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General Average: Principles and Applications in Maritime Transport
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Common Average: A maritime institution that has been relevant for millennia.
This ancestral institution was born in antiquity at the same time as maritime law but has continued to exist until today and remains an expression of human solidarity in the face of the risks of the sea.
Strongly criticized by some, especially for the high level of decision-making freedom it grants to shipowners, it remains relevant for all stakeholders in maritime shipping.
The recent major events that have affected the maritime world in recent years, such as the Ever Given in 2021 or the MV Dali at the port of Baltimore in 2024, are concrete examples of this.
What is the General Average?
General average is an institution in maritime law according to which shipowners and cargo owners must proportionally share the costs related to the rescue of the cargo and the ship When the latter is facing imminent danger. This decision is unilaterally taken by the shipowner and is de facto binding on all participants in the expedition. The costs and losses incurred in saving the expedition are shared among all parties involved (shipowners, owners of the goods, etc.).
When the latter is facing imminent danger. This decision is unilaterally taken by the shipowner and is de facto binding on all participants in the expedition. The costs and losses incurred in saving the expedition are shared among all parties involved (shipowners, owners of the goods, etc.).
In March 2021, the Ever Given, a 400-meter-long container ship, became stuck in the Suez Canal for reasons still under debate in Egyptian courts (weather? crew negligence? excessive speed?). Global traffic was interrupted for a week. In order to cover the costs related to the assistance and rescue operations, general average was declared by the shipowner.
When the latter is facing imminent danger. This decision is unilaterally taken by the shipowner and is de facto binding on all participants in the expedition. The costs and losses incurred in saving the expedition are shared among all parties involved (shipowners, owners of the goods, etc.).
To prevent all difficulties at sea from being considered a general average, there is of course an international regulation, the York and Antwerp Rules, which set out the cumulative conditions that the shipowner must justify in order to consider an event as a general average:
Voluntary act
The act must be intentional, meaning that the captain or crew deliberately decides to take an action that results in a loss or expense. Example: Throwing part of the cargo overboard to lighten the ship during a storm.
Common danger
The ship, the cargo, and the crew must be exposed to a common and imminent danger. Example: Fire on board, storm threatening to capsize the ship.
Success of the operation
The action must contribute to the rescue of endangered assets.
What is happening in practice?
When a shipping company declares a general average for one of its shipments, it sends a notification to all cargo interests which will include a description of the incident and a request for a guarantee to release the cargo. Under general average, the shipowner has a lien on the cargo, meaning they can retain the goods until a guarantee is obtained.
To manage the entire procedure, a general adjuster will also be appointed by the shipowner. Their role is to determine, calculate, and allocate expenses related to general average. In practice, they are responsible for collecting all guarantees from shippers, corresponding to a percentage of the value of the cargo.
How is the merchandise released?
At the declaration of general average, the general average adjuster will request from each shipper a promedio de bonos This is a commitment to pay the contribution when the general average settlement is definitively established. It also allows the dispatcher to obtain the contact information of the cargo owner.
The second element required by the dispatcher to be able to release the goods is a financial guarantee. In this context, 2 scenarios may apply:
- Your merchandise is not insured. A cash deposit will be required as a guarantee corresponding to a percentage of the value of your cargo. This can represent significant amounts.
- Your merchandise is insured. An average guarantee can be filled out and signed by your insurer, and the procedure for general average is then delegated to the insurers.
Subsequently, the general adjuster will then calculate the exact costs related to the general average and distribute the contributions between the parties. This is a complex and very lengthy procedure, often taking several years, as there are a multitude of cargo interests on container ships.
Once the analysis is completed, the general adjuster will establish a detailed report mentioning the amount of the mandatory contribution due from each shipper.
What is the purpose of an insurance policy?
Optional insurance policy In addition to covering your potential damage or loss of goods, it will also allow you, upon receipt of the notification of general average, to delegate the management to your insurers who will provide financial guarantee allowing the release of the goods and who will also settle the final contribution. It is also important to note that this general average coverage is granted within the framework of All Risks coverage but also with limited risks (FAP Except).
However, it should be noted that the guarantee of contribution to general average is not acquired if it results from an event that is expressly excluded by All Risks or FAP coverages, such as war risks.
The importance of also subscribing to war risk insurance to be covered in the event of a general average procedure whose origin is classified as a war risk such as a terrorist attack. Recent geopolitical events in the maritime world demonstrate the importance of War Risk coverage.
Similarly, your insurer and your broker can also assist and advise you in all the administrative and legal steps that can sometimes be very complex.
Contrary to popular belief, Common damages are not so rare. and can lead to significant financial consequences for shippers. In the event of a declaration of general average, companies are often faced with substantial, sometimes unforeseen, contributions that can weigh heavily on their cash flow.
and can lead to significant financial consequences for shippers. In the event of a declaration of general average, companies are often faced with substantial, sometimes unforeseen, contributions that can weigh heavily on their cash flow.
Subscribing to optional insurance coverage not only protects your goods but also ensures the sustainability of your business in the face of unforeseeable events. Howden supports you in proactively managing these risks, so you can navigate calmly in a complex maritime environment.
and can lead to significant financial consequences for shippers. In the event of a declaration of general average, companies are often faced with substantial, sometimes unforeseen, contributions that can weigh heavily on their cash flow.
