Extraordinary sacrifice or expenditure

The YAR stipulates that one of the factors to determine GA is either extraordinary sacrifice or extraordinary expense. In fact, sacrifices may include cargo, ships and freight, etc. while extraordinary expenses that may arise are salvage, refuge costs at the port of refuge, environmental costs, substituted expenses, etc.

A typical case involving sacrifice is Robinson v Price6, where during a voyage, the vessel had a leak causing water to flood into itself. To stay afloat, the vessel must ontinuously pump water out. By doing this action, the vessel quickly used up all the coal, cargo and parts of the vessel were forced to be burned to get fuel to continue pumping water. As this sacrifice was unusual, the loss of parts of the vessel and its cargo was considered GA.

Regarding expenses, in Société Nouvelle d’Armement v Spillers & Bakers Ltd.7, the captain hired a tugboat to tow their vessel from Ireland to England to avoid being attacked by undersea submarines during World War I. Typically, a tugboat is engaged to assist a vessel in entering and leaving port, however, in this instance, the tugboat intervened in the vessel's voyage. However, the Court held that towing costs were not GA because they were not unusual during wartime.

In short, a sacrifice or expenditure must be of an extraordinary nature to be considered a GA.8 Therefore, ordinary expenses or losses incurred by the shipowner when performing the contract of carriage are not recognized as GA.

Intentional act

The sacrifice or expenditure shall be made or incurred intentionally.8 This means that the action must be chosen according to the free will of the decision maker and there are no accidental losses. Losses due to the effects of natural factors are only counted as particular averages, regardless of their unusual nature.9 For example, when a fire occurs, using water to put out the fire is intentional. Therefore, water damage can be recognized as a GA, while fire damage remains a particular average because it arises due to an accident.

The intentional act is either that of the captain or an act that he has ratified or approved.9 In case of emergency or for any reason the captain is absent, if the chief officer or another person on board makes a decision, the action will still be considered as GA, provided that in such a situation the captain would make the same decision.

In Athel Line v London & Liverpool WRA10, two vessels in a convoy departing from Bermuda to the UK had to return to Bermuda on orders from the Convoy Commander. As a result, the two vessels consumed more fuel and stores. The court held that the losses due to this delay were not the GA because the expenses were the result of blind compliance with orders from higher authority rather than a deliberate action by the captain. It can be seen that a forced action is not an intentional action, so the loss caused by it is not considered a GA.

Reasonable act

For a sacrifice or expenditure to qualify as a GA, it must be reasonably made or incurred.8 The captain’s action would be reasonable if taken with due discretion based on the information available to the captain at the time of the action.1

In The Cape Bonny11, when the engine broke down, the ship booked a tugboat for $55,000 per day, despite the apparent availability of another tugboat at approximately $40,000. The court held that the decision to order the more expensive tugboat was reasonable under the circumstances. As immobilization due to engine failure is a danger that must be resolved immediately even in fine weather. Furthermore, in this case, the ship is also likely to be in danger due to the risk of storm MA-ON.

The Rule Paramount of YAR emphasized the reasonableness requirement of a GA action that “In no case shall there be any allowance for sacrifice or expenditure unless reasonably made or incurred”. The phrase “all the circumstances” in this provision made reasonableness of action the paramount criterion for a valid GA claim under the YAR.

Time of peril

A sacrifice or expenditure must be made or borne in times of peril.8 This means that the danger has to threaten the safety of the vessel and its cargo, it must exist in reality and not be imaginary. A sacrifice resulting from an erroneous assessment of the existence of a danger is not considered a GA.12

In Joseph Watson and Sons Ltd v Fireman’s Fund Insurance Co13, the captain believed the vessel was on fire and to extinguish it, he put steam into the cargo hold, which damaged the cargo. In fact, the ship never caught fire. It was held that there was no GA because there was no real peril.

Although the hazard must be real, it does not need to be immediate. In Vlassopoulos v The British & Foreign Marine Insurance Co Ltd14, the ship was placed in a port of refuge to have a faulty propeller repaired. The expenses incurred were recognized as GA since although the ship was not in actual peril at the time it entered the port of refuge, the action was reasonable to avoid potential danger later in the voyage. In other words, even though the danger has not yet occurred, it still exists. Thus, costs arising from reasonable actions to avoid potential dangers during the voyage may also be recognized as GA.

