General Average: An example of fairness in an ancient trade concept.
Imagine a ship leaves for a distant port with a cargo of marble, and a cargo of wine on top.
Midway through the voyage the ship runs aground. In order to refloat the vessel, the Captain orders the crew to throw the barrels of wine over the side.
Fortunately the vessel refloats after most of the wine has been jettisoned. The ship reaches its destination and all of the marble, and a small portion of the wine gets delivered. The Captain receives payment for the remaining cargo and returns to his homeport.
There he meets the cargo owner of the marble, and pays him the money he received for the marble (minus the freight). Then he meets the owner of the wine, and pays him the pittance he received for the remaining wine (minus his freight). The owner of the wine is upset, and wants to know why he receives so little money. The captain explains that he had to throw the barrels of wine over the side to save his ship, the other cargo, and the crew.
“Why didn’t you throw the marble over the side?” the wine trader asks him.
“The marble was on the bottom of the hold, I could not reach it”, the captain tells him. “It was dangerous and we had to act as quickly as possible, and the wine was the easiest to jettison”.
“But that is not fair”, the wine trader said; “You sacrificed my cargo and it benefited you and the marble trader.”
Let’s assume the Captain was an honorable man and thought about the wine trader’s argument. After discussing it with his wife (who had been planning to buy new curtains with the earnings for this voyage) he called the marble trader and the wine trader for a meeting.
They sat down around the Captain’s table and the Captain summarized the situation.
He then explained his solution to the problem. He said: “Gentlemen the way I see the problem is that when I left port with a cargo of marble and a cargo of wine a few months ago, we all were taking a risk. We all would make a lot of money if I completed the voyage, or the ship could have sunk and we all would have lost everything.”
“Now it turns out that something in between happened. I had a profitable voyage, and you Mr. Marble Trader had a profitable voyage, but you Mr. Wine Trader lost a lot of money on this venture” “Mr. Wine Trader pointed out to me that it was his wine that saved the voyage for you, Mr. Marble Trader, and me”
The marble trader shrugged and the Captain continued: “I had never thought about it that way, but Mr. Wine Trader has a point, we all went into this adventure together, and while we all had different commercial interests, an ocean voyage is an adventure, and it was a shared adventure. I think it would be fair if we shared the unexpected cost of completing the voyage between all of us”
“And what is that going to cost me?” the marble trader asked.
“Cost us”, the Captain replied. “I developed a formula, that should be fair to all of us: I checked to see how much the value of the marble, the value of the wine, and the value of my ship was before the grounding. Then I checked what the value of the ship, marble and remaining wine was after the grounding”
“The difference between the two is the loss. What I suggest is that we evenly apportion this loss based on the remaining value of each cargo and the ship. This way everybody shares in the loss”
“You mean I have to pay money to Mr. Wine Trader, just because he lost his cargo” the Marble Trader exclaimed.
“No”, said the Captain, “you are paying because sacrificing his cargo resulted in saving your cargo”
“I have to think about that”, said the Marble Trader.
When they met a week later, amazingly the marble trader agreed to the Captain’s proposal on one condition; from now on the Captain always had to apply this formula if there were any unexpected sacrifices to complete the voyage, and he, and the wine trader had to help him convince the other traders in their port to also ship their cargoes under those rules.
“And just so were are not confused” the marble trader continued, “These are the rules”
And he put a piece of paper on the table that showed the following rules:
GENERAL AVERAGE RULES
Rules only apply on a voyage when the following conditions are met:
1. There has to be an unexpected peril
2. There has to be a sacrifice to fight the peril
3. The sacrifice has to be successful
If general average applies, the cost of the sacrifice will be shared proportionally by all parties to the voyage based on the value of the ship and cargo at their destination.
The wine trader was elated he was given a chance to emerge from ruin. He ran home to get some of his finest wine to celebrate the occasion with these two fine people.
First he toasted the Captain for his wisdom, then he toasted the marble trader for his generosity, they drank.
Then the captain toasted his friends, and then the marble trader toasted his friends. Later that evening when they had become really good friends, the wine trader asked the marble trader why he had agreed to these rules, because he himself was not sure he would have agreed to them if he were in the marble trader’s position.
“At first I was not going to agree”, he replied “but then I starting thinking. I don’t just ship slabs of marble that are in the bottom of the ship, I also ship fine marble statues that are crated, and stored on top of most other cargoes.”
“The marble slabs are profitable, but I make much more money on the statues. However, the statues are incredibly expensive and some day the Captain might have to sacrifice one of those statues to free the ship, and then I would really need the other cargo owners to help compensate for my loss.”
“So I figured that some day these rules might save my business, and then I thought about your situation and realized that the Captain’s approach is fair”
And that is how I imagine general average started around the time of Christ. All of this is made up, but the concept is true and it has survived unchanged for all this time.
General average is an amazing concept. Why has it survived this long? There is only one reason; it provides a level of fairness against the cruel sea.
This does not mean there are never any general average disputes (there are some horrific general average stories relating to the slave trade); it just means that at its core general average is fair.
Surprisingly, concepts that are fair have incredible staying power, and many of those concepts were developed in maritime commerce, and are still developing in maritime commerce.
Last Updated: 2/16/05