Abortive General Average

1. Recently, another major container casualty unfolded – the fire on board Xpress Pearl and which resulted in both the vessel and the cargo on board becoming a Total Loss. While the investigations are ongoing, we believe that once the circumstances related to the loss are clearly established, they will go in creating procedures necessary to deal with issues arising from dangerous cargo on board. We must however complement owners of Xpress Pearl on the information flows on the casualty and for which they had set up a website to respond to various queries by the interested parties. We believe that this should be the way forward for all casualties so that all interested parties are in the loop.
2. We also chanced upon the interview of the CEO of X Press Feeder, the operator of Xpress Pearl, wherein he stated that they were insured for their exposures and their direct financial burden to this incident would be limited. We believe that while this is what should be striven for (insure for all possible exposures), there will always be gaps either due to commercial cover being unavailable or an incomplete understanding of the risk. In this casualty, we believe that one of the exposures would be related to the “abortive” General Average (“GA”). In particular, if salvors were engaged on contractual instead on Lloyds Open Form “LOF” terms, Owners of Xpress Pearl may have found themselves in a situation wherein they would have to bear some of the salvage expenses by themselves. This article will touch on the issues related to abortive GA’s and possible solutions.
   1. By way of background, following the casualty, Owners engaged salvors, SMIT Salvage Pte Ltd, on  “LOF” terms. We are however not aware on the specific edition of LOF terms SMIT were engaged on and whether it also incorporated the SCOPIC Clauseⁱ. The Owners terminated the LOF when they became aware that the vessel was a Total Loss and instead appointed a new contractor as Caretaker to monitor and address any possible oil spills and the removal / cleaning of debris.
   2. If the salvors were indeed able to save any property, they would be entitled to a reward from the saved property interests (Hull, Bunkers, Cargo, Vessel Fittings, etc.) and Freightⁱⁱ, if at risk.
3. Abortive GA:
   1. We define “abortive” GA as a failed attempt to save any property and/or freight at risk or when the expenditure incurred for the GA exceeds the property/freight saved. We have not considered sacrifices given that in the event of a Total Loss, they (property owners) are no worse off i.e. if the sacrifices were not made.
   2. Following a casualty such as the Xpress Pearl, Owners would engage Salvors either on LOF or on Contractual terms. Which terms are suitable for engagement would depend on many factors including whether the casualty is fast developing such that Owners require immediate assistanceⁱⁱⁱ. While engagement on LOF terms would result in greater payouts to Salvors, the time spent on agreeing terms for engagement would be minimal such that Salvors could be engaged at short notice. Salvors may in some instances be reluctant to be engaged on LOF terms, particularly when the chances of success is limited and/or coupled with limited potential for any special compensation rewards. In such cases, Salvors would prefer to be engaged on Contractual basis.
      1. LOF basis: If the engagement of Salvors is on LOF, the Salvors are entitled to a reward basis the property saved. Accordingly, if no property is saved, Salvors loose the opportunity of a reward. Following the London Salvage Convention 89, Salvors are also entitled to special compensation under Article 14 payable by the Owners (who will be reimbursed by their P&I Insurers) if the salvage operations prevented or minimized damage to the environment. If the LOF does incorporate SCOPIC clause, the Salvors could invoke SCOPIC^iv when they become aware that the chances of a reward are minimal or that significant costs would be incurred to deal with environmental related issues.
      2. Contractual Salvage (say a base amount followed by a daily hire rate): In this case, Owners would have to make payment of the contractual rates agreed irrespective of whether the salvors are able to save any property or not. If the salvage services have saved any property, then these costs could be apportioned by including the contractual rates in GA to be shared rateably from the interests benefited. Issues would arise when no property is saved and in which case, Owners would have to bear these expenses by themeselves and then consider potential recovery:
         1. GA: One of the requirements for GA^v is that there must be some preservation of property. This would therefore mean that if no property is saved by engaging salvors, these expenses (contractual salvage) cannot not be included in the GA pot.
         2. Sue & Labour (“S&L”): If the policy contains a S&L, then under English Law^vi, these expenses can be recovered in addition to the limits provided under the policy. However, if salvors were engaged for the benefit of both the Owners of the vessel and cargo interests (which is in the case of Xpress Pearl as she was laden with cargo), then these expenses would not be S&L.
         3. Hull policy^vii: We have considered the commonly used Hull policies^viii i.e., ITCH 1/10/83^ix & IHC 2003^x, AIHC 77^xiand AICH 2009^xii. We note that these policies do provide for some limited cover for reimbursement for such abortive expenses. What reimbursement is available under the policy would depend on various factors including the various properties at risk together with the basis of calculation adopted by the average adjuster^xiii. However, the cover provided does not provide a complete indemnity and therefore the balance of unrecoverable costs would have to be borne by the Owners themselves.
         4. P&I Policy:
            1. About 90% of the world’s ocean-going tonnage is insured with one of the 13 members of the International Group of P and I Clubs/Mutuals. The balance 10% cover is provided by commercial insurers (who are generally called fixed premium insurers).
            2. The major difference in the cover between mutuals and fixed premium is that the mutuals do have a discretionary cover by way of an Omnibus Rule^xiv i.e., upon the application of a Member, the Directors of the Club may agree to pay compensation in respect of a claim which falls outside the Risks expressly covered under the Rules.
            3. Other than that, the cover available for irrecoverable GA^xv contributions by both Mutuals and Fixed Premium are similar and is available if the contributing interests (say cargo interests) are able to deny Owners entitlement to GA due to a breach of the contract of carriage and in which case, the shortfall would fall for consideration under the Owners P&I cover.
