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Salvage & General Average – Uninsured Cargo Interests

Jagan - March 31, 2018 - 11 comments

The past few weeks have been full of news on the fire in Maersk Honam. This casualty resulted in loss of 5 lives and our sympathies are with the bereaved families. Owners of Maersk Honam have declared General Average (the vessel appears to be loaded with 7860 containers with various cargoes including dangerous cargo) and is underway to Jebel Ali. We understand that some of the cargo interests are uninsured. In such casualties, insured cargo interests are able to deal with both Salvage and General Average expeditiously as they would be assisted by their insurers. However, uninsured cargo interests generally face difficulties as they would not only have to make various arrangements but also provide securities as may be demanded for Salvage and General Average. This article will focus on the steps an uninsured cargo interest should take following a Salvage and GA declaration.

  1. Salvage: When a ship is distress, she will seek assistance from others to deal with the danger. Salvage firms have assets at various locations and are able to render assistance to Owners at short notice. The provision of salvage services can either be on the basis of Lloyds Open Form (“LOF”) or on contractual terms i.e. a daily rate for a fixed period of time or lump sum basis. If salvage is provided on LOF terms, the salvors are entitled to a reward based on various factors including the value of the property saved (as provided in the London Salvage Convention 1989). After the vessel is towed to a position of safety i.e. a port of refuge, salvors will hand back the property saved subject to being provided adequate security to secure their salvage reward. Subsequently, the matter will be arbitrated at Lloyds where a specialized tribunal would award with the reward due to the Salvors. In the case of Maersk Honam, salvors (Smit and Ardent) are providing salvage services under a LOF and would  require security from the various property interests saved including the cargo interests (both insured and uninsured).
  2. The parties contributing in a General Average are those benefiting from the sacrifice / expenditure (Hull, Equipment such as containers, Bunkers / Fuel on board and Cargo). Parties involved in the adventure must first ascertain if their properties are affected by the incident prior to providing any security. If it is ascertained that the property (say cargo) has become a total loss, then there is nothing to provide security for (Richards Hogg Lindley have listed in their casualty website the list of containers in hold 1-3 which are believed to be a Total Loss due to the fire / heat damage).
  3. With respect to uninsured property (equipment such as containers owned and operated by a third party (not the Owners) and cargo), the property interests would have to either provide acceptable security (by way of an average bond signed by the Owners of the property together with an average guarantee from the insurers of the property acceptable to Owners of Maersk Honam or a cash deposit in lieu of the average guarantee). The amount of cash deposit will be a percentage of the sound C&F value of the property and upon request, the adjusters would be able to advise the percentage of the value of the cargo required for the cash deposit. As and when the acceptable security is provided, cargo interests would then be entitled to take delivery of their cargo. If an uninsured cargo interests fails to provide acceptable security, then the cargoes may be auctioned to recover the residual value of the cargo (Any such forced sale would realize lesser values and which will in turn affect the owners of the cargo). Additionally, the uninsured cargo interests may be liable, subject to their contractual terms, to their contractual carriers for all costs and consequences arising from their failure to provide acceptable security. With respect to Maersk Honam, we understand that the containers on board are mainly of Maersk Line (includes Hamburg Sud) and MSC.
  4. We have checked the Bills of Lading terms and conditions of Maersk Line and MSC and note that they both provide for General Average to be adjusted on the basis of York Antwerp Rules 1994. As mentioned in 3 above, the uninsured cargo interests will be asked to provide a cash deposit which will be for salvage and in lieu of the average guarantee. The general practice is for the cash deposits to be held by the adjuster in an interest earning account till such time the liability for general average and salvage is determined (Rule XXII of York Antwerp Rules 1994). Once the liability is determined, the adjuster will use the deposits held to pay the relevant parties and refund the excess if any.
  5. Rule D of the York Antwerp Rules 1994 states “Rights to contribution in general average shall not be affected, though the event which gave rise to the sacrifice or expenditure may 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”. Accordingly, a cargo owner could deny an Owners claim for contribution on the basis of their (Owners) actionable fault (for instance – did the Owners exercise due diligence to make the vessel seaworthy at the beginning of the voyage and whether that particular unseaworthiness was causative in the chain of events leading to General Average)1. It would therefore be preferable for the uninsured cargo interests to be represented by a firm dealing with such issues to assist them to consider possible defence to the contributions sought. In this regard, uninsured cargo interests should reach out to cargo recovery agents or maritime lawyers to assist them.
  6. Rule XXI of York Antwerp Rules 1994 states “Interest shall be allowed on expenditure, sacrifices and allowances in general average at the rate of 7 per cent. per annum, until three months after the date of issue of the general average adjustment, due allowance being made for any payment on account by the contributory interests or from the general average deposit fund.”
    1. It is submitted that the uninsured cargo interests should request for their deposits to be used as payment on accounts for the common expenditures so that they are entitled to interests at 7% per annum instead of the interest earned by depositing it in a fixed deposit account by the adjuster (our web search reveals that a USD fixed deposit in London will earn approx. 2% per annum).
    2. Failure to agree to such a request would be inequitable given that the uninsured cargo interests are out of pocket from the time they have provided the cash deposit. We however admit that in a casualty with thousands of interests, adjusters may face difficulty in dealing with such requests, but this is not unsurmountable.
    3. The other point to be considered is what happens if the entitlement to General Average contribution is later denied due to the actionable fault of the Owners? In order to avoid such an eventuality, the uninsured cargo interests should seek an agreement with Owners providing for the refund of the cash deposits with interests (as may be provided in a fixed deposit) immediately once it is ascertained that they have no entitlement to any contributions due from them.
    4. If the cash deposit provided by the uninsured cargo interests is not a substantial sum, then obviously it would not make sense to consider this aspect given that there would be costs incurred in pursuing this course of action. However, given that there would be many uninsured cargo interests, and if they are able to work together, the sums involved may indeed be substantial. The problem is that there may not be sufficient time to reach an agreement on this aspect and perhaps this could be considered for inclusion in future editions of the York Antwerp Rules. 
  7. Even if the cargo interest are insured, some of them may face issues over provision of security from their cargo insurers i.e. the cargo insurers may be reluctant to provide security and / or the adjusters do not accept the security provided by the cargo insurers as they are not “acceptable” security. In such instances, cargo interests must act as if they are uninsured and provide acceptable security for both Salvage and General Average as mentioned in 3 above. Subsequently, once the contributions due are determined and paid, the cargo interests should submit their claim to their cargo Insurers for reimbursement.
  8. The advantage of a cargo interest being insured is that the cargo insurers facilitate the provision of acceptable security and deal with any eventual award for salvage / contribution due for both Salvage and General Average. The uninsured cargo interests should consider whether it would be preferable to continue to remain uninsured in the future or instead be insured so as to avoid issues arising from similar similar incidents.
  9. In conclusion, uninsured cargo interests should
    1. Provide an Average Bond and make payment of a cash deposit to be used as security for both Salvage and General Average
    2. Request the Adjusters to use the cash deposits to be used as payment on accounts so that they may earn interests at 7% as provided in Rule XXI of the York Antwerp Rules 1994.
    3. Seek an agreement with the Owners that should the Owners entitlement for General Average be denied, then they would refund the uninsured cargo interests funds being used as payment of accounts immediately.
    4. Engage recovery agents / marine lawyers to represent their interests to deal with any possible defences / recovery for both the Salvage and General Average.