Common safety

To contribute to the GA, sacrifice or expenditure must be made for the common safety of the common maritime voyage.9 Therefore, a sacrifice or expenditure incurred just to ensure the safety of a part of the property during the voyage is not a GA. This principle represents the will of sacrifice, which is to put common safety first, the losses of the minority can be sacrificed to ensure the benefits and safety of the majority. This principle leads to the following two consequences:

First, expenses incurred after a cargo has been brought to safety cannot be included in GA.9 These costs are considered to be beyond the scope of GA, as they do not contribute to the immediate preservation of the cargo during the voyage. Additionally, any expenditures related to routine maintenance or repairs carried out after the cargo's safety is ensured are typically excluded from GA contributions.

Second, the GA depends on the ultimate success of the sea voyage.9 The act of sacrifice must truly bring safety to both vessels and cargoes. If it does not bring common benefits or does not make the voyage successful, it is not recognized as a GA.

In short, sacrifices and expenses are recognized as GA when they are made or incurred voluntarily and reasonably in time of emergency for the purpose of preserving property in danger during the common voyage. A loss that does not satisfy the above analyzed conditions is counted as a “particular average” and the other parties in the common maritime voyage do not have to share this type of average.

Jettisoned cargo

The most popular GA case is about the cargo being sacrificed when they are jettisoned from ship to ensure the common safety.9 In normal circumstances, when goods are jettisoned for reasons of general safety, all losses resulting from this action are considered GA losses. These losses may affect the ship itself or other cargo, as long as they directly arise from the sacrifice of the jettisoned goods.15 However, to mitigate the contribution to GA from such losses, Rule I of the YAR specifies that cargo jettisoned shall only be considered a GA loss if the cargo was carried in accordance with recognized commercial usage.16 Alongside those general principles, the determination of GA arising from the jettisoned cargo from the vessel needs to be examined in specific cases such as jettisoned cargo resulting from the fault of this cargo, jettisoned cargo on deck, or incidents of damage caused by the jettisoned cargo.

Salvage cost

Salvage first appeared in Rule VI YAR 1974. The purpose of this rule is to force the parties to bear the cost of salvage whether it is stipulated in the contract or not, and at the same time recognize salvage as GA after the end of the common voyage when this salvage action is taken for the common safety.21, 22

However, as Rule VI evolved to the YAR 2004 version, salvage costs were no longer recognized as GA,23 leading to this version being rarely used in contracts. Therefore, at the 2012 CMI Conference in Beijing, the International Working Group (IWG) was established to draft a new set of Rules to meet this requirement, which is the YAR 2016 version.

Accordingly, Rule VI of YAR 2016 provides that any payment in the nature of salvage, made for the purpose of preserving the property concerned from peril during a common adventure at sea, whether under contract or arising independently from the contract is considered GA. However, this rule is applied differently depending on the legal perspective of each country, leading to different consequences for the payment of salvage costs.

In several countries, pure salvage (salvage without a contract) is still accepted if it meets the relevant conditions.24 Accordingly, this salvage operation arises when a person, voluntarily (that is, without any pre-existing contractual or legal obligation), acts to protect or contribute to the preservation of any vessel, cargo, or other salvage object at sea from danger.25 Thus, it can be seen that when performing obligations under a pre-existing contract, salvage will not be considered a voluntary activity according to customary salvage law.

Unlike pure salvage, contractual salvage is carried out based on agreements between the ship owner and the prospective salvor, and this contract is binding on the parties.16 Typically, salvage agreements are based on a standard form; The most widely known form today is Lloyd's Standard Form of Salvage Agreement.24, 26 Accordingly, LOF is the most commonly used form for a “no cure - no pay” contract15, meaning that the salvor will only receive a reward for his salvage service if the salvage operation is successful. However, the “no cure - no pay” clause still has an exception. When the salvage is unsuccessful, but the salvage ship has prevented the risk of causing damage to the environment, it will still receive an award.27

For both types of salvage mentioned above, according to Rules VI YAR 2016, they are considered GA. In Jason28, the United States Court of Appeals (Fifth Area) rendered that all salvage costs paid to salvors are determined based on various criteria related to the facts of the situation and at that time are recorded as GA.

In other cases, the GA adjustment agencies might propose to the parties that if it is found that recalculating salvage costs according to GA will not significantly alter the figures or lead to extraordinary costs. The parties may then decide whether to include salvage costs in GA or not.29

Therefore, whether salvage costs are recognized as GA depends on the version of the YAR that the parties agree to apply. However, if the parties choose to apply the YAR 2016 to their contract and incorporate them with the BIMCO (Baltic and International Maritime Council) standard carriage contract, then salvage costs shall be recorded as GA.

