- During one of the webinars we attended, the case of The CMA CGM Libra was discussed and in which participants raised queries on who would bear the shortfall in the General Average (“GA”) kitty should one of the cargo interests successfully deny owners entitlement to seek contributions. Briefly, in The CMA CGM Librai, the English Supreme Court decided that there was actionable fault on the part of the Owners such that the cargo interestsii were entitled to deny any contributions sought for GA”. This article will touch on Rule D defence and consider who will be responsible to bear the unrecovered contributions.
- GA exists even if it arises due to an actionable fault of one of the parties to the adventure. This would mean that parties would still be required to contribute to the sacrifice or expenditure incurred. However, this right is subject to an important exception that the party whose actionable fault caused the GA is not entitled to recover from the other parties. The justification for this exception is to avoid circuity of action and that a person should not be entitled to recover for the consequences of his own wrong.
- Actionable fault exists when the person has no defences to the fault committed. If the Hague Visby Rules applies to the contract of carriage (as it invariably does), the Carrier must fulfil Art III R 1iii in order to be entitled to avail of the exceptions under Art IV R 2 (a-q). Failure to fulfil the provisions of Art III R 1 say by not “exercising due diligence to make the vessel seaworthy” and which is causative of the loss is considered to be an “actionable” fault. In simple language, actionable fault is fault which is not excusable under the contract, law or otherwise.
- This right to deny contributions is also provided in Rule D of the York Antwerp Rules 1994 and which states “Rights to contribution in general average shall not be affected, though the event which gave rise to the sacrifice or expenditure may not have been due to the fault of one of the parties to the adventure, but this shall not prejudice any remedies or defences which may be open against or to that party in respect of such fault.” The object of this Rule, as stated in Lowndes & Rudolf – XV edition, is to keep all questions of alleged fault outside the average adjustment and to preserve the legal position at the stage of enforcement. Cargo interests would therefore be entitled to deny any GA contributions sought by Owners on the basis that the GA arose out of an actionable fault of the Owners (and which was the case in CMA CGM Libra).
- The question then is, if cargo interests are entitled to deny, then who will bear this unrecovered portion?
- The parties to the adventure are all property interests together with freight, if at risk. GA is indeed covered under a Owners Hull policyv subject to provisions of the contractvi. Accordingly, the H&M Insurers would contribute to the value of the Hull, the fittings and Bunkersiv on board (if specifically insured). Invariably, Hull Insurance is effected on time basis and if the policy provides for English Law as the law of the contract, the UK Marine Insurance Act 1906 (“MIA 1906”) would apply. S39(5)vii of the MIA 1906 entitles Insurers to deny cover if they could prove that the Insured was aware that the vessel was unseaworthy and that this unseaworthiness was causative of the loss. However, this would indeed be very difficult compared to breach of actionable fault such that it is very rare for Hull Insurers to deny making any payments for GA contributions due under the Hull policy. While nothing has been reported on this aspect, we believe that in the CMA CGM Libra case, the Hull Insurers would have paid their portion of GA contributions as adjusted by the Average Adjusters.
- The Protection & Indemnity (“P&I”) Cover provided to Owners provides cover to Owners for the contributionsviii unrecoverable solely by reason of the Owners breach of the contract of carriage i.e. actionable fault. Accordingly, if cargo interests are able to deny Owners entitlement to recover contributions on the basis of “actionable fault”, then the P&I policy would be triggered to respond to the shortfalls. Even if the Owners or thier P&I Insurers were aware that they may have breached the contract of carriage (“actionable” fault), they would still have to go through the motions and declare a GA, collect security and seek contributions when the adjustment is published. A cargo interest who successfuly in denies Owners entitlement to collect contributions, would trigger the Owners P&I policy to respond to the shortfalls. Accordingly, in the CMA CGM Libra matter, we believe that the Owners P&I Insurers would have responded to deal with the shortfall in collections arising out of the successful denial by the 1.5% of the cargo interests.
- Cargo interests who have paid General Average: The question which naturally flows is would the cargo interests who have paid their contributions be entitled to seek a refund given that there was an actionable fault on the part of Owners. Our view is that payment of the GA contributions by the balance 98.5% of the cargo interests would be considered as “acceptance” of the Owners entitlement to recover contributions such that it would be later difficult to challenge the same. While there may be potential to argue that the payment was made under a mistake or due to mis-representation, given the pace of justice in such mattersix, the claim would be time barred.
- Our further thoughts:
- GA, as we understand, is a principle of equity, in which all parties involved in a maritime adventure (Ship, Cargo and Freight) share losses arising from a voluntary and successful sacrifice (ship or cargo) to save the whole adventure from an impending peril, or incur extraordinary expenses for the joint benefit. This being the case, we submit that it is incumbent on the parties to the adventure, including Owners, to voluntarily share information so that they (parties) can properly ascertain as to whether a GA situation exists together with any defences. The Owners remain in a stronger position to consider the circumstances of the incident and therefore should voluntarily provide the same to the parties to the adventure. However, this is rarely, if ever, done. Accordingly, the present adversarial system of dealing with GA claims goes against the principle of equity and therefore the process needs to be re-looked to ensure fair-play.
- Cargo interests should deal with GA on a pro-active basis so as to preserve evidence and consider whether they should seek counter-security from Owners should they believe that they have a defence to GA. While this would mean that there would be front-loading of costs, at least the cargo interests would have taken a proper informed decision on whether they wish to accept the GA contributions sought or contest the same.
- Given that any successful denial of GA contributions due to actionable fault would trigger the P&I policy, it would be appropriate for the P&I policy to also deal with any potential claim for damagesx sought by the cargo interests.
i. See https://www.bailii.org/ew/cases/EWCA/Civ/2020/293.html
ii. About 98.5% of the cargo interests appear to have paid the GA contributions sought by the Owners. The action was initiated by the balance 1.5% who succeeded in denying Owner’s entitlement. See article by Clyde & Co and which can be viewed at https://www.clydeco.com/en/insights/2021/11/supreme-court-decision-on-the-cma-cgm-libra-ga-def
iii. The carrier shall be bound before and at the beginning of the voyage to exercise due diligence to:
(a) Make the ship seaworthy;
(b) Properly man, equip and supply the ship;
(c) Make the holds, refrigerating and cool chambers, and all other parts of the ship in which goods are carried, fit and safe for their reception, carriage and preservation.
iv. If the vessel is on a Time Charter, Bunkers would be the property of the Charterers and who would contribute basis the value of the Bunkers at the end of the adventure together with any sacrifices during the GA.
v. See 11 of ITCH 1/10/83 and which is titled “General Average and Salvage”.
vi. The English policies are on named perils basis as (for instance Clause 6 of ITCH 1/10/83) with exclusions (Cl 23,24,25 & 26 of ITCH 1/10/83) overriding any positive cover provided under the policy.
vii. In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.
viii. See Section 19 of UK P and I Rule book which deals with Unrecoverable General Average Contributions and which states “The proportion of general average, special charges or salvage which an Owner may be entitled to claim from cargo or from some other party to the marine adventure and which is not legally recoverable solely by reason of a breach of the contract of carriage…”.
ix. The CMA CGM Libra grounding incident occurred in 2011 and the decision of the English Supreme Court was provided in 2021 i.e. nearly after 10 years. The English Limitation Act 1980 provides time of 6 years from the date on which the cause of action accrued.
x. We submit that cargo interests should be entitled to pursue for the loss of use of the security provided if Owners were indeed aware that the GA arose from an actionable fault.