Abstract
“Let that which has been jettisoned on behalf of all be restored by the contribution of all.” This statement from Rhodian law summarizes the principle of general average in maritime law and it is as applicable today as it was in 916–700 bc. Like limitation of liability, general average is another peculiar maritime principle which arose in the similar background of pre-insurance era. While the concept of limited liability is a feature common to all maritime liability laws, the issue of general average arises only in the context of maritime cargo liability law. Whenever ship owners can successfully declare an incident as general average, they not only avoid paying for the loss of the cargo under their care but can also ask the cargo owners to contribute to the expenses incurred in the repair of the ships necessitated by a general average incident.
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Notes
- 1.
Cited in Dover (1975), p. 6.
- 2.
- 3.
See Selmer (1958), pp. 27, 190.
- 4.
See Gilmore and Black (1975), p. 258.
- 5.
See Selmer (1958), p. 291.
- 6.
- 7.
- 8.
See Birkley v Presgrave (1801), 1 East. 220 at 228, 102 E.R. 86 at 89; Northland Navigation Co. Ltd. and Northland Shipping (1962) Co. Ltd. v Patterson Boiler Works Ltd., [1983] 2 F.C. 59 (T.D.); The Star of Hope, 76 U.S. 203 at 228 (1869); see also Marine Insurance Act, S.C.1993, c22 (Canada), s. 65.
- 9.
Freight will be a contributing item only when it is at risk. This occurs when the earning of freight depends on the successful delivery of the goods. On the other hand, if the freight is pre-paid and non-refundable, it is already earned and therefore not at risk.
- 10.
For example, see Marine Insurance Act, S.C.1993, c22 (Canada), s. 65 and Marine Insurance Act, 6 Edward VII, ch. 41 (UK), s.66. See also article V of the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading, Aug. 25, 1924, 51 Stat. 233, 120 L.N.T.S. 155 as amended by its 1968 Protocol, 2 U.N. Register of Texts ch. 2, at 180 [hereinafter the Hague-Visby Rules]; article 24 of the United Nations Convention on the Carriage of Goods by Sea, Hamburg, Mar. 31, 1978, U.N. Doc. A/Conf. 89/5, (1978) 17 I.L.M. 608 [hereinafter Hamburg Rules]; article 84 of the newly adopted UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, 2008 [hereinafter Rotterdam Rules]; available on the website of UNCITTRAL (UN Commission on International Trade Law) at http://www.uncitral.org/pdf/english/texts/transport/rotterdam_rules/09-85608_Ebook.pdf. Accessed 01 September 2013.
- 11.
The rules were first adopted in 1890 by the Conference of the Association for the Reform and Codification of the Law of Nations, held at Liverpool. Gilmore and Black (1975), p. 252. The rules have been subsequently amended in 1924, 1950, 1974, 1994 and 2004. See Bennett (2006), p. 763. Reference in this chapter to the rules will mainly be to their 2004 version unless indicated otherwise. The 2004 version was adopted at the CMI (Comité Maritime International) conference in Vancouver on 31 May–04 June 2008 and the rules can be accessed at the CMI website: http://www.comitemaritime.org/Uploads/YAR%202004%20english.doc. Accessed 01 September 2013.
- 12.
- 13.
See Century Insurance Co. of Canada v N.V. Bocimar, S.A. (The “Hasselt”) (1987), 39 D.L.R. (4th) 465 (S.C.C.), rev’g. (1984), 53 N.R. 383 (F.C.A.); see also Gilmore and Black (1975), p. 258.
- 14.
See Ultramar Canada Inc. v Mutual Marine Office Inc. (The “Pointe Levy”) (1994), 82 F.T.R. 1; Edward and Charles Gurney v Aeneas D. MacKay (1875), 37 U.C.Q.B. 324 at 340.
- 15.
See Ainsworth v Cusack (1858), 4 Nfld. L. R. 236; Canadian Transport Co. Ltd. v Hunt, Leuchars Hepburn (The “City of Alberni”) (1947), 63 B.C.L.R. 262 at 264. See also rules X and XI of the YAR.