            4. While a member of a Mutual may indeed make an application to seek contribution for the unrecovered abortive GA expenses, we believe that there would be reluctance  given that this is more a property based risk. Even if the Directors of the Mutuals are sympathetic, it is a not a given that a Member would always be able to recover this shortfall. This being the case, the discretionary cover is not the optimum solution to  recover this shortfall.
4. Solution for this Gap? As there is a potential exposure to Owners with respect to abortive GA’s, it would be best if they consider
   1. maintaining a cash reserve to deal with such exposures related to the business of shipowning and / or
   2. seek an additional cover say by way of an endorsement from Hull Insurers for the reimbursement of  the unrecoverable expenses related to an abortive GA. Alternatively, the wordings of the Small GA clause could be modified to respond to such expenses.

^i.See article by Capt Rajeev Jassal touching on London Salvage Convention and the SCOPIC Clause and which can be viewed at https://www.myseatime.com/blog/detail/simplifying-scopic-clause-and-salvage-convention
^ii.We do not believe that Freight was at Risk as invariably, contracts of affreightment in this industry provide for Freights to be earned on loading. Hence, Freight would be merged with the cargo values at risk.
^iii.See article by GARD on challenges to LOF and which can be viewed at https://www.gard.no/web/updates/content/29246093/the-challenges-to-lloyds-open-form-salvage-contract-from-a-shipowners-perspective.
^iv.See an article by CMI on SCOPIC in practice and which can be viewed at https://comitemaritime.org/wp-content/uploads/2018/05/Graham-Daines-Scopic-Paper.pdf.
^v.See Rule A 1 of the York Antwerp Rules 2016 and which states: “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”.
^vi.See S 78(1) of the English Marine Insurance Act 1906 which states “Where the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or that the subject matter may have been warranted free from particular average, either wholly or under a certain percentage”.
^vii.This has been the subject of an extensive article published in the Tulane Law Review 83 Tul.L.Rev.1227(2009) on “Hull Insurance and General Average – Some current issues” by Jonathan Spencer, a full member of the Association of Average Adjusters of the United States and a member of the Associaton Mondiale de Dispacheurs (International Association of Average Adjusters).
^viii.We have not touched on the other covers available in the European Market (Norwegian Form, German – DTV, etc.) and would be delighted to hear from readers on their understanding of the cover available on these forms for abortive GA’s.
^ix.See clause 13.5 of Institute Time Clauses Hulls 1/10/83 and which states “When a claim for total loss of the Vessel is admitted under this insurance and expenses have been reasonably incurred in saving or attempting to save the Vessel and other property and there are no proceeds, or the expenses exceed the proceeds, then this insurance shall bear its pro rata share of such proportion of the expenses, or of the expenses in excess of the proceeds, as the case may be, as may reasonably be regarded as having been incurred in respect of the Vessel; but if the Vessel be insured for less than its sound value at the time of the occurrence giving rise to the expenditure, the amount recoverable under this clause shall be reduced in proportion to the under-insurance”.
^x.See clause 9.4 of the Institute Hull Clauses 2003 and which states “When the Underwriters have admitted a claim for total loss of the vessel under this insurance and expenses have been reasonably incurred in saving or attempting to save the vessel and other property and there are no proceeds, or the expenses exceed the proceeds, then this insurance shall bear its pro rata share of such proportion of the expenses, or of the expenses in excess of the proceeds, as the case may be, as may reasonably be regarded as having been incurred in respect of the vessel, excluding all special compensation and expenses as referred to in Clause 8.5”.
^xi.See lines 152 to 157 of the American Institute Hull Clauses June 2, 1977 and which states “If claim for Total Loss is admitted under this Policy and sue and labor expenses have been reasonably incurred in excess of any proceeds realized  or value recovered, the amount payable under this Policy will be the proportion of such excess that the amount insured hereunder (without deduction  for loss or damage) bears to the Agreed Value or to the sound value of the Vessel at the time of the accident, whichever value was greater; provided  always that Underwriters’ liability for such expenses shall not exceed their proportionate part of the Agreed Value. The foregoing shall also apply to expenses reasonably incurred in salving or attempting to salve the Vessel and other property to the extent that such expenses shall be regarded as having been incurred in respect of the Vessel”.
^xii.See lines 218-223 of the American Institute Hull Clauses 2009 and which states “If claim for Total Loss is admitted under this Policy and sue and labor expenses have been reasonably incurred in excess of any proceeds realized or value recovered, the amount payable under this Policy will be the proportion of such excess that the amount insured hereunder (without deduction for loss or damage) bears to the Agreed Value or to the sound value of the Vessel at the time of the accident, whichever value was greater; provided always that Underwriters’ liability for such expenses shall not exceed their proportionate part of the Agreed Value. The foregoing shall also apply to expenses reasonably incurred in salving or attempting to salve the Vessel and other property to the extent that such expenses shall be regarded as having been incurred in respect of the Vessel”.
^xiii.See Page 139 of Marine Insurance Clauses, V^th edition where in the authors have commented that … leaves it for the average adjuster to investigate the facts of the particular case and make an equitable division (words in underline by us for emphasis)”.
^xiv.See Rule 9.28 of the London P&I Class 5, The Protection and Indemnity Rules 2021/2022.
^xv.See Rule 9.20 of the London P&I Class 5, The Protection and Indemnity Rules 2021/2022.