YAR 1994 v 2004

Gaute Gjelsten, partner at Wikborg Rein, looks at the York-Antwerp Rules 2004 and why they are less favourable to shipowners

THE concept and principles of general average date back thousands of years and are based on the notion that the ship, cargo and freight form part of a common maritime adventure. On this basis, two main principles have been derived.

Firstly, if the common adventure is exposed to a common danger during a voyage, then the costs of extraordinary sacrifices and expenditures necessary to protect the involved interests from the peril shall be apportioned according to the value of said interests (the ‘common safety principle’). Examples include salvage expenses, damage from beaching a leaking ship to prevent sinking, or the jettisoning of cargo to re-float a grounded ship.

Secondly, expenses incurred for the common benefit of the common maritime adventure may also be allowed in general average despite their not being necessary to avoid the peril (the ‘common benefit principle’). Examples include expenses for unloading and storing cargo whilst the ship is being repaired in a port of refuge so that the voyage can be completed.

The primary legal source for general average rules is the York-Antwerp Rules (YAR), which were first drafted and adopted by the Comitè Maritime International (CMI) in 1877, and then revised in 1890, 1924, 1950, 1974 and 1994. The YAR are not part of any international convention, and are legally binding by way of incorporation into bills of lading, charterparties, and in some instances national law. In Norway, the YAR 1994 have binding force through the provisions in the Norwegian Maritime Code section 461, unless the parties agree otherwise.

Since the adoption of the YAR 1994, cargo insurers have advocated further reductions in the scope of allowable recoveries in general average with the insurers’ trade association the International Union of Marine Insurers (IUMI) taking a leading role. Although IUMI would prefer the general average concept to be abandoned altogether, its proposals to date have been for radical reform of the YAR, based on i.a. restricting general average to common safety expenses and thereby excluding recovery based on the common benefit principle. At the CMI conference at Vancouver in 2004 the proposed changes were subject to extensive debate.

A revision of the YAR was adopted by CMI in 2004. To a certain extent allowance was made for IUMI’s suggestions, making the YAR 2004 less favourable to shipowners compared with the 1994 edition of the rules.

One of the most important and contentious changes in the YAR 2004 is the amendment to Rule VI disallowing salvage remuneration in general average. Thus, salvage payment will lie where it falls. An exception is made where one party to the salvage has paid all or any of the proportion of salvage due from another party. In such a case the unpaid contribution to salvage due from that other party shall be credited in the general average adjustment to the party that has paid it, and debited to the party on whose behalf the payment was made.

Furthermore, the YAR 2004 narrow the scope of the common benefit principle with changes to Rule XI disallowing the wages and maintenance of the master, officers and crew in general average during the period the vessel is in a port or place of refuge undergoing repairs recoverable in general average. However, fuel and stores consumed will continue to be allowable expenses.

The provisions in the YAR 1994 Rule XIV provide for allowance in general average for i.a. temporary repairs of damage to a ship caused by general average sacrifice. In the 2004 edition of the rules, the allowable amount has been capped with the addition of the so-called ‘Bailey clause’ restricting the advantage of the owner where temporary repairs make it possible to effect permanent repairs at a place where such repairs can be made more cheaply. Recovery will be limited to the difference between the costs of temporary repairs plus permanent repairs actually carried out and the estimated costs of the permanent repairs at the port of refuge.

Other departures from the YAR 1994 include the abolishment of the two percent commission on general average disbursements (Rule XX), the set seven percent rate of interest is replaced with a rate to be decided by the CMI Assembly each year (Rule XXI), new time bar rules which in broad terms correspond with the time bar rules in the Norwegian Maritime Code section 501 (Rule XXIII) and a general modernising and further consistency in terminology throughout the rules.

Will the YAR 2004 be incorporated into the Norwegian Maritime Code? A comment period on this question closed on 14 May, 2005. Prior to receiving comments, the Norwegian Department of Justice had suggested that YAR 2004 should replace the YAR 1994.
During the comment period, the Norwegian Shipowners’ Association pointed out that the YAR 2004 reduces the shipowners’ prospects of recovering allowances from the cargo interests in general average. The changes to the YAR 2004 were highly debated. Although the 2004 edition of the rules have been available from 1 January 2005, there are still no signs of them being used in practice. Furthermore, the Norwegian Shipowners’ Association referred to a published circular by BIMCO recommending against general average adjustments pursuant to the YAR 2004. BIMCO has already decided that all new and revised charterparties will refer only to the YAR 1994 and that the previously used additional text in the general average clauses reading “or any subsequent modification thereto” will no longer be used. With this as a backdrop, the Norwegian Shipowners’ Association urged the Ministry of Justice to wait until the market accepts the YAR 2004 before incorporating them into Norwegian law.

While the Norwegian Justice Ministry has not yet taken an official position, there are strong indications that they will adhere to the request from Norwegian Shipowners’ Association and postpone the incorporation of the YAR 2004.

Loss of Class

SHIPOWNERS and their banks are reminded that changes in the class status of vessels can have serious consequences for insurance coverage. According to Haakon Stang Lund, partner at Wikborg Rein, under the Norwegian Marine Insurance Plan of 1996, vessel insurances automatically terminate when class is suspended (temporarily lost) or cancelled (permanently lost) during the insurance period. Similar provisions are found in other international insurance conditions, including London’s International Hull Clauses.

The relevant provision of the 1996 Plan is section 3-14, which states that a vessel’s insurance “terminates in the event of a loss of class”. According to section 3-14, third subsection, “loss of class” occurs where the assured requests that the class be cancelled or “where the class is suspended or withdrawn”. The provision is designed to protect insurers from increased risk stemming from ships that do not adhere to satisfactory standards for maintenance, operation and safety; known commonly as substandard ships.

There are two exceptions to the rule in section 3-14:

1. The insurance cover will not terminate if the insurer “explicitly” gives his consent that the insurance may continue, cf. section 3-14, second subsection. The provision prevents the assured from arguing that he has informed the insurer, who has then given tacit acceptance.
2. If class has been suspended due to a casualty, which is often the case, insurance is not terminated, cf. the Plan section 3-14, third subsection.

Shipowners and banks should take special note of the rule in section 3-14 in light of the fact that the International Association of Class Societies (IACS) and its members, including Det Norske Veritas and Lloyd’s Register, have tightened their rules on suspension of class in recent years.

The bank’s interests may, however, be protected if the bank has taken out so-called mortgagee’s interest insurance (MII) or sought to obtain protection of its interests by way of, for instance, extended co-insurance, if available.