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General Average – issues arising in Container Shipping

Author: M Jagannath
Date: June 18, 2014

This article discusses, as we see it, the issues faced in General Averages in the Container Liner Industry

  1. Introduction:
  1. General Average can be defined as a principle of maritime law in which parties who have benefited from any extraordinary sacrifice or expenditure voluntarily and reasonably made in a time of peril for the purpose of preserving the property contribute proportionately to the sacrifice or expenditure. This principle is derived from Rhodianan Law (circa 800 BC). The purpose of this paper is not to discuss whether the traditional approach (who believe that General Average has a place considering the development of law) or the new approach (who believe that that General Average should be scrapped altogether with the losses being borne where it falls) is the correct approach but to discuss some of the problems faced in the container liner industry together with possible solutions.
  2. In the container liner industry, we have main line vessels which can carry upwards of 8000 TEU's. We would estimate that the various interests in such a vessel would be numbering to several thousands (Owners, Charterer, Slot Charterer, Container Operators/NVOCC. Consolidators, Cargo interests). Since there are so many interests, it not only becomes difficult to manage a General Average situation but also that there would be substantial costs which may be incurred for the collections of securities from the various interests.
  3. We have been involved, in the recent past, in some GA's where it took more than 1 year for the cargo and containers to be discharged due to issues/delay on the provision of security from some cargo interests. As we write this article, we are involved in another GA in which some of the cargos and containers whilst having provided proper security are yet to be discharged (Owners await instructions from the Time Charterers with the vessel at anchorage incurring costs).
  4. GA developed so that all parties could work together. However, our recent experience leads us to believe that sometimes it is otherwise and perhaps this is due to failure in proper communication. 

 

  1. Engagement of Average Adjusters: When a GA is declared, Owners generally have the prerogative to decide on the Average Adjuster (who are experts in maritime law and practice of general average and marine insurance) to assist them in the collection of security and adjustment of the General Average. While Average Adjusters may be appointed by the Owners, they are bound to act in an impartial and independent manner. In a GA, the Average Adjuster is involved with a multitude of interests and his impartiality goes to ensure that all parties’ interests are properly protected. 

 

  1. Collection of security:
  1. Once a GA is declared, Average Adjusters inform all cargo and container interests seeking provision of Security (Average Bond to be signed by the cargo interests and Average Guarantee to be signed by the cargo insurers for the value of the cargo or payment of a cash deposit and which is generally based on a rough estimate of the contribution due). The issues generally arise on the acceptance of Average Guarantee as the Average Adjusters would only recommend acceptance of securities from Insurers having good credit ratings and do not have any bad history i.e. they have contributed when they were called to do so. 
  2. Some of the cargo (particularly perishables) is generally uninsured and for which Average Adjusters would seek security by payment of a cash deposit (in lieu of the Average Guarantee provided by the cargo insurers). We have reviewed Rule XXII of the YAR 1974, 1994 and 2004 which deals with the treatment of cash deposits. The Rules provide that the deposits be put into a special account in the joint names of a representative nominated by the Owner and a representative nominated on behalf of the depositors in a bank to be approved by both. In practice, what we see in the container liner industry is that Average Adjusters ask for the payment of the deposits into their bank account without discussing on whether the bank is convenient to the cargo interests.
  3. The issue arises when the Average Adjuster is sited at a different location from the cargo/container interests and requests for payment of cash deposit to their bank account where they are based. This would mean that the cargo/container interests would need to remit funds and bear the costs for the remittance (there would be both transmission costs at the time of making a deposit and at the time of refund of the deposit, if any). The costs incurred for remittance, may not be significant individually, but may be substantial if taken as a whole. For instance, if we consider a vessel which can carry say 4000 TEU’s, with say 3000 cargo/container interests. Even if 30% of the cargo/container interests are un-insured, then we have about 900 separate cargo/container interests. Assuming transmission costs at USD 50 per remittance, the total transmission costs for remittance would be USD 45,000.00 (we have not considered refunds of any deposits which may be made once the adjustments have been accomplished in our calculations).