- 16.
- 17.
‘Risk-neutrality’ is the opposite concept of risk aversion. See Shavell (2004), p. 178.
- 18.
See Posner (2003), pp. 10–11.
- 19.
Shavell (1987), pp. 11–12.
- 20.
See Billah (2007), pp. 308–309.
- 21.
Billah (2007), pp. 310–311.
- 22.
Selmer (1958), pp. 27, 190.
- 23.
In the absence of insurance, a ship owner may not be able to predict the average loss arising from general average incidents as he or she would not have the information about the losses of other ship owners. Even if the ship owner has that information, it will be of no benefit to him when his losses from general average incidents are above or below the average. On the other hand, it is the average loss which matters to an insurer in calculating the premium necessary to cover the insured losses. The insurers can determine the average loss very easily as they would have claim statistics of all the insured.
- 24.
We assume here that these average losses would occur despite proper care and precaution taken by ship owners. Theoretically, if general average losses would occur regardless of any precaution, it would be irrelevant who bears the loss. General average in such circumstances would just shift the losses from one party to another. However, as we will see below, the presence of general average encourages some ship owners to take less care and thus increases maritime losses.
- 25.
Even though ship owners could pass some of the cost of general average in the freight rates, the burden of general average loss on individual ship owners would have been very heavy in the absence of insurance. Fear of such loss would have discouraged some from investing into shipping even though their expected profit would have been more than their expected loss. Again, this is because most individuals are ‘risk averse’ when it comes to risk of high loss despite the probability of such loss being very low. See Posner (2003), pp. 10–11; Abraham (1986), pp. 11–12.
- 26.
See Gilmore and Black (1975), p. 258.
- 27.
For the examples of intentional grounding, see Dancey v Burns (1880), 31 U.C.C.P. 313 (Ont. C.A.); Gibb v McDonnell (1850), 7 U.C.Q.B. 356 (C.A.); see also Tetley (2008), p. 1807.
- 28.
- 29.
Per Vaughan Williams L.J in Montgomery v Indemnity Mutual Assurance Co [1902] 1 K.B. 734 at 740 (CA), “The object of the maritime law seems to be to give the master of the ship absolute freedom to make whatever sacrifice he thinks best to avert the perils of the sea, without any regard whatsoever to the ownership of the property sacrificed; and, in our judgment, such a sacrifice is a general average act quite independently of unity or diversity of ownership.” [emphasis added].
- 30.
Selmer (1958), p. 291.
- 31.
Selmer (1958), p. 291.
- 32.
The lack of choice prompts some authors (the holders of “alternative theory”) to argue that such situations cannot amount to general average because one of the conditions of general average is ‘voluntary’ sacrifice/action and this element would be missing in such situations. Selmer (1958), pp. 72–76, 214–215.
- 33.
For example, when a ship in the middle of the sea might sink due to the high waves caused by heavy storm, only jettison of the cargo can lighten the ship and prevent it from the danger of sinking.
- 34.
See Federal Commerce and Navigation Co. v Eisenerz-G.m.b.H. (The Oak Hill), [1974] S.C.R.1225, [1975] 1 Lloyd’s Rep. 105. See also Notara v Henderson, (1870) L.R. 5 Q.B. 346; (1872) L.R. 7 Q.B. 225; cited in Cooke and Cornah (2008), pp. 36–37, para 00.61. Per Hobhouse J., “The fact that the master was acting as an agent of necessity in the interests of the joint adventure does not relieve him of his duty to exercise reasonable care in the preservation of the cargo.” in Corfu Navigation Co v Mobil Shipping (The Alpha) [1991] 2 Lloyd’s Rep. 515, 522.
- 35.
‘Peril of the sea’ is defined as “something so catastrophic as to triumph over those safeguards by which skilful and vigilant seamen usually bring ship and cargo to port in safety.” Per Hough J. in The Rosalia, 264 F. 285 at 288, (2d Cir. 1920).
- 36.
