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Salvage & General Average – Security Issues


Jagan - May 31, 2019 - 0 comments

We had the opportunity to meet Ms Joanne Waterfall of Roose + Partners earlier this month in our hopefully annual visit to London to attend the Association of Average Adjusters AGM and Dinner. Her feature “Yantian Express – A plea for Cargo?” published in their newsletter1 of 08th May 2019 is a welcome read to understand some of the issues plaguing General Average (“GA”) in container shipping. This article focuses on the security issues associated with the cargo interests (which would also include the container interests owned by 3rd parties).

The purpose of this article is to highlight the issues faced in the container shipping as we see it. We are aware that there are more qualified people to comment on these issues and we would be happy to hear their comments and also publish their views. The views expressed here together with all errors are entirely ours. 

  1. Following a GA, Owners are entitled, under common law, to a lien on the cargo not only for the freight but also for the cargo’s share of GA. For container vessels, shipments are usually effected with the freight not being on risk i.e. freight is earned on loading irrespective of the cargo being delivered. Accordingly, security sought by Owners is for contribution from the cargo interests for the GA ( freight becomes merged with the cargo).
  2. The practice is for Owners to engage Average Adjusters to assist in the collection of securities from cargo interests consisting of GA Bonds (to be signed by the cargo owners) and GA Guarantees (to be signed by the cargo insurers). If the cargo is uninsured or the cargo insurer does not have a security rating justifying acceptance, a cash deposit would be sought in lieu. The issue here is that the security was sought when the vessel was at a port of refuge (in the case of Yantian Express, the security for both Salvage and GA was sought at Freeport, Bahamas). The Yantian Express continued to remain at Freeport for approximately 3 months due to failure of some cargo interests not providing adequate security for both GA and Salvage.
  3. Salvage:
    1. While Salvors are entitled to adequate security once the vessel is in a position of safety at a Port of Refuge, this is not the case for GA and which requires the vessel to complete its intended voyage. The question which then arises is whether Salvors can continue to hold the vessel indefinitely for security given that a majority of cargo interests and vessel interests may have provided adequate security. In this case, it is submitted that the Salvors are not entitled to hold lien on the secured vessel and cargo2. Instead, they must either consider
      1. maintaining the unsecured cargo in the port or place at which they first arrive after the completion of salvage operations until the receipt of satisfactory security3 or
      2. allow Owners to continue with the voyage subject to provision of temporary security (“bridging security”).

        If the Salvors do not consider either of these options, then the secured cargo interests could approach the relevant courts for assistance4 to ensure that the either the unsecured cargo is discharged allowing the vessel to continue with its voyage or allow their secured cargo to be discharged so that they can make alternative arrangements for completion of the intended voyage. While there would be imposition of costs for this exercise on the cargo interests, we believe that if they are insured under say Institute Cargo Clauses A (1/1/09), they would be entitled to recover these additional costs under Cl 12 – Forwarding charges5&6.
    2. What is adequate security?: If salvage services are provided basis LOF 2011, salvage security would then need to be provided in accordance with LSSAC 2011 cl 4. Cl 4.5 of LSSAC 2011 makes reference to security being acceptable either to the Contractors or resident in the United Kingdom and acceptable to the Council. Accordingly, there is a contractual provision that acceptable security would be in a form acceptable to the council7 (say ISU 1 or 2) and in the absence of agreement of the Contractors, would have to be provided by a resident in the United Kingdom. In this inter-connected world, particularly when banking channels and financial information is readily available, we believe that the requirement of UK security is restrictive and is detrimental to  cargo interests. Unless this clause is amended, cargo interests would be required to provide either security acceptable to the contractors (salvors) or of a resident in the UK and acceptable to the Council.
  4. With respect to GA, when are Owners entitled to security?
    1. If the cargo is meant to be discharged from the carrying vessel involved in GA in an intermediate port (say mother vessel / feeder vessel or termination of voyage due to the vessel being unable to continue with the voyage) then there is a termination of interests when discharged from the vessel. Accordingly, it is submitted that the time for provision of security would arise prior to the discharge of cargo from the vessel.  
    2. If the vessel continues to destination after the GA, Owners are only entitled to security prior to the vessel discharging the cargo.

