo are certain to have formed a well-based notion of this issue. In this respect, Marine Cargo will work with a tried and tested set of rules and regulations, along with a completely new scenario under construction. Marine Cargo's extensive experience offers security and a solid basis for constructing new routines applicable to modern needs.
Ulrika Carlson