Although under the traditional analysis there are two purposes of liability rules: deterrence and compensation, deterrence should be the main, if not the sole, purpose of liability law. This is because deterrence from negligence would lead to the reduction of accidents caused by negligence. See generally, Shavell (2004), pp. 267–269; Billah (2007), pp. 300–301.
- 37.
See article IV.1 (d) and (c) of the Hague-Visby Rules; article 17.3 (a) and (b) of the Rotterdam Rules. Although the Hamburg Rules do not specifically contain these exceptions, ship owners will be exonerated from any cargo liability arising from perils of the sea because of the absence of any negligence on their part. See article 5.1 of the Hamburg Rules.
- 38.
- 39.
UNCTAD (1994).
- 40.
It is true that no ship owner wants his ship to suffer a maritime peril because time wasted in the repair of the ship will deprive the owner of the profit the ship could make in such time. Yet, as the odds of peril are low, a ship owner may think that it would be able to escape any such peril despite his suboptimal care.
- 41.
UNCTAD (1994), p. 17.
- 42.
It is found in a survey of 400 cases of general average that ships with ‘flag of convenience’ represent only 12.2 % of total number of ships but have 34.2 % of total general average incidents, indicating suboptimal care. See UNCTAD (1994), pp. 5, 17–18. This may also be corroborated by the evidence that the highest causative factor in general average incidents is the failure of ships’ machinery (37 %). Many other causes such as grounding (24 %), fire (14 %), collision and contact (11 %) are also indicative of lack of proper care on the part of ship owners. See UNCTAD (1994), pp. 19–25.
- 43.
It can be recalled here that contribution of the parties towards general average expenses is based on the value of their respective saved interests.
- 44.
See The Portsmouth, 76 U.S. (9 Wall.) 682 (1870); Western Canada Steamship Co v Canadian Commercial Corp., [1960] S.C.R. 632; St. Lawrence Construction v Federal Commerce and Navigation Co., [1985] 1 F.C.767 at 788. This principle is somewhat modified by rule D of the YAR as the negligence of any party is ignored for the purpose of calculating the contribution. However, the innocent parties are able to seek reimbursements from the negligent party for any contribution they have to make due to the latter’s negligence.
- 45.
See Louis Dreyfus & Co. v Tempus Shipping Co., [1931] A.C. 726; Drew Brown Ltd. v The Orient Trader, [1974] S.C.R. 1286, 1333. Although this was not so in the US [see The Irrawaddy, 171 U.S.187 (1898)], the ship owners’ insertion of a clause (‘Jason clause’/‘New Jason clause’) in the bill of lading to exclude liability in such case was upheld by the US Supreme Court. See The Jason, 225 U.S. 32, 32 S.Ct. 560 (1912); Gilmore and Black (1975), pp. 266–267; Selmer (1958), pp. 80–81. As the Hamburg Rules and the Rotterdam Rules do not contain this negligent navigation exception, the ‘Jason clause’ will not have this effect under the latter regimes.
- 46.
UNCTAD (1994), pp. 24–25.
- 47.
However, if a loss occurs or is aggravated due to the negligence of a ship owner, as opposed to the crew, in providing a seaworthy ship or in caring for the cargo, the ship owner cannot claim for general average contribution from the cargo owners. See Century Insurance Co. of Canada v N.V. Bocimar, S.A. (The “Hasselt”), (1987), 39 D.L.R. (4th) 465, rev’g. (1984), 53 N.R. 383, where the ship owner was found negligent to provide proper training to the crew to extinguish fire and was consequently denied general average contribution. See also St. Lawrence Construction Ltd. v Federal Commerce & Navigation Co. Ltd., [1985] 1 F.C. 767, 56 N.R. 174 (C.A.); Western Canada Steamship Co. Limited v Canadian Commercial Corp., [1960] S.C.R. 632; Canadian Transport Co. Ltd. v Hunt, Leuchars Hepburn (The “City of Alberni”) (1947), 63 B.C.L.R. 262 at 264; Montreal Trust Co. v Canadian Surety Co., [1939] 4 D.L.R. 614, aff’g. (1937), 75 R.J.Q. 278; cited in Strathy and Moore (2003), p. 329 note 52.
