The principle of general average

Why is it important to understand the financial obligation if you ship using sea freight.

 

If you ship by sea freight you may have unexpected costs

General average is a principle in maritime law that applies to sea freight. It basically means that if there's an emergency at sea and the captain must make a sacrifice, incurs expenses for repairs, or salvage due to an emergency, you, as a cargo owner, would be responsible for a portion of those costs. This can be a significant unexpected expense.

 

General average, a centuries-old principle of maritime law

Imagine a storm threatens to sink a cargo ship. The captain chooses to jettison some containers overboard to lighten the load and save the vessel. Here's where general average comes into play. All stakeholders in the voyage – the ship owner, and the owners of the cargo (including the jettisoned containers) – share the financial burden of this sacrifice proportionately.

This principle ensures fairness. The party incurring the loss (the jettisoned cargo owner) is compensated by others who benefitted from the action (the saved ship and remaining cargo). A neutral third-party adjuster calculates each party's contribution based on the value of their stake in the voyage.

 

Here are a few high-profile examples of general average

March 2024: The M/S Dali, a 9,000 TEU capacity vessel struck the Baltimore Bridge, which subsequently collapsed on top of the bow of the vessel. Whilst the salvage operation is expected to last months, General Average was declared mid-April meaning cargo owners face large costs to recover their cargo on board.


March 2022: The Ever Forward container ship ran aground in Chesapeake Bay, while departing the Port of Baltimore. After two unsuccessful refloating attempts, Evergreen Marine, the ship's owner, declared general average after being stuck for 35 days. This was to ensure all parties were prepared to contribute to the potentially high costs of refloating the ship.


March 2021: The Ever Given which became wedged in the Suez Canal for six days, blocking a major global trade route. Salvage efforts required declaring general average and the Egyptian authorities seeking compensation of close to $2 billion.


January 2020: The Northern Jupiter, an 8,500 TEU (Twenty-foot Equivalent Unit) container vessel, suffered a main engine fire while on a journey from Singapore to Port Klang, Malaysia and general average was declared and all parties with a stake in the voyage became liable to contribute towards the expenses incurred due to the emergency.


March 2018: The Maersk Honam, a fire erupted leading to the declaration of general average. The general average declared for cargo owners with cargo aboard the Maersk Honam was 54% - meaning for every $100,000 of cargo on board, cargo owners would have to pay $54,000 to have their goods released.


 

A general average declaration can result in significant unforeseen expenses

These incidents highlight the importance of sea freight shippers understanding general average. While encountering a general average situation is uncommon, being prepared is key. Discussing general average with your freight forwarder and ensuring adequate cargo insurance are crucial steps. By understanding this principle, sea freight shippers can navigate unexpected circumstances with greater financial security and minimise disruptions to their supply chains.



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