It is not uncommon these days for people to share the spendings of a group equally. For example, for a group of five friends having lunch together, they share the bill in five equal parts. Each one contributes one fifth of the total amount.
Or for example three to four people sharing a ride back home from office.
This is so easy. Right ? Dividing the fare or food bill is easy and everyone saves some money. But this looks easy because of two reasons.
One because the amount is divided in equal parts. And second because the money involved is not so big to draw a controversy. It would be much more difficult to draw an average if one person said that he has eaten less so he should pay less.
Or for that matter one person said he weighs less so he will pay less for the cab ride.
Oh!! I was supposed to talk about York Antwerp rules, right ? Why am I even talking about sharing a ride and food bill.
Well the York-Antwerp rules are also about sharing the expenditures with certain conditions attached.
Take this example.
A hold on a bulk carrier with cargo in it catches fire. The hold is flooded with water to extinguish the fire and to avoid the fire spreading in other parts of the ship.
We have saved the ship and we have saved the cargo in other holds of the ship. What have we lost ? The cargo loaded in one hold.
Now who would pay for the cargo lost in this case ?
Both the cargo interests as well as the ship owner has saved themselves damages which could have been more. If it was up to me and you to decide, it could be almost impossible to draw a balance on who should pay how much. After all it isn’t as simple as averaging for the food bill or cab fare.
This is what York Antwerp rules aims to do. The process of averaging the contribution of each party (who benefitted) to make up one party’s loss (Sacrifice as well as expenditures) is called “general average“.
General average is based upon the principle
That which has been sacrificed for the benefit of all shall be made good by the contribution of all
So not all sacrifices and expenditure qualify to be averaged and shared by other parties.
York Antwerp rules sets the guidelines of which all sacrifices and expenditures can be included during “General Average” and which all cannot.
How General Average works ?
Let me give an example. A loaded ship is hijacked in Somalian waters and pirates demanded the ransom for release of the ship. After much of negotiations the ransom was brought down to 30,00,000 (3 Million) US dollars.
The ransom amount was delivered and the ship was released. Let us see the break up of total expenses incurred in releasing the ship.
Now who do you think will pay this huge amount ?
The principle of general average says that all the parties that benefit from this sacrifice of the ship owner should pay. But how much each one need to pay ?
Cargo owner who had small parcel on board the ship should not pay same as other cargo owners who had huge amount of cargo on board.
So the break up need to be in proportion of how much each party saved from this sacrifice.
As per general average, each party will pay the same percentage of amount that they have saved. For example of the total value saved, 60% belongs to the ship owner. So ship owner need to contribute 60% of the expenditures or amount sacrificed.
Here are the general average contributions from each party in this example.
Now in this example, I have over simplified this for the sake of understanding but in realty these calculations can be extremely complex.
Some can even argue if the ransom paid for piracy can give rise to claims under general average ? All this may not be that simple.
For example it may be that ship was taken to Somalia and then upon release ship joined its planned route after one day sailing.
In this case the ship owner’s expenses like fuel cost and ship staff’s wages etc for this period also need to be shared.
But if we do not have a pre defined set of rules, the cargo owners may refuse to share the fuel costs or crew wages. They may say that we will only share the ransom amount.
So there need to be rules which each party will agree upon before the start of voyage. These rules already exists and are known as “York Antwerp rules”.
York Antwerp rules
The first version of York Antwerp rules were issued in 1890. But it was second version of York Antwerp rules that got much of applaud. Even though the latest version of the rules were issued in 2004, most companies use 1994 version of the rules.
Recently a new version of rules were issued in 2016.
York Antwerp rules has two sections. First section has rules that are identified by the letters (Rule A, Rule B .. ). These rules give general guidelines on what can be included in the general average.
Second section has rules that are identified by numbers (Rule I, Rule II .. ). These rules give specific situations, sacrifices and expenditures that can be included in the general average.
Let is discuss few of the important rules.
While all the rules in York Antwerp rules are named either with a number or an alphabet, this one rule is named differently. This is because this rule is paramount to all the rules.
Sacrifices made by ship owners should be reasonable and they cannot over spend. For example let us say the vessel was towed even when the ship’s engine were working.
This would be considered as “not -reasonable” and this amount will not be included in the general average.
What is General average act (Rule A)
What expenditures will be shared by all parties ? When we talk about general average and York Antwerp rules, this is most important question.
If ship owner places armed guards on board, can this be considered as general average act ? Will these expenses be shared between ship owner and cargo owners ?
Rule A of the York Antwerp rules defines the limits of general average act. It says
There is a general average act, when and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure
So there are four essential requirements for an action to fall under General average.
1. The expenditure or sacrifice need to be extraordinary
The ship owner is bound by his duty to deliver the cargo safely at the destination. There is nothing extraordinary in any actions that a ship owner performs to fulfill this duty.
This also answers my earlier question if placing the armed guards would come under general average act. It won’t. Ship owner is placing the armed guards to fulfill his duty of delivering the goods safely.
2. The act must be intentional
If the ship ran over a wreck and to release the ship a part of ship or the wreck need to be cut away. The expenditure involved in this will not come under general average because this was not intentional.
Jettisoning part of cargo to re-float the ship or flooding the water in a hold to extinguish the fire are intentional acts.
