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GA and Salvage Clause - What is its role in a Transport Liability Policy?

Author: M.Jagannath
Date: August 28, 2015

A Transport Liability Policy covers the legal and contractual liability of the Insured involved in transportation of cargo. As the cargo is not owned by the Insured, it is often thought that the GA and Salvage Clause is of no relevance.This article considers the application of a GA & Salvage Clause in a Transport Liability Policy and identifies scenarios when it would respond to provide security / contribution for the cargo contractually carried by the Insured.

  1. GA & Salvage Clause: A Transport Liability Policy ("TLP") provides cover to the Insured for their legal and / or contractual liability arising out of their activities declared to their Insurers.The wordings of the GA & Salvage Clause in a TLP would typically be “The policy covers the legal and / or the contractual liability of the Insured for cargo’s proportion of the general average, salvage or salvage charges”. A TLP may also have a charterer's extension so that the Insured, if acting as a slot charterer, could declare this activity to their insurers and seek appropriate coverage.

  2. Container Operator: In this article, we have considered the Insured to include a Container Liner Operator, a Non Vessel Operating Common Carrier and a Contractual Carrier (henceforth known as "Container Operator") - the common denominator being that they would be issuing their Bills of Lading to the cargo interests, as Carrier. In turn, the Container Operator would be contracting with Owners / Actual / Performing Carrier for the carriage of the cargo. As the cargo is not owned by the Container Operator (although this is possible in rare circumstances as listed in 11 below), would there be any liability to the Container Carrier for the provision of General Average / Salvage Contributions and / or Security?

  3. General Average and Salvage:

    1. General Average: S66(2) of the UK Marine Insurance Act 1906 defines General Average Loss as being “...any extraordinary sacrifice or expenditure is voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperilled in the common adventure”. As contracts of carriage would invariably incorporate the York Antwerp Rules to adjust General Averages, we have also considered the definition of General Average as provided in Rule A of the York Antwerp Rules 1994 which is “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. General average sacrifices and expenditures shall be borne by the different contributing interests on the basis hereinafter provided”  (The wordings of the York Antwerp Rules 1974, although vary minutely, have a similar effect).

    2. Salvage: S65(2) of the UK Marine Insurance Act 1906 states “Salvage charges” means the charges recoverable under maritime law by a salvor independently of contract…” As mentioned in 3 i above, contracts of carriage would invariably incorporate the York Antwerp Rules and which permit Salvage Charges to be allowed as General Average. In this regard, R VI (a) of the York Antwerp Rules 1994 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….”  (The wordings of the York Antwerp Rules 1974 vary minutely and have a similar effect).

  4. As mentioned in 2 above, the Container Operator is involved in the transportation of goods (which do not belong to him except in rare circumstances and in which case, he must consider taking cargo insurance for the cargo). If the container is owned or leased by the Container Operator, then this being a property, it will have to contribute for any General Average Sacrifice / Expenditure and Salvage. A TLP may also provide additional cover for Equipment and which would respond for the provision of Security / Contribution for General Average and Salvage for the Containers. However, as we are focusing purely on the liability aspects of a Container Operator, we are not discussing on this aspect (equipment) further.

  5. A Container Operator would contract with Owners either on the basis of a "slot charterparty" or on the basis of “use basis” (in which case, the terms of the contract between the Owners and Container Operator would generally be on the basis of the Bills of Lading issued by the Owners). We consider each of these below:

    1. Slot Charterparty: We have considered BIMCO SLOTHIRE as being the Charterparty between the Owners and the Container Operator:

      1. Clause 19 and 20 of the BIMCO SLOTHIRE deal with General Average and Salvage respectively. The wording of these clauses is as follows:

        19.General Average: General Average shall be adjusted at the place as indicated in Box 21 according to the York-Antwerp Rules 1974, as amended 1990, or any subsequent modification thereof. Slot Charter Hire shall not contribute to General Average. The Owners authorise and empower the Charterers to act as the agents of the Owners in the collection of General Average security. The Charterers shall guarantee the contributions properly due to the Owners in respect of:(a) Goods for which the Charterers are the contracting carrier unless such Goods are delivered to the Charterers prior to notice being given by the Owners to the Charterers that General Average security is required; and (b) Containers shipped by the Charterers under this Slot Charter Party.

