A container ship suffers an engine room fire. Tugs are hired, the vessel is towed to a port of refuge, salvors are paid. Your containers are three bays away, untouched, in perfect condition. You will still get a letter demanding a deposit before they are released.
This is general average, and it is roughly three thousand years old. The principle is simple: when a sacrifice or an extraordinary expense is incurred to save the common maritime adventure, everyone whose property was saved contributes in proportion to the value of what they saved.
The logic behind it
A master facing a crisis must be able to act without calculating whose cargo to sacrifice. If jettisoning deck containers saves the ship, the owners of those containers should not bear the whole loss while everyone else walks away untouched. General average spreads it.
The modern rules are the York-Antwerp Rules, a private code rather than a treaty. Several versions are in circulation, and the bill of lading decides which applies to you. The 2016 version is the current one and is increasingly the default, but plenty of trades still contract on 1994 or 2004 wording, and the differences affect what expenses are allowable.
What happens in practice
- The shipowner declares general average and appoints an average adjuster, usually within days of the casualty.
- Cargo is not released until each cargo interest provides security. This is the part that catches people, and it applies whether or not your cargo was damaged.
- You provide security, normally a general average bond signed by you plus either a general average guarantee from your cargo insurer or a cash deposit. Salvage security is often demanded separately and at the same time.
- The adjustment is prepared. This takes a long time. Two to five years is normal, and complex casualties run longer.
- The final contribution is settled, and any cash deposit over-collected is returned, without much interest.
The number that matters
Security is demanded as a percentage of the CIF value of your cargo. Early figures are conservative because the adjuster does not yet know the final cost, so an initial demand of 10 to 50 percent of cargo value is not unusual, and it can be higher after a serious salvage operation.
If you are insured, this is administrative. Your insurer issues the guarantee, the cargo is released, and the eventual contribution is theirs to pay. If you are uninsured, you have to find the cash, and until you do, your goods sit in a terminal accruing storage.
This is the strongest argument for cargo insurance
Shippers who decline cargo insurance are usually thinking about the risk of their own goods being damaged, and concluding that the odds are low. General average is a different risk entirely. It is uncorrelated with anything you do, it attaches to cargo in perfect condition, and it can be a six figure demand on a routine shipment.
An ordinary marine cargo policy under Institute Cargo Clauses covers general average and salvage contributions. Note that even ICC (C), the narrowest cover, includes general average sacrifice and jettison, which tells you how fundamental this is to marine insurance.
What to do when it happens to you
- Tell your insurer or broker immediately. They deal with average adjusters routinely and you do not.
- Do not ignore the correspondence. The cargo stays where it is until security is posted, and demurrage runs.
- Do not pay a cash deposit if you can post a guarantee. A cash deposit ties up your money for years.
- Check what your bill of lading says about which York-Antwerp Rules apply and where the adjustment will be drawn up.
- Consider whether the carrier is actually entitled to declare. If the casualty was caused by the carrier's own actionable fault, cargo interests may have a defence, but this is a lawyer's question and it does not get your goods released any faster.
Salvage is a separate bill
General average and salvage are often demanded together and are frequently confused. Salvage is what is owed to the salvor for saving the property, usually under a Lloyd's Open Form. General average is the mechanism that shares that cost, and other costs, among the parties. You can face both, and both are covered by an ordinary cargo policy.
General guidance, not legal advice. General average is governed by the bill of lading terms, the applicable York-Antwerp Rules and the law of the place of adjustment.
