General average, generally

( Disponible en anglais seulement )

13 janvier 2022 | James Manson

All hell broke loose aboard the container ship MV ZIM Kingston in late October last year as she made her way across the Pacific Ocean. The 40,300-tonne vessel lost several shipping containers overboard in heavy weather during her crossing from Busan, South Korea to Vancouver, Canada. A fire then broke out in the ship’s cargo stacks: initial reports suggested that the fire was first ignited in two containers stowed with potassium amyl xanthate, a spontaneously combustible substance used in the mining industry.

The fire was ultimately contained and the ship secured. Sadly, however, 109 shipping containers were ultimately lost as a result of the mayhem. In addition, other shipping containers suffered fire, heat, smoke and water damage as a result of the fire and fire suppression efforts.

Luckily, no one was injured; however, the episode led the ship’s owners to declare “general average” on November 1, 2021. Average adjusters have now been appointed, and interested parties are now required to comply with their various obligations as the process unfolds.

But, what is “general average” anyway? What is its purpose? What does the process involve? Who is an “interested party” and what obligations must they comply with? This article sheds some light on these questions.

General Average – What is it?

In its simplest terms, “general average” is a maritime principle concerned with sharing loss among parties interested in a given voyage on which the loss occurs. The principle is ancient, dating back all the way to Roman times and even earlier. The English expression “average” comes from the French word avarie, which means “damage” or “loss”. Thus, “general average” quite simply means “common loss”. It is distinguished from “particular average”, or loss suffered by an individual.

The basic purpose of general average is to compensate a party for loss deliberately incurred to save the voyage. Compensation is made by levying a proportionate contribution on all parties to the voyage. Still cited today, the old English case of Birkley v Presgrave 102 ER 86 (1801) sets out the principle as follows:

All loss which arises in consequence of extraordinary sacrifices made or expenses incurred for the preservation of the ship and cargo comes within general average, and must be borne proportionately by all who are interested.[1]

These days, general average in Canada continues to be recognized at common law; while its existence is recognized in section 65 of the federal Marine Insurance Act (S.C. 1993, c. 22), no attempt is made by that legislation to regulate its application. Thus, the operation of general average is largely regulated by the terms and conditions found in bills of lading and other contracts of carriage, which usually incorporate by reference an important set of rules known as the York-Antwerp Rules. These rules have been developed by consensus among the international maritime community over the years. While they do not have the force of law, the York-Antwerp Rules are widely recognized and followed all over the world.

Thus, general average exists and is well-understood. Moreover, the process is mandatory. Unless an interested party can show that a claim in general average does not meet the below requirements and is therefore ill-founded, that party cannot avoid making a contribution in general average if such a declaration is made by a shipowner.

Claims in General Average

General average claims must satisfy four distinguishing requirements, which are spelled out in s. 65 of the Marine Insurance Act, as well as in Rule A of the York-Antwerp Rules. First, there must be an extraordinary loss or sacrifice, which must be something that is not a usual incident of the voyage. Thus, the jettisoning of shipping containers into the ocean in order to make a ship lighter to raise it from a shoal would qualify as an extraordinary loss. Similarly, intentionally stranding a vessel to avoid an even larger peril would also qualify.

Expenses incurred on behalf of the common interest in a voyage are also admissible as part of a general average claim. For example, costs associated with fire suppression efforts, temporary repairs and salvage costs would qualify.

Second, a sacrifice made or expense incurred must be intentionally and reasonably made. Thus, for example, damage done by a fire (being accidental) would not qualify as part of the general average claim; however, damage caused by the intentional fire suppression efforts would qualify. Naturally, the “reasonableness” requirement has the potential to introduce significant uncertainly into the situation and generate litigation.

Third, generally a sacrifice made must be made for the purpose of preserving the vessel and property from imminent peril.

Finally, a sacrifice qualifies as general average only when it is made for the common safety of the voyage.

How General Average Claims Proceed

When a shipowner declares general average, it will then appoint a professional known as an “average adjuster” whose task is to compile a statement of adjustment. This process can be very complicated and time-consuming. Essentially, the adjuster must first determine the value of the loss to the cargo, ship and other equipment. Various cargo and other interests who suffer damage to their cargo or experience other losses must file claims and other documents (commercial invoices, bills of lading, etc.) demonstrating the value of their individual losses, which are then aggregated. This can take quite some time. Second, the adjuster must then determine the amounts of the contribution that the interested parties must make, in proportion to the value of their interest in the voyage. For example, a shipper whose cargo represents 90% of the value of a ship’s manifest will be called on to contribute a much larger share of a loss than a shipper who only ships one small container. The value of the ship itself must also be taken into account; hence, the shipowner’s contribution also stands to be significant. And so the process goes.

In order for the cargo to be released quickly and commerce to continue, average adjusters have developed a process where they will take security from an interested party, to be applied to the eventual amount of the contribution that will be paid by that party. Security can often be furnished in the form of a letter of guarantee from an insurer; however, where cargo is uninsured, monetary security must be provided in advance.

These days, average adjusters also maintain websites (similar to those maintained by bankruptcy trustees, for example) where parties can log in and find information about general average claims in which they are interested. Often the average adjuster will provide instructions and other information on those websites.

The Bottom Line

General average is an unhappy but necessary fact of life in the maritime shipping world. Luckily, it remains a rare event. When general average declarations do occur, however, interested parties may be uncertain how to protect their interests and recover their cargoes as quickly as they can. Naturally, a maritime lawyer can be of valuable assistance during such times.

If you have any questions about the ongoing ZIM Kingston general average declaration, or any other questions concerning maritime shipping, please reach out to a member of Miller Thomson’s Transportation & Logistics team.

[1] (1801), 102 E.R. 86 at 89.

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