REPORT
OF THIRTY EIGHTH ANNUAL MEETING
OF THE ASSOCIATION OF AVERAGE ADJUSTERS
OF CANADA
Held at the Royal & SunAlliance Amphitheatre on June 10th, 2004
OFFICERS
OF THE
ASSOCIATION OF AVERAGE ADJUSTERS
OF CANADA
(Founded 1967)
2004-2005
___________
Chairman:
Maurice Gesner
____________
Executive Committee:
B. Kyle, Chairman
P. Boucher
Ian Fraser
____________
Rules of Practice Committee:
D. Fitzerald, Chairman
T. Brain G.
Gibbons
___________
Membership Committee:
R. Eldridge, Chairman
T. Brain D.
Holden
____________
Advisory Committee:
N. Dennis, Chairman
I. Fraser J. Cantello
____________
Secretary
R. Fernandes
Rui M. Fernandes, Chairman: Good morning distinguished guests, ladies
and gentlemen. Welcome to the 38th annual meeting of the Association of
Average Adjusters of Canada.
This year as in the past we are fortunate to have distinguished guest
to our annual meeting. I would like to welcome our distinguished guests
and as I do so I would ask them to stand and be recognized:
K.H. Mao Chairman, Association of Average Adjusters
of the U.S.A.
Thomas S. Rue President, U.S. Maritime Law Association
Apologies for their absence here today have been received from Michael
Harvey, Chairman of the U.K. Average Adjusters Association, Captain
Nakagawa the Chairman of the Association of Average Adjusters of Japan
and Mr. Stefano Cavalo the President of AIDE, the European Association.
It has been brought to my attention that we have lost two members over
the past year and the Association acknowledges their contributions to
the Association and their passing. Mr. Herb Golding was a Full Member
of the Association, an Honourary Member and a past Secretary of the
Association. He passed away late last year. Mr. Harry Bennett of
Osborne & Lange passed away this year. He was a founding Associate
member.
Now, before I make any further comments, there is one formal matter
which has to be addressed at this stage of the proceedings, the
adoption of the Minutes of the last Annual Meeting which was held in
Toronto on June 5th, 2003. These minutes were circulated and I would
therefore make the following motion:
"That in accordance with the By-laws, the minutes of
the last Annual Meeting, having been examined and certified correct by
the Executive Committee, now be confirmed."
May I have a seconder?
Seconded by Ron Eldridge.
All in favour? Adopted unanimously by all present.
Be it recorded that the Minutes of the 37th Annual General Meeting held
in Toronto on the 5th of June 2003 are adopted.
I wish to report to you on my official functions of my second term.
I had the pleasure of representing this Association in early October in
New York at the annual meeting and the black tie dinner of the
Association of the Average Adjusters of the U.S. I wish to thank Fred
Pietropolo and K.H. Mao for their hospitality.
Two weeks later I traveled to Amsterdam to attend the European
Association of Average Adjusters annual meeting and dinner. I wish to
thank Mr. Stefano Cavalo and his Association for their hospitality.
Two weeks later I traveled to Boca Raton to represent the Association
at the United States Maritime Law Association Annual meeting. Ray
Hayden the President of the USMLA was as usual very welcoming.
This year I continued my duties as Chairman when I represented the
Association in England for the British Association of Average Adjusters
annual meeting and dinner at the Savoy hotel in May. Thank you
David Taylor and Michael Harvey. I returned to Toronto to attend
the Canadian Board of Marine Underwriters' semi-annual meeting at the
Taboo Resort where on behalf of the Association I participated on a
panel on “Governance Issues in the Insurance Industry.”
We move now to the next item on the agenda which is usually the address
of the Chairman. This year I will follow the precedent set by the
American and the British Associations. A Chairman only has to give one
formal address during a two year term. I did so last year. This year we
have a panel of speakers.
Our first panelist is Mr. Norman Letalik. He is with the law firm
of Borden Ladner Gervais. He’s just back from his current stint
in Scottsdale, Arizona in the heat. Mr. Letalik is going to take
the position that general average should be abolished. He has
graciously agreed to argue this position, even if his belief is
otherwise.
Our second speaker is Mr. William Sharpe. He practices maritime law in
Toronto and he will be taking the position that we should keep general
average as is.
Our final speaker, who will act as moderator, is the current Chairman
of the U.S. Association of Average Adjusters. He will be making some
general comments on general average and probably criticizing or
approving the comments of the first two speakers.
Without delay I would like to call Norman Letalik to take us through
his presentation.
Norm Letalik:
Thanks Rui. We have the technology. Rui has been kind enough to
give the disclaimer on my behalf. This presentation is a bit
against my thinking someway. It might be more appropriate for Rui
to give because he is usually on the cargo side. I’m usually on
the shipowner’s side or the on the Club side. In any case, I’m
always interested in a challenge and today the challenge before me is
to convince you that general average is obsolete and should be gotten
rid of. So that’s my job today as the agent provocateur.
I used to teach marine law many years now. Frankly, whenever the
topic goes that general average came up amongst law students at Dal,
there was the tendency of one of two things to happen. For the
great majority, their eyes started to glaze over. It was not a
topic that particularly thrilled them and they tended to start watching
the clock and hoping against hope that the hour would soon end.
Then there was another smaller perhaps some kind brighter group that
you could see their eyes light up and they said “wow” here is a really
interesting idea; that here’s a concept that comes from ancient time
and it talks about sharing. Here is a venture of people working
together in a common cause and when adversity strikes them, they all
pull together and use the concept or develop a concept like general
average that existed throughout the ages and used this to help sort of
share the loss to make sure that that person who was adversely affected
because of the risk that arose, that person was now going to be able
collect rateably from the others that were involved in the
venture. So, I think that they all appreciated the concept and if
you look at it from the prospective of when it was developed and to be
quite frank, I tried to look into exactly when it was that general
average was developed. Nobody as best as I can tell has the true
answer to that question. But all things considered, really what
it was, was that it was very a simple form of insurance at that time.
The concept of general average dates back to at least 800 B.C. and
probably earlier yet than that. Really what it was is that it was
a form of insurance that was available when insurance was not otherwise
available.
