General Average

The idea

General average is one of the oldest principles of maritime law, traced back to the sea custom of ancient Rhodes. When a sacrifice is deliberately made, or an extraordinary expense incurred, to save a ship and its cargo from a common peril, everyone who benefits shares the loss. The shipowner and every cargo owner contribute in proportion to the value of their interest.

The reasoning is fairness. If one owner's cargo is thrown overboard so that the ship and all the other cargo survive, it would be unjust for that owner alone to carry the loss. Jettison, deliberately throwing cargo overboard to save a ship in danger, is the classic general average sacrifice.

What counts as a general average act

Four things must be present. The sacrifice or expenditure must be voluntary and intentional. It must be made in a time of common peril. It must be for the common safety of the ship and cargo. And it must be reasonable in the circumstances.

Accidental damage is not general average. Cargo damaged by an accident of the voyage, with no deliberate act for the common safety, is particular average: damage to one party's property, borne by that party alone and claimed under that party's own insurance. General average involves all the parties; particular average affects only one.

The law and the rules of adjustment

In India, section 66 of the Marine Insurance Act, 1963 defines a general average act and a general average loss for insurance purposes, and sets out when the insurer is liable for it. The contribution between ship and cargo is a different matter: it is settled under the contract of carriage and maritime law.

The contract of carriage usually adopts the York-Antwerp Rules, the internationally used rules for adjusting general average. They apply because bills of lading and charterparties incorporate them, in whichever version the contract names. An average adjuster works out each party's contribution.

Getting the cargo released

Once general average is declared, cargo is not released at destination until the contribution is secured, even if that cargo arrived undamaged. A cargo owner without insurance must sign a general average bond and pay a cash deposit, set by the average adjuster as a percentage of the cargo's value. The deposit is held until the adjustment is finalised, which for a complex casualty can take years.

An insured cargo owner is in a different position. The cargo insurer issues a general average guarantee to the shipowner or adjuster, guaranteeing payment of the insured's proportional contribution, and the cargo is released without the insured paying a cash deposit.

How cargo insurance responds

General average is covered under all three Institute Cargo Clauses, (A), (B) and (C). It is one of the universal covers in marine cargo insurance, so even the most basic clause responds to a general average contribution.

Rules at a glance

Key points

• General average shares a deliberate sacrifice or extraordinary expense among the ship and all cargo interests in proportion to value.
• A general average act must be voluntary and intentional, made in common peril, for the common safety, and reasonable.
• Accidental damage to one party's cargo is particular average, borne by that party and its own insurer.
• Section 66 of the Marine Insurance Act, 1963 defines general average loss for insurance purposes; the adjustment follows the contract of carriage, usually the York-Antwerp Rules.
• Without insurance a cargo owner signs a general average bond and pays a cash deposit before release; with insurance the insurer's guarantee takes the deposit's place.
• General average is covered under ICC (A), (B) and (C).

Common misunderstandings

• Undamaged cargo is not exempt: every interest saved by the sacrifice contributes in proportion to its value.
• Not every loss at sea is general average: accidental damage is particular average and stays with the owner of that property.
• Section 66 does not fix how the loss is divided between ship and cargo: that follows the contract of carriage and maritime law.

Questions people ask