Development of Maritime General Average Adjustment
Its Proposed Contribution to Alternative Dispute Resolution
By Eric Messelt
Independent Research Project
Directed by Prof. H. Bigham
Pepperdine University School of Law
last printed on -
September 28, 1995
Table of Contents
There are two issues to be explored in this paper, the first is the quixotic nature of General Average Adjusting and second is its possible contribution to the Alternative Dispute Resolution movement.
In the area of Admiralty Law known as General Average, there are specialists called Adjustors. These Adjusters have de facto power to resolve matters arising out of General Average events. Simply, these events are situations where a party to ship voyage suffers a loss due to the avoidance of peril during the voyage. The General Average Adjustors who resolve these matters are employed by one of the parties involved. This would lead, in other legal contexts, to a presumption of bias that would invite litigation. Yet few General Average claims are litigated these days. This situation is a result of the unique environment of Admiralty Law built on its unique subject matter, the several hundred years of evolution of General Average cases, and the sterling reputation of General Average adjustors. Historically, how did this happen and why does it work?
The Alternative Dispute Resolution ("ADR" ) movement has promoted the resolution of disputes without use of the traditional court system. The ADR movement focuses on the process of dispute resolution rather than the subject matter of the dispute. The main processes are negotiation, mediation, and arbitration. These processes are perceived to be less expensive, less time consuming, and result in a resolution that addresses broader interests - and is therefore more "just" - than litigation can. However, the ADR movement has not focused on the use of the Factfinder - a neutral third party who makes determinations of fact based on their own investigation. In the case of General Average claim settlement, this is routinely done by virtue of the activity of the Adjustor and the effect of his finding - and without the use of negotiation, mediation, or arbitration as generally defined by current ADR theorists and practitioners. Moreover, the General Average Adjustor's factfinding is binding on the parties, if the parties have so agreed. If Maritime interests have substituted General Average adjusters for litigation, is there a lesson for the ADR movement - perhaps a new model to follow?
There is also a theme which threads through this paper. That theme is that ADR, broadly defined, is a useful hermeneutic to understanding the evolution of law throughout the millennia.
This paper is the result of the author's personal interest in both Admiralty and the ADR movement. The author is a Candidate for Pepperdine University School of Law's Institute in Dispute Resolution's Certificate.
The thought that the two areas might be combined came from hearing, "Admiralty matters are characterized by prolonged litigation." The question presented itself; why has Admiralty not made use of ADR techniques? It can not be that Admiralty matters are more complex - ADR techniques have shown great success in complex cases or where the amounts of money are large Why is there prolonged litigation in Admiralty when ADR techniques have proven themselves so clearly in other areas of law? Some may argue that Admiralty relies heavily on arbitration to resolve disputes. Clearly arbitration is part of the ADR movement's techniques. Yet arbitration, as practiced in Admiralty, is actually not practiced much differently than litigation. For Admiralty, arbitration's primary benefit is the ability to enforce awards trans-nationally. Admiralty arbitration is not practiced to reduce or improve upon the litigation model, therefore, it is not an "alternative" to traditional litigation but merely an adjunct. While most of Admiralty remains litigious and does not make use of ADR techniques, General Average is Admiralty's notable exception in generally avoiding litigation - or even an "adversarial" dispute resolution process.
This paper has three purposes: the first is to explore the "Due Process" questions regarding General Average; such as, what is the role of the adjustor, what is the effect of the General Average statement, and how did the unique General Average environment come into being? The second purpose of the paper will be to explore the contribution that the General Average model might make to ADR. Fundamental to this discussion is an understanding of the historical place that ADR has within the traditional legal system. It is this paper's third purpose to generally contend that the history of legal evolution has been one long pursuit of alternatives to the then existing legal system.
Although it will be necessary to discuss the nature of General Average law in some detail, an area not familiar to most, this paper is not a complete exposition of General Average law. There are many issues regarding General Average that have been purposefully glossed over or even left out. On the same token, this paper is not an exposition of ADR, but it will provide enough of a conceptual overview to allow discussion of the salient points of this paper's theme.
Simply explained, "General Average" is an ancient method of risk-spreading such that when a ship encounters a peril, all interests in the voyage share in any loss suffered. This definition will be refined by the discussion below. In essence, it is self-insurance among all interests of a particular voyage without any additional payments of premiums.
Given the rather arcane nature of the law of General Average (at least as compared to the somewhat more accessible law of Contract, Tort, or the Federal Constitution), it may be useful to list the authorities in General Average in some order of influence. The first and most authoritative source are British cases. While Admiralty did not arise in England, its dominance in maritime affairs and its treatment of Admiralty within its Common Law structure have given British admiralty cases great weight in General Average cases, even in courts of the United States.
In regard to Admiralty law within the United States - especially in the area of General Average - the next most influential level of authorities are texts and "Hornbooks." The Gilmore & Black treatise is particularly authoritative.
Though this is contrary to conventional legal researching wisdom, the next American authority is case law decided in the U.S. Supreme Court, federal courts sitting in Admiralty, and lesser courts. These court opinions and the findings of other, lesser jurisdiction cases are reported in the American Maritime Cases Reporter.