Why were the students confused? Well one of the things is that
the wording is rather mysterious. General means kind of nothing;
average means kind of nothing. You put the two words together, it does
not illuminate to you any further what it’s about. When I explain
to them that average means loss and that general average therefore
means a loss that is to be shared by all, then there was a kind of bit
of nod of recognition amongst the vast majority and then the others
“I’m okay, now we understand it better”.
There is a bit of mystery to the concept simply because the title
doesn’t in of itself sort of explain to people what it’s all
about. Now, I mentioned earlier that we know that the concept
stems back to at least 800 B.C. and how do we know this? We know
this because we found in the sort of the basic piece of law that forms
the foundation of much of civilian law in Europe, which is the Digest
of Justinian. An awful lot of the law that is currently enforced
in most of Continental Europe finds its origins for a lot of the basic
concepts in the Code of Justinian. Just to prove to you that it
was in fact, I have actually given you the Latin version which I won’t
try and pronounce for you given that it has been too many years since
my two years of high school Latin. The English version is
perfectly readable; it says, “Roman Law decrees that if it were to
enlighten the ship, merchandize is thrown overboard that which it has
been given for all shall be replaced by the contribution of all”.
So that is the basic concept, the concept of sharing in a situation
where the ship is in a position of peril or danger.
We know that the Rhodian Law, just so that you understand what we are
talking about, we are not talking about the area that use to be
Rhodesia. Rhodes is an island that is now part of Greece.
If you have ever been there, you would know what a lovely place it is.
If you haven’t been there, I highly recommend it. It is actually
on the, the City of Rhodes is on the list of major world heritage
sites. It is a very very ancient City and you will recall that in
one point in time, one of the Seven Wonders of the World Colossus of
Rhodes was there with its huge gargantuan statue, where it was just
over the entrance to the harbour and the ships kind of literally passed
through the legs of Colossus of Rhodes. Unfortunately, it is not
there anymore, but if you go there, there is a lovely museum that kind
of shows you how things must have looked back at the time when the
Colossus of Rhodes was still alive and well with ships passing
underneath his legs. Rhodes geographically is located just off of
the Southwest Coast of Turkey and it was in a perfect location for
international trading at that time. It was a perfect bridge
between the western world and the eastern world. So it became a
true center for marine activity and as a result, in Rhodes because it
became a major settlement in the shipping world, it became really a
spot where people started to engage in various forms of commerce and
one of the things that they did was that they put together a very
comprehensive code for marine law and an awful lot of marine law that
we look at today actually believe it or not, goes back to and arrives
from the principles of Rhodian law. The Roman’s were never
stupid; they knew a good thing when they found it and they in fact,
picked up on most of Rhodian law including the concept of general
average and then put it into the Justinian Code, which was well as I
said, it had a profound effect especially on the western world and the
western legal system.
Now, was the concept of general average a good idea in the year 800
B.C.? I think the answer to that has got to be yes. Through
the wonders of the internet yesterday, I went tolling about to type
into Google sort of Greek galleys, ancient, you press a button and sure
enough, a website pops up and it has all sorts of pictures of Greek
galleys, so I found one and now what I think is about the period of 800
B.C. So if you take a look at that vessel, you will see how it
was powered. It’s wind powered and it is also powered by human
muscle. It is fair to say that, in those days, once the ship
passed over the horizon at about 20 nautical miles, you had no means of
communicating anymore with the vessel. It was impossible;
obviously there was no telegraph, nothing. I don’t even think
carrier pigeons had been developed at that time or the concept of using
pigeons. So there was no means of communication.
Weather was a huge issue. How did you determine what the weather
was? Well, simply you went to an oracle to ask the oracle what
the weather was and that is why at the time people who were thought to
have sort of special powers, were highly prized in those days.
You never knew when you started off, whether you were going to run into
a storm that was going to cause you all sorts of problems. The
vessel, some of the things about her are really quite advanced.
How long did it take us before we realized that a bulbous bow is a
great way to cut through the water? So in some ways, they are in
fact, quite sophisticated, we kind of lost that idea and then gained it
back again. In other ways, the ship is not horribly seaworthy and
literally, every time you went out on a venture, you never knew whether
you are ever going to see the ship again. So in a situation like
that, I would guess it’s right for coming up with the concept like
general average and in a situation where the ship is in peril and we
have to do things like jettison or you have to go into a port of refuge
and you incur extra costs; when that is happening it makes imminent
sense for that time.
Again through the wonders of the Internet, this is what they thought
happened, the bad things that were going to happen during the course of
the journey. They not only went to the oracles, but you also
praised to the Gods. Poseidon, if you are familiar with Greek
mythology, he could either be for you or he could be against you and he
had a tendency for being a rather nasty sort of God and turned against
you. So here is a galley quite similar in fact, to the one I
showed you earlier and unfortunately incurring the wrath of Poseidon
who seems to be making life a little bit miserable for the poor fleet
traders that are trying to make their way and perhaps to bargain with
some silk or franks and God knows what they were carrying those days.
Sea monsters would also have to be dealt with. Into a port of refuge
and the Cyclops is there. All sorts of horrible things can follow
you. We all know this because it has all become part of tradition
through Homer’s famous poem “The Odyssey”. In the context of the
time it’s a great scheme.
Now, why is it a great scheme? Because we are in a situation
where as best as we can tell, formal types of insurance did not yet
exist. In fact, our modern concept of insurance doesn’t really
start until the late 1600s when Edward Lloyd started his coffee house
as a convenient spot to have marine underwriters in London come and
meet together so that they could sort of share risks and get involved
in reinsurance. In fact, Lloyd’s in not the first spot in the
1600s where insurance policies were written. As far as I’m aware,
historically, the oldest policy found to date was dated in 1347 and it
was written by a Lombard merchant. Lombard is where present day
Florence is in that area. These merchants were heavily involved in
international trade and realized that in order to promote trade it was
going to be necessary to find people to share the risk. People
have in fact found this policy dated the 23rd of October 1347 on the
ship Santa Clara where there was insurance on it. Hull insurance on it
for a voyage to Majorca, which is in the Balearic Islands off the coast
of Spain. It wasn’t until 1350 roughly that we can see that there were
other means of sharing risks when you head out to sea.
