General Average is a principle of maritime law that essentially establishes that all sea cargo stakeholders (owner, shipper, etc.) evenly share any damage or losses that may occur as a result of voluntary sacrifice of part of the vessel or cargo to save the whole in an emergency. The basis behind this principle is that a party who has suffered extreme financial loss in order to save property belonging to others has the right to be compensated for such loss. The origins of General Average date back to the York-Antwerp Rules of 1890, but have obviously been modified numerous times since to adapt to modern supply chain conditions, most recently in 2004.
The rule states “There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.” (York-Antwerp Rules, 2016 update) From this, General Average is calculated, and each party who suffered a loss will be credited for the value of said loss, and will be charged a percentage of their own interests’ value to pay for shared costs and others’ loss of interests.
Once a vessel owner declares General Average, a neutral third-party (the General Average adjuster) appointed by the vessel owner, will determine the applicable costs owed to and by each stakeholder involved in the vessel voyage. The adjuster will determine which losses qualify for General Average, total costs of the incident, as well as the amount each party owes, etc.
After the maritime incident (like the recent news of the Ever Given), stakeholders with cargo/cargoes aboard the ship will need to provide General Average guarantees. Any affected cargo will not be released to the cargo owner until the General Average guarantee has been provided.
Cargo owners carrying cargo insurance should notify their Underwriters immediately so the guarantee is paid by the Insurance Company or will be faced with making payment on their own.