General average clause in shipping industry

The general average concept in shipping deals with losses arising during ocean transport that need to be shared between all cargo owners shipping on the vessel.

The general average clause can become relevant in several different situations such as when:

  • There is a fire onboard the vessel
  • When there is vessel collision out at sea
  • When cargo needs to be jettisoned in order to save the vessel
  • A general loss is only so considered when sacrificial action is undertaken to save the vessel/crew
  • General losses are only applied to direct losses. Other losses such as delays, loss of market share, loss contracts cannot be included in general average claims
  • Each party will bear equal share in computation liabilities
  • If salvage operations are done to retrieve cargo, these costs will be added to the general average

Further details of handling general average matters can be found in the text of York Antwerp rules 1994 of General Average.

When the general average clause needs to be invoked, cargo owners can expect the following to happen:

  • All cargo on board the vessel will be seized
  • Cargo owners will need to share the liabilities for the loss
  • In order to release the cargo quickly, cargo owners will usually need to put up a cash security bond

General average clauses can take many years to resolves as the claimed amount can run into millions of USD. If the appropriate level of insurance is procured, the insurer will put up the bond on behalf of the cargo owner. Since the monetary amounts in question are large, a loss adjustor or average adjustor may be involved. The costs of hiring a loss adjustor will also be split between all the cargo owners.

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