Possible Solution:

  1. We believe that the transmission costs could be avoided if Average Adjusters provide bank accounts sited at the country of loading and / or the country where the voyage is terminated so that the cargo / container interests could transfer funds with the minimum of costs. Given that all the leading banks have branches all over the world and that internet banking is provided by almost all of them, we believe it would be possible to approach a bank that could provide a multi-country account allowing parties to deposit and withdraw funds in various countries and thereby avoid transmission costs. We are aware that some countries have exchange regulations in place and in these instances, it may be best to provide bank accounts in neighbouring countries which do not have any such restrictions.
  1. Lien on cargo: Owners have a common law possessory lien on the cargo till such time they have received contribution for the GA.

Whether Owners are entitled to hold cargo and containers which have been secured?

  1. If the container shell is secured but the cargo inside the shell is yet to be secured or that some of the cargoes in the shell are yet to be secured (consolidation cargo), the question is whether Owners can continue hold the shell or the cargo. In the bulk trades, it is much simpler considering that there are not so many interests involved. However, it is complicated in the container liner industry considering that the cargo is inside the container and that costs would be incurred to devann and store the unsecured cargo / container to continue with the possessory lien. We understand that there is no provision under law for Owners to hold secured cargo and containers and therefore failure to release the secured cargo and containers may be considered as conversion (which simply means that it is an unauthorised act that deprives the owner of personal property without his consent.)

Inordinate delay in releasing secured cargo and containers

  1. The YAR 1974/1994/2004 Rule C excludes loss or damage sustained by cargo/container interests due to delay. Whether this can be successfully argued to extend to extreme delay is something debateable. In our view, we believe that if this matter is litigated, the courts would be more favourable to the interests of the cargo/container interests in holding that the intention of this Rule is not to cover inordinate delay, particularly when proper security has been provided by the cargo/container interests. This being the case, in addition to cargo owners seeking recovery of their losses due to delay, Owners of container shells could seek reimbursement of expenses for the detainment of their containers. 
  2. In actual practice, we have not seen secured Container Owners considering recovery for the delay and this is due to the fact that the value of a dry van is not substantial. However, if the shells involved are refrigerated or tank containers, considering their values, Containers Owners may certainly consider pursuit for their losses. With respect to secured cargo interests, as we are primarily involved with container operators, we do not have any previous knowledge of them pursuing Owners for the inordinate delay.
  3. It is quite possible that due to the extreme delay in releasing the cargo, the value of the cargo reduces (particularly for perishable or time sensitive cargo such as goods timed for X’Mas Sale, etc). If the holding of secured cargo is for the benefit of all parties in saving expenses, then we believe that any loss in value due to the delay should fall for contribution under the GA. On the other hand, if Owners do not consider loss of value to the secured cargo due to delay into consideration under the common benefit principle, it appears to us that cargo interests may have an entitlement to pursue Owners for their losses.

Recovery under Insurance for Cargo and Container Interests

  1. If the cargo or container is insured for “all risks” (ICC-A Clauses for cargo and Institute Container Clauses, Time 1/1/87), then the cargo / container interests could submit a claim under their policy for conversion (See Bayview Motors Ltd v Mitsui Marine and Fire ICL [2002] 1 Lloyds Rep 652). 
  2. If the extreme delay frustrates the contract, again the cargo / containers interests could submit a claim to their Insurers for frustration (See British & Foreign Marine Insurance Co v Sanday (1916) 21 Com Cas).  Insurers, could, once they become subrogated to the rights of the cargo / container interests, pursue the Owners for recovery. 

