LEENA MODY & ASSOCIATES

Average Adjusters & Marine Claim Consultants

HDFC Ergo General Insurance Company Limited

Webinar - General Average Demystified
22nd May, 2020

Leena B Mody
Fellow Member of Association of Average Adjusters, UK
 Sea Transportation

• Transportation by Sea is the largest carrier of freight throughout

recorded history.
• Today, around 90 percent of world trade is carried by
the international shipping industry.
• Tankers transport fluids, such as, crude oil, LPG, LNG, chemicals,
vegetable oils, etc. and comprises one third of the world tonnage.
• Construction of Mega vessels with capacity to carry huge amount
of goods in thousands of shipping containers at competitive freight
costs has led to enormous expansion of trade.

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 Sea Perils
Fire

Collision
Stranding

Sinking

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Short story on GA
Way, way back in ancient Greece,
there was a man named Domestos
who owned a boat. He would moor
his boat on one of the Islands in
Greece and carry barrels of wine from
the owners of vineyards to the city of
Rhodes.

One day Domestos arrived at a very

small port where he was met by three
merchants each of whom wanted him
to carry barrels of wine from
outlaying island in Greece to the city
of Rhodes. They paid him, the barrels
were loaded and the boat sailed.

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Few hours later, the boat ran into a storm and Domestos / his crew feared
that boat would capsize. They decided that the only way to survive was for
the boat to be lightened to enable it to ride out the storm. Thus, ten barrels
of wine were thrown overboard and by this act, the boat was able to ride the
storm and complete its voyage to Rhodes.
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1st Merchant with
his 10 barrels Upon arrival at Rhodes, Domestos was
met by three merchants who had
purchased the wine from the owners of
the vineyard. The first merchant
received his ten barrels of wine, as did
the second.
2nd Merchant But for the third merchant there was
with his 10 barrels
nothing, for it was his wine which had
3rd Merchant been thrown overboard.
with no barrels
A great argument started between the third merchant and Domestos.
“What right did you have to throw it overboard”, “Why did you pick only
my ten barrels and not someone else’s?”, “What you have done has
ruined me”. The other two merchants realized that this was not fair, for
the barrels of wine had been sacrificed in order to save their wine and
Domestos’ boat. It was Domestos who hit upon the idea that they should
each contribute in the proportion to the value of the property that was
saved.
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Accordingly, Domestos’ boat would
. contribute on 100,000 drachma
which was her worth and the merchants all agreed that each barrel of
wine was worth 1,000 drachma and, therefore, 10 barrels contributed
on 10,000 drachma.

Domestos arrived at calculation as under:-

Domestos’ Boat worth 100,000 pays
8,334

Merchant One - 10 barrels worth 10,000 pays 833

Merchant Two - 10 barrels worth 10,000 pays 833

Merchant Three - Nil barrels receives 10,000

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“Now hold on”, said one of the Merchants “although the other merchant
whose barrels have been jettisoned will be paid 10,000 drachma for his
loss - the same value as my wine - after I have paid my contribution to
his loss, I will only have 9,167 drachma i.e. (10,000 - 833), that cannot
be fair”. “Quite right”, said Domestos, “we must all end up in the same
position - it shouldn’t matter whose property has been sacrificed”.
Accordingly, he redid the calculation as follows:-
Domestos’ Boat worth 100,000 pays 7,693
Merchant One -10 barrels worth 10,000 pays
769
Merchant Two -10 barrels worth 10,000 pays
769
Merchant Three -10 barrels worth 10,000 pays
769
Merchant Three receives 10,000 but pays 769

Now all the three merchants were in the same position and they all livedLMA
 Principle in Rhodian Law

“That if in order to lighten

a ship merchandise has been thrown overboard

that which has been given for all

should be replaced by the contribution of all”

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 Definition of GA

“There is a general average act when, and only when,

any extraordinary sacrifice or expenditure is
intentionally and reasonably made or incurred for the
common safety for the purpose of preserving from peril
the property involved in a common maritime adventure”

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 Essential Elements of GA

• Common Maritime Adventure.

• Common Safety.
• Sacrifice or Expenditure must be Extraordinary.
• Intentional and Reasonable.

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 Distinction between GA & PA

Particular Average is a loss, which takes place on the property of a

particular party - ‘loss stays where it falls’.

General Average is loss incurred for common safety or safe

prosecution of voyage and does not fall on one particular party but, is
contributed by / or apportioned between several parties / interests,
such as ship, bunkers, cargo, freight, etc.

PA loss is accidental in nature, whereas, GA loss is a loss deliberately

or intentionally made.

