Everyone With Cargo Aboard Shares the Cost of Saving the Ship

A Rule From Before Insurance Existed

A ship in distress gets rid of some of its cargo to lighten the vessel and survives. The goods thrown overboard belonged to a merchant. The saved goods belonged to everyone else

Leaving that loss where it fell would be arbitrary since the sacrifice was deliberately made for the common benefit and the choice of what cargo was to be passed was a question of what was accessible rather than of fault. Ancient maritime custom dating back to the maritime law of Rhodes and codified over the centuries settled it: the loss is shared proportionally between all parties whose property was saved

That principle is general average and survives essentially unchanged in modern shipping governed by the York and Antwerp Rules incorporated into contracts of carriage

What Triggers It

Not all losses qualify. Requirements are specific

A container swept overboard by a wave is an accident and falls on its owner and his insurer. Cargo deliberately discarded or damaged by water used to fight a fire or the cost of hiring salvage tugs and diverting it to a port of refuge are general average

Why the Sacrifice Has to Be Deliberate

The intent requirement seems like a technicality and carries all the economic logic of the doctrine

Consider the position of a captain with a fire in a hold the weather worsening and a decision to be made in minutes. All options cost money: flooding the hold and ruining the cargo inside dumping containers to restore stability diverting them to a port of refuge or hiring salvage tugs in emergency conditions. Each of them is expensive and each of them could save the voyage

Now let's ask who pays under a rule in which losses simply lie where they fall. The cargo owner whose goods are closest to the fire pays for the flood. The shipowner pays for the tugboats. None of them capture the profit which is distributed among all parties whose ownership survives

This is a decision maker facing the full private cost of an action whose benefits go almost entirely to other people and the predictable result is hesitation. Hesitating in the face of a burning ship is an expensive outcome for everyone

General average removes the disincentive. The captain can order the flood knowing that the cost will be shared by all the interests he protects so the calculation at the time is about whether the company is worth making the sacrifice and not about who will go bankrupt

Which explains why an accident can't qualify. No one needs an incentive to have a container washed overboard. The doctrine exists to make a difficult decision easier to make so it only covers losses that someone actually chose

The success requirement follows from the same reasoning. The contribution is owed by the parties whose assets were saved calculated on what was saved. If nothing survives there is no benefit that has been conferred and there is no one with whom to share it

Salvage Is a Separate Bill That Also Gets Shared

Salvage still appears on the list of general average expenses and is worth separating because it is its own doctrine that solves its own incentive problem

A salvor who voluntarily saves endangered property at sea is entitled to a reward assessed based on the value of what was saved along with the danger faced and the skill applied. It is not a pre-agreed rate which is the point

The traditional basis is that if there is no cure there is no payment. A failed salvor gets nothing back at all. That sounds harsh on the salvor and is what makes the system work in an emergency because it allows a tugboat to immediately attend to a burning ship without stopping to negotiate terms with a captain who has no time or authority to agree on them. The reward is set later through arbitration if necessary

The salvage premium is then an extraordinary expense incurred for common safety which places it directly in the general average adjustment to be distributed among all interested parties on board

So a major casualty creates two overlapping layers. Salvagers have a claim against the property they saved and the adjuster then distributes that claim along with diversion costs and foregone cargo across thousands of consignees. In modern casualties the salvage item is usually the largest number in the entire exercise

The agreement has a known weakness. A ship carrying low-value cargo but posing a serious pollution threat is unattractive if there is no cure or payment since a salvor could spend a lot of money protecting a coast and recover nothing because few properties survived. Separate compensation agreements were developed to pay salvors for that environmental work regardless of what is saved and when they are applied the cost generally falls on the shipowner's liability insurers rather than being shared among the cargo

The Adjustment

When general average is declared the shipowner designates a average adjuster a specialist who calculates the total sacrifices and expenses values all saved assets including ship cargo and freight at risk and determines the proportional contribution of each party

The arithmetic is conceptually simple and practically enormous. A modern container ship carries goods belonging to thousands of different consignees each of whom must be identified valued notified and collected. Adjustments on large casualties often take years to complete

Why It Takes Years

The delay is worth explaining because importers often assume it reflects the slowness of the job and not the actual size of the task

The liquidator must establish a contributory value for each interest on board that is what each package of cargo was worth at the destination. That requires documentation from thousands of different parties in different languages ​​and legal systems many of whom have no idea what a general average declaration is when the notice arrives. Bills of lading may have been exchanged during the voyage so the party that shipped the goods and the party that holds them upon arrival are often different