      If English law applies to govern the contract of carriage, Section 668 of the Marine Insurance Act 1906 would apply and which deals with General Average.
    3. What security?
      1. GA Bond:
        • A GA Bond needs to be provided by the cargo owners and would probably respond if the GA Guarantee fails to respond as was suggested in The Lehmann Timber9. The actual fact is that it would be easier for the Owners to pursue the Cargo Insurers instead of Cargo Owners given the enormous number involved. In any event, Owners vet acceptance of GA Guarantees and therefore the chances of these securities failing would be extremly rare. Accordingly, we do agree with the comments made by Ms Joanna Waterfall made in her feature i.e. do away with the collection of GA Bonds when valid  GA Guarantee’s are provided. However, given the state of the present law, Owners are legally entitled to insist GA Bonds from Cargo Owners irrespective of whether they have received a GA Guarantee or not.
        • Wordings: Wordings which should be agreed should reflect what is provided in the relevant York Antwerp Rules incorporated in the contract of carriage to govern the adjustment of GA. In this regard, Rule G of YAR 1994, 2004 and 2016 do entitle Owners to “Non Separation Allowances”10. If the contract of carriage provides for the earlier editions of the York Antwerp Rules (1950, 1974 as amended in 1990 – however, this is unlikely given that the prevailing contract of carriages incorporate YAR 1994), then cargo interests could deny any such clauses allowing Owners to be entitled for Non Separation Allowances.
      2. GA Guarantee: If the cargo is insured, the Owners in addition to seeking a GA Bond, seek a GA Guarantee signed by the Cargo Insurers.
        • Adequacy: Unless there are specific provisions in the contract of carriage, Owners are only entitled to ensure that the security of cargo insurers is of good standing and should not impose any requirements that they should be resident in the UK (see 3 b above). Accordingly, it is submitted that submission of GA Guarantee of a suitably rated cargo insurer in the port of transshipment / discharge port prior to the discharge of cargo  would be valid security. Failure to accept such security by Owners would entitle Cargo interests to seek assistance from the courts as may be provided in the relevant jurisdiction3.
        • Wordings: As stated in 4 c i above
      3. Cash deposit: If the cargo is uninsured, Owners would seek a cash deposit in lieu of the GA Guarantee. 
        • Amount and form: Owners are only entitled to demand a cash deposit for the maximum amount for which the cargo interests would realistically be liable to contribute. If the Owners seek unreasonable amounts or  impose unreasonable terms as to the manner in which the deposit is held,  cargo interests could initiate proceedings either by
          • tendering a sum sufficient to meet the rightful demand with the onus being on them (cargo interests) to determine the amount (this is unlikely given that it would be difficult for the cargo interests to ascertain the sums sufficient)
            or
          • commence proceedings for delivery of the goods, and apply to the courts for an order for delivery of the goods upon paying the disputed sum into the court11.
        • Currency: Unless the contract of carriage provides for adjustment in a specific currency, adjusters have showed a preference for implying a currency of contract where there are reasonable grounds to do so, or adopting a currency of convenience12. Given that invariably freight is charged by Owners in USD, this has become the default currency for adjustments and therefore deposits could be reasonably sought on this currency. An argument can indeed be made that the deposits should be in the currency closest to the cargo interests i.e. in the currency in which they trade.
        • Place of deposit: As mentioned in 4a above, any deposit should  be provided to the Owners prior to the termination of the adventure i.e. prior to parting of interests with the Vessel. In actual fact, Adjusters seek payment of the cash deposits in their accounts at the location where they are based. This would result in cargo interests bearing additional costs both for the transmission of funds and in receiving funds (if there is a balance after contribution). Accordingly, we  submit that this practice is without any basis given that the place of deposit is frequently at a location which has no relevance to the ports where the vessel trades. However, the transmission costs for individual cargo interests would not be substantial to warrant attention on this point and therefore we are not considering this aspect further. 
  5. Counter-security:
    1. Are the cargo interests entitled to seek a counter-security? This question will generally arise if the Owners right to seek contribution could be defeated by their (Owners) actionable fault. On the occurrence of a casualty giving rise to a GA, Owners may control access and therefore other interests may not be sufficiently aware of their defences. By the time details are available to the cargo interests, they may loose their entitlement to pursue for recovery for their loss or damage due to the cargo claim being time barred13. Accordingly, it would be best practice to seek counter-security from Owners if cargo is damaged during the GA incident. 
    2. With respect to GA contribution, the wordings of securities (GA Bond and Guarantee) provided by cargo interests would generally include the words “… and which is payable …/ … which is properly due” and which preserves the right of the signatory to rely on actionable fault as a defence to a claim. However, these wordings do not entitle cargo interests to pursue for  loss of use of their funds when their security is in place.  Accordingly, seeking a counter-security from Owners could entitle cargo interests to recover these costs. 