- 48.
Grover v Bullock (1849), 5 U.C.Q.B. 297. The apparent justification was that the accidental grounding itself was a peril which endangered both the ship and cargo. Thus, the expenses to rescue the ship and cargo from such peril are general average expenses.
- 49.
Rule D of the YAR.
- 50.
Selmer (1958), pp. 81–84. Although there is no decided case on the issue of the limitation of ship owners’ liability in a general average situation, it was held in The Ettrick (1881) 6 P.D. 127 that the payment of limited liability by a ship owner did not give him the right to claim contribution later on for general average expenses caused by their own negligence. However, there are cases where ship owners had to contribute for general average despite the validity of contractual or statutory exoneration from total liability. Such cases may be taken to infer that ship owners have to pay full contribution for general average despite the availability of limitation for their ordinary liability. See Schmidt v Royal Mail S.S. Co (1876) 45 L.J.Q.B. 646, Crooks v. Allen (1879) 5 Q.B.D. 38, Burton v. English (1883) 12 Q.B.D. 218 and Greenshields, Cowie v. Stephen & Sons Ltd [1908] A.C. 431. These cases are cited in Cooke and Cornah (2008), pp. 168–169.
- 51.
For example, redistribution from a negligent party to an innocent one would deter the former from similar negligence in the future and will thus reduce social loss or increase social utility. In addition to the creation of incentives, redistribution sometimes may further increase social utility if the money redistributed has more value to its recipient owner than its initial owner. The latter benefit of redistribution is the main justification for income tax on the rich and for the income subsidy to the poor. See generally Calabresi and Melamed (1972), pp. 1089–1128.
- 52.
Higher price may also reduce the consumption (utility) of the goods if there are perfect substitutes to such goods.
- 53.
For example, damage caused by fire is not general average but the damage done in extinguishing the fire is general average. See Rule III of 1994 York-Antwerp Rules; Strathy and Moore (2003), pp. 318–319.
- 54.
Expenses not allowed under general average are termed as ‘particular average.’ These expenses are borne by individual interests for whose benefit they are incurred. However, the distinction between ‘general average’ and ‘particular average’ is sometimes arbitrary and depends mainly on their historical labelling. For example, expenses to dry wet cargo due to a general average incident are not allowed under general average and are thus ‘particular average’, while expenses to store the cargo safely on the shore while the ship is being repaired are considered general average. See Selmer (1958), pp. 260–261.
- 55.
See Selmer (1958) at pp. 160–161.
- 56.
- 57.
For example, in one instant the ship was carrying 920 containers under 900 bills of lading with general average claim of more than $1 million. See Myerson (1995), p. 472.
- 58.
See Gilmore and Black (1975), pp. 249–250.
- 59.
Otherwise, they would not pursue such settlement except for mistaken calculation. Such mistakes do occur as there are instances where ship owners’ or their insurers’ settlement costs were more than the contributions they received from cargo owners or their insurers. See Selmer (1958), p. 164.
- 60.
For example, if the cargo’s contribution is $2,000 but the total settlement costs are $3,000, a ship owner would press for settlement because he would only bear half of the settlement costs with a $500 margin.
- 61.
See Selmer (1958), p. 164.
- 62.
- 63.
The possibility of totally uninsured ships is almost non-existent. Some ships, however, may be underinsured or there may be deductibles. Such underinsurance and deductibles are mostly voluntary on ship owners’ part and thus negates any real need for general average to fill the gap between the actual value and the insured value of ships or the proportionate gap between the actual loss and the insured loss. However, there are still cases where the cargo is uninsured. Yet, because in most cases of general average contribution would flow from cargo owners to ship owners, insurance through general average is of no use for uninsured cargo. In fact, uninsured cargo is a problem for ship owners claiming general average as the ship owners have difficulty in securing guarantee from such cargo interests. Besides, uninsured cargo tends to be of trifling value. See Selmer (1958), pp. 190–194.