There is statutory influence as well existing in the Carriage Of Goods by Sea Act. This characterization of "influence" rather than control is appropriate since there is not even a statutory definition of General Average; the cases are far more influential. General Average adjusting practice is specifically governed by a set of widely recognized international rules known as the "York-Antwerp Rules," of which the latest version is 1974.
Furthermore, in the absence of any other controlling authority, General Average adjusting is controlled by the General Average port rules in practice at the port where the voyage ends.
Certain books enjoy significant stature in the area of General Average. These are identified by authors such as Congdon, Loundes and Rudolf, Buglass, and Parks.
The subject occasionally appears in other law review and journal articles, however the Tulane Maritime Journal and the Journal of Maritime Law and Commerce contain the overwhelmingly greatest number of articles on the subject of General Average.
The term "General Average" is difficult to understand using contemporary American vocabulary; an understanding of the term's etymology is necessary to grasp the meaning. The term "Average" is derived from the French "avarie" meaning "loss"; in this context, damage to ship or cargo. The term "General" is contrasted with a "Particular" loss, which must be borne by the owner of the vessel. The French term for General Average is clearer, it is "avarie commune" or "group loss."
The term, "General Average" has been characterized as "indefinite," though a better description might be "ambiguous." This is because the term "General Average" can be used to refer to a type of act, a type of loss, and/or a type of contribution.
The General Average act was first decided in Columbian Ins. Co. of Alexandria v. Ashby and later in Barnard v. Adams. The act is defined as having three elements. The first is that the ship and cargo are placed in common imminent peril. This element is not narrow, it may include a tug and barge as unit. The second element is that there be a voluntary sacrifice of property to avert that peril. This sacrifice is performed by the master or his authority due to the master's extraordinary powers as agent for a venture's interests. The third element is that as a result of the sacrifice, the safety of other property is presently and successfully attained.
The nature of the sacrifice and its result are given interesting treatments. The York-Antwerp Rules of 1950 is a combination of the English "preservation of goods & cargo" standard and the American "for common good or benefit" emphasis. The effect of fault is also considered in defining what is a General Average act, thus a party at fault can not claim contribution. This was codified in the Harter Act and as a later development, the inclusion of a "Jason Clause" into bills of lading and so drafted as to avail a ship of every immunity granted by statute, such as Cogsa.
The General Average loss is defined by case, statute, or rule - though primarily by case. The loss can either be a sacrifice, an extraordinary expense, an expense dealing with safety, or even the preparation of the General Average statement itself.
The classic General Average loss is the sacrifice of part of the ship or cargo. For example, during a voyage a sudden storm comes up and to save the voyage some cargo is jettisoned overboard to lighten the ship. Rather than the owner of the cargo or the shipowner bearing the cost of that loss alone, the loss is spread to all interests in the voyage. This is because all interests in the voyage benefitted by the jettison since the sacrifice was required for the successful completion of the voyage. The requirements for a General Average loss is an event where 1) the property was imperiled, 2) the sacrifice was a deliberate act, 3) the purpose of the sacrifice was the achievement of safety, 4) the sacrifice was reasonable, and 5) the sacrifice was not only made under unusual circumstances, but also in an unusual manner. Some examples are jettison of cargo, fire, voluntary stranding, damage to ship or engines, salvage, burning stores for fuel, and incurring liability to a third party. There has been some discussion regarding General Average loss as to shipping containers and their valuation.
A generally accepted extension to the General Average loss are extraordinary expenses to assure the safe completion of the voyage. The most common example is that of putting into port of refuge. These expenses include port charges, wages and maintenance of crew, the handling cargo, and the "substituted expense" (defined as an expenditure which, while not qualifying as a General Average loss, is permissible because it substitutes for an allowable General Average expenditure).
An extension of the scope of General Average loss that is recognized in the United States is the "safety extension." This includes certain expenses after safety is attained reflecting the policy of safe completion of the voyage, not merely attainment of safety at the moment. An example was given in a case where expenses incurred in repairing a vessel's propeller at a port of refuge during the voyage, even where that port was a scheduled port of call, were held recoverable in General Average if necessary for the safe prosecution of the voyage.
An interesting extension of General Average loss may perhaps include even the preparation of General Average statement - even if it is later found that no General Average act occurred. The expense of preparing the statement can also be recovered.
The General Average contribution arises out of the General Average act and loss. Rights in General Average are not created in contract, but exist when an actual General Average act as described above occurs. This was described millennia ago by the sea-law ascribed to the Rhodians. This is described more modernly in the York-Antwerp Rules, "General Average sacrifices and expenses shall be borne by the different contributing interests on the basis hereinafter provided." In essence, all parties engaged in a maritime venture must contribute in proportion to the value of their property safely delivered.
It should be clarified that, strictly speaking, General Average has nothing to do with marine insurance, yet all parties to the venture are usually insured for General Average contributions; and thus the real "players" in a General Average event are insurance companies. Actually there are relatively few players which makes for a small and tight club atmosphere. In fact insuring organizations are called "clubs" and are commonly located in London or Scandinavia. One area of discussion has been whether there is a Tort duty to insure for General Average.