Now by about 1600 we know that there is active insurance taking place
and we know that because Sir Francis Bacon drafted what’s the first
Insurance Act, the Marine Insurance Act of 1601 in Britain. And,
just as a bit of a trivia, some of you maybe aware that there is a
debate out there as to whether or not Shakespeare actually
existed. The greatest writer in the English speaking world.
A lot of people say that there are no good records to prove that
somebody called Shakespeare was ever born and there is a bit of debate
as to who might have been Shakespeare because at the time it wasn’t
exactly a proper thing to be writing plays and it was considered to be
something like the World Wrestling Federation is today. If you
were a promoter of the WWF, something along those lines, so educated
and proper people wouldn’t necessarily be connected with it.
There was one school of thought that it was Marlow who was really
Shakespeare and there is another school of thought that believes that
in fact, it was Sir Francis Bacon, the fellow that drafted this Marine
Insurance Act of 1601. The reason they say this is, I don’t know
if you ever read The Merchant of Venice in high school. If you look at
The Merchant of Venice, there are an awful lot of shipping terms in
there that only somebody who was hugely familiar with marine law would
understand and Sir Francis Bacon was known to be one of the brightest
people of this era. I don’t know how people do this after the
fact, but I guess they suggest he had an IQ of over 160, spoke many
different languages, which was truly a man of letters in many
ways. So this is a bit of trivia and a side point to say, maybe
he was in fact Shakespeare as well, because he knew so much about this
whole concept of marine insurance and how the merchant trade worked and
managed to slip in a lot of tidbits into The Merchant of Venice that
one wouldn’t expect somebody who happened to sort of grow up in Avon,
Stradford on Avon would necessarily know about.
Back to the 1800s. We are sitting there; there is clearly no
suggestion that there is an easily available means for shipowners to
find insurance otherwise to take into account those risks when they
encounter desperate situations during the course of a voyage.
Let’s compare that with what the situation is today. What do we
know? We know that ships today are massively more seaworthy than
the vessels that I showed you earlier. Think about heading out
even just from one island to another in the Aegean and that as opposed
to sort of some of the super ships that we see today. Back in
those days, charts didn’t exist. Today, even the ocean floors have been
mapped. Frankly, today on some of our larger vessels, the
lifesaving boats, the rescue crafts are larger than those and eminently
more seaworthy. You don’t have to rely anymore on muscle power or
wind power as you did in those days. What happens if your crew
starts to give out? What happens if you gave your crew bad food,
which you can imagine since there was no refrigeration was a very
common kind of a problem. Today, you have situations where
engines are very reliable, and you have engineers that have been
trained to fix those engines on board. In many instances, you
have computer systems monitoring the engines; you are not nearly as
susceptible to problems occurring as you are if you rely on muscle
power and wind power.
What else? Communication. These days, if you run into a problem
through the joys of bad weather and something happens, you can use
normal VHF. You can be in constant contact with the shore, with
relevant authorities. In the old days, those authorities did not
exist and under the circumstances, it’s just far safer now when you are
in a situation where there are going to be problems, to call on
somebody early to make sure that the situation is taken care of; and of
course, these days officers and crews are far better trained than they
would have been in those days. Although I suppose just simply the
desperation of staying alive was probably a significant motivator in
800 B.C. to make sure that you were going to get to at least to shore
somewhere.
The situation today is that the insurance market has changed
dramatically from what it was 800 B.C. The insurance today is
widely available and in particular today with very low interest rates
that we see throughout the world. The very weak equities market.
You don’t see people sort of taking their extra money and flooding it
into the stock market anymore today. A lot of people are
looking for a place to park their money and these days, insurance looks
to be a very good spot. We all know what a sad and a horrible
occasion 9/11 was. However, in a lot of ways for the insurance
industry, once it got over dealing with the huge and many losses that
are still going to take many many years to sort out that were connected
with that horrible incident, it did have the impact of dramatically
increasing rates because the world got a bit jittery. People wondered,
if you can remember a couple of years ago, it was very difficult in
some instances to find sufficient numbers of people to fill out a slip
on major pieces of property insurance. In particular, there were
sort of tall buildings and the property portfolio. But that has
all changed. It changed radically. There is lots of money that is
available. There is absolutely no problem with capacity within
the market these days and we all know through the internet and other
means, money has become truly international. I see folks here
from some of the major brokerage firms, AON, Marsh, Willis etc.
They can all find people to take out a risk literally from all corners
of the world. It’s not like it was in the days of even Edward
Lloyd’s coffee shop where you had to find people within proximity of
the shop to sort of add their percentage onto a slip. Money can
be found for insurance and underwriters can be found to insure risks
literally all over the world and that’s one of the huge advantages that
the international brokerage firms have brought to us.
It’s interesting that the concept of general average developed in the
marine sector, because if you take a look other sectors that are also
used in aviation work and if you look at the aviation market by
comparison, no one really used aviation for transport considerations
really other that personal transport until after the first World
War. I think it is fair to say that the aviation sector just
after the first World War was at least as risky as the marine
sector. Frankly, I would say significantly more risky, but oddly
enough in the aviation sector, nobody ever saw the need to all of a
sudden bring in the concept like general average. Why is
that? Simply because one of two things occurred, either the
companies decided simply to absorb those risks and to pass them on to a
higher freight rate or another instance is insurance was found to cover
those particular risks. If you take a look at a venture like
aviation, and aviation in the 20s was very very desperate and risky
kind of situation. People built aircraft more by eye than by
computer assisted design as they do today, but somehow they got along
perfectly well without the concept of general average. They were
able to deal with it.
What is general average like today? What is it costing us?
What I did was I got off the trusty internet and I found a report or a
summary of a report that has been performed by IUMI, that is the
International Union of Marine Insurers and they did a study in 1994
that was then updated in about 1996 and was completed about 1998 where
they took a look comprehensively at what general average was costing
and here’s what they found. It found that the annual cost for
marine insurance was $300,000,000.00. A huge amount.
Adjustment fees were 10%, so roughly $30,000,000.00 per year. Interest
and commission was about 12% of salvage. That was readjusted
through GA was 40%, 4% went to crew for their wages presumably in times
in ports of refuge, etc. or circumstances where extra people were
required, fuel was 1% and others 33%. We know from this
comprehensive IUMI study that it is a very very large percentage and
very expensive.
