The string of recent containership fires has once again shined a light on the merits of general average (GA), a complex principle of maritime law dating back to Ancient Greece.
When a shipping line declares GA, all cargo owners are required to proportionally share any financial losses resulting from lost or damaged cargo during a sea voyage.
It is well-documented that the practice originated from Rhodian merchants, who developed the law to share the risks of maritime shipping, such as when cargo had to be thrown overboard to save a vessel during a storm.
Present-day GA law requires individual shippers to put up security for their share of the loss, based on the proportion of cargo they own aboard per the GA terms or demonstrate adequate insurance cover.
In May, Hapag-Lloyd’s 7500-TEU Yantian Express declared GA after it suffered a fire en route to the Canadian port of Halifax. As with previous high-profile GA declarations, the process was criticised by some stakeholders who claimed long delays and a lack of information had discouraged many uninsured shippers from putting up the required security. Depending on the amount, there may be lengthy litigation to recover the GA from uninsured shippers.
These types of criticisms are not new. In the past, shipping lines have been accused of abusing the system and have been legally challenged in maritime courts, while others say the time and cost associated with it are out of proportion to the supposed benefits.
However, Matthew Wilmshurst, an associate with London-based law firm Holman Fenwick Willan, argued that GA works well most of the time.
“The general principle of an equitable sharing of expenses and sacrifices incurred to preserve the common maritime adventure is sound,” he explained.
“Where there are criticisms, they arise in the context of container vessels and relate to the time and expense of collecting GA security from every cargo interest; the time and expense of producing the adjustment of GA; and the time and expense in then collecting contributions.”
Wilmshurst also noted that while criticisms have been raised since vessels started getting increasingly larger in the 2000s, there would need to be a working alternative in place to abolish it.
Moves to abolish the General Average are have rumbled on for more than a century. At a Liverpool Underwriter’s Association in 1902, Wellington Williams presiding at the centenary meeting said,
“It is admitted on all hands that owing to the increase in the size of vessels and the great diversity of their cargoes there are many abuses in connection with General Average, and the enormous charges which are connected with Statements are out of all proportion to the amount involved”.
“Many suggestions have been made, but none have taken off,” said Wilmshurst, adding that abolishing GA in the context of container shipping would make dealing with the aftermath of incidents easier as there would be “less of a long tail”.
“Most of the suggested ways of replacing GA involve shippers of goods paying a small surcharge on every container shipped as a form of GA insurance. The implications of those solutions would be that all shippers pay slightly more for every shipment, but would not then have to pay for the larger GA contributions.”
On the other hand, Wilmshurst said there has actually been a decrease in the number of GA declarations arising from incidents that could have potentially resulted in GA.
“Container lines are increasingly looking to avoid the difficulties that declaring GA can pose, whether by entering into GA avoidance agreements with their alliance partners, Vessel Sharing Agreement partners and slot charters, or by having large GA deductibles in their Hull & Machinery (insurance) policies,” he explained.
The main challenge is in estimating the GA level to levy on shippers and the time and cost it takes insurers to identify the shippers and follow up for payment. This process has been exacerbated by larger ships, carrying cargo for thousands of shippers.