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General Average – Container Vessels


Jagan - October 11, 2019 - 0 comments

  1. One of the common topics in all most all shipping conferences is on “Container Fires”. In the seminar on “Resolving Disputes, Claims and other issues in Containerized Cargo Shipping, Multi-modal Transport, Logistics” conducted in late August this year at Mumbai, this was again a topic which was discussed. Participants noted with concern on the numerous General Averages being declared mostly due to fires1&2 arising in cargo holds. The majority of participants were from the other side of the fence (Shippers, Freight Forwarders, Logistics Service Providers, etc) and who were of the opinion that the costs incurred by the Owners should be borne by themselves and not shared i.e. by way of General Average. In this regard, one of the speakers did give an analogy to land and air transport where General Average does not exist. Instead, should anything untoward occur during carriage, the land / air transport operator would deal with the issues by themselves. Some of the participants failed to understand why the shipping industry should have a different practice. This article will discuss on the differences between the shipping and other modes of transport, the fire issue and also touch on a possible solution propounded by Peter Townsend when he was at Swiss Re in his presentation to IUMI 2012.
  2. Differences between Road, Air and Sea Transport:
    1. Road Transport: A major accident may result in severe damage to the Prime Mover / Trailer such that the further performance of the contract becomes physically impossible or something radically different from that contracted for. Accordingly, the contract would be frustrated such that the Road Transport Operator (“RTO”) would be entitled to terminate further carriage and instead ask the cargo interests, if the cargo is undamaged, to take delivery at the location where the accident occurred. However, it is not uncommon for RTO’s having a fleet to make alternative arrangements given that they have other assets in place and the possible impact to their commercial relationship should they decide to terminate the carriage. While General Average has not developed in road transport, we believe the developing law of unjust enrichment and restitution3 may allow a RTO, following a major accident arising without their fault, recover extra-ordinary expenses incurred for the benefit of cargo interests.
    2. Air Transport: A major accident would generally be catastrophic such that no cargo would survive further for transport. Accordingly, we have not considered this further.
    3. Sea Transport: In the case of Sea Transport, the volumes of cargo being transported in one bottom is certainly much more than the other modes of transport. Following a casualty resulting in serious damage to the ship resulting in repairs exceeding the value of ship and freight at risk, or if the time required for repairs would be inordinate and frustrate the adventure, Owners could abandon the voyage as the adventure is frustrated4. This is where General Average is of assistance in that if expenses are incurred for the common benefit, the party incurring the expenses would be entitled to recover from the parties who have benefited out of the exercise. The point we are trying to make is that if Owners are not eligible for contributions from other interests for the additional costs which they may incur (which they are not contractually bound to incur), they would obviously consider what is best for their interests and which may simply be to abandon the voyage.