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Damage done to ship and cargo due to fire is a PA loss, whereas, damage
caused in extinguishing the fire is a GA loss.

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The efforts taken for extinguishing fire may be hiring firefighting tugs or it
could be even scuttling or beaching the burning ship or breaking down of
the cargo holds in order to reach the seat of fire.
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Hire of tugs for carrying out salvage operations or to pull a vessel off the
ground, whether on daily hire basis or on LOF basis, are allowed in GA.
Subsequent towage of the vessel to a port of refuge and expenses incurred
for repairs necessary for safe prosecution of voyage is also GA.
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Accidental stranding or grounding of vessel with cargo onboard either due
to heavy weather or negligence of crew or due to an error in navigation is a
PA. Efforts taken to refloat the grounded vessel and her cargo is a GA .

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 General Average Loss

• General Average loss may be a GA Sacrifice and / or Expenditure.

• General Average Sacrifice is the deliberate loss of property

voluntarily made for the common safety of property involved in
common maritime adventure. The value of any sacrifice of property
leads to diminution in its arrived value at the destination.

• General Average Expenses are incurred for common safety and to

enable the ship and cargo to safely prosecute remaining voyage and
involves monetary expense but not property.

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 Example of How GA works?
A loaded ship was hijacked in West Nigerian waters and the ransom
amount demanded by pirates for release of the ship was negotiated at
US$.5 Million.
The ransom amount was delivered and the ship was released.
Following expenses were incurred to save the ship and her cargo:-
GA Expenses Amount ($) Property saved Value ($)

Ransom 5,000,000 Ship and Bunkers 10,000,000

Lawyer’s Fees 500,000 Freight 3,000,000
Negotiation and Search 1,000,000 Cargo Consignee 1 14,000,000
Expenses
Port of Refuge Charges 200,000 Cargo Consignee 2 36,000,000
Adjuster’s Fees 200,000 Cargo Consignee 3 6,000,000
Total 6,900,000 69,000,000
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As per the principle of general average, all the parties who
benefit from the ransom amount paid by the shipowner should bear
their proportion of loss.
But then what is the basis on which each one would pay?
Owners of cargo with less value should not pay the same amount as
other cargo owners who had huge amount of cargo onboard.
Costs incurred Amount ($) Property saved Value ($) GA loss 10%

Ransom 5,000,000 Ship and bunkers 10,000,000 1,000,000

Lawyer’s Fees 500,000 Freight 3,000,000 300,000
Negotiation & Search 1,000,000 Cargo Consignee 1 14,000,000 1,400,000
Expenses
Port of Refuge 200,000 Cargo Consignee 2 36,000,000 3,600,000
Charges
Adjuster’s Fees 200,000 Cargo Consignee 3 6,000,000 600,000
Total GA 6,900,000 Total Value of 69,000,000 6,900,000
Property
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 Steps to be taken to settle a GA loss
• Identify a GA situation.
• GA declared by the Master of the ship.
• Notice to the cargo receivers.
• Bill of lading and cargo manifest are provided to the GA Adjusters.
• GA security documents given by the Adjusters to all interests
involved.
• Value of the property involved is determined.
• General Average Loss / GA fund is estimated.
• GA percentage to be contributed is quantified by the GA adjuster.
• This percentage is applied to the GA loss to determine the amount of
security deposit to be collected from each interest.
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 Example of how the GA security amount is decided?
Value of the vessel US$. 200,000,000
Value of total cargo onboard 200,000,000
Freight at risk 100,000,000
Total Value of Property 500,000,000

• It is determined that cargo valued at US$.5,000,000 was

jettisoned.
• None of the jettisoned cargo belonged to Shipper ‘A’ whose cargo
was valued at US$.10,000,000.
• ‘A’ will contribute in GA at 1/100th or 1% of value of his cargo.
• ‘A’ will give GA security deposit of US$.100,000.
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 Process of GA Security Collection

•Shipowners have a possessory lien on the cargo for GA contribution

and cargo is not delivered until security in lieu of contribution is
provided.
•Collection of GA security by GA Adjuster.
•GA Bond or Agreement, Valuation Form and Invoice to be submitted
by the cargo receiver.
•GA Guarantee is given by the cargo underwriters or GA cash deposit
by cargo receivers, if cargo is uninsured.
•Counter Guarantee to be given by the cargo assured to his insurer
before a guarantee can be issued by them.
•Non-Separation Agreement from cargo interests in case of
transshipment / forwarding of cargo.
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 Role of GA Adjusters

• On receipt of security, GA Adjusters issue release orders for cargo

to be delivered at destination port.
• Appointment of GA surveyor who acts ‘in general interest’.
• GA is adjusted at a place and as per provisions of YAR
incorporated in the freight contract.
• Assessment of Contributory Values and Apportionment of GA
loss.
• GA Adjustment prepared recommending GA loss / contribution
payable / receivable by various parties and their underwriters.
• Settlement of GA loss between parties and discharge of lien.

