27 Nov 2023

General average: Law and practice in the UAE

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Introduction to the general average concept

The principle of general average has its origin in the earliest days of shipping and is based on simple equity. The concept of a "general average" is prevalent across the maritime trade sector and is a helpful mechanism to determine and distribute losses across stakeholders when there is a voluntary sacrifice to save the cargo and/or the vessel from greater damage or risk.

As a starting point, Federal Law No. 26 of 1981 on the UAE Commercial Maritime Law (the "UAE Maritime Law1") would not qualify a dispute to be subject to  general average unless such a dispute falls within the definition of a 'Maritime Loss'.

A Maritime Loss is defined under Article 340 of the UAE Maritime Law as "[E]very loss or damage caused to the vessel or the cargo during the maritime voyage, as well as any sums paid by way of exceptional expenditure to ensure the safety of the voyage". Each maritime loss is settled in accordance with the relevant provisions of the UAE Maritime Law, as set in more detail below. 

A maritime loss can be categorised into two categories: a 'private loss' or a 'common loss'. Private losses are the losses that do not fulfil the conditions of the common average, such losses to be sustained by the owner of the damaged object or the person incurring the expenditure, without prejudice to his right to have recourse against whoever causes the loss or damage or benefits from expenditures. On the other hand, common or general losses are the sacrifices and exceptional expenditures spent intentionally and in a reasonable manner in favour of public security and for the aversion of a serious danger threatening the ship and/or the cargo. The justification that underlies the principle of general average is that a party who has suffered an exceptional financial loss to save property belonging to others has the right to be compensated for such loss.

Definition of general average under UAE Maritime Law

General average is defined by Article 342(1) of the UAE Maritime Law as "sacrifices and exceptional expenditures spent intentionally and in a reasonable manner in favour of the public security and or the aversion of a serious danger threatening the ship and the cargo…". This includes ten instances stipulated expressly in Article 342(2) of the UAE Maritime Law. 

Instances of general average

Broadly speaking, any sacrifices and exceptional expenses incurred intentionally and in a reasonable manner for the public interest or the aversion of potential danger or damage to the ship and/or the cargo on board shall be deemed a general average. Accordingly, the party claiming its loss is a general average shall establish and substantiate its claim. However, Article 342(2) of the UAE Maritime Law sets out particular scenarios that would constitute a general average situation, as follows: 

  1. Jettisoning goods into the sea and damage caused to the vessel or cargo by such actions.
  2. Deliberately stranding the vessel for public safety, increasing the speed or the steam in view of refloating the vessel, and bearing the damage caused to the vessel or cargo by such action.
  3. Damage caused to the vessel or cargo because of the penetration of water or the creation of a hole in the vessel in view of extinguishing a fire erupting therein.
  4. Expenditures to lighten the vessel's load, including costs and hire for offloading and reloading the cargo, in the event of unintentional stranding or grounding of the vessel.
  5. Objects and provisions required for use for public safety, including additional bunker needed in exceptional circumstances. Expenditures of the recourse of the vessel, for the public safety, to an anchorage because of exceptional circumstances or cost of resuming the voyage with its first cargo or a part thereof, as well as the expenses of the sailing thereof to a port other than the one where it is anchored for repair.
  6. Expenditures of unloading of goods, fuel, or provisions, should it be necessary to repair damage deemed a common average and because of which the vessel cannot resume the voyage without such repair. This shall include the expenditures of reloading, stowing, storing, and insuring the goods offloaded, as well as any damage incurred to the cargo, fuel, and provisions during the carrying out of such operations.
  7. Wages of the master and the crew, the value of fuel and provisions used during the extension of the voyage because of the recourse of the vessel to a port or an anchorage for protection or for repairs deemed of common average and such within a reasonable period in order to render the vessel seaworthy for the continuation of the voyage.
  8. Expenditures of assistance and towage of the vessel.
  9. Expenses of settlement of common average.

It is worth noting that whilst  general average would apply to material damages and expenses arising from an act qualified as a common average instance, indirect damage and/or expenses arising from the delay or breakdown of the vessel, including the market price fluctuation of the goods or vessel, shall not fall within the general average. However, expenses spent in lieu of other expenses that, if spent, would have been deemed common average shall be deemed common average, and such expenses shall be within the limits of the amount that would have been spent.

Appointment of a general average adjuster

Once the ship owner has declared a general average scenario, a mutually agreed expert makes the calculation and determination of the losses incurred by each stakeholder. Such an expert is called a general average adjuster. However, if the parties do not reach such an agreement, calculation shall be determined by at least one court-appointed expert. Similarly, if the parties cannot agree on a settlement regarding the incurred losses, the dispute will be referred to any competent court with jurisdiction to hear the dispute.

The role of the average adjuster is to divide the total general average amount in proportion to the value of all property that has been saved and reaches its destination.

Bars from reliance on the general average principle

While the concept of general average is broad, the UAE Maritime Law entails numerous factors that will prevent stakeholders from relying on the general average principles and recovering losses on this basis; these are known as 'bars' to the general average concept.