What else did this study tell us? What were the causes? I
think in the initial study it was something like on the order of a
thousand and seven hundred GA incidents and then when they updated the
study they added a few more. I am told there are about 2,000 incidents
that they looked at. The study tells us that 40% roughly of the
GA incidents were files from engine or mechanical failure. Almost
22% from grounding; there is a little bit of debate as to exactly what
the proper figure should be. I have seen various people interpret
the data in different ways, but generally the view is that either fault
on the part or the people on board the ship or generally
unseaworthiness in the sense that the ship wasn’t in the condition that
it probably should have been when it started the voyage. It’s
likely to have accounted for 90% there but I have seen some other
people that were a bit more conservative and suggested that perhaps the
figure should only be 80%. Whether it’s 80% or 90% it’s still an
astonishing number with respect to the unseaworthiness of the
vessel.
The next question is of course, who picks up this tab for the
$300,000,000.00 a year through GA? The answer is cargo, picks up
between 60% and 65%. In addition, the adjustment process is
anything but speedy. Typically after a two-year period, only one
third of the money that is to be ultimately shifted in the GA
adjustment has been shifted. But be heartened, after seven years
a whapping 95% has been shifted, after seven years! I’m a lawyer,
I’m used to things being postponed but I’d have to say, even we
sometimes manage to hustle the case to courts, especially these days
with case management, a good deal sooner than that. You should
also be aware that two thirds of the adjustments are produced within
two years, but they only account for one third of the money that is
ultimately shifted as a result of the GA adjustment. So after two
years only about a third of the money has been shifted.
I wanted to speak about this concept and I again, through the marvels
of the Internet, found a speech that Nick Gooding did. Some of you may
know him; he’s a cargo underwriter at the Wellington Syndicate at
Lloyds. He did an historical analysis of the concerns that people
have had over the years on behalf of the insurance industry with the
concept of general average and he managed to find a speech that was
written in 1937. So this debate that we are having today is not a
debate that hasn’t been entered into before. He found a speech by
a gentlemen by the name of E.W. Murray who at the time was the chairman
of the American Association of Average Adjusters and he kind of did a
bit of a spoof on general average and it was recorded and when I read
it I found it to be quite entertaining, so I’m going to repeat it to
you and hopefully I can do it some justice in reading it to you.
It’s kind of diffident and sort of a bit of a fairytale story:
There once was an honest captain who took great
pride in his ship. He used to make the crew scrub down the deck
each day and would become very angry if ever the stokers (remember this
is 1937, so we still have stokers feeding the fires of the boilers)
even the stokers allowed the flames to go down under the boilers or if
the mess boys did not wash the dishes after each meal, but for all this
harsh discipline he was a kindly man and was generally well liked and
almost respected by all of the members of the crew including the under
officers and the cabin boys. One evening when the captain was
sitting on the deck talking to the first mate about how well he ran the
ship, he happened to think of something and he said to Mr. Briggs, for
that was the first mate’s name, Mr. Briggs, we haven’t had the general
average for 14 months come next Sunday. “Don’t you think we put
it off rather too long?” “Strike me think,” said Mr. Brigs.
Or at least the nautically equivalent that strikes me think. “I’m
sorry Captain I hadn’t noticed it before, I will attend to it right
away sir. Why if we don’t look out, we will forget all about her
requirement and we won’t know how to have a proper general average.
It’s very technical the general average and one can easily get out of
practice.” “Quite right Mr. Brigs.” said the captain, “but I
didn’t mean to criticize you. There is no need for hurry, let’s
think it over. I may have a suggestion or two to make Mr. Brigs,”
the captain said. “My idea of this proposed general average is to
time it for New Orleans. A little stranding, no real fire and damage
you understand, a little machinery trouble, enough to sight the bottom
and overhaul the machinery you understand, about two days. As you know
from the radio advice received today, my relatives are going to be in
New Orleans next Wednesday. She’s my wife’s cousin once removed
and I haven’t seen her for over a year, but she took a fancy to me
years ago and I don’t want to disappoint her.” “Ooh.” said Mr.
Brigs enthusiastically, “I think I understand about the
stranding. Has she a sister? I know a place where I can put
her, the vessel I mean, sock bottom, no danger. We’ll have to
work on the engines a little bit to get her off, but I guarantee you
we’ll be in New Orleans next Wednesday. Has she a sister?”
I found it interesting that the former head of the American Association
of Average Adjusters sort of was telling his own group a little bit of
an inside joke about the very issue that sometimes, in fact, it’s the
ship that can get into a situation. I’m sure it rarely happens by
design as it did with the good master and the first mate, Mr.
Brigs. But nevertheless, it’s often attributable back to the
shipowner.
Let me come to a conclusion, I have taken too much of your time
already. I think it’s fair to say that general average was a
great idea in it’s time and I suggest to you however, that it’s a
concept that has out lived it’s commercial utility in today’s
date. Ships are safer today, insurance is available; if there are
additional costs there would be no problem in passing on those
additional costs, either through higher freight rates or through
insurance. Frankly, if there is a tendency of a particular ship
or a particular shipping line to engage in too many situations where
insurance that would be covering the general average types incident
that has been happening with too much frequency, then the market would
almost certainly correct that behavour because then you would see that
that particular shipowner or shipping line would soon find their
premiums rising. I suggest to you that overall corrections of
that type will cause overall the quality of shipping to improve.
The long and short of it is, I think that general average is the
insurance equivalent of the horse and buggy and it maybe time to put
the old nag out to pasture. Thank you.
Rui Fernandes: I wish I had a professor like Norman when I went
through law school and learned a little bit more law and history.
Thank you so much. Now William Sharpe will give us the opposite
view.
William Sharpe:
It’s time for me to make a fool of myself. That depends on whose
behalf your advocating. Good morning. As Norm has said,
there has been a debate in the past and particularly of late whether
general average is become so irrelevant or inefficient that it all be
scraped rather than rebuilt. My task this morning is to make a
case for general average.
The last 20 years I have seen a lot of general average files cross my
desk. Everything from a VLCC which struggled into a port of
refuge with considerable shell plating standards to one day an
uninsured cargo owner who arrived in my office bearing a demand from an
adjuster for a cash general average security. The cargo owner had
never heard of general average before; he got a rather quick
education.