Repair and expenses at port of refuge

Piracy and Kidnap and Ransom Insurance

Kidnap and Ransom (hereinafter referred to as “K&R”) at sea occurs when pirates13 engage in “shopping”37 raids, which may result in property loss, or more seriously, threaten the lives of shipowners and crews as shipowners and crews hold little value to pirates. They could be killed, thrown overboard, or left adrift.38

Previously, K&R insurance was developed to indemnify shipowners against risks from pirate attacks. In Hicks v. Palington39, where property was voluntarily surrendered to pirates in exchange for the release of the vessel, cargo, and crew, such sacrifice was deemed a GA loss. In such cases, insurance compensation is based on the loss of goods seized.

However, modern piracy tends to involve attacking vessels and holding crew members hostage for ransom. Moreover, besides ransom payments, significant additional expenses arise to ensure the release of the vessel and cargo, such as payments to negotiation teams, transportation of ransom, ransom insurance, as well as initial search costs.40 It’s worth noting that expenses including crew wages, vessel maintenance, and fuel consumed during the time the vessel is avoiding being detected after a pirate attack, or while detained awaiting negotiation for vessel release, are excluded under Rule C(3) of YAR 2016 from the GA.

In the case of MV Longchamp41, a crucial issue in the appeal was whether operational expenses incurred during negotiations could be included in the GA under Rule F YAR 197412. After deliberation, the UK Supreme Court accepted the owner's appeal. It ruled that reducing the ransom payment to $1.85 million was not a “substitute action” for the initially demanded ransom but a variation.42 Accordingly, Rule F does not mandate expenses arising after a substitute action. Thus, expenses incurred during ransom negotiations shall be recognized in the GA loss. Additionally, the court held that Rule C was not applicable in this case: “Rule C applies to expenses and other payments required to be indemnified as GA losses resulting from an action causing GA... This rule does not apply to expenses referred to in Rule F... By definition, the amounts that may be recovered under Rule F are not to be taken into GA, but are alternative choices to the amounts allowed”. Furthermore, there's no need to consider the owner’s intention when assessing an expense under Rule F, and even if the shipowner agreed to the initial ransom, costs due to delay may still arise and should be considered part of the shared costs.

Under English law, paying ransom itself is not illegal;43 Therefore, if the ransom meets the 5 criteria of Rule A YAR, it may be considered a GA.11 However, in Somali piracy cases, there’s a perspective that piracy is to fund terrorist activities, which according to modern anti-terrorism laws, financing terrorism directly or indirectly is illegal.40 Therefore, expenses related to kidnap and ransom may not be considered GA.

Thus, whether expenses related to kidnapping and ransom are considered GA depends on the domestic law where the ship is destined. If the parties do not have clear provisions agreeing on the applicable law in the carriage contract, it will govern the activities contributing to the GA.

GA loss caused by the fault of a party in the common maritime adventure

The right to claim contribution to GA is independent and not dependent on the cause of the GA. When a GA occurs, any party may demand contribution from other interested parties without considering whether the fault lies with them. This stems from the fact that, in many cases, the interested parties have an obligation to contribute to GA to immediately remedy potential damages, such as oil spills, which pose a risk of marine environmental pollution. However, this contribution to GA will not prejudice any form of compensation or defense that may be pursued against the party responsible for this fault. This means that, at the time of the GA occurrence, interested parties have an obligation to contribute to address the consequences, but they retain the right to initiate separate legal proceedings to recover the amount they have contributed to the GA from the party at fault for the GA. Prioritizing the exercise of the right to contribute to GA will not prejudice or limit the rights of other entities to exercise rights of complaint or litigation against the party causing the fault leading to the GA incident.44 This issue is recognized in Rule D YAR 2016. As a consequence of this rule, a party suffering loss from the GA incident may be compensating for other interested parties from the contribution they have made to the GA.45

