Newsletter

GA & Salvage – Value of Containers

Author: M Jagannath
Date: April 13, 2015

In the container liner industry, containers are either owned or leased and operated by various parties. Following a General Average Incident, the Average Adjuster will seek details of the valuation of the containers loaded on board the vessel together with appropriate security for their release. This article explores the various values of the container and discusses on the correct value to be declared to the Average Adjuster.

  1. This article is a continuation of our earlier article on General Average – issues arising in Container Shipping and focusses on the valuation of the container. Although the value of a dry container is not substantial (a new 20’ DV container could be bought for a price less than USD 2500),  if volumes are substantial they may then have an effect on the contribution being borne by the container operator. Further, if the container operators deal with a fleet of special containers, these would be of considerable value (say reefer containers which are valued from USD 10,000 to USD 30,000 and above depending on the technology and machinery) and providing the “correct value” will ensure that the container operators contribute for what they are actually meant to.

  2. Values of the containers could be one of the following:

    1. Purchase Price: The price at which the container has been purchased as new builds.

    2. Depreciated Value (DV): When containers are acquired by a company (who may be the container operator or their lessor), they record the cost of the container on their balance sheet. This cost of the container is depreciated over its estimated useful life to its estimated residual value (say the estimated value derived from a sale on “as is” basis at the end of the container’s useful life - the container would still have a value at the end of its useful life as it could be refurbished, used for other uses or sold as scrap, etc).The amount of depreciation varies from company to company and there may be correlation to the taxation laws at the place where the container operator / lessor is based.

    3. Replacement Value (RV): It is the actual cost incurred to replace a container by buying a similar container from the market.

  3. The question now is which of these values is to be declared to the Average Adjuster following a GA? Almost all of the contract of affreightments incorporate the York Antwerp Rules to govern the adjustment of General Average. In this regard, we have reviewed:

    1. BIMCO’s Multidoc 95: Clause 23a of BIMCO’s Multidoc 95 deals with General Average and states:

      "General Average shall be adjusted at any port or place at the MTO's option, and to be settled according to the York-Antwerp Rules 1994, or any modification thereof, this covering all Goods, whether carried on or under deck. The New Jason Clause as approved by BIMCO to be considered as incorporated herein".

    2. Maersk Line’s Bills of Lading clause 24.1 on General Average states:

      General average to be adjusted at any port or place at the Carrier’s option and to be settled according to the York Antwerp Rules 1994, this covering all Goods carried on or under deck. General average on a Vessel not operated by the Carrier shall be adjusted according to the requirements of the operator of that Vessel.”

  4. The York Antwerp Rules 1994:

    1. Rule VI (a) deals with Salvage and states " Expenditure incurred by the parties to the adventure in the nature of salvage, whether under contract or otherwise, shall be allowed in general average provided that the salvage operations were carried out for the purpose of preserving from peril the property involved in the common maritime adventure".  

    2. Rule XVII deals with the contributory values and states “The contribution to a general average shall be made upon the actual net values of the property at the termination of the adventure”.

      This would mean that the values to be declared by the container operator should be the RV of the container at the place where the adventure terminates.

    3. Rule XVIII deals with Damage to Ship and states “ The amount to be allowed as general average for damage or loss to the ship, her machinery and/ or gear caused by a general average act shall be as follows:

      1. "When repaired or replaced, the actual reasonable cost of repairing or replacing such damage or loss, subject to deductions in accordance with Rule XIII;

      2. When not repaired or replaced, the reasonable depreciation arising from such damage or loss, but not exceeding the estimated cost of repairs. But where the ship is an actual total loss or when the cost of repairs of the damage would exceed the value of the ship when repaired, the amount to be allowed as general average shall be the difference between the estimated sound value of the ship after deducting therefrom the estimated cost of repairing damage which is not general average and the value of the ship in her damaged state which may be measured by the net proceeds of sale, if any