Now, of course, it is easy to see why water carriers and their insureds
would want to lay off the risk of expense of repairs and the
like. It may be less intuitive to see why cargo interests and
particularly their insurers in fact benefit from a general average
regime.
Let’s start with the basic concept. I won’t go into Rhodian law
or Justinian. I think it’s important to remember that general
average is not an anomaly in marine law; it’s only one example of a
very general concept of analogy law and maritime risk management of the
common venture. Professor Tetley in his recent text installment
on international and maritime law says:
The common venture like seaworthiness is a common theme found in
various forms in most maritime contracts of law. The common
venture is the principle that the parties to a maritime adventure, such
as the common carriage, private carriage or hire of a tug, share the
risks of responsibility. There is no absolute liability on one or
either party. The same is true in general average, limitation of
shipowners liability, salvage and faulty vision. So one is
talking about an over arching concept, not an exception or an
anomaly. General average is only one reflection of the common
venture.
Now, it’s important to remember also that general average is not simply
an historic relic but the concept of sharing of risk is a deliberate
and considered policy choice of many modern maritime law inventions.
One need only think of the Fund Convention for oil pollution. Now
government and industry do not spend time and effort negotiating and
implementing such a new convention or new systems simply for the call
purpose, the call being GA. There are economic and risk
management principles and benefits behind it. This is not a
matter of historic inertia; this is I will put to you, a deliberate and
considered policy insurance.
Now the interesting thing about general average, unlike a loss of the
legal matrix of maritime law, is that general average is
voluntary. There is no international convention compelling the
adoption for the continued use of general average. Now, let’s put
this in an economic context. Since about late 1940s to the
present there has been a chronic supply of shipping capacity in most
markets. I would like to do a survey. If general average is
so economically disadvantageous wouldn’t you think that cargo interests
and their insurers would demand the shipowners in such a market to
state “no we do not want to see a general average clause in the Bill of
Lading” Now I grant you that the small, less than container load, cargo
owner may not have much bargaining power when faced with a bill of
lading issued by a major carrier. But think about the oil producing
major and the carrier. These are sophisticated armies that enter
into sophisticated long-term contracts with the freight man and the
saying goes there are two fisted of bargainers on either side.
Now has anyone who has seen a cargo interest demand of a shipbroker for
the negotiating for a container contracted with the freight man.
We don’t want to bargain with you shipowner if you put in a general
average clause. I have never heard of that. So, I think we
have to look at the IUMI study numbers very carefully and I’ll have a
few comments about that later.
Now, in economic terms, it may be that the incidence of significant GA
events is so low as not to warrant the transaction costs of excluding
general average and contracts of carriage by water. If it doesn’t
happen very often, you are not going to spend two hours tooing and
frowing through the internet or telexing between brokers to try and
negotiate an exclusion; but I would point to you that the reason is
more probably that general average contributes to economic
efficiency. Why do I say that? Well, we have to look at the
concept. Who is the least costs insurer? There are many
participants in the ocean-shipping venture. Everything from
forwarders liability insurers to cargo underwriters to P&I Clubs.
Shipping of course, is a very cost sensitive industry and costs are a
vital element of general risk management. Now, there are many who
say “oh we can do away with general average because there is other
insurance around”. I say that is not a safe assumption.
Let’s look at the majority of ocean shipping which is the carriage of
all cargo. You look at various data and you can see it in the
Encyclopedia Britannica Yearbook, you can see it in OEC, you can see
the statistics there are various sources. Since at least the last
40 years, with the occasional blip, there has been a rapid decline in
the real price of most boat commodities and most of those of ocean
shipping are boat commodities.
Now in a globalized market, the trading margins are so thin for some
commodities that trading companies or suppliers, will simply
self-insure rather than pay premium even for FPA or institute cargo
quality for sea. Now I don’t know if anyone has done a study, but
I think we would be very interested to see an international study of
the proportion of water going cargo which moves uninsured or with such
tiny retention that it is effectively uninsured. I think that the
proportion could be surprising to many in this room. Now in the
absence of general average, an uninsured cargo interest could face
considerable expense. Demanding cash and GA security they face expense
anyway. But let’s take the hypothesis of no GA and an uninsured
cargo. Interests in that scenario, if there is a sort serious
casualty or delay, the cargo interests would be forced to make their
own loss protection arrangements and the expenses are trying to
negotiate costs and loss protection arrangements whether it’s by an
uninsured cargo interest or even by cargo underwriters is bound to
effect the price of the commodity. Assume the insurance
situation: is a claims manager for a cargo insurer really going to be
interested in running around negotiating at off loss protection such as
discharge of cargo and a point of refuge. They may be reluctant
to do so except in the case of a substantial loss. You then get
into the real possibility that cargo owners would feel compelled to
make their own arrangements. Now apart from the issue of
inexperience, cargo owners making unfortunate decisions, even if you
have a sophisticated cargo owner, even if you have a cargo owner with
cargo insurance, the problem from the prospective of the insurer is
that even with the sue and labour clause policy, the money in effort
that is advanced in the absence of a predictable loss management
regime, is recoverable only if a loss arises from covered risks.
So that any cargo owner who takes the initiative in trying to minimize
the loss in the sense rolling the dice as to whether it will eventually
come to be a covered loss, or the expense as in sue and labour will
found to be reasonable. Even if cargo underwriters eventually pay
on a sue and labour basis, the cargo interest which has to advance
money, this will certainly consume operating capital of losses to be
adjusted. We then have the economic reality that even if the
cargo interest eventually recovers, it’s 115% on the valued
policy.
Let’s look at the business of moving goods from A to B. Traders
and manufactures and consumers are interested in getting the goods not
so much the money. There may be commodities and particular
manufactures process goods, where there may not be ready a replacement
market that reported destination and particularly in these days of just
in time and logistics management and very sensitive consumer markets,
like the Christmas rush which for the trans specific container trades
starts somewhere around August. The consignee, the buyer is more
interesting in getting the goods, not the indemnity money. Now
why am I going to this route of business commercial interests? It is if
you have a general average system in place, if you have a clear set of
rules for getting the cargo going from a place of refuge, if you have a
concept of contribution for a call and benefits retained as a concept,
you are more likely to have the actual cargo recovered and on its way
rather than the money eight months, twelve months, two years
later.