      The other point we would wish to make is that other modes of transport have a higher content of redundancy management5 leading to reduced impact of any severe incidents. This may however change in the shipping industry as and when autonomous shipping6 becomes the norm.
  3. During the recently concluded International Maritime Claims Conference7 held at Dublin, one of the comments we heard  is that to avoid such General Averages, cargo interests could negotiate and incorporate clauses in their contracts providing for Owners to bear these extra-ordinary costs in full. While this is certainly possible, given the bargaining powers in the container liner industry, it is unlikely that Container Owners / Operators would ever agree to the imposition of such clauses. Instead, we believe that it would be best for cargo interests to seek a common standard requiring Owners to have a greater general average absorption clauses under the hull policy together with better and effective communication following the declaration of a general average8.
  4. Fire arising due to mis-declared cargo is a growing problem in the container industry. We believe that better risk management processes could certainly reduce the number of incidents. Some of these are:
    1. KYC’s: Most of the cargoes causing the fire (Calcium Hypochlorite, Dry batteries, Charcoal, etc) together with the locations from where they are manufactured / shipped are commonly known to the trade. Accordingly, it should be incumbent on Owners / Vessel Operators to ensure that the cargoes being loaded in these locations are as declared say by conducting random inspections / imposing fines / etc. While some mis-declared cargoes may indeed slip through, these measures (random inspections) would certainly reduce the number of incidents.
    2. Use of fire retardants: One of the speakers at IMCC 2019, Uwe-Peter Schieder9 , made a strong case for the use of Water / Foam instead of CO2 given that CO2 was not very effective in dealing with fires in enclosed spaces say inside a container. The other important suggestion was the use of monitoring devices to detect fire so as to deal with it at the onset.
  5. Is the present GA fit for purpose in the container Industry?
    1. Keith Jones10, in his closing remarks as chairman of IMCC on 26 Sep 2019 mentioned that “GA was not built for fire problem in container vessels with 30000 bills of lading – more of an industry problem”.Since then, we have had the opportunity to revisit his Chairman’s speech at the Association of Average Adjusters UK in 2013 where he stated
      In major container casualties where even multi-million US$ absorption covers are insufficient, the ship-owner will be forced to declare general average with the resultant security collections. Collecting salvage and general average security from so many interests is a major task, even with the World Wide Web and Excel spreadsheets, let alone formulating payments, damage done, sacrifices made, calculating contributory values and collections of contributions due etc. etc. In such cases it may take time for the general average adjustment to be issued and it has been questioned by some whether the process or application of general average is ‘fit for purpose’ in such circumstances in this day and age.
      Large scale security collections and the enforcement of contribution from cargo interests are not exactly new problems and over the years many underwriters have put together various general average contribution covers. The take up or interest from the container community, presently appears somewhat muted, short of owners increasing the absorption cover amounts in their own hull & machinery policies which as noted in major casualties are generally not sufficient.
      With such multi-interest cargoes the answers probably lie within the particular section of the shipping industry most affected i.e. the container market needs to resolve any perceived shortcomings as opposed to the York-Antwerp Rules being adapted to suit one section of the industry”.
    2. We were also advised by Keith Jones that Peter Townsend, whilst he was at Swiss Re, had suggested a GA and Salvage cover to be taken by the Freight Industry on the nominal values of the cargo to deal with any contribution for General Average / Salvage. In this regard, we chanced on the presentation made by Peter Townsend at IUMI in 2012 and which can be viewed at http://www.aimuedu.org/aimupapers/4JSSInsuranceDay2012.pdf (see page 44-46). This insurance cover would indeed simplify the aspects following a casualty. However, as we have not come across this product, it appears to us that this product received no take up. Perhaps, this may be an opportune time for the freight industry to re look at this or other alternative products, in combination with the requirement of Owners having a greater General Average Absorption Clause to deal with such incidents.
    3. Although we have no statistics, we submit that container shipping cargoes are of generally higher values and consist of finished products whereas cargoes carried in Bulk / Break Bulk vessels are used further in the manufacturing processes with lesser values (at least compared to the containerized cargo). Accordingly, delays in the completion of the voyage will have an impact on containerized cargo values. When the principles of general averages were formulated, container shipping did not exist. In our opinion, at issue are three specific rules of the York Antwerp Rules11 1994 and which are as follows:
      1. Rule C12 provides that parties suffering any losses due to delay would not be admitted in general average. Delay in bulk / break bulk cargo may not have a significant impact on the values. However, this is not the case in the case of containerized cargo and it would be inequitable if the voyage is delayed and benefits some interests and not all (say the container cargo interests)
      2. Rule G13 provides that Owners would be entitled to seek recovery of costs which would have been incurred in general average even if the cargo was discharged and forwarded to final destination i.e. non separation allowance. Once the sound containers have provided security and discharged and loaded on to other vessels to complete the voyage, there is a parting of interests such that the sound cargo should not contribute to any further costs incurred by the Owners. Containerized cargo is different from bulk cargo in that bulk cargo may be discharged whilst repairs are carried out on the vessel following which the cargo is reloaded to complete the voyage. We also understand that Shipping Lines generally load the sound containers on alternate vessels to complete the voyage without making a claim for the additional freight costs (which could be claimed on substituted basis under Rule F15).
      3. Rule XVII14 provides that cargo would contribute on the basis of the commercial invoice or if there being no commercial invoice, from the shipped value. As the values of cargo may reduce due to the delay caused by General Average, it would be inequitable for the cargo interests to contribute on the commercial invoice value particularly if any delays would result in any reduction in values (this clause was incorporated to simplify the process).
  6. Conclusion: It is perhaps time to consider alternative methods to deal with General Average / Salvage in container shipping  to ensure that trade continues without any disruptions by considering:
    1. insurance coverage’s by both Owners (greater general average absorption clause in the hull policy) and the freight industry (coverage’s as earlier propounded by Peter Townsend or other alternatives) which would kick in to deal with General Average and Salvage
    2. better risk management to deal with problematic / mis-declared cargoes
    3. better communication between the various parties i.e. Owners, Operators, Cargo Interests etc
    4. special clauses to deal with the adjustment of claim (say by creating a specific York Antwerp Rules for container shipping when it comes up for revision)