        As you will note, this Rule does not specifically deal with containers but as “machinery and / or gear” is included, it is submitted that it should apply for containers and which would be considered as gear. In this case, for a total loss, the general average allowed would be restricted to the RV of the container.
  5. It is an established fact that container values depend on the location where they are being purchased or sold (price variance due to demand and supply) and a container operator must consider this fact at the time of declaring the value. In the case of a ship, the usual practice is for a valuation of the vessel to be undertaken to ascertain the value with the costs of the valuation as one of the expenses incurred for the adjustment of the general average. It is submitted that if a valuation of containers is required by the average adjuster as evidence of value, the reasonable costs incurred for the valuation of containers should similarly be considered as one of the expenses incurred in the adjustment of the general average. However, in actual fact, what we have seen is that the declarations made by the container operators are generally accepted as representing the fair value of the containers (we do not believe that any correction would be applied if the values declared are higher, but would be happy to hear from readers on this aspect).
  6. We have also considered Salvage as often (as provided under YAR 1994), the salvage awards form a portion of GA (which would fall under Rule VI). However, the effect would be the same even if the salvage awards are not included in the GA Adjustment (YAR 2004 Rule VI has been amended to exclude the allowance of salvage from G.A., except in cases where one party to the salvage has paid all or any of the proportion of salvage due from another party). This is because salvage reward is paid on the basis of the values of the property saved and is derived from the value of the property at the place/port of refuge i.e. the RV of the containers at the port of refuge.
  7. In order to show the difference which may arise in contribution, we give below an example of a container operator who has say 100 X 20’ DV and 50 X 40’ Rfrs loaded on a vessel which has declared GA. The DV of the containers is USD 1,900 for 20’DV and USD 24,000 for 40’ Rfrs whereas the RV of the containers is USD 1,500 for 20’ DV and USD 15,000 for 40’ Rfrs. The difference in contribution values would be as follows (let us take 10% of the value as the contribution required for the GA):

    1. DV:

      100 X USD 1,900 + 50 X USD 24,000

      = USD 190,000 + USD 1,200,000

      = USD 1,390,000

      Hence, contribution of 10% of USD 1,390,000 is USD 139,000.

    2.  RV:

      100 X USD 1,500 + 50 X USD 15,000

      USD 150,000 +USD 750,000

      USD 900,000

      Hence, contribution of 10% of USD 900,000 is USD 90,000.

      The difference in the contribution would be(USD 139,000 – USD 90,000) = USD 49,000.
  8. A container operater may insure their equipment (both owned and leased) and following a General Average, would approach their insurers for provision of security by way of an Average Guarantee. Containers may be insured on the basis of various wordings and for the purpose of this article, we have considered the Institute Container Clauses – Time - 1/1/87 (this is an “All Risks” policy).

    1. Clause 1 details the cover provided “ all risks of loss of or damage to the subject-matter insured, except as provided in Clauses 4, 5, 6, 7 and 8 below

    2. Clause 2 deals with General Average and states “ This insurance covers general average salvage and salvage charges, adjusted or determined according to the contract of affreightment and/or the governing law and practice, incurred to avoid or in connection with the avoidance of loss from any cause except those excluded in Clauses 5,6,7 and 8 or elsewhere in this insurance

       For the purpose of claims for general average contribution salvage and salvage charges recoverable hereunder the subject-matter insured shall be deemed to be insured for its full contributory value”.


       Insurer’s liability for General Average is therefore restricted to the containers full contributory value only. It is submitted that this value should be RV.

  9. When containers are leased, the valuation of containers provided under the leasing contract for a total loss is generally on the basis of the DV of the container i.e. if containers become a Total Loss, the liability of the Lessee to the Lessor is for the DV. What happens if a leased container becomes a total loss due to a general average sacrifice?

    As mentioned in 4) above, Rule XVIII of YAR 1994 deals with the amounts to be allowed as general average and which would be restricted to the RV of the container. In the case of a Total loss, there would be difference in values i.e. the leasing contract would provide for the lessee to be liable on the basis of the DV whereas the adjustment of the General Average would be accomplished on the basis of the RV. For such cases, subject to the Container Operator having declared to his Insurers the valuation provided by the container lessors and sought cover accordingly, the difference in recovery should properly fall under Clause 1 of the ICC 1/1/87 (this policy is an “All Risks” policy. Although we have not seen a “named perils” cover for equipment, we believe the recovery in a “named perils” policy would depend on whether the named peril led to the General Average).

  10. In summary, container owners should
    1. Provide the RV value of containers to the Average Adjusters following a general average.
    2. If containers are leased, ensure to declare the DV to their Insurers and seek appropriate cover.
    3. Consider seeking the costs, if incurred to provide evidence on the value of the containers, from the Average Adjuster as a part of the Adjustment costs
(a) Expenditure incurred by the parties to the adventure in the nature of salvage, whether under contract or otherwise, shall be allowed in general average provided that the salvage operations were carried out for the purpose of preserving from peril the property involved in the common maritime adventure.
RULE VI. SALVAGE REMUNERATION

 

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