The case of a vessel being unseaworthy is one of the typical examples of a GA loss arising from the fault of one party. In Alize 1954 and another v Allianz Elementar Versicherungs AG and others46, the vessel CMA CGM Libra was berthed at Xiamen port, and upon commencement of the voyage, the working chart malfunctioned, failing to indicate the risk of shallower depth outside the navigational channel, which could endanger the vessel. The second officer prepared a passage plan based on the faulty working chart without noting the hazardous positions. This led the vessel to enter shallow waters and run aground. Consequently, the shipowner had to pay for the incurred expenses for salvage operations and refloating the vessel. Subsequently, the shipowner declared GA and demanded contribution from all interested parties under YAR. However, some cargo owners disagreed with the shipowner’s contribution demand, so the shipowner sued for contribution against these cargo owners. According to Rule D YAR 2016, the damaged party is entitled to contribution for sacrifices or extraordinary expenses it had to bear, even if it was at fault for the GA event. However, this right of the at-fault party does not affect the ability of interested parties to file claims/litigation against that party’s fault. In the aforementioned case, cargo owners argued that the vessel was unseaworthy from the outset of the voyage due to the shipowner's failure to accurately update the working chart. The Court concluded that the shipowner breached the duty under Article III(1) of the Hague-Visby Rules to exercise due diligence to make the vessel seaworthy at the commencement of the voyage and therefore was not entitled to any exceptions under Article IV(2) of the Hague-Visby Rules. In this case, the authors agree with the Court's finding that the shipowner must compensate cargo interest for the amount they contributed or were not required to continue contributing to the GA in case they had not contributed. This is because, from the outset of the voyage, the vessel was unseaworthy due to faults arising from the nautical chart and the faulty working chart. Nautical charts and working charts are documents related to the voyage aimed at ensuring the vessel’s seaworthiness.47 Therefore, when failing to ensure these factors to guarantee the vessel’s seaworthiness, in the event of a complaint from parties with related interests, the shipowner will have to compensate parties with related interests for the amount they contributed or were not required to continue contributing to the GA in case they had not contributed.

However, in another case, the shipowner was exempt from liability under Article IV(2)(b) of the Hague-Visby Rules and had the right to claim a GA contribution from cargo interest. In Glencore Energy UK Ltd v Freeport Holdings Ltd, a dispute arose between the cargo owner (Glencore) and the shipowner regarding the expenses of the salvage operation. During the voyage, the chief engineer intentionally set fire to the ship’s engine room, resulting in the vessel being immobilized and requiring salvage to be brought safely back to port. These salvage costs were deemed a GA, and the cargo owners reimbursed the salvage expenses to the salvors. At the time of the litigation, the cargo owner sued the shipowner on the grounds that the GA arose from the shipowner's direct fault in deliberately setting fire to the engine, and therefore, the shipowner was liable to compensate for the GA incurred by the cargo owners. However, the shipowner argued that they were exempt from liability and had the right to claim a GA contribution from the cargo owners. In the Appellate Court session, the judges ruled that the shipowner was exempt from liability and had the right to claim a GA contribution. This conclusion was based on two grounds: (i) the fire did not result from the carrier's actual fault or intentional act; they determined that the fire arose from the intentional act of the chief engineer (a member of the crew) rather than the intentional act of the carrier, while also determining that the chief engineer did not exercise civil competence when performing the act; and (ii) the fire did not result from a breach of the carrier’s obligation as provided for in Article III(1)(a) of the Hague-Visby Rules. Therefore, the shipowner was exempt from liability under Article IV(2)(b) of the Hague-Visby Rules and had the right to claim a GA contribution from parties with related interests.48, 49

From the above cases, it can be observed that claiming a GA contribution in cases where the fault arises from the actions of the shipowner/crew is very complex. Parties need to determine whether shipowners are exempt from liability under relevant international conventions (such as the Hague-Visby Rules). If it is determined that the shipowner is exempt from liability, then the shipowner has the full right to demand contributions to the GA from cargo interest, and conversely, if the shipowner is not exempt from liability, then they have no right to demand contributions to the GA from cargo interest.