  1. See http://www.gard.no/web/updates/content/25186996/tackling-cargo-misdeclaration-a-first-line-of-defence-against-container-fires
  2. See http://www.gard.no/web/news/article?p_document_id=28440601
  3. See https://en.wikipedia.org/wiki/Unjust_enrichment
  4. See Para 00.43 sub para (1) of Lowndes and Rudolf, XV edition.
  5. https://en.wikipedia.org/wiki/Redundancy_(engineering)
  6. https://en.wikipedia.org/wiki/Autonomous_cargo_ship
  7. The inaugural International Marine Claims Conference was held in 2004 and is now annually held every Sep in Dublin, Ireland. Participants include Claims Handler, Adjusters, Marine Surveyors and Lawyers from all over the world who learn and share the issues relating to Hull and Machinery Claims (although P&I topics integral to marine casualties are also discussed).
  8. See “The Yantian Express – plea for cargo” to understand some of the issues plaguing General Average in container shipping.
  9. Uwe-Peter Schieder’s biography can be viewed at http://www.marineclaimsconference.com/speaker/uwe-peter-schieder/ . We also chanced upon an article written by him on “Fire – the ever-present risk on container ships” and which can be viewed at https://iumi.com/images/gillian/Links_under_various_committees_2015/FireHazardsOnContainerVesselsIUMIEyeLPCHomepageVersionFINAL.pdf
  10. Keith Jones biography can be viewed at http://www.marineclaimsconference.com/speaker/keith-jones/
  11. Invariably all of the Bills of Lading issued for cargo shipped in container vessels would provide for general averages to be adjusted based on various editions of York Antwerp Rules, the latest being of 2016.
  12. Rule C of the York Antwerp Rules 1994 states “Only such losses, damages or expenses which are the direct consequence of the general average act shall be allowed as general average.
    In no case shall there be any allowance in general average for losses, damages or expenses incurred in respect of damage to the environment or in consequence of the escape or release of pollutant substances from the property involved in the common maritime adventure.
    Demurrage, loss of market, and any loss or damage sustained or expense incurred by reason of delay, whether on the voyage or subsequently, and any indirect loss whatsoever, shall not be admitted as general average.”
  13. Rule G of the York Antwerp Rules 1994 states “General average shall be adjusted as regards both loss and contribution upon the basis of values at the time and place when and where the adventure ends.
    This rule shall not affect the determination of the place at which the average statement is to be made up.

    When a ship is at any port or place in circumstances which would give rise to an allowance in general average under the provisions of Rules X and XI, and the cargo or part thereof is forwarded to destination by other means, rights and liabilities in general average shall, subject to cargo interests being notified if practicable, remain as nearly as possible the same as they would have been in the absence of such forwarding, as if the adventure had continued in the original ship for so long as justifiable under the contract of affreightment and the applicable law.
    The proportion attaching to cargo of the allowances made in general average by reason of applying the third paragraph of this Rule shall not exceed the cost which would have been borne by the owners of cargo if the cargo had been forwarded at their expense.
  14. Rules XVII of York Antwerp Rules 1994 states “The contribution to a general average shall be made upon the actual net values of the property at the termination of the adventure except that 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 value of the ship shall be assessed without taking into account the beneficial or detrimental effect of any demise or time charterparty to which the ship may be committed.
    To these values shall be added the amount made good as general average for property sacrificed, if not already included, deduction being made from the freight and passage money at risk of such charges and crew’s wages as would not have been incurred in earning the freight had the ship and cargo been totally lost at the date of the general average act and have not been allowed as general average; deduction being also made from the value of the property of all extra charges incurred in respect thereof subsequently to the general average act, except such charges as are allowed in general average or fall upon the ship by virtue of an award for special compensation under Article 14 of the International Convention on Salvage, 1989 or under any other provision similar in substance.
    In the circumstances envisaged in the third paragraph of Rule G, the cargo and other property shall contribute on the basis of its value upon delivery at original destination unless sold or otherwise disposed of short of that destination, and the ship shall contribute upon its actual net value at the time of completion of discharge of cargo.
    Where cargo is sold short of destination, however, it shall contribute upon the actual net proceeds of sale, with the addition of any amount made good as general average.
    Mails, passenger’s luggage, personal effects and accompanied private motor vehicles shall not contribute in general average.
  15. Any additional expense incurred in place of another expense which would have been allowable as general average shall be deemed to be general average and so allowed without regard to the saving, if any, to other interests, but only up to the amount of the general average expense avoided.

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