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 Contributory Values
Contribution to GA is on the actual net values of the property at the
termination of adventure or on arrival at destination. ‘Amount made
good’ towards GA sacrifice is added to this value.

•Ship contributes on her value on completion of discharge at the final port

of destination. Cost of repairing any damage carried out subsequent to the
GA act is deducted and ‘made good’ in GA is added.

•Cargo contributes on value as per commercial invoice or the shipped

value. The value includes the cost of insurance and freight.

•Freight contributes on the basis of gross freight at risk, less ‘contingent

expenses’ i.e. expenses incurred subsequent to a GA act.

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 Example of Apportionment of GA
• Value of Vessel in sound condition at destination was $.4,000,000,
loaded cargo of iron ore valued at $.1,000,000.
• Prior to reaching destination, ship ran aground and cargo worth
$.200,000 was jettisoned to lighten the vessel before refloating.
• Ship was successfully refloated but was damaged in refloating
operations.
• Vessel safely completed her voyage to destination and carried out
repairs. Cost of repairing grounding damage - $.100,000 whereas,
cost of repairing refloating damage - $.400,000.
• Total GA
Cargo jettisoned $.200,000
Cost of repairing refloating damage $.400,000
Total $.600,000
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 Calculation of CV & Apportionment of GA
Particulars C/V G.A. Contribution

Ship: Value in sound condition $. 4,000,000

Less: Cost of repairing PA & GA
sacrificial damage. 500,000
Vessel’s arrived value $. 3,500,000
Add: Cost of repairing GA
sacrificial damage 400,000 $. 3,900,000 $. 477,551

Cargo: CIF value $. 1,000,000

Less: Value of cargo jettisoned 200,000
Arrived value of cargo $. 800,000
Add: Amount made good in G.A.
towards cargo jettisoned 200,000 1,000,000
122,449
Total : $. 4,900,000 $.
600,000

G.A. is 12.25% of Contributory Value LMA

 GA & Marine Insurance Act, 1906
• Section 66(6) as well as Institute Hull & Cargo Clauses provide that
GA loss / contribution are recoverable only if incurred to avoid, or in
connection with avoidance of a peril insured against.

• Section 66(4) - assured entitled to recover 100% of GA sacrificial

damage directly and immediately from the insurer. GA sacrifice is
not subject to underinsurance.

• Where the assured has incurred a GA expenditure, he may recover

from the insurer in respect of the proportion of loss which falls upon
him which is further reduced for underinsurance.

• Section 66(3) provides that where there is a GA loss, the party on

whom it falls is entitled to a rateable contribution from the other
parties interested.
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 GA & York-Antwerp Rules

• York Antwerp Rules derived its name from conferences in York

(1868) and Antwerp (1877) which served as a vehicle for
international unification in treatment of General Average.
• Under the custodianship of CMI, these Rules are periodically revised
to conform to the changing needs of trade and commerce.
• GA clause in contract of affreightment invariably provides for the
adjustment of General Average in accordance with YAR.
• YAR were last revised in 2016, which consists of:-
 Rule of Interpretation
 Rule Paramount
 Lettered Rules (A to G)
 Numbered Rules (I to XXIII)

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 GA & York-Antwerp Rules

• Rule of Interpretation provides that the Rules will apply to the

exclusion of any law or practice inconsistent therewith.
• Numbered Rules take precedence over the Lettered Rules.

• Rule Paramount takes precedence over both, Numbered as well as

Lettered Rules.
• Rule Paramount excludes allowances for sacrifices or expenditure
unless they were reasonably made or incurred.

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 GA Due to Fault

• GA arising due to fault of the shipowner where negligence,

unseaworthiness or deviation are involved.

• GA situation may also be due to fault of one of the cargo interest e.g.
mis-declaration of cargo leading to fire.

• Where GA act arises from fault of one of the parties to the

adventure, and that fault is not excused by the contract of carriage,
the guilty party cannot claim in GA for any loss he sustains, though
there may be adjustment drawn for the purpose of contribution
between innocent parties.

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 Thank You!!

Leena Mody & Associates

301 Megor Arcade, Plot No.15, M.G. Road, Opp. Satyam Shopping Complex, Ghatkopar (E),
Mumbai 400 077 (India)
Email: [email protected]
Tel: +91 (022) 2506 5090
URL: www.leenamody.com