        20. Salvage: In the event of the Vessel needing to engage salvage services and in order to secure the release of Goods and/or Containers for on-carriage, the Owners shall be required to give any undertaking to salvors to assist in the collection of  security and not to release Goods and/or Containers until acceptable salvage security has been provided. The Charterers shall guarantee to the Owners that the requirements of such undertaking will be met in respect of Goods, for which the Charterers are the contracting carrier and Containers shipped by the Charterers under this Slot Charter Party, provided that these requirements are notified to the Charterers prior to the delivery of the Goods and/or Containers to the Charterers.

      2. Under the above slot charterparty, the charterers guarantee contributions properly due from the cargo interests for general average and therefore if there is a short fall in the contributions received from the cargo interests, Owners would be entitled to pursue the Container Operators for this shortfall. In such instances, the TLP would be triggered to respond to the balance of the requisite contributions due. With respect to salvage, we do not see any corresponding liability arising as the undertaking would be to provide relevant security prior to release i.e. if cargo is not released by Container Operators, no liability would arise.

    2. Container Operator contracting with the Owners on “use basis” with the terms of contract being the Bills of Lading issued by Owners (Bills of Lading would correspondingly be issued by the Container Operator to the cargo interests which will govern the relationship between the Container Owner and the cargo interests). We have considered the wordings of the relevant clauses in the Bills of Lading issued by two feeder operators given below:

      1. General Average shall be adjusted at any port or place at the option of the Carrier in accordance with York-Antwerp Rules,provided that where an adjustment is made in accordance with the law and practice of the United States of America or of any other country

      2. General Average and Salvage:

        (1) In the event of accident, danger, damaged or disaster before or after the commencement of the voyage resulting from any cause whatsoever, whether due to negligence or not, for which, or for the consequence of which, the Carrier is not responsible, by statue, contract or otherwise, the Goods and the Merchant shall contribute with the Carrier in general average to the payment of any sacrifices, losses or expenses of a general average nature that may be made or incurred and shall pay salvage and special charges incurred in respect of the Goods.

        (2)Any general average on a Vessel operated by the Carrier shall be adjusted at any port or place and in any currency at the option of the Carrier and shall be settled in accordance with the York-Antwerp Rules 1994 or subsequent amendments this covering all Goods on or under deck. Any general average on a Vessel not operated by the Carrier shall be adjusted according to the requirements of the operator of that Vessel. In either case the Merchant shall give such cash deposit or other security as the Carrier may deem sufficient to cover the estimated general average contribution of the Goods. Any security, other than cash deposits, must be given by a party acceptable to the Carrier and/or a party with assets in a jurisdiction nominated by the  Carrier. Such security must be provided prior to delivery of the Goods if the Carrier so requires, or, if the Carrier does not so require, within three months of the delivery of the Goods. The Carrier shall be under no obligation to exercise any lien for general average contribution due to the Merchant.

    3. In the GA Clause of 5 ii b above, there is a reference to “Merchant" and which is defined in the Definitions clause in the relevant Bill of Lading as “'Merchant' includes any Person who at any time has been or becomes the Shipper, Holder, Consignee, the receiver of the Goods, any Person owning or entitled to the possession of the Goods or this Bill of Lading and any Person acting on behalf of any such Person.” As the Bills of Lading of Owners would be issued to the Container Operator either as the Shipper or Consignee, they would appear to fall within the ambit of the General Average and Salvage Clause.

    4. In the first clause (5 ii a), there does not appear to be any direct liability to the Container Operator to provide any contribution and / or security for the cargo. However, with respect to the second clause (5 ii b), as the definition of Merchant is very wide, the Container Operator appears to have a concurrent liability for the provision of the contributions due / security for the GA. Hence, Owners can consider seeking the same from the Container Operators and which would trigger the TLP to respond to provide the contributions / security as the case may be.

  6. When expenses are incurred in General Average and / or Salvage, the Owners / Salvors are entitled to maintain a possessory lien on the cargo / property till such time they have received the requisite security. In addition, the Owners may also have a duty under law to exercise the lien on behalf of other parties who have suffered a general average loss eg – cargo jettisoned in order to float a grounded vessel. There would be costs for maintaining the possessory lien and which could also be recovered from the cargo / property interests in addition to their contribution to the General Average / Salvage as these costs arose due to their (cargo / property) failure in providing security promptly. Contributions due from the various interests for the General Average and / or Salvage would be known once a General Average Adjustment has been prepared and / or a Salvage reward is agreed / awarded and which would take time. Hence, in practice, Owners / Salvors would require security from the cargo interests to cover the estimated contributions due prior to the release of the cargo and subsequently this security will go to pay out the contributions ascertained in the adjustment of the general average and / or the agreement / award of the salvage.

