The tenth in a series of papers providing an overview of topical shipping issues, this briefing reviews the proposed 2016 Rules currently being negotiated.
General average has existed for many centuries, and is part of international maritime law. Based on equity, it is a mechanism which apportions losses and compensation to cargo and shipowner interests in a particular set of circumstances. A general average loss occurs if, faced with peril, the vessel’s Master voluntarily “sacrifices” either part or all of the cargo or ship for the common safety of the ship and all of the cargo on board – which he would not have ordinarily done to carry out the shipowner’s duties under the contract of affreightment. A classic example of a general average loss is where there is a fire on board, and in putting out the fire, the firefighting services cause damage to cargo or the ship.
The concept of general average was conceived to resolve the possible conflict between cargo interests between themselves, and the ship owner where, without general average, the Master would have to decide which interest should incur the loss in order to save the ship and other property involved in the “common maritime adventure”. Under general average, the Master can act in the “common interest”, and whoever has incurred that loss as a result of the Master’s act will be compensated by all the other parties to the adventure. It therefore enables the Master to act first to resolve the incident, and to leave any legal disputes until after the event.
In practice, if reapportioning claims under general average would be uneconomical due there being a number of insignificant claims of a low value, or it being a small general average loss, this is often dealt with by either the shipowner or by the hull insurer through an absorption clause in the hull policy.
In a set of less than 30 rules, the York-Antwerp Rules (hereafter referred to as the Rules) govern what is allowed in general average and how it is apportioned. They were developed as a result of commercial parties’ desires to have a broadly uniform set of rules on general average, rather than relying on national laws which vary greatly. However for them to apply, the Rules need to be incorporated into the contract of affreightment, typically through a general average clause – such as those seen in NYPE 93 or BPTIME3.
The Comité Maritime International (CMI) has been the custodian of the Rules since 1950. There are several versions of the Rules, the most recent being the 2004 Rules. However, the 1994 Rules are most widely used version for various reasons. In short, many of the advantages for shipowners present in the 1994 version were removed in the 2004 Rules at the 2004 CMI Conference. Despite the concerns expressed by ship owning interests, those advantages were removed at the behest of the International Union of Marine Insurers (IUMI) due the pressure to reduce the cost of general average to cargo insurers. The lack of consensus resulted in the 2004 Rules not being widely used.
More recent developments have led to the possible formation of 2016 Rules next year at the forthcoming CMI Conference in New York. The aim is to present a set of Rules which will expedite and reflect current adjusting practice, maintain the principle of equity for the “common interest” and tidy up the wording of the Rules for clarity. The CMI has been working with representatives of ship owning interests and underwriting interests (as they take on the liabilities of the cargo, and of shipowners via hull and machinery insurance) to come to a consensus on various aspects of the 2016 Rules.
There is a perception that general average cases sometimes take too long to resolve. This is often because the adjuster can find it difficult to collect security and information from all of the various interests involved in a particular incident. This is particularly felt in container ship casualties. The 2016 Rules propose to address this by clarifying the 12 month time limit where one can claim in general average. The ability to challenge an adjuster’s issued estimate for the values of those interests who have not met the 12 month limit in the first place will also be more limited. The adjuster will also need to be informed if claims against third parties related to the general average are being pursued separately, as well as the amounts eventually received.
The principle that salvage is allowable in the 1994 Rules has caused controversy. Under the 2004 Rules, salvage is excluded from general average. It was argued at the time that, if both the cargo and shipowner interests had separately negotiated awards payable to the salvors under contracts such as Lloyd’s Open Forum (LOF), it was unnecessary and costly to reassess those awards under the 1994 Rules – especially if the inclusion in general average resulted in no significant redistribution.
This exclusion of salvage was not accepted by shipowners, on the basis of equity and the common interest; if one of the parties exploits their advantage with salvors and achieves a more satisfactory result than the other interests, the gains should be shared and be allowed and reapportioned in general average. It also allows for reapportionment if, for any reason, the salved values at the time of the salvage operation are different to the values at destination which are adopted for general average – such as if there is a subsequent incident after the salvage operation but before reaching the destined port.
The proposed 2016 Rules state that salvage should be allowed in general average as a matter of principle, unless separate contracts have been used. However, within those contracts, if one or other of five situations occurs salvage will be readjusted in general average. In essence, the five conditions enable errors to be corrected and reflect the principle that salvage shall continue to be allowed in general average when reapportionment is warranted to maintain equity.
Commission and interest payments to interests who have suffered loss or incurred expenses allowed in general average are also under review. Under the 1994 Rules, as an incentive for the parties to fund general average expenses and to reward those providing the funds to pay out monies due under general average, commission at the rate of 2% is payable. Additionally, interests can accrue interest at the rate of 7% per year on the expenditure, sacrifices and allowances under general average. It is proposed in the 2016 Rules that, due to modern banking practices and the low interest rate environment, commission should no longer be payable. Also, to maintain flexibility it is also proposed that the interest rate should be set through a market based mechanism with a percentage uplift. Presently, ICE LIBOR + 4% has been proposed.
It is also proposed that wages and maintenance of crew and other expenses putting in to and at a port of refuge should remain allowable within general average, as in the case of the 1994 Rules. Other possible areas of reform include, but are not limited to:
• whether the allowance for costs of temporary repairs that have been effected as a result of accidental damage should be limited;
• dealing with the impact of The Trade Green (2001) decision in relation to port charges, to clarify which charges should be allowed in general average;
• enabling the adjuster, where appropriate, to disregard cargo contributing in general average where they are disproportionately low in value or number, in relation to the value of the overall general average claim;
• a new rule for how cash deposits should be treated when collected as part of the general average security;
• clarifying how some of the other provisions in the 1994 Rules operate whilst maintaining the general principle of equity for the common interest – with possible non-binding guidelines on subject areas such as the role of the adjuster.
The negotiations are set to continue on the possible new set of Rules, which will result if consensus is achieved on all the areas up for reform. It is envisaged that, if a 2016 set of Rules is adopted and incorporated into future contracts, administering general average should cost less and claims should be quicker to resolve – while maintaining its basis on equity.