- 64.
See Rejda (2008), pp. 5, 31–33.
- 65.
On moral hazard and the insurance mechanisms to prevent it, see Billah (2008), pp. 427–461.
- 66.
This is simply because contributions arising from general average are determined according to YAR Rules, which are incorporated by ship owners in the contract of carriage by reference, thus giving little option for cargo owners to have any say on the matter.
- 67.
See generally Shavell (1982), pp. 120–132.
- 68.
For various wordings of ‘absorption clauses’, see UNCTAD (1994), pp. 11–12.
- 69.
See Cooke and Cornah (2008), p. 18.
- 70.
Saving of administrative costs is the main motivation behind such clauses. In most of the cases where absorption clauses apply, the marginal recovery (gross recover minus administrative costs) from cargo owners would have been either little or negative. See generally Selmer (1958), p. 164.
- 71.
See Selmer (1958), pp. 165, 195–197.
- 72.
For example, if a ship on average receives $1,000 contribution in a year from cargo interests, abolition of general average will lead to an increase of $1,000 freight rate for each ship annually because in the absence of general average ship owners or their insurers would have to bear the loss which heretofore has been borne by cargo interests.
- 73.
Rule VI (a) of the YAR 2004 reads: “Salvage payments, including interest thereon and legal fees associated with such payments, shall lie where they fall and shall not be allowed in general average…”.
- 74.
See rule VI of YAR 1994.
- 75.
Common law salvage is to be contrasted with contractual salvage as there is no contract under the former before any salvage operation is undertaken. Interestingly the generous reward for common law salvage may be attributed also to the absence of insurance for salvors in the past. As salvors were more risk-averse against losing their salving vessel without insurance, stronger incentive in the form of higher reward was necessary. Since salvors, like other maritime players, today carry insurance, the reward does not have to as high as that in the past to maintain incentives. As a result, ‘moiety rule’ (half the value of salved property), which was minimum reward in the past, now became ‘a ceiling instead of a floor.’ This may, however, also be due to the high value of today’s salved property. However, the value of salvage ship and instruments has also increased proportionally. See generally Gilmore and Black (1975), pp. 563–564.
- 76.
The YAR 2004 did not gain much support from the shipping interests. Most contracts of carriage still contain the YAR 1994. Consequently, most salvage expenses would still be considered as general average. See Cooke and Cornah (2008), pp. 64–65 in para 00.111–00.112.
- 77.
Although salvage expenses can be incurred without an incident of general average, costs of salvage measures become part of general average expenses once an incident is declared as general average.
- 78.
That is, both the cargo and the ship have to contribute to the salvage award according to their respective value. See Gilmore and Black (1975), pp. 560–562. See also Rule VI of the YAR.
- 79.
The only exception where a cargo owner may still need to contribute to salvage costs is when the contract of carriage is frustrated without any fault of the ship owner, e.g., when the ship is wrecked with the cargo because ‘frustration of contract’ absolves the ship owner from any responsibility towards the cargo. For the effect of frustration, see Taylor v Caldwell (1863), 3 B. & S. 826, 122 E.R. 309; Appleby v Myers (1867), L.R. 2 C.P. 651; Jackson v Union Marine Insurance Co (1874), L.R. 10 C.P. 125. Some of today’s general average situations may also amount to frustration of contract.
- 80.
Prof. Selmer investigated all the incidents of general average in Norway for the year 1952 and found that out of 82 cases of general average only 26 (or about 30 %) cases involved salvage. He also investigated 367 cases adjusted by one Swedish adjuster for the period 1946–1955 and found only 102 (or 27 %) cases were general average. See Selmer (1958), pp. 180–181, 203.
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Billah, M.M. (2014). Insurance Through General Average: Its Justifications and Effects on Optimal Care and on Social Costs. In: Effects of Insurance on Maritime Liability Law. Springer, Cham. https://doi.org/10.1007/978-3-319-03488-1_4
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