York Antwerp Rules 2004 Progress or problems for Underwriters and Shipowners?

1. York Antwerp Rules2004Progress or problems for Underwriters and Shipowners? Tim Madge FAAA - Partner Mediterranean Average Adjusting Company Marine Law and Insurance 2006, Moscow

2. What is General Average?

3. General Average • A form of international maritime law/ practice - first incorporated in York Rules 1864. • Exists irrespective of insurance or fault of any party. • All parties contribute to sacrifices and expenditure for the common safety/ safe prosecution of the voyage. • Contribution based on values at end of voyage. • Property lost subsequently on voyage does not contribute. • Security = Underwriters’ Guarantee or cash deposit or Bank Guarantee + Average Bond signed by Consignees. • Terms incorporated in Charter Parties & Bills of Lading.

4. Typical GA Sacrifices For common safety: • Jettison of cargo at a time of peril • Loss/ damage to ship or cargo extinguishing a fire • Damage to main engines refloating a laden vessel which is aground and in peril • Loss/ damage to property owned by third parties in consequence of refloating operations

5. Typical GA Expenditure • Salvage costs • Port charges at port of refuge • Crew wages at port of refuge • Cargo discharge for repairs • Cargo storage/ reloading costs • Temporary repairs • Overtime on repairs

6. Expenditure allowable York Antwerp Rules: 1974/ 1994 Expenditure for common safety and for common benefit (safe prosecution of voyage) 2004 For common safety but certain expenditure for common benefit now limited

7. Reasons leading to 2004 Rules • Perceived widening of scope of GA in 1994, such as anti-pollution measures • Cargo often contribute more than Vessel due to higher values • Reapportionment of Salvage in GA considered unnecessary and expensive • Desire to restrict GA to Common Safety and to limit Common Benefit • First set of YAR Rules introduced without consensus between Shipowning and other interests • 2004 Rules only applicable if incorporated in Charter Parties/ Bills of Lading.

8. Effects of 2004 Rules Who wins? Who loses?

9. Salvage awards inGeneral Average • Salvage based on values at termination of salvage services. • Contribution to General Average based on values at end of voyage. • Further losses/ damage/ sacrifices after termination of salvage services and before end of voyage affect contributions ultimately payable for salvage in GA. • Limits under YAR 2004.

10. Salvage allowable in GA York Antwerp Rules……..1974/19942004 LOF/ negotiated settlements paid by all parties Yes No Paid by one party on behalf of all Yes Yes

11. Independently negotiated Salvage awards1974/ 1994 Rules Salved valueSettlementGA Ship $ 3,000,000 $200,000 (6.7%) $250,000 Cargo 9,000,000800,000 (8.9%) 750,000 $12,000,000 1,000,000 1,000,000 = 8.3% Under 2004 Rules payments remain as settled

12. LOF Salvage award SHIP Sound value US$10,000,000 Deduct fire damage 1,000,000Salvage US$ 9,000,000 pays US$468,750 CARGO 1st consignment Sound value US$3,250,000 Deduct fire damage 250,000 US$ 3,000,000 pays US$156,250 2nd consignment Sound value US$3,250,000 Deduct:- Fire damage US$250,000 Extinguishing damage 600,000 850,000 US$ 2,400,000 pays US$125,000 US$14,400,000 pays US$750,000 = 5.2% of values

13. Reapportionment of salvage in GA SHIP Sound value US$10,000,000 Deduct fire damage 1,000,000GA (Salvage) US$ 9,000,000 pays US$450,000 CARGO 1st consignment Sound value US$3,250,000 Deduct fire damage 250,000 US$3,000,000 pays US$150,000 2nd consignment Sound value US$3,250,000 Deduct:- Fire damage US$250,000 Extinguishing damage 600,000 850,000 US$2,400,000 Add back Extinguishing damage 600,000 US$3,000,000pays US$150,000 US$15,000,000 pays US$750,000 = 5% of values

14. Effects of reapportioning salvage costs in GA • Benefits of a favourable settlement by one interest shared by others – 2004 Rules Individual Hull or Cargo Underwriters could gain or lose depending on figures. No change for Owners. • Uninsured/ unrepresented interests share in salvage arbitration costs - 2004 RulesHull and Cargo Underwriters lose. No change for Owners. • Disproportionate legal costs representing time charterers’ bunkers or freight shared by Ship and Cargo – 2004RulesHull and Cargo Underwriters gain. No change for Owners.