  6. The Yantian Express: The Yantian Express remained in Freeport, Bahamas for approximately 3 months after termination of the salvage services due to failure of some cargo interests to provide both salvage and GA security.
    1. With respect to salvage security, as stated in 3 above, Salvors could hold the cargo pending receipt of valid security. However, this does not entitle salvors to hold secured cargoes indefinitely. The question would be the costs involved as stated in 3 a i & ii above and the party who would bear these costs.
    2. With respect to GA, as stated in 4 above, Owners are only entitled to security prior to arrival at the destination port or when the cargo is being discharged from the vessel. If the vessel is to continue with the voyage, failure to continue with the voyage promptly may entitle cargo interests to pursue Owners for their failure to complete the voyage with “due despatch”.  Container Carrier’s Bills of Lading Terms would generally incorporate terms entitling them to contractually exclude any loss arising due to delay (Clause 7(5) of the Hapag Lloyd Bills of Lading Terms). It is submitted that losses arising out of normal delay would fall within this clause. However, abnormal delays such as in the case of Yantian Express is  something else and it appears to us cargo interests may be entitled to pursue the carrier for damages arising from their failure to fulfill their obligations. We make this comment as this abnormal delay may have resulted in some of the cargo contracts being frustrated14.
    3. With respect to cargo losses arising out of normal delay, following The Longchamp, a decision of the UK Supreme Court, it is submitted that cargo interests are entitled to seek recovery of these losses in GA under Rule F of the York Antwerp Rules i.e. on “substituted basis” 15
    4. With respect to the vessel costs incurred during the waiting period, it is submitted that Owners are only entitled to reasonable costs and not extra-ordinary costs.  What is reasonable is a question of fact and on this basis, we would submit that costs incurred for say a week for collection of securities should fall for consideration under GA. With respect to the balance period, these costs would have to be borne by the Owners themselves. Given the amounts involved, it does make sense for Salvors and Owners to find a commercial solution say by agreeing to continue with the voyage to stem unnecessary costs after taking appropriate insurance and which could be included in the GA. 
    5. The other option is to consider a Bridging security and which has indeed been suggested by Ms Joanna Waterfall in her article. Our initial thoughts were that this was not workable given that the Owners / Carriers are doing business at freight rates (due to competition) which do not allow them the flexibility of adding additional  spends say for such securities. However, we have since changed our views given that the freight rates are of Owners / Operators own making and imposition of costs is certainly possible (imposition of say Sulphur Limits by the MARPOL Convention which enters into force from 01st Jan 2020 will add additional costs). Accordingly, Owners should be required to provide Bridging Security either contractually (cargo interests should make it a requirement to use their services) or under a suitable law / convention. We understand that that the Yantian Express finally sailed after receipt of Bridging security. Costs could certainly have been avoided if this option was actively pursued at the outset instead of the vessel being held up for 3 months or so. 
    6. GA is borne by property interests. However, if  property interests are able to deny Owners entitlement to GA on the basis of actionable fault, P&I cover is triggered to respond to the shortfalls. This may indeed be a “Potential Time Bomb” to the P&I Insurers16 & 17 given that they may have to revisit reserves arising from such issues. Accordingly, it is submitted that it is in the best interests Owners P&I Insurers to play a pro-active role to avoid GA becoming a liability issue.
    7. Our comments are made on the basis of information available in public domain. We are aware that theory and practice are often different in the container industry but this could be easily explained by the imbalance present when one party is stronger than the other. In this interconnected world where information is readily and easily available, there will always be resistance to any such impositions. In any event, GA is founded on equity and if it is not maintained during the complete process, it is submitted that the basis of GA is defeated. Hence, it is important that at least for GA, Owners should ensure that all parties are aware of developments and work together to resolve issues which may arise. 
  7. Conclusion:
    1. Following a Salvage, Salvors are entitled to reasonable security once the vessel is in a position of safety at the port of refuge.
    2. Similarly for a GA, Owners are entitled to reasonable security prior to the discharge of the cargo at either the transshipment port or the port of discharge (if the original vessel continues with the voyage). The security would consist of an Average Bond signed by the Cargo Owners and an Average Guarantee signed by the Cargo Insurers or Cash deposit in lieu. Unless the form and place of security is pre-agreed, Owners are only entitled to reasonable security at the place where the adventure terminates.
    3. Delay in continuing with the voyage due to failure of other Cargo Interests failing to submit adequate security may result in the secured Cargo Interests initiating action against both Salvors and Owners to protect their interests. While this may have not necessarily happene at the time security is sought, it could happen at a later stage once Cargo Interests become aware of their losses. It is therefore in the best interests of all parties to work together to ensure that the voyage continues without any unnecessary delay. 

