General Average wording under scrutiny

In Navalmar UK Limited v. (1) Ergo Versicherung AG & (2) Chubb European SE (BSLE Sunrise) [2019] EWHC 2860 (Comm), the Court rejected a shipowner’s arguments that the wording of a standard form General Average (GA) guarantee, customarily issued by cargo insurers to secure the release of cargo in a GA situation, precluded the cargo insurers from pleading actionable fault as a defence to a GA contribution claim.

The background to this case was that on a laden voyage from Jebel Ali to Antwerp, the vessel ran aground off the coast of Valencia and GA was declared. The owner carried out a number of repairs before the vessel resumed its voyage, later arriving in Antwerp and discharging all its cargo.

The cargo interests provided the owner with GA security in the form of GA bonds on the Lloyd’s Average Form as per the usual practice. The cargo insurers then issued GA guarantees in the ordinary way under the terms approved by the Association of Average Adjusters and Institute of London Underwriters.

As per their wording, the GA bonds responded to: “The proper proportion of any […] general average […] which may hereafter be ascertained to be properly and legally due from the goods or the shippers or owners thereof.”

The GA guarantees were drafted so as to be responsive to: “Any contributions to General Average […] which may hereafter be ascertained to be properly due in respect of the said goods.”

They relied on the actionable fault defence under Rule D of the York Antwerp Rules 1974, alleging that the owner was in breach of Article III rule 1 of the Hague/Hague-Visby Rules in that the vessel was unseaworthy.

While the owner accepted that the cargo interests could plead a Rule D defence under the bonds, they alleged that the cargo insurers could not do so under the GA guarantee wording, which was wider and which imposed a primary obligation on the insurers to pay that which was properly due as between cargo interests and owner. Reliance was placed among other things on the decision in the Maersk Neuchatel [2014].

In that case, the Court held that the wording of a letter of undertaking (LoU) issued by the charterer on behalf of cargo interests as security for a GA claim precluded the charterer from challenging the adjustment. The wording in question stated that the charterer: “…would pay the proper proportion of any General Average and/or Special Charges which may hereafter be ascertained to be due from the cargo or the shippers or owner thereof under an Adjustment prepared by the appointed Average Adjusters.”

Court reasoning

Dealing with the matter as a preliminary issue, the Court found in favour of the cargo insurers. The Court’s reasoning was as follows:

1. While the GA guarantees created primary obligations on the part of the cargo insurers to pay amounts “properly due”, it did not follow that this primary obligation was broader in scope than the obligation under the GA bonds. Construing the GA guarantees independently of the GA bonds would be to ignore the commercial purpose of a GA guarantee, which was to secure the bond such that a cash deposit was not necessary.
2. There would be no practical purpose in owners collecting GA bonds from cargo interests if the intended effect of the GA guarantees was to create an obligation on the part of their cargo insurers to pay the owner without regard to the ultimate underlying liability of the cargo interests. It was also difficult to see why cargo insurers would have any commercial interest in undertaking a more onerous obligation than cargo interests in circumstances where the owners were only entitled to demand reasonable security.
3. In terms of the guarantee wording, the word “due” was synonymous with the word “payable”, and payable meant legally payable. Therefore, the addition of the word “legally” to the bond wording did not mean that there was any practical difference between the wording of the GA bonds and the GA guarantees. In the Court’s view, a sum would not be legally payable until any Rule D defence had been determined, and the use of the word “properly” only fortified that conclusion.
4. The Maersk Neuchatel decision could be distinguished from this case. In particular, the wording of the GA guarantees was materially different from the wording of the LoU in the Maersk Neuchatel. Furthermore, that LOU was issued in a different factual and commercial context.

The decision is consistent with the commonly held understanding of how standard form GA bonds and guarantees operate. While it is possible for a party providing GA security to contract out of its right to plead a Rule D defence, this would have to be clearly and expressly stated in the relevant documentation. Otherwise, the Court is unlikely to conclude that a party has voluntarily given up its rights in this way.

Christian Dwyer is global head of Admiralty and Joe Crompton is an associate with Ince, www.incegd.com.