Now assuming the abolition of general average, what would happen in an
emergency situation? Well, there is the general prospective I say
it would shift the risks of the shipowner. Cargo interest say,
no. It shifts the risks of the shipowner in my view, to the
detriment of the cargo interest. Now to understand this, you have
to look a bit at the economics of the shipping industry. Right now,
there are a few very large container operators left or they are
vertically integrated but the greater proportion of ocean carriers,
like other land based industries, face this concept of decupling.
In the marine industry you have the decupling of shipowners, ship and
financing from technical and commercial management. If you have an
accident of stranding or grounding, a fire in the middle of the ocean,
it will immediately cut in two cash flows. The vessel goes off hire,
delay in trade tracks etc. Now the reaction of a cash stressed
shipowner, in that circumstance is, they are not going to look first to
getting the cargo to their destination, they are going to look first to
how do I protect my cash flow. If that means abandoning the
voyage, if that means discharging halfway there, so the vessel can
quickly get into a dry dock and go back on hire, the shipowner in these
circumstances is going to look to cash flow before the interests of
cargo. When you look at the economic market for freight and I say
despite the recent spike in freight rates due to the Asian commodity
demand here, historically, looking at freight markets in a historical
sense, I would say that the abolition of general average would
encourage more of the abandonment of voyages and more abandonment of
cargo. How is that going to help cargo interests whether they are
insured or uninsured? How is that going to help cargo insurers?
You then look at some of the law; you have the older case Field v. Barr
construing a hull policy. A generalization is dangerous given the
range of hull policy terms but I think one can say at the
generalization that in the absence of specialized wording, on most hull
policies the cost of discharging cargo to effect repairs to the ship is
not within the covered areas. So the hull underwriters are not going to
help out the shipowner if they are faced with a ship that can’t move
cargo.
Now it has been argued that the shipowners can protect themselves
through various supplementary coverage: loss of hire,
supplementary P & I insurance etc. But these supplementary
coverages only a carrier with a very good track record is likely to be
able to get. If one abolishes GA and one had the flow through of the
costs of delay and dealing with cargo in the case of a significant
casualty, flowing through other types of insurance such as whole or
supplemental P & I, will eventually cause the economic birds to
come to roost and you will have an increase in calls and in
premiums. In the long run, there is nothing free in
insurance.
Now consider what would happen if GA were abolished. How would
shipowners react? Well, if you think of the Hague-Visby Rules in
their various forms, the Hague-Visby Rules are essentially silent on
diversions or force majeure. I know in the United States there is
a somewhat different broader case law on what constitutes the deviation
but again, being general we are looking at the maritime laws of the
major industrialized countries. A shipowner largely has freedom
of contract when it comes to force majeure or diversions. No GA?
What is a shipowner going to do? They are going to strengthen the
diversion and enforcement provisions in their contracts. How does
that benefit cargo interests? I say it does not. Now part
of the rationale to the abolition of general average is that it is
perceived as a shelter for the substandard shipowner. Norm’s little
anecdote. We need a few more weeks to report so let’s put it on
the soft ground. In the real world, I say this is wrong or at
least doubtful. There are several reasons for this. First of all,
if it is found the carrier has failed to exercise due diligence, it’s
claim for GA contribution from cargo will be denied. Granted that this
may take a few years as the claims process works it’s way through the
courts, but the shipowner who fails to exercise due diligence will not
be covered in the long run. Now one can fairly say why would we
have this whole system with GA if three or four years from now a judge
finds the carrier did not exercise due diligence therefore, the carrier
is not going to get the contribution? Well there is still a
benefit because just after the casualty happens there needs to be
surely a predictable system for loss control. I’ll come to that a
little more in a moment.
Now, arguably even before the Antwerp Rules from the 1994 version was
passed, there was a general requirement of reasonableness. Antwerp
Rules 1994 has underlined this and so unreasonable expenditures are not
going to get the sympathy of adjusters or the courts. Will the
abolition of general average expose the unreliable shipowner? Will it
help get rid of the unreliable shipowner and therefore, reduce costs
and loss of history? I point your attention to a very good
commentary of the Jonathan Spencer, a member of the U.S. Association of
Average Adjusters who has a running web page on some of these
arguments. “Part of the IUMI agenda is to eliminate marginal
Shipowners. However, it seems unrealistic to expect that the
insurance industry will achieve what the regulatory authorities have
failed to achieve and one cannot underestimate the determination of
even quite reputable shippers of cargo to continue to attempt to pare
freight rates to the bone.”
Now anyone who reads the Maritime Trade Press will know the complaint
of tanker operators that even with the best ship management, even with
the best technical management, the best VLCC will be chartered first,
but not at a penny more than the market freight rate, leaving the
marginal operators to pick up the remaining business. It is to
say the least controversial within the insurance industry and the
shipping industry whether the premium quality operator can demand
premium freight, I don’t think the answer is in so it is interesting
that the OAC’s secretariat which has done a lot of studies on how
marginal shipowners by snagging gaps within the regulatory regime have
managed to depress freight rates from markets beyond and below the
costs of operation. They did a study in 1998 on whether an
adjustment or the abolition of general average such as the
International Ship Managers Association and you have a lot of talk
about a good management and good risk prevention. Now with GA
when a significant marine casualty occurs, usual and preferred practice
is to get a GA adjuster involved from the outset and have coordinated
planning with the Salvage Association with a hull insurer, with the P
& I Club, as to how to best deal with the ship wallowing in the
swells and get it to a port or a place of refuge and get the cargo on
its way. Because it is a predictable system with a set of GA
rules in place, both cargo interests and shipowner interests will know
that there is a predetermined set of procedures for how the costs are
going to be shared. You are not inventing anything from square
one. The moment after a casualty, and I will say to you that the
charged atmosphere immediately after a casualty is not the ultimate
time and place to start thinking about a plan for recovery. The
plan for recovery should be preplanned and part of that of course is
general average.