  7. If the cargo interests do not come forth to provide security, Owners and / or Container Operators may be entitled under their Bill of Lading terms to auction of the cargo so as to recover the proportion of the security due from the cargo / property interests with the balance being held in trust for the cargo / property interests. With respect to Salvors or Owners / Container Operators (if they do not have a clause entitling them to auction of the cargo in the Bill of Lading), they can approach the courts for an order to proceed with an auction to recover the proportion of the security due from the cargo / property interests. If the sale conducted by the Owners / Salvors realize the contributions due, then no legal liability would arise to the Container Operator (unless the Container Operators were at fault – say for instance, they did not provide the details of the cargo interests).

  8. The Owners may demand provision of security from the Container Operators on the basis of the relevant contract and failure of the Container Operators to respond with appropriate security may result in Owners initiating arbitration (as may be provided in the charter party or the relevant Bill of Lading) or an action in the courts. However, Owners would also have a duty to mitigate their loss such that the reasonable course of action would be to conduct an auction of the unsecured cargo, with the proceedings of the auction going first to secure the cargo interests contrubutions for the General Average. If the auction sale does not realise the portion of the security estimated due from cargo interests, Owners could consider pursuing the Container Operators for the balance due and this would depend on the quantum of shortcomings and the costs of pursuit (as there would be unrecoverable costs for any pursuit).

  9. If security is provided by the Container Operator to the Owners, they (Container Owners) would, in turn, be entitled to seek security from the cargo interests. If the cargo interests are not forthcoming, then the Container Operator must consider auctioning off the cargo (either under the provisions of the Bills of Lading or by applying to the Courts) to recover the proportion of the contribution due from the cargo interests. All costs incurred for this exercise may also be claimed from the cargo interests. As the contracts of carriage invariably incorporate the York Antwerp Rules to adjust the General Averages, we have considered the application of Rule XVII of the 1994 Rules which deals with Contributory Values and states “… the value of cargo shall be the value at the time of discharge, ascertained from the commercial invoice rendered to the receiver or if there is no such invoice from the shipped value. The value of the cargo shall include the cost of insurance and freight unless and insofar as such freight is at the risk of interests other than the cargo, deducting therefrom any loss or damage suffered by the cargo prior to or at the time of discharge….” (The York Antwerp Rules 1974 has identical wordings). These wordings suggest that the contributory value of the cargo interests is to be on the basis of the commercial invoice or the shipped value (if no invoice is available), irrespective of the the actual values of the cargo at the time of discharge.

  10. It would be rare for the actual values of the cargo to vary significantly from the invoiced / shipped value such that there would be minimal impact on the values realised through the sale of the cargo by auction or court appointed sale by the Container Operator (as stated in 9 above). However, if the value of the cargo has significantly reduced vis – a – vis the invoiced / shipped value (eg Ornaments / trinkets meant for the X’Mas season but due to the GA / Salvage, the cargo lost its value as it was discharged  after X’Mas), then the difference between the proportion due from the cargo interests as provided in r XVII of the YA 1994 and the actual values realized would have to be borne by the Container Operator. In this case, the GA Clause in the TLP would be triggered to pay the difference.

  11. If the cargo is owned by the Container Operator and is required to provide security, would this trigger the engagement of the Container Operators TLP (say the cargo is uninsured and the Container Operator seeks the engagement of the TLP to respond for the provision of security)? Our view is that the TLP is meant to deal with issues arising from the Insured’s role as a Container Operator. While it could certainly be argued that as and when  a legal or contractual liability arises against the Container Operator for the provision of security, the TLP should respond for the provision of security. However, as the coverage of the Container Operator by the TLP is for their role as a Transport Operator and not as Cargo Interests, it is submitted that the TLP should not respond for the provision of security for the cargo. If it is however agreed by the TLP Insurers to provide the requisite security in the first instance, the Container Operator would then be duty bound to auction off the cargo, as mentioned in 9 above, to replace the security by the proceeds of the auction.

  12. To conclude:

    1. The GA / Salvage Clause in a TLP has an important role and would respond to any legal or contractual liability arising to the Container Operator.

    2. If a liability does arise to the Container Operator, although rare, they and the Transport Liability Insurers must be aware of the potential short fall which may arise due to the adjustment of GA being accomplished by York Antwerp Rules 1994.

 

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