In all likelihood, you have read about the Ever Given, the large container ship that was grounded in the Suez Canal this year. The owners of Ever Given have made a declaration of General Average, but what does that mean?

Disasters at sea and the subsequent declaration of General Average can occur at any time which is why it’s worth considering what the position is for those entities who had cargo on the Ever Given.

We asked Phil Doran of Freight Training to explain what has been happening and how he sees the situation playing out.

“As this is a current and unfolding situation it is anyone’s guess right now how this will play out. But I am happy to offer my thoughts based on what is presently known. Terms and conditions apply…”

What’s the status of the Ever Given?

The vessel has been re-floated but is still being assessed for fitness to continue its journey. The vessel owner has declared a General Average, and those vessels that had been delayed have started passing through the Canal in one direction or the other in volume.

The anticipated costs directly associated with the incident (excluding costs coincidental to the commercial delays) are thought to run into a “nine-figure dollar value”.

There are three areas of immediate interest:

• the position of merchants with cargo on the specific vessel
• the position of merchants with cargo on the delayed vessels
• the position of ‘the industry’ as a whole.

There are areas of commercial interest as well:

• the position of the ‘sellers and buyers’
• through the knock-on impact this incident will have on their private contract terms.

Aside from the delay, merchants with cargo on the vessel should be anxious.

What is the General Average?

As in this incident, when a vessel runs aground there is a cause, and the re-floating of the vessel gives rise to a cost. If the cause is deemed a legitimate cause, the cost must be borne by all parties taking part in the adventure. There will be an investigation to determine the cause and court actions have already started to prevent or promote liabilities.

The maritime insurance term for a loss is ‘average’ – if one party suffers a loss then it is deemed a ‘particular’ average in that one party in particular has suffered the loss. But, when a vessel avoids (or faces and survives) a peril, and costs are incurred to the benefit of all, then the loss (the average) is shared ‘generally’ amongst the parties concerned, and a General Average is declared.

So a merchant with cargo on the vessel – cargo that is not wet, damaged, or stolen – will still suffer a ‘loss’, by way of a contribution they must make to the fund that will be gathered, against the costs incurred or anticipated to arise in saving the adventure (with ‘the adventure’ being the vessel and cargo).

How is the General Average calculated?

The mechanism which regulates the GA process, and that determines the calculations for the contribution, is complex and is the subject of a governing convention (The York-Antwerp Rules). Declaring a GA is not done lightly and the process of determining causes and costs can take several years to finalize.

A merchant carrying adequate marine insurance will be protected from this exposure, and the contribution will be made by the insurer. The only party exposed will be the merchant who is uninsured (or inadequately insured). This merchant will be required to make a cash deposit (or offer acceptable security), and the level of the contribution may run into 70 or 80% of the cargo’s customs’ c.i.f. value, uplifted by 10%. Even in seemingly small incidents a GA Contribution can be a substantial amount. Insolvency aside, it is exceedingly difficult for an uninsured merchant to avoid liability to meet a GA Contribution claim.

What if a consignee cannot pay its portion of the General Average contribution?

It is possible that the uninsured consignee in any model may abandon their cargo interests if they are unable (or unwilling) to make the Contribution, provided they can avoid the contract with the carrier. This avoidance may be achieved merely by inactivity, yet the ‘shipper’ is not so privileged and ultimately the liability for the Contribution falls on them if all other parties’ default or abandon. 

This is the crucial point made in Incoterms rules for F-prefixed sellers: do NOT act as the shipper on the transport document, do not engage the buyer’s carrier; do not make the contract of carriage through your actions; do not become the carrier’s principal. The ‘seller’ is not the ‘shipper’, and these roles can be easily disconnected, provided that payment is not linked to the transport document.

For example, any “FOB” seller on the Ever Given who is named as the shipper on the bill of lading or who has somehow acted as the carrier’s principal when making the booking, yet without knowing if the buyer is carrying adequate marine cover, should be consulting a maritime lawyer or a travel agent right now.

(To be continued)