I would end with the comment of the CMI subcommittee on general average
and I will quote what I think is a key paragraph in the discussion
paper in the last yearbook and it’s this:
“The general philosophy of cooperation which underlines general average
encourages the parties to incur the expenditure necessary to ensure
that the ship and cargo reach their ultimate destination. If this
distribution of expenses were not regulated by the common benefit
rules, the parties would, after the emergency has occurred [in the
quote, it said incurred, I think they meant occurred], often have to
resort to individual agreements about the distribution of outlays and
expenses such as particular cargo handling. Necessary to bring
about an expeditious and cost effective solution for all parties
concerned, this would involve serious risks of delays and other
agreements which may well be for the disadvantage of cargo interests
compared to the present system, and it is possible that in many cases,
the delays and losses arising will hit the cargo interests harder then
the shipowner”.
So I think these are wise words for cargo interests and their
insurers. A word on the IUMI statistics. If you are a
shipbroker or a lawyer and you see charter-parties pass across your
desk, it’s amazing how many older York Antwerp Rules are still
there. I have seen a COR 7 was still referring to the Rules back
in 1911. There are still a lot of Bills of Lading,
Charter-parties out there referring to 1950 let alone 1974. It
appears that reference is to 1994 [York Antwerp Rules] are few and far
between. So when one looks at the IUMI statistics, the first
filter you have ask yourself is, under which GA regime did this
adjustment occur and although generalization to danger to the extent
that the earlier regimes were perhaps more receptive to cost of refuge,
crew wages etc. The numbers are affected by the GA regime under
which they were adjusted.
Beginning in 1994 and particularly from last week in Vancouver the York
Antwerp Rules 1994 and 2004 have really tightened up on some of the
areas that IUMI has considered as maybe disadvantageous or over
reaching. There are now more restrictions on what costs of
repairs are recoverable. Pollution liability was excluded in 1994;
salvage and crew wages have been adjusted in 2004 and if you look at
the numbers that Norm had up from the IUMI study, of the elements that
IUMI was concerned about, my rough calculation is a good 56% of the
classes of expenses that IUMI thought were somewhat dodging would have
been excluded by the 1994 – 2004 York Antwerp Rules, so I pose it that
the IUMI study is an interesting bit of economic history but if these
events, if these GA occurrences had been adjusted under the 1994 or
2004 York Antwerp Rules, there would have been less, if I may say gray
area, and therefore, the moral of the story is update general average,
take a good hard look at causation and risk management, but remember
the purpose to the exercise is to encourage ship and cargo to get to
its destination in a planned and organized way. Any predictable
way so the losses can be properly rated for underwriting purposes and
in a controlled way and surely that is better than the K.O’s. I
will give you an example, the Amoco Cadiz. As the Amoco Cadiz
minus a defective ruder drifted to the French Coast, 17 hours were
taken up in negotiations between the operator and various salvage
contractors as to the terms on which the vessel would be salvaged. We
all know what happened and that is not the sort of uncontrolled,
unplanned time and place to negotiate. So let’s have a
reasonable, predictable and updated system.
Those are my thoughts.
Rui Fernandes: The last word goes to an average adjuster, K.H.
Mao.
K.H. Mao: Good Morning,
First of all, Mister Chairman, I would like to thank you very, very
much for your hospitality for last night and I look forward to
tonight’s dinner as well.
It has been quite some time since I was volunteered. I didn’t
even know where I was supposed to be this morning. I found out at
the meeting, it’s my turn to speak. I found it extremely interesting to
listen to two very well prepared speakers. I congratulate you
Norman, I congratulation you William. Both of you made excellent
points.
But before I give you some of my thoughts, may I just ask you all, how
many of you think general average should be abolished? Would you
would please put up your hands? Okay. How many of you think
it shouldn’t be abolished? I do not see too much.
Okay. It should not be abolished
As you know, I’m an average adjuster; I represent the Association of
the United States Average Adjusters. I think what’s happening in
today’s world is we are in a consumption society. Economics and
technicality often take over what is an old business. I neither endorse
abolishment nor preservation. But whatever is going to happen, I think
it is going to be evolutionary rather than revolutionary. If you
don’t get rid of general average, not only the entire commercial system
is to change, I think some of the legislation will have to change and
all of that will take quite a bit of time. But it is also true
that at times consumed in preparing the adjustment, the official costs
involved in preparing this is something probably the consumption
society that we are in, will not tolerate it.
The argument that the mythology of general average has been going on
for quite some time seems to have gotten to this industry. In reality,
we average adjusters so called general average adjusters. In
reality being really spent by my estimate, probably 90% if not more of
our time, in adjusting political average rather than general
average. So from an adjuster’s point of view, it does not really
matter whether general average is abolished or not
abolished. Because if you were to abolish general average, you
simply have shifted the claims from general average to what I call
political average. Why do I say that? Again in today’s
consumption society, the society will not permit you to carry out a
maritime commerce without insurance. The banks won’t allow
it. The creditor service certainly will not allow it. So what you
are really doing is really shifting what we now call the general
average claim into a political average claim as a contract of
insurance. Well as an average adjuster I really welcome either
one. Because whichever way the claim falls on, you will require
an expertise of an average adjuster. So, my fellow friends I
thank average adjusters from the Canadian Association. I would
like tell you that while we congratulate both of them I wish both of
them well in their concepts and we will reap the benefits of whatever
comes out.
Rui Fernandes: Well thank you very much, you have all been great
speakers.
The floor is now open for Comments.
Thomas S. Rue:
Rui, I would just like to bring formal greetings from the Maritime Law
Association of the United States and I would also like to thank you for
the lovely dinner party last night dear Joni, so heavenly hosted. It
was most delightful and I particularly enjoyed the conversation.
I would commend you on the presentation of the speakers and a very
clever way of getting out of beating yourself. I will remember
that. And lastly, I want to thank you and congratulate you on a
term well served as the head of your organization. Thank you.
Rui Fernandes: “Any other comments?” I would like to move now to
the Nominating Committee. Ian Fraser of that committee will
report on the election.