3. The Action must be for the common safety
Let us understand the term “Common safety: with an example.
Let us say a container ship has few of the refrigerated containers. The referigeration system of the ship failed and ship had to be diverted to a nearest port for repairing it to avoid damaging this cargo.
Will the expenditures incurred by the ship owner in this case come under general average ?
No, because the action is only for saving part cargo and not for the common safety of ship owners and for other cargoes loaded on ship.
For the general average, the action has to be for the common safety.
The action of Jettisoning some cargo to avoid sinking of entire ship is for common safety.
4. There must be a peril
If the master jettison a cargo to save the ship from sinking, it is a peril. But if the master jettison the cargo because he feels that the ship is overloaded, is not a peril.
Dictionary meaning of “peril” is “Grave danger”. If there is no grave danger, general average cannot apply.
But in the context of York Antwerp rules and General average, the interpretation of grave danger can be different.
In fact that is the difference between “a ship in distress” and “a ship in peril“.
For example take a ship that has broken engine in the mid sea with calm weather. The ship is not in distress but the ship is in peril.
General average Sacrifices
The sacrifices that can be made and are included in the general average fall under three categories.
The numbered rules gives the examples of the sacrifices that can be included in the general average.
Jettison of cargo: Jettison of cargo will include in the general average if the cargo was carried as per customary trade. For example if the deck cargo was loaded on a ship that is not allowed to load on deck, sacrifice of such cargo will not include in the general average.
Extinguishing fire: General average will include the damages (to ship or the cargo) because of extinguishing fire on board.
Voluntary stranding: Damage and loss because of intentional stranding in “common safety” is allowed to be included in general average.
General Average Expenditures
Apart from the sacrifices, one party may spend lot of money in the common interest of saving the ship and the cargo. As per York Antwerp rules, these expenditures also can be included in the general average.
Some of these expenditures can be
- Salvage expenses
- Port of refuse expenses
- Wages of master and crew during the prolongation period because of port of refuse
- Fuel during the prolongation period because of port of refuse
No general average for environmental pollution (Rule C)
As per Rule C of the York Antwerp rules, the costs involved in handling environmental pollution cannot be included in the general average.
This is a logical rule as if the general average was to include the environment damage claims, it would have taken the domain of the general average too far.
It does not matter whose fault it is (Rule D)
Let us say a vessel ran aground. The vessel had to sacrifice (Jettison) some of the cargo to re-float it. As per rule D, the cargo owners cannot claim that the grounding was due to the fault of ship owners and they would not contribute to the general average.
Irrespective of the fault which led to the event (in this case grounding), all parties have to contribute to the general average.
But this will not be the case if the ship was unseaworthy. If the grounding resulted because the vessel was unseaworthy, then ship owner cannot benefit from the general average.
In spite of the rule D of the York Antwerp rule, US law does not allow the navigation fault of the ship owner to be neglected. As such most of the ship owners make sure to include “new Jason Clause” in the bill of lading and charter party agreement.
Application of York Antwerp rules and General average
In most countries these rules do not have any legal force in themselves. The York Antwerp rules and principle of general average have legal force only if these are included in the bill of lading or charter party agreement.
If you get to see an actual bill of lading, read the term, conditions and clauses on the back side. Most likely you will find a clause regarding York Antwerp and General average there.
Recovery of general average contribution
In “taxi fare” example, if one person refuse to pay his share what options one can have to recover it.
May be we can let it go as the amount will not be that big.
In the perils at sea, in most of the situations it will be ship owner who would make sacrifices and expenditure to come out of these situations.
So how can a ship owner ensure that everyone will contribute to general average amount that ship owner should get.
In the maritime law a ship owner has the lien on the cargo for the general average contribution. So ship owner will only release the goods once he receives a guarantee that he will get his dues. This guarantee can be in form of
Role of Average adjuster
Don’t go by the name. Average adjuster are not average people. They are the expert in one field of marine insurance, that is general average.
During a general average situations, usually a average adjuster is appointed by one party. The role of the average adjuster is to
- Collect all the information following a general average action
- Make a statement of general average contribution of each party
- Collect general average security from each party
- Assist in effective settlement of the general average
Irrespective of which party has appointed average adjuster, it is the duty of the average adjuster to be impartial towards general average settlement.
Association of average adjusters sets the standards for the training of average adjusters.
General average allows sharing of loss in an unfortunate incident. General average is a good old maritime practice. Not only for ship owners and other parties involved but also for ship’s masters.
To some extent it allows the master of the ship to be a boss and take actions what he believes is the best for that situation.
Take an example where master need to beach the ship to save it from sinking. Because of general average, master would face lesser resistance from all the parties as the loss would be shared.
In the absence of general average, condition would be different. Master may have to convince all parties that beaching is the only option.
Another example where master has to jettison some cargo to save the ship. In the absence of general average, the cargo owner might object to why his cargo was jettisoned and not the other cargo ?
York Antwerp rules and General average has something good for everyone involved with a ship and carriage of cargo.
About Capt Rajeev Jassal
Capt. Rajeev Jassal has sailed for over 19 years mainly on crude oil, product and chemical tankers. He holds MBA in shipping & Logistics degree from London. He has done extensive research on quantitatively measuring Safety culture onboard and safety climate ashore which he believes is the most important element for safer shipping.