What is GENERAL AVERAGE?

What is GENERAL AVERAGE?

Back on 23rd March we all watched or heard the news that the vessel the “Ever Given” owned by shipping company Evergreen had gotten wedged across Egypt’s Suez Canal, blocking one of the world’s busiest trade routes. It took until 29th March for the vessel to be freed but it appears that the drama has only just started.

For a sense of perspective, about 12% of global trade passes through the Suez Canal, which connects the Mediterranean to the Red Sea and provides the shortest sea link between Asia and Europe. The Ever Given, a giant container ship the length of four football pitches, capable of carrying 20,000 teu’s (20’ equivalent units) was bound for the port city of Rotterdam in the Netherlands from China and was passing northwards through the canal on its way to the Mediterranean.

On average, nearly 50 vessels per day pass along the canal, although at times the number can be much higher. It is particularly important as an avenue for oil and liquified natural gas, enabling shipments to get from the Middle East to Europe.

To free the vessel is it reported to have taken more than a dozen tugboats, multiple dredgers and 800 people over a 6 day period. Egyptian authorities recently said they could seek more than $1 billion in damages to cover the costs incurred and recover the loss of canal revenue.

So who will have to pay this bill?

The owner of the Ever Given notified Evergreen on April 1 that it declared a “GENERAL AVERAGE”, meaning that all shippers will be required to share the relevant expenses incurred in ship rescue.

Historically General Average is an old concept dating back hundreds of years that has evolved over time with the shipping industry. Cargo would occasionally need to be thrown overboard in emergency situations to lighten loads and save the ship. General average arose to help spread this loss. These days, the general average terms are outlined in a shipment’s bill of lading and can cover a long list of expenses, including towing and salvors.

The job of determining how much the shippers will have to pay is up to an adjuster. The process requires getting in touch with all of the shippers that had cargo on board and then basing a calculation against the cargo invoice.

The last time a large container vessel declared a general average was in 2018 following the fire aboard the vessel “Maersk Honam”. The fire happened in March and shippers were able to pay to release their cargo by May. Cargo owners aboard the Honam had to pay 54% of the cargo’s value to get it released, which was described as being 42.5% of the cargo value for the security, plus 11.5% as deposit on the general average.

A shipper’s insurance will typically cover the guarantee and other fees associated with the general average.

Evergreen said its insurance will cover the carrier’s container, fuel and other assets to help reduce the risk of cost sharing.

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