The most relevant bar to the general average concept is that if the loss or expenditure was incurred by the party at fault. That party will be barred from relying on the general average principle under Article 344 of the UAE Maritime Law. That said, other stakeholders in the voyage can still declare their losses and expenditures as general average losses. Furthermore, if the loss is arising from a navigational error of the master, the operator/disponent owner can also invoke the general average principle. 

Goods loaded on the vessel's deck contrary to customary practice shall be a part of the general average should they be salvaged. However, if they were jettisoned or lost, the owner of such goods may not consider them as common average unless it was established that the goods were shipped on deck without its consent or contrary to the maritime custom at the port of loading.

Equally, any goods shipped on board the vessel without the knowledge of the master or in circumstances of misdeclaration shall be excluded from being deemed as a general  average.

Time bar

A demand for participation in a general average by the cargo owner regarding loss of cargo shall not be accepted unless the master is notified in writing of such demand within 30 days from delivery. Similarly, a demand for participation in the general average contribution by the shipowner concerning a loss or damage to the vessel shall only be admissible if such demand is notified to the cargo owners within 30 days from the date the voyage was concluded.

Furthermore, in the event that a general average contribution claim was denied and in the absence of a lawful excuse, no claim for the participation in the general average shall be heard after the lapse of two years from the date of the arrival of the ship to the port of destination or to the port where the maritime voyage ended. However, should an average adjuster be appointed, the said period shall be interrupted, and a new period will be reinstated from the date of signing of the general average settlement or from the date on which the average adjuster resigns, as the case may be.

Case study on general average before UAE Courts – Khor Fakkan Court

The UAE Courts have recently examined the reliance on the general average principle concerning a cargo of medium-density fibreboard ("MDF"). In this case, the MDF cargo was shipped from Coafedian, China, to Khor Fakkan Port, UAE, with a stopover in Shanghai. Whilst in transit, welding operations were undertaken to lash additional cargo that was being uploaded. One day after welding operations were completed, smoke was detected on board the vessel, which led the vessel's master to apply CO2 to extinguish the fire. However, smoke was witnessed once again, and this time, the master activated the water sprinkle system and sought help from the port authority in Shanghai. After the fire was extinguished, a joint survey was conducted to determine the intact and affected cargo. The owners declared general cargo in relation to the incident and appointed general average adjusters who decided that 10% of the damage sustained was due to fire, whereas 90% of the remaining damage was caused by water, which was used to control and smother the fire.

A dispute arose between the owners and the cargo interest on the declaration of the general cargo, as the cargo interest filed a case before Khor Fakkan Court claiming the total value of the cargo, whereas the owners sought a general average contribution from the cargo interests. As it is common in UAE proceedings, the court appointed a panel of experts. The court mandated the experts to identify the cause of the fire, establish if the general average is applicable, and, if it was applicable, quantify the general average contribution payable by the cargo interests. The panel of experts found that the owners were responsible for causing the fire on the basis that they allowed the welding operations to be undertaken next to the MDF cargo and concluded that the undertaking of welding operations was a sign of the unreadiness and unseaworthiness of the vessel. The Court of First Instance issued a judgment adopting the conclusion that the owners are barred from relying on the general average principles on the ground that the owners caused the fire and, as such, were at fault. The Court of Appeal and the Federal Supreme Court upheld this judgment.

Practical tips and challenges

In light of the above, owners should ensure to promptly declare a general average for serious incidents and conduct a contemporaneous joint survey, in order to determine the cause and nature of any damages sustained to the vessel and/or the cargo. Subsequently, the relevant stakeholders should agree on and appoint a general average adjuster and release the cargo, on the condition that security is provided from the relevant cargo interest stakeholders. The stakeholders should seek to work collaboratively with the general average adjuster, in order to determine the losses of each stakeholder and reach an amicable settlement.

This said, there are numerous challenges that can impede stakeholders from efficiently carrying out these steps. It is commonplace for the relevant port authorities to put pressure on owners for the release of the cargo, irrespective of whether security has been provided by cargo interest, or provide a salvage sale of any damaged cargo, in order to mitigate the risk of interruption to the port operations. Similarly, cargo interests whose cargo remains undamaged are likely to demand the release of such cargo, prior to any security being provided. Logistical concerns regarding demurrage and stowage costs are also likely to apply further financial and commercial pressure on stakeholders and can create further complexity as to which parties ought to bare such costs and to what extent.

Conclusion

The general average concept is rarely tested before the UAE courts. However, the new UAE maritime law that is set to come into force on 28 March 2024, which seeks to provide greater clarity and uniformity in this area, may prompt the UAE courts to establish a maritime legal framework with international standards and best practices in this area. It is expected that this will provide a more coherent and predictable legal landscape for general average in the UAE.

Contact us

For any assistance with understanding and navigating the general average concept and advice regarding how to mitigate related risks arising from such scenarios or any other related questions on these topics, please do not hesitate to contact Saif, Mazin, or your usual contact at Stephenson Harwood.

 

 

1 The UAE Federal Law No 26 of 1981 on the UAE Commercial Maritime Law will be replaced by the UAE Federal Law No. 43 of 2023 as of 28 March 2024.

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Mazin El Amin

Mazin El Amin
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