What Is General Average?
General average is a long-standing principle in maritime law that requires all parties involved in a sea voyage to proportionally share losses and expenses incurred when part of the ship or its cargo is intentionally sacrificed to save the entire venture from imminent peril. This concept falls under the broader financial category of marine insurance and risk management within the shipping industry. The principle ensures that no single shipowner or cargo owner bears the full burden of a necessary sacrifice made for the common safety. When a general average event occurs, all stakeholders, including the ship and all cargo interests, are expected to contribute to the financial outlay.
History and Origin
The concept of general average has ancient roots, dating back to the Rhodian Sea Law (circa 800 BCE) and the Lex Rhodia of ancient Greece. This early legal framework established the principle that if goods were jettisoned from a vessel to lighten it and save the remaining property, the loss would be made good by the proportional assessment of all property that benefited from the sacrifice. The practice was formalized over centuries and gained significant traction in medieval European maritime codes. By the late 19th century, efforts were made to standardize general average practices globally. This led to the creation of the York-Antwerp Rules, first established in 1890, which have since been periodically revised to reflect modern shipping practices and facilitate international uniformity in its application.2, 3, 4, 5
Key Takeaways
- General average is a principle of maritime law requiring proportionate sharing of losses and expenses.
- It applies when extraordinary sacrifices or expenditures are intentionally and reasonably made for the common safety of a maritime venture.
- All property interests saved, including the ship and cargo, contribute to the general average fund.
- The calculation of each party's contribution is typically performed by a specialized average adjuster.
- Compliance with general average requirements is often a prerequisite for the release of cargo after an incident.
Formula and Calculation
The calculation for general average involves determining the total general average losses and expenses, and then apportioning these costs among all contributing interests based on their saved values.
The basic formula for a party's contribution is:
Where:
- Party's Saved Value represents the actual net value of the party's property (ship or cargo) at the termination of the common maritime adventure, after deducting any general average damage to that property.
- Total Contributory Value is the sum of the saved values of all participating interests (ship, freight, and cargo).
- Total General Average Losses includes all sacrifices and expenditures allowed under general average.
The process often involves complex evaluations by a general average adjustment firm.
Interpreting the General Average
When general average is declared, it signifies that a major incident occurred where the master of the vessel took deliberate action to save the ship, its crew, and the cargo. The declaration itself is a notice that all parties with an interest in the voyage will be expected to contribute financially to the costs incurred. The interpretation of general average centers on the principle of shared peril and shared benefit. If one party's goods were sacrificed for the greater good, or if extraordinary expenses were incurred to save the collective, then all who benefited from that action must bear a proportionate share of the cost. Understanding this reciprocal liability is crucial for anyone involved in international shipping, from the shipowner to the consignee of the cargo.
Hypothetical Example
Imagine a container ship, the "Ocean Voyager," carrying diverse cargo for multiple consignees, encounters a severe fire in its aft cargo hold during a transoceanic voyage. To prevent the fire from spreading and engulfing the entire vessel, the crew activates the ship's firefighting system, flooding the burning hold with water. This action successfully extinguishes the fire but destroys the containers within that hold.
The total value of the "Ocean Voyager" and its entire cargo at the start of the voyage was $150 million. The cargo in the flooded hold, valued at $5 million, is a total loss. Additionally, the expenses incurred for diverting to a port of refuge and the costs of the firefighting efforts amount to $2 million. The remaining saved value of the ship and the rest of the cargo is $145 million.
In this scenario, general average would be declared. The $5 million loss from the jettisoned cargo and the $2 million in expenses, totaling $7 million, represent the general average losses. All parties whose property was saved—the shipowner and the owners of the remaining $140 million worth of cargo—would contribute proportionally to this $7 million. For instance, if a particular cargo owner's goods were valued at $1 million (part of the saved $140 million), their contribution would be:
This ensures that the burden of the deliberate sacrifice for common safety is distributed equitably, rather than falling solely on the owner of the lost goods or the shipowner for the expenses.
Practical Applications
General average is routinely incorporated into contracts of carriage, such as the bill of lading, for virtually all international sea freight. It comes into play in various real-world scenarios where extraordinary measures are taken to preserve a maritime venture. Common situations leading to a general average declaration include:
- Jettisoning cargo overboard to refloat a grounded vessel or to enhance stability during severe weather.
- Costs associated with intentionally stranding a ship to prevent sinking.
- Expenses incurred fighting a fire onboard that threatens the entire ship and its contents.
- Salvage charges paid to third parties for assisting a vessel in distress.
- Expenses of putting into and departing from a port of refuge for necessary repairs due to a casualty.
A notable recent application occurred following the Baltimore Bridge collapse in March 2024, where the owners of the Dali cargo ship declared general average. This decision initiated a process where companies with goods aboard the vessel were expected to share in the significant financial losses associated with the incident, including salvage operations. Thi1s mechanism helps manage the inherent risk in global supply chain logistics.
Limitations and Criticisms
Despite its historical significance and continued use, general average faces several criticisms, primarily regarding its complexity, cost, and the potential for delays. Critics argue that the process of calculating and collecting general average contribution can be extremely time-consuming and expensive, particularly with modern container ships carrying thousands of individual shipments for various cargo owners. This leads to considerable delays in cargo release, as owners often must provide a guarantee or make a deposit before their goods are released.
Some criticisms of general average suggest that its original purpose, conceived before widespread marine insurance, is less relevant today. With comprehensive insurance coverage for both hull and cargo, some argue that losses could simply lie where they fall, to be absorbed by respective insurance policies, thereby streamlining the process and reducing administrative overhead. Moreover, issues surrounding transparency in cargo valuation and the potential for moral hazard have also been raised. While the York-Antwerp Rules aim to standardize the process, variations in interpretation and local legal nuances can still add to its complexity and lead to disputes.
General Average vs. Salvage
While both general average and salvage are concepts within maritime law related to saving a vessel and its cargo from peril, they differ fundamentally. Salvage refers to the voluntary service rendered by a third party to save maritime property from danger at sea. A salvage award is typically granted to the salvor for their efforts, and it is based on factors such as the value of the property saved, the skill and efforts of the salvor, and the degree of danger involved. Salvage remuneration is paid by the owners of the property saved.
General average, on the other hand, involves a deliberate sacrifice or extraordinary expenditure made by one of the parties to the maritime venture (usually the shipowner or master) for the common safety of the entire adventure. The key distinction is the voluntary, non-contractual nature of salvage by an outside party versus the intentional sacrifice or expense made by an involved party for the collective good in general average. While salvage charges can be part of the expenses included in a general average claim, general average itself is a principle of shared contribution among all benefiting interests, not a reward for an external service.
FAQs
What types of incidents trigger general average?
General average is typically declared for extraordinary incidents where a voluntary sacrifice or expenditure is made to save the ship and its cargo from a common peril. Common examples include putting out a shipboard fire, jettisoning cargo to refloat a grounded vessel, or incurring expenses to enter a port of refuge for emergency repairs.
How do I know if my cargo is subject to general average?
If your cargo is on a vessel that has declared general average, the shipowner or their agents will notify you or your freight forwarder. To secure the release of your cargo, you will likely need to provide a general average bond or cash deposit, often facilitated by your marine insurance provider.
Does my cargo insurance cover general average?
Most standard marine insurance policies, particularly "All Risks" clauses, typically include coverage for general average contribution. It is crucial to review your specific policy to understand the extent of your coverage and the process for submitting a claim in such an event.