Let’s just talk – May 2022: general average | Seward & Kissel LLP
Almost a year to the day after the EVER GIVEN blocked the Suez Canal, making global headlines and bringing mainstream attention to the world of shipping, bad news has once again hit the parent company of EVER GIVEN. The EVER FORWARD ran aground in the Chesapeake Bay, where it lay for over a month, requiring multiple refloating attempts over several weeks, including unloading hundreds of containers loaded with cargo. The two ship groundings have exacerbated global supply chain headaches and caused enormous hardship to both the parent shipping company and the cargo on board. Both cases also saw shipowners declare “general average” – a way to manage the inevitable financial impact of groundings, and the subject of this article.
What is it and what does it do?
General average is a principle dictating that all parties involved in a voluntary sea freight emergency share the damage or loss equally. The most commonly referenced interpretation (the York-Antwerp Rules, 2016 update) states that “there is a general average act when, and only when, any extraordinary sacrifice or expense is intentionally and reasonably made or incurred for common safety with the aim of preserving from peril goods engaged in a common maritime adventure.The concept of general average essentially protects each party involved in a cargo emergency from bearing the total loss by dividing the loss among all parties involved .
The classic example of general average is the dropping of cargo to lighten a stranded ship, in the hope of freeing the ship from its stranded position. The overall average value of loss is calculated by a neutral third-party general average adjuster, and all participants, including the shipowner and owners of all goods on board, contribute to compensating for losses incurred.
Why is he there?
General average is used to distribute losses in an emergency in order to avoid additional losses. If cargo must be jettisoned to move a stranded ship forward, it is the ship’s responsibility to jettison some of the cargo and resume its intended voyage with the remaining cargo, rather than standing still with all the cargo on board. Such action allows shipowners to mitigate cargo damage claims and helps to maintain at least some cash flow for the ship and cargo owners, as the release of cargo allows the ship to continue its operations. remaining deliveries.
Why is this important (or not so important) for the lender?
Lenders are of course concerned with the repayment of their loans, which is obviously impacted in the event of a freight emergency. General average provides lenders with some protection in emergency situations, as sharing costs and keeping the vessel as close to schedule as possible helps to mitigate long delays that hamper revenues that are ultimately used to repay the loans. Additionally, General Average encourages shipowners to take decisive and immediate action to preserve the ship (and its value) in an emergency accident scenario, as shipowners can count on a future contributory apportionment. costs, which is safeguarded by the mandatory posting by cargo owners of security bonds. Although a lender may not be a party to a general average situation, its borrowers are usually the party owners of the ship or cargo involved.
How does this affect a borrower in practical terms?
The borrowers are often shipowners in a general average situation. Correspondingly to lenders, sharing the cost of any freight contingencies with freight owners helps mitigate the loss of revenue for the borrower, helping the borrower avoid defaults on their loans.
How is this relevant to shipping?
General average is a specific maritime principle which dates back to the 19th century in its current codification, but which dates back several centuries, even up to around 800 BC. case of general average during the past year alone. At least now the EVER FORWARD is no longer standing still.