1.  See MT Cape Bonny where the English High Court denied Owners entitlement to General Average Contribution from the cargo interests given that there was actionable fault of the Owners.

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  1. Paulo Silvano

    Dear Jagannath, good day!

    Many thanks for the superb article and the relevants contents disclosed thereon. Meantime Take the opportunity to ask you which circunstances the terms “no cure no pay” may be enclosed in such salvage operations. Second, its worth the uninsured stakeholders cargoes in the GA enter in court against Owners/carriers, what are the cost bennefits of such decisions?

    Thanks in advance for the response.

    Paulo Silvano
    55 27 99664 8310

    • admin

      Thank you for your comments.
      Salvage by definition is without contract. The terminology of “no cure no pay” simply means if that there is no saving of property, the property owners will not be liable for any reward to the Salvors. However, the London Salvage Convention has made some changes for pollution / damage to the environment claims (Art 14 reward) and which is due from Owners. In so far as the cargo interests is concerned, they would have no liability to pay on this aspect (pollution claims). In general, Salvage is provided on LOF Terms and which is no cure no pay. Sometimes, Salvors are reluctant to enter into a LOF salvage as the chances of saving of property is relatively slim and in which case, they would prefer to do it on the basis of contract.
      With respect to the uninsured stakeholders, it would be difficult to answer unless we have knowledge of the value of security to be provided. Given that the uninsured stakeholders are fragmented, there would be administrative costs incurred for pursuit of each of their claims and which may make this exercise unwieldy. Accordingly, we had suggested that it would make sense for them to work together so that these costs could hopefully be shared pro-rata or on other equitable basis. Trust this assists.

  2. Hariesh Manaadiar

    Mr.Jagannath, very useful and great read.. Just today I wrote about insurance being a grudge purchase ( in my article about why cargo should be insurred.. I will share your article as well..

  3. Kapil Dev Bahl

    Dear Jagannath
    Very informative and excellently written
    York Antwerp Rules were made pursuant to which Act, ie the authority to make rules were derived on what basis

    • admin

      Dear Capt Bahl,
      Thank you for your kind words.
      Some countries have included the York Antwerp Rules into their domestic legislation but barring these, the York Antwerp Rules are contractually incorporated into the contract of carriage (Charterparties / Bills of Lading).
      Trust this assists.

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