 

  1. Roose & Partners publish a weekly casualty newsletter sent to their subscribers
  2. See Lloyd’s Standard Form of Salvage Agreement (“LSSAC”) 2011 Cl 4.8 which states “until security has been provided the property salved shall not without the consent in writing of the Contractors (which shall not be unreasonably withheld) be removed from the place to which has been taken by the Contractors under clause A. Where such consent is given by the Contractors on condition that they are provided with temporary security pending completion of the voyage the Contractors’ maritime lien on the property salved shall remain in force to the extent necessary to enable the Contractors to compel the provision of security in accordance with clause 4.5”.
  3. See Llloyd’s Open Form (“LOF”) 2000 cl A which states “Contractors’ basic obligations: The Contractors identified in Box 1 hereby agree to use their best endeavours to salve the property specified in Box 2 and to take the property to the place stated in Box 3 or to such other place as may be hereafter agreed. If no place is inserted in Box 3 and in the absence of any subsequent agreement as to the place where the property is to be taken the Contractors shall take the property to a place of safety”.
  4. This will obviously depend on whether the court approached to has jurisdiction similar to the English Courts as available under Senior Courts Act 1981 under S20(2)(j).
  5. Clause 12 of ICC 1/1/09 states “Where, as a result of the operation of a risk covered by this insurance, the insured transit is terminated at a port or place other than that to which the subject-matter insured is covered under this insurance, the Insurers will reimburse the Assured for any extra charges properly and reasonably incurred in unloading storing and forwarding the subject-matter insured to the destination to which it is insured. This Clause 12, which does not apply to general average or salvage charges, shall be subject to the exclusions contained in Clauses 4, 5, 6 and 7 above, and shall not include charges arising from the fault negligence insolvency or financial default of the Assured or their employees”.
  6. Delay is excluded under Clause 4.5 of Institute Cargo Clauses (A) and which states “loss damage or expense caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above)”. However, delay of 3 months such as in the case of Yantian Express should be considered as an abnormal delay. It is submitted that the delay exclusion only holds good for normal but not for unusual or abnormal delay as stated by the English Courts in Schloss Brothers v Stevens [1906] 2 KB 665 for an all risks Insurance and approved by the Court of Appeal.
  7. Council of Lloyd’s
  8. https://www.legislation.gov.uk/ukpga/Edw7/6/41/section/66
  9. Metall Market OOO v Vitorio Shipping Co Ltd (The Lehmann Timber) [2012] EWHC(Comm); [2012] 2 All E.R. (Com) 577 (Comm.Ct.); [2013] EWCA Civ 650; [2015]Q.B.760, CA
  10. Huth v Lamport (1885-86) 16 Q.B.D.442.
  11. See para 30.55 – Lowndes & Rudolf – XV edition
  12. See para 40.22 – Lowndes & Rudolf – XV edition.
  13. Invariably, the contract of carriage would provide for the compulsory or contractual application of The Hague or The Hague Visby Rules. Art III R 6 of these rules provide for one year time bar for cargo claims. 
  14. The example which comes to our mind is cargo meant for the Christmas Rush Sale arriving after the Christmas Sale or the shipments meant for a exhibition arriving after the exhibition has concluded.
  15. See Address by Lord Clarke at the Association of Average Adjusters Annual General Meeting held on 09th May 2019. 
  16. See UK P&I Club Rule 2 Section 19 which deals with – Unrecoverable general average contributions: 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. …
  17. See the recent case of CMA CGM Libra wherein some cargo interests were able to deny the Owners entitlement to General Average.  

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