newsletter - general average explained

A D M I R A L T Y A N D M A R I T I M E M A T T E R S

M A R C H 2 0 1 2

© 2012 LEGGE, FARROW, KIMMITT, McGRATH & BROWN, L.L.P. 6363 WOODWAY, SUITE 400, HOUSTON, TEXAS 77057 Tel. 713-917-0888 Fax. 713-953-9470

Contribution Issues in a Mutual Fault Collision Where Cargo Has Made Its G.A. Contribution to the Carrying

Vessel: How Is Innocent Cargo Made Whole? General average requires a peril common to the interests in the voyage and a voluntary sacrifice or extraordinary expense made to avert that peril and complete the common adventure – a benefit to all. Aktieselskabet Cuzco v. The Sucarseco (The Toluma), 294 U.S. 394, 401 (1935). All who have an interest in the common adventure pay general average in proportion to their share to the total general average value. Id. When general average is declared, it is the responsibility of the vessel to require that the cargo interests contribute to the general average fund. Master Shipping Agency, Inc. MS Farida, 571 F.2d 131, 134 (2d Cir. 1978). The actual calculations are usually performed by a professional general average adjuster. Id. at 134. General average can be declared following a collision when the carrying vessel has to put into port for repairs necessary to continue its voyage. The confusion arises when the carrying vessel collects cargo’s portion of general average while still litigating the collision suit against the non‐carrying vessel for the full amount of damages sustained. It is well established that when the cargo interest has made a general average contribution to the carrying vessel, the cargo owner may recover 100% of the amounts paid in general average directly from the non‐carrying vessel assuming some proportionate fault on the part of the non‐carrying vessel. Aktieselskabet Cuzco v. The Sucarseco (The Toluma), 294 U.S. 394, 404 (1935). The claim by the cargo interests for their portion of general average is not a derivative claim, nor does it arise through subrogation; instead this claim accrues to the cargo interest in their own right as a participant in the common venture. Id. The claim is thus treated the same as physical damage to cargo arising from the collision. Id.; The Energia, 66 F. 604, 608 (2d Cir. 1895); Erie R.R. Co. v. Erie & Western Trans. Co., 204 U.S. 220, 225–26 (1907). Furthermore, this right against the non‐carrying vessel is not affected by the existence of a New Jason clause in contract between the carrying vessel and the cargo interests. Id. at 404–05. Having established that the innocent cargo owners are entitled to full reimbursement for the amounts paid in general average, the question next arises, how is this amount distributed in the calculation of damages between the two responsible vessels? According to the Supreme Court, this amount is added to the damages of the non‐carrying vessel which is then apportioned according the degree of fault of the two vessels. See Aktieselskabet, 294 U.S. at 400, 404. In this way, the proportionate fault of the carrying vessel must deduct the


M A R C H 2 0 1 2


contribution it has received from cargo from the total collision damages it seeks from the non‐carrying vessel. This is necessary to prevent a double‐recovery by the carrying vessel. A depiction of the flow of contribution is below:

Carrying Vessel - 30% Fault $1,000,000 Total Damages Sustained

Non-Carrying Vessel – 70% Fault $1,000,000 Total Damages Sustained

The Collision

General Average Declared and Paid

Cargo Interests – 0% Fault $200,000 in Damages

Non-Carrying Vessel – 70% Fault $1,000,000 Total Damages

Carrying Vessel – 30% Fault

$800,000 in Damages after $200,000 GA is Paid by Cargo

Carrying Vessel - 30% fault $800,000 in Damages after GA is Paid by Cargo

Non-Carrying Vessel – 70% Fault

$1,200,000 Total Damages

Cargo Interests – 0% Fault $0 in Damages

Cargo Recovers from Non-Carrying Vessel


M A R C H 2 0 1 2


As shown above, when applied correctly, innocent cargo’s contribution is a pure pass‐through. The last reported case to apply the principles of general average in a mutual fault collision was Compania Punta Alta S.A. v. Dalzell in 1958. 162 F. Supp. 926, 929 (S.D. N.Y. 1958). In that case, the vessels were found to be equally at fault. Id. at 928. The non‐carrying vessel did not sustain any physical damage in the collision. Id. However the carrying vessel, needing repairs, declared general average but only collected general average