Assurance must be obtained from all of them before one can proceed and the parties that respond most quickly wait for those that do not respond at all

Then there is the defense that turns an accounting exercise into litigation. Cargo interests are generally not required to contribute when the danger was caused by the shipowner's lack of due diligence in making the ship seaworthy. Therefore a fire attributed to a defect that the owner should have found or to incorrectly declared dangerous goods that were accepted without proper controls can nullify the claim entirely

That gives each substantial cargo a reason to investigate the cause before paying and it gives the shipowner a reason to resist that investigation. The adjustment cannot be concluded until the issue is resolved and issues of that type are resolved in court in judicial terms

The Part That Affects Ordinary Businesses

Here is the characteristic that surprises importers. The shipowner has a lien on the cargo for its contribution to the general average and will not release the goods until the guarantee is presented

This means that an importer whose container was not damaged on a voyage in which a fire broke out in a different part of the ship cannot collect his goods until he provides a average bonus and normally a general average warranty from your cargo insurer or a cash deposit if uninsured

Therefore an uninsured importer must make a cash deposit often a substantial percentage of the value of the cargo and wait years for the adjustment to determine what is actually owed and refund the difference

This is the strongest practical argument in favor of marine cargo insurance. The insurer issues the guarantee the merchandise is released and the contribution between insurers is managed. Without coverage an importer of routine goods may find working capital tied up indefinitely due to an incident that never affected its container

What the Deposit Actually Costs

If approximate figures are put the reason why it harms companies becomes obvious. The following is an illustrative case rather than a real one

An importer receives a container of ordinary merchandise. The purchase was financed with working capital and the plan was the usual: obtain the products sell them over the following weeks and recycle the profits in the next order

A casualty on another part of the ship produces a declaration of general average. The importer is not insured so the release of the container requires a cash deposit calculated as a percentage of the value of the cargo paid before the goods are moved

Two different injuries arise from that single requirement. The deposit is cash that the company no longer has held by someone else for the duration of the adjustment which in a case of a large loss is measured in years instead of months. And the inventory that was going to be sold has meanwhile been on a diverted ship or in a port of refuge so the sales that were supposed to finance the next cycle have not happened either

Therefore the company is short of cash and short of stock at the same time due to an incident on a part of the ship with which it had no connection without any accusation that it has done anything wrong

In contrast cargo insurance replaces the cash deposit with a guarantee from the insurer. The importer publishes nothing the container is released and the final contribution is settled between the insurers long after the products have been sold. The premium buys damage coverage and what most often justifies it is this: not being asked for cash at a time completely out of your control

The Cases That Made It Familiar

Several major casualties brought widespread attention to the doctrine. A major container line collapse and subsequent vessel arrests a ship running aground in a critical channel and several serious container ship fires produced general average declarations affecting thousands of shippers who had never encountered the term

In each case the pattern repeated itself: cargo held up security demanded importers with urgent goods discovering that their shipment was hostage to an adjustment process measured in years and considerable surprise that an age-old rule was still in effect

The Criticism

The doctrine has serious criticisms and the argument against it is coherent

General average developed when marine insurance did not exist and a trader faced ruin for a single voyage. Almost all modern cargo is insured and insurers could simply bear their own losses without the enormous administrative cost of adjustment. Adjusting a major loss consumes years of specialized work and legal expenses that ultimately fall on the same insurers who would have paid anyway

The counterargument is that general average covers expenses particularly salvage and port of refuge costs that benefit everyone and that neither party would have an incentive to incur alone. Eliminating the doctrine would create a coordination problem in exactly the situations where speed is most important

Reform efforts have reduced the categories of recoverable expenses through successive revisions of the rules rather than abolishing the principle

Note that both sides are arguing about the same thing from opposite ends. Critics say the sharing mechanism is redundant because insurance already spreads the loss. Proponents say the mechanism is not really about distributing losses but about who can be trusted to authorize emergency spending in the first few minutes. The ever-tightening reforms are an attempt to maintain the second function while getting rid of the administrative burden of the first

The Bottom Line

General average shares the cost of a deliberate sacrifice among all those whose property was saved by it which was a sensible arrangement before insurance and is still included in every shipping contract. Its practical consequence for a company is that a casualty anywhere on a ship can freeze your cargo until you clear security regardless of whether your goods were touched. Cargo insurance is what turns a cash flow crisis into a phone call which is why the doctrine is themost compelling reason to buy it. The rule has endured because it solves an insurance problem that was never addressed which is ensuring that the person on the bridge can act without personally paying for the decision