15. Excluding Salvage from GA • Underwriters save the costs and time required to reapportion salvage although still necessary to collect GA security. • Individual Hull or Cargo Underwriters could gain or lose as a favourable salvage settlement or disproportionate legal costs not shared. • Hull and Cargo Underwriters lose because uninsured/ unrepresented interests do not share salvage arbitration costs. • Beneficial for Owners as exclusion makes GA absorption clauses in Hull policies more effective.

16. Crew wages York Antwerp Rules……… 1974/19942004 Crew wages: Deviating to port of refuge and resuming voyage Yes Yes While detained effecting repairs Yes No Likely considerable losses to Shipowners under YAR 2004

17. Temporary repairs (1974/1994) Temporary repairs to complete voyage US$100,000 Assumed savings:- Cost of handling cargo…….US$50,000 Extra detention expenses to effect permanent repairs………. 25,000 Allowance in GA…..US$75,000 Excess US$25,000 not allowable.

18. Temporary repairs (2004) • Temporary repairs …..US$100,000 • Permanent repairs…… 400,000 US$500,000 If estimated permanent repairs at port of refuge:- A. If US$500,000 = no GA allowance B. If US$450,000 = US$50,000 allowable, subject to GA savings. 2004 Rules result in higher claim PA claim on Hull Underwriters but lower costs to Cargo Underwriters.

19. Transhipment/ forwarding cargo1974/ 1994/ 2004 Rules • Owners not normally obliged to forward cargo • Requires special agreement • Savings in costs allowable • Allowances under 1994/2004 Rules limited to costs which cargo interests would incur forwarding at their own expense (Hull Underwriters may be liable for the extra costs which not GA)

20. GA Commission and Interest2004 Rules • No commission allowable under 2004 Rules to party paying GA expenditure. Benefit to Underwriters but considerable loss to Shipowners as they usually incur the expenditure (previously 2% excluding crew wages and fuel replaced after the voyage). • Rate of interest on GA expenditure and sacrifices to be set annually by CMI under 2004 Rules. Previously 7% fixed rate under 1974/ 1994 Rules. Likely benefits to Underwriters but considerable losses to Shipowners.

21. Time Bar New rule in 2004 – Subject to mandatory rule on time limitation under any applicable law: - Rights to GA contribution cease unless party claiming brings legal action within 1 year of GA Adjustment issue date. - No action can be brought after 6 years from termination of GA voyage. - These periods can be extended by agreement of the parties. - Rule does not apply between the GA parties and their Underwriters.

22. Summary of changes in 2004 • Salvage excluded except when paid by one party. • No crew wages during detention at port of refuge. • Different treatment of temporary repairs. • No commission (previously 2%) • CMI set rate of interest annually (previously 7% p.a.). • Time bar provision.

23. Example comparing GA allowances Allowance19942004 Salvage US$ 500,000 Remains as paid Wagesto port of refuge 2,500 2,500 Wages at port of refuge 17,500 ---- Temporary repairs 75,000 50,000 Commission 11,500 ----- Interest 40,000 2,000 (if 4%) US$ 646,50054,500

24. General Average in future • Shipowners may continue to insist on YAR 1974 or 1994 as more favourable than 2004. • B/Ls providing for 1994 YAR still apply as YAR 2004 are new set of rules, not an amendment or modification of 1994 Rules. • Absorption clauses could reduce number of GA claims against cargo. • BIMCO Average Bond Clause may reduce time and costs of collecting GA security.

25. End of Voyage