Carrying Vessel – 30% Fault $1,000,000 in Total Damages Receives $700,000 from Non-Carrying Vessel Pays $300,000 to Non-carrying Vessel [Net received] = $400,000

Non-Carrying Vessel – 70% Fault Pays $700,000 to Carrying Vessel $1,000,000 Total Damages Receives $300,000 from Carrying Vessel [Net paid] = ($400,000)

Amounts Recovered and Paid if General Average were not Declared

Carrying Vessel – 30% fault Pays $360,000 to Non-Carrying Vessel $800,000 in Total Damages Receives $560,000 from Non-Carrying Vessel Already Recv’d $200,000 in General Average [Net received] = $400,000

Non-Carrying Vessel – 70% Fault Pays $560,000 to Carrying Vessel $1,200,000 in Total Damages Receives $360,000 from Carrying Vessel [Net paid] = ($400,000)

Cargo Interest – 0% Fault $0 in Damages

Settlement


M A R C H 2 0 1 2


amounts from the cargo owners that were insured. Id. The carrying vessel did not collect the portions of general average belonging to the uninsured cargo interests. Id. This case being after the Aktieselskabet decision, both sides recognized that the carrying vessel could not recover twice for the amounts paid to it by the cargo owners. CIA Punta Alta v. Dalzell, 1958 A.M.C. 2016. 2024–025 (S.D. N.Y. Oct. 30, 1957). The insured cargo owners that had paid general average sought to recover their portion of general average from the non‐carrying vessel. Compania Punta Alta, 162 F. Supp. at 928. The non‐carrying vessel, in turn sought to recoup a portion of any payment it would be forced to make to the insured cargo owners through apportionment of damages between the two vessels. Id. The carrying vessel sought to recover from the non‐carrying vessel for the amounts left unpaid by the uninsured cargo owners. Id. The court explained that “the ‘common adventure’ collectively is entitled to recover the full amount of expenditures resulting from the collision and made for the benefit of those who share in the adventure; the general average contributions ‘merely affect the distribution of the loss.’” Id. at 929. By way of an earlier opinion, the court allowed the insured cargo owners to collect 100% of their portion of general average from the non‐carrying vessel. Compania Punta Alta S.A. v. Dalzell, 102 F. Supp. 391, 399 (S.D. N.Y. 1952). The court also instructed that this amount would be considered part of the damages of the non‐carrying vessel. Id. The court further held that the amount left uncollected from the uninsured cargo owners was a proper element of the carrying vessel’s damages. Id. at 929. According to the court “[i]f the carrying ship incurs the entire expense and chooses to bear that expense rather than collect the share due from its fellow adventurers, the cargo owners, it may certainly recover its total expense from the tort‐feasor.” Id. Therefore, the court allowed the carrying vessel to recover for the amounts that had been declared as general average but had gone unpaid by the uninsured cargo interests. Id. at 929–30. In these type situations, counsel for the non‐carrying vessel is well‐advised to determine early on if cargo has made its contribution to the carrying vessel. Cargo should be reimbursed, and then that amount added to the damage claim of the non‐carrying vessel so it can be properly apportioned according to fault. Further, counsel must make sure the G.A. contribution of cargo is deducted from the total damage model of the carrying‐vessel to prevent a double recovery. If one waits until the collision matter is tried or settled, and then cargo seeks its full reimbursement from the non‐carrying vessel, the non‐carrying vessel may have paid double damages to the carrying vessel and waived its right to have cargo’s G.A. contribution apportioned between the two ships according to fault.

************


M A R C H 2 0 1 2


If you have any questions about this topic, please contact any of the following Legge Farrow attorneys:

James T. Brown Rachel Reese Partner Associate [email protected] [email protected] (713) 706‐1947 (713) 706‐4908

This publication is intended for educational purposes only and is not a substitute for legal advice based on unique facts and circumstances. It is provided free of charge as a courtesy to clients and friends of the firm.

newsletter - general average explained

Documents