What it means
General average is one of the oldest ideas in commerce. If a captain throws some cargo overboard to lighten a ship in a storm, the owners of the saved ship and cargo all benefit, so they should all share the cost of the sacrifice.
Otherwise the person whose goods happened to be thrown overboard would carry the whole loss. The York-Antwerp Rules set out which losses count as general average and how the contributions are worked out.
They define what counts as a sacrifice, such as jettisoned cargo or damage caused by putting out a fire, and what counts as extra expense, such as the cost of towing the ship to a safe port. The rules have been revised several times to keep up with modern shipping.
The rules apply only if the parties agree to them, which they usually do by including a clause in the contract of carriage, such as the bill of lading. Because shipping crosses many legal systems, a common set of rules avoids lengthy disputes about which country's law applies.
Specialist adjusters, who are professionals appointed to calculate the shares, prepare the statement of who owes what. For a business, the practical impact is that cargo owners may be asked to pay a contribution even though their goods arrived undamaged.
The shipowner can hold the cargo until the owner provides security, such as a guarantee, for the share. Cargo insurance usually covers these contributions, which is one reason that insurance matters.
Timing is often long. The adjustment of a general average claim can take months or years, because values must be assessed and all parties must provide security.
Finance teams should note the possible liability and speak to their insurers as soon as they hear that a voyage involves a general average declaration.
In practice
Real-world examples.
Example
A shipper in Asia sends electronics to a European buyer, and during the voyage the ship suffers an engine room fire. The shipowner declares general average, and the shipper is asked for a contribution before the goods are released. The shipper's cargo insurer provides the guarantee and pays the share.
Example
An importer of furniture learns that a ship has run aground and needs a tug to refloat. The towing cost is treated as a general average expense shared by the ship and all the cargo. The importer's finance team records a provision for the likely contribution.
Example
A logistics company advises a customer that their consignment is subject to a general average declaration. The company explains that the customer must provide security to receive the goods. It helps the customer contact its insurer to arrange a guarantee quickly.
Formula
Calculation
Each party's contribution = (value of its property at risk / total contributory values) x general average loss
Suppose a general average loss of $200,000 arises from a fire-fighting operation. The ship is valued at $6,000,000, cargo A at $3,000,000 and cargo B at $1,000,000, so total contributory values are $10,000,000. The ship pays 6,000,000 / 10,000,000 x 200,000 = $120,000. Cargo A pays 3,000,000 / 10,000,000 x 200,000 = $60,000, and cargo B pays 1,000,000 / 10,000,000 x 200,000 = $20,000, giving a total of $200,000.Case study
Seen in the real world.
Tidewater Imports is an illustrative, fictional company that received a message from a carrier declaring general average on a container of machine parts valued at $400,000. The goods had not been damaged, and the finance manager was surprised to be asked to contribute to losses suffered by others.
She found that the contract incorporated the York-Antwerp Rules, and that the carrier would hold the container until security was provided. After contacting the company's marine cargo insurer, she arranged a guarantee within days so the container could be released.
The adjuster's statement later showed a contribution of 2.5% of the cargo value, or $10,000, which the insurer paid. The illustrative lesson is that a general average declaration is not a sign that your goods were damaged, but it does require quick action to avoid delay.
Watch out
Common mistakes.
- Assuming that only the owner of sacrificed goods bears the loss, when all parties who benefit must contribute.
- Ignoring a general average declaration because the cargo arrived undamaged, which can delay release of the goods.
- Believing the rules are a law, when they apply only if the parties agree to them in their contract.
Questions
People also ask.
What are the York-Antwerp Rules?
They are international rules on how losses from deliberate sacrifices at sea are shared among the ship and cargo owners.
Do I need insurance for this?
Marine cargo insurance normally covers general average contributions, which is a strong reason to hold it.
How long does it take to settle?
Adjustments often take many months, because values have to be agreed and security provided.
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