Possible solution

  1. One way to resolve this issue is to agree on provision of bridging securities by the container operators/consolidators so as to allow the cargo and containers to be released promptly to continue with the voyage. If bridging security cannot be agreed or provided, Owners should consider working with container operators / consolidators to allow the cargoes to be moved to final destination with the Owners holding control on the release of the cargo (this could be done by ensuring that the releases of the cargo is first done through Owners agent or a company nominated by them). Alternatively, Owners can themselves take on the role of moving the cargo and container to final destination using third party operators with the releases to be given only when proper security is provided. 
  2.  Alternatively, Owners and Charterers take it on themselves to seek cover with high Average Absorption Clauses. This will obviously obviate the need to take security from the various interests and instead the Owners and Charterers would submit their GA Claim to their Insurers.

 

  1. Adjustment of GA
    GA can either be adjusted on the basis of the law (depending on where the vessel terminates the voyage) or by the contractual incorporation of the York Antwerp Rules. Generally, all contracts of carriage incorporate the York Antwerp Rules (which were first agreed in York in 1864, known then as the Rules and were amended in Antwerp in 1877 and then on known as the York Antwerp Rules). The York Antwerp Rules consists of Lettered (A-G) and Numbered (1-22) Rules with the Numbered Rules taking precedence over the lettered Rules  Most of the contracts either incorporate the York Antwerp Rules 1974, 1994 or 2004. The question is whether these Rules are any way different and whether incorporation in contracts of carriage in the same voyage by different interests would create issues. 

Which Rules would apply to adjust GA?

  1. Since there are various parties involved and who would be issuing their bills of lading, some of the bills may incorporate YAR 1974, YAR 1974 as amended (which could be considered as YAR 1994) , YAR 1994 or YAR 2004. Alternatively, the bill could provide a general clause stating YAR as per Owners option (an argument could be made that this clause should be struck down for want of certainty). In the unlikely event, the bill does not contractually incorporate YAR; GA would then be adjusted on the basis of the provision of law at the place where the vessel terminates the adventure.
  2. When there are various YAR Rules incorporated into various contract of carriage, the question is which YAR Rules should be used for adjusting the GA? Owners may require Charterers to incorporate specific GA Clause in the Bills of Lading issued by them. Failure of the charterers to fulfil the contractual provisions may entitle Owners to seek an indemnity from Charterers. However, as Bills of Lading will be issued by other parties down the chain and who may not have any contractual relationship with the Owners or Charterers, it is conceivable that some of the Bills would make reference to other YAR Rules. While the YAR 1974 and 1994 are generally similar in nature, the major issues would crop up when YAR 2004 is incorporated in the Bills.

Possible solution

  1. One way to avoid the difference in YAR would be for Owners to seek an indemnity from the charterers for any difference in the incorporation and who in turn could seek the same down the chain. What this would do is that all parties are aware of this issue and work together to ensure that they all agree to incorporate the same YAR in their contracts of carriage. Failure to act would mean that the overlying party could seek an indemnity from the underlying party. .
  1. Conclusion: 
  1. While we believe that GA has a role to play in the modern times, parties involved in the GA should work together for a common purpose. This , we believe,  is the intention of GA
  2. We also believe that information, whether good or bad, should be shared immediately with the various interests. This would help parties to work together instead of workings towards cross purposes. 
  3. As far as possible, Average Adjusters should consider using banks who allow them the provision of “multi – country” banking facilities to avoid remittance costs.
  4. If cargo / containers security is not acceptable to the Average Adjusters / Owners or uninsured, to avoid delays and associated costs/ losses (for instance loss in value), Owners must consider acceptance of  Bridging security from container operators or proceed to move the cargo to final destination either by themselves or by seeking assistance from operators.
  5. Owners and operators must ensure to incorporate the same edition of YAR into their contracts to avoid any issues arising in the adjustment of GA.

 

The purpose of this article is to highlight the issues faced in the container liner industry as we see it. While we are engaged by both container operators and their insurers, we have written this article keeping also in mind the interests of the cargo. We are aware that there are more qualified people to comment on these issues and we would be happy to hear their comments and publish their views. The views expressed here together with all errors are entirely ours.

 

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