Additionally, faults leading to GA may arise from cargo owners. For example, a ship catches fire while underway due to a chemical leak from an ISO Tank Container10. This incident was determined to be caused by the fault of the container owner. The extinguishing of the fire resulted in salvage costs and other expenses. In cases where the shipowner declares a GA, only expenses such as salvage costs and damage to cargo due to water ingress during firefighting are considered GA. Expenses related to damaged cargo due to the fire and damage to ISO Tank Containers are not considered GA. Damaged cargo due to the fire constitutes separate losses, as it is not incurred for the purpose of ensuring common safety for the vessel or damages resulting from actions to ensure common safety. In particular, not only shall the container owner not receive any contribution to general average from other interested parties for the general average act caused by their fault, but they shall also contribute to other general average losses.8

Regulations on Supplementary Costs

The definition of GA is outlined in Article 292(1) of the Vietnam Maritime Code 2015 and sacrifices or expenses must satisfy the criteria specified in this article to qualify as GA. Article 292(2) also provides “Only losses, damages and expenses which are the direct consequence of the act causing the general average shall be included in the general average.”50. Nevertheless, the Vietnam Maritime Code presently lacks a provision equivalent to Rule F of the YAR regarding supplementary costs. In the Longchamp case referred to in section 4.4 of Piracy and Kidnap and Ransom Insurance, when considered under Rule F, the operating costs of the vessel incurred during the negotiation period are not required to satisfy the exclusion principle of “indirect loss” of Rule C of the York-Antwerp Rules or Article 292(2) of the Vietnam Maritime Code 2015. In addition, we do not need to consider the “intentional” criterion of the owner when considering an amount under Rule F. Hence, supplementary costs substituting for another expense that would otherwise qualify as GA are prone to be disregarded in the assessment of which sacrifice, or expense qualifies as GA, as they may not meet the criteria and principles outlined in Clauses 1 and 2 of Article 292 of this Code. This flaw renders the process of ascertaining and distributing the GA. Typically, these expenses are substantial, and if treated as individual average, they would impose a financial strain on shipowners or cargo owners. Based on the aforementioned reason, the authors contend that supplementary costs should be classified as a “distinct” form of GA in the Vietnam Maritime Code. This would enable justice agencies, average adjusters, and other interested parties to assess sacrifices and GA costs more comprehensively. This provision can be incorporated as a clause within Article 292, with the content drawing inspiration from Rule F of the YAR. The stipulations are as follows: “Any supplementary costs assumed in place of another expense that would typically be acknowledged as general average shall be regarded as general average and granted up to the maximum extent of avoidable general average, without considering any other potential savings.”

Criteria for sacrifices “and” extraordinary expenditure to determine general average

Article 292(1) of Vietnam Maritime Code 2015 is built as the same as Rule A of YAR, however, there exists a discrepancy in how Rule A defines one of the criteria for extending GA, including “sacrifice or extraordinary expenditure”, whereas Article 292(1) specifies "sacrifice and extraordinary expenditure”.

From a comparative law perspective, there are virtually no countries that require the criteria for determining general average losses to include both sacrifice and expenditure simultaneously. For instance, the UK Marine Insurance Act of 1963, Thailand’s General Average Act in maritime voyages, and the Maritime Code of the People’s Republic of China 1992, all stipulate this criterion as either “sacrifice” or “extraordinary expenditure”, similar to the YAR. Besides, in the case of Star of Hope51, Supreme Court of the United States has defined GA as: “The contribution of all parties on common maritime adventure to indemnify for the losses incurred by one of their members either due to the relinquishment of a portion of the vessel or cargo to preserve the remaining assets and protect the lives of the crew or individuals from imminent peril; or on account of specific essential expenditures that one or more parties must shoulder for the mutual advantage of all rights holders in the enterprise”.52

Thus, the losses determined in GA will include:

(i) Losses arising from the deliberate sacrifice of a portion of the vessel or the jettisoning of part of the cargo, carried out to rescue the ship from peril; or

(ii) Amounts arising from special charges for the general benefit of the vessel and cargo.53

Sacrifice and extraordinary expenditure are two different concepts and scopes of determination. If the cargo heats up to a degree that jeopardizes the vessel's safety and is accordingly abandoned, it will be considered sacrificed without incurring any additional extraordinary expenditure. Similarly, the expenditure accrued during the entry and departure from a port of refuge, related to unloading and reloading cargo, will not warrant any additional sacrifices. It means, when determining the GA, it is not necessary to have “sacrifice” and “extraordinary expenditure” at the same time according to the provisions of the Vietnam Maritime Code, which just rely on (i) there are unusual sacrifices; or (ii) there is extraordinary expenditure.

Based on the aforementioned analysis, the authors suggest that Vietnam Maritime Code 2015 revise the provisions in Article 292(1) to read as follows: “General average comprises sacrifices or extraordinary expenditure made deliberately and reasonably for the collective safety aimed at rescuing the vessel, cargo, luggage, freight services, and passengers from common peril.”