Ian Fraser:
Good morning ladies and gentlemen. In the coming year the
Chairman will be Maurice Gesner from Vancouver. The Executive
Committee will be headed by Bill Kyle, Chairman, Peter Boucher and
myself. The Rules of Practice Committee Chairman will be Dennis
Firzgerald, with Tony Brain and Gordon Gibbons from the underwriters
side. Membership Committee – Chairman will be headed by Ron
Eldridge, with Tony Brain and David Holden. The Advisory
Committee – Chairman will be headed by Neil Dennis, with myself and
John Cantello and our new Secretary and Treasurer - Rui Fernandes.
Thank you
Rui Fernandes: I now call upon the Mr. Maurice Gesner who will provide
the Membership Committee report.
Maurice Gesner:
Thank you Rui, ladies and gentlemen, good morning. It has been my
pleasure to act as Chairman of the Membership Committee for
2003-2004. No examinations for full membership were held this
year. The total membership now stands as follows:
Honorary Members:
6
Full Members:
16
Associates:
1
Resident Associate:
140
Foreign Associates :
41
For a grand total of 204.
Respectfully submitted, Ron Eldridge, Tony Brain and Maurice
Gesner. Thank you.
Rui Fernandes: With respect to the coming year the association is
exploring having its annual meeting and dinner at Mont Tremblant in
Quebec in conjunction with the CBMU. Further information will be
provided to the members in the next couple of months.
The Association is also exploring having its 2006 meeting in Halifax in
conjunction with the CMLA, the CBMU and other maritime
organizations. I believe a full week is planned with
seminars and receptions.
We will be relying on electronic communication and you will be
receiving email information from the Association. This year's Annual
Meeting Report will be sent out electronically to all members. A hard
copy will be provided on request or for those members without an email
address.
It is my pleasure to introduce to you our new Chairman for the 2004/05
term. Maurice Gesner is a Vice President and Manager of the
Marine Claims Department of Aon Reed Stenhouse. He joined Reed
Shaw Stenhouse in 1976 (as it was known back then) and after a 5-month
experience of working in the black-hole of the Mailroom, moved into the
Marine Claims Department in 1977 as a junior adjuster training under
David Holden. Maurice completed his Associate of the Insurance
Institute of Canada in 1983. He became a full member of our
Association by examination in 1985. Throughout his time with Reed
Stenhouse Maurice has had the pleasure of working with David Holden,
Peter Boucher, Ken Hext and Tim Stradling (all full members of the
Association) receiving the benefit of their knowledge and experience of
which he is extremely grateful. He has been active in
Toastmasters and is currently coaching his oldest daughter's baseball
team.
Maurice is married to Missy and together they have two lovely
daughters, Lindsay and Noelle
I will ask Maurice Gesner to come forth and ask you to welcome him as
our Chairman for the coming year.
Maurice Gesner:
Thank you Rui for that kind, kind introduction. Before I move to
adjourn this meeting, I would like to recognize Rui for serving his
two-years as our Chairman. It happens to be the longest anyone
has served our organization, our Association as Chairman and throughout
this period of time, Rui has represented our Association at the various
functions, the U.S. Maritime Law Association, the Association of
Average Adjusters in New York, London as well as, I believe you went
AIDE in Amsterdam. Throughout this period of time, Rui has
represented us with dignity and professionalism which we are very
grateful and on behalf of the Association Rui, I would like to thank
you for your hard work and dedication for the past few
years.
I would also like to congratulate Rui along with Norm and William and
the comments of Mr. Mao for the holding of the panel this year on
general average. This is the first time our Association has ever
held such a panel. I congratulate both William and Norm on their
presentations; I would like to borrow them for my presentation for next
year. I thought each of them could singularly apply and present
or represent a thorough, thorough, very thorough presentation. I
am very impressed with the work that went behind it, the research, it
was very interesting and enlightening.
General average is somewhat of a hot topic these days, I had the
privilege of attending the CMI conference last week and it turned out
to be a very fascinating process on the general average side.
They had everyone situated and divided up by country and IUMI started
the meeting by giving their thoughts on general average which was of
course, on their point of view to abolish it. Then we had this
opposing view coming up saying why they felt that general average
should be preserved without change. There were a lot of debates
that went on rule by rule of those who were in question. It
wasn’t without a bit of controversy as well, because on one rule the
first one that the delegates were to vote on, the Chairman said that
Hong Kong would not have a vote because China had already voted and
used the example of New Zealand and Australia having one vote, but then
they only have one Maritime Law Association, I believe. We went
for a break and the Chairman came back after the break and allowed or
said that Hong Kong were allowed to vote. It was a bit tense there for
awhile. It was fascinating. I am happy to say that general
average is going to be around and we now have a new York Antwerp Rules
2004. There have been some amendments and some changes. In
one particular instance, salvage has been taken out completely, except
if the shipowner incurs it all himself and it could be a portion.
So you see that when the new Rules come out, it makes for fascinating
reading. One concern that was expressed, and it’s only alluded
to, is the fact that it has only been 10 years as opposed to the usual
20 – 25 years in between Rules.
I would like to thank the Association for accepting me as their
Chairman. I feel rather humble. It feels just like yesterday that
I walked into Dave Holden’s office, He was my first boss, as Rui
mentioned. I was thankfully rescued from the mailroom and I sat in
David’s office for about an hour as he explained to me the details
behind particular average, general average, sue and labour and other
things. I came out of there with my head spinning, wondering what
the heck was he talking about. So over the years, I thank for David’s
training and guidance that I was able to achieve something I never
thought would be possible and in passing those difficult average
adjusting examinations and that was something I will always be grateful
to David for. As Rui mentioned, in my time at AON, I have had the
privilege and pleasure of working with not only David but with Ken
Hext, Peter Boucher and Tim Stradling who are all former Chairmen of
this Association and I am very fortunate to be the benefit of their
experience and knowledge and not to mention patience.
I was going to mention about the scanning of reports and the fact we
have a website, again thanks to Rui, a great deal thanks to Rui and as
the past Chairman the addresses will be put into the
website. I would like to call and send out an invitation to
any of you that if you have any papers of interest that if you pass
them onto our Secretary, Rui and we will see that they are put into our
website.
I think that now brings me to an end and brings this meeting, this
memorable meeting to an end. I would like to call for a motion to
adjourn.
Moved by Ian Fraser.
Seconded by Tony Brain.
Maurice Gesner: Then I hereby adjourn this meeting. Thank you.
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