The history of maritime General Average spans all of western civilization. General Average has it source in the earliest Maritime history and is the oldest area of maritime practice. As alluded to above, the first reliable recitation of the General Average rule is ascribed to the sea-faring civilization of Rhodes. The codification of Roman law compiled by the Emperor Justinian contains the following text: "Lege Rhodia cavetur ut si levandae navis gratia jactus mercium factus est, omnium contribuione sarciatur quod pro omnibus datum est (Thus Rhodian law decrees that if in order to lighten a ship merchandise is thrown overboard, that which has been given for all shall be replaced by the contribution of all)." A more literal translation would be: The law of Rhodes holds that, if a willing ejection of merchandise is made to alleviate a ship, all contribute the burden for the one who gave all.
The Rhodian rule remained virtually unchanged in the Medieval era in the Articles of Oleron numbers VIII & IX, the Laws of Wisby, the Consolato del Mare, and the Ordinance of the City of Antwerp (1583). The rule was accepted by all maritime countries of the world at that time. The first English reported case of a General Average act was in 1540 and involved the classic scenario of a jettison of cargo and the final determination was apparently made by arbitration. The rule continued development in the United Kingdom, though only pertinent cases will be discussed below.
The first United States case was Columbian Ins. Co. of Alexandria v. Ashby (38 U.S. (13 Pet.) 331 (1839)). There was a great deal of General Average court activity in 1920's through the 1930's within the United States, but a considerable drop thereafter.
There has always been a half-hearted movement to abolish General Average. The reason for this is that General Average is an archaic idea of risk spreading. Indeed, General Average is itself an "anomaly in law;" it has a close analogy to the unaccepted Bankruptcy Model of "Creditor's Bargain." Even so, nobody likes to toss out "quaint" law that is not completely unworkable. Therefore, even though it has its liabilities, the future of General Average looks secure.
The process of determining the extent of the General Average loss and the contributions from each party to others is called Adjusting and is controlled by the "York-Antwerp Rules." The "Rules" are not a treaty and have no statutory effect within the United States, though other countries have codified them into law.
The Rules originated due to the variation of General Average practice throughout world. To provide some consistency in practice, a convention was initially held in Liverpool, England which eventually culminated in the "York-Antwerp Rules of 1890." This consisted of 18 rules addressing specific issues of controversy regarding General Average. An additional rule was added in 1903. The Rules were reviewed again in 1924 when the specific "numbered" rules were supplemented by "lettered rules" which gave general principles. The Rules were again modified in 1950, and again in 1974, the most current version.
It is important to understand that the Rules are not a "ex nilho" creation, but a codification of existing practice. As such, they are pragmatic since they reflect General Average as it is actually practiced, not as it ought to be practiced.
Given the Rules' lack of statutory authority, what is their effect? Despite lack of legal status, they operate as a modern code controlling General Average. The Rules are very important to the courts in understanding General Average adjusting practice. They are widely adopted into bills of lading throughout the world so as to elect a kind of Choice-of-Law of the parties, though the Rules are not codified law within the United States. This party autonomy is further reinforced since bills of lading can mix and match versions of rules and ignore some rules to allow gap filler of port practice to control.
As mentioned above, the Rules employ a structure of "numbered" and "lettered" rules. The numbered rules cover more specific instances while the lettered rules cover more general guidelines. The numbered rules are construed as controlling over lettered rules.
The General Average adjustment begins when the master of ship declares a General Average loss. This declaration is done at the "end of venture" or when a "severance of interests" occur. The method of adjustment - absent other controlling authority - is generally governed by the rules of the port when venture ends. An Adjustor will be hired by the shipowner, who has the greatest interest in the venture. Pending the resolution of the adjustment, the shipowner has a lien on the cargo.
The method of General Average adjusting are outlined both in Admiralty texts and cases. Adjusters are typically given wide discretion in that both the application of fundamental doctrines of General Average and the impact of the York-Antwerp Rules are left to Adjustors. In the United States, an Adjuster may do more than prepare the statement, he may also make a rough calculation before cargo is discharged by the ship so that a deposit or "escrow" fund can be created. In this case, the Adjuster acts as trustee of the fund; alternatively, an "underwriter's guarantee" can be made.
The Adjuster first investigates the events and determines if a General Average event has occurred. The Adjustor's next task is to create a statement of General Average. The Adjustor's role in this process has changed over time. In the mid-1920's, the Adjuster was described as conferring with the interested parties and then arranging a settlement - in essence acting as a Mediator. However, more recently, the Adjustor's role is described as a kind of accountant: calculating, in great detail, which expenses fall within the scope of General Average reimbursement. The Adjuster calculates both as to damages and value - that is, he acts as an independent factfinder. In this more modern view, the Adjuster's determination of items to be included are controlled by York-Antwerp Rules and the generally accepted practice of adjustors.
The result of the Adjusting process is a "Statement of General Average." The Statement contains 1) a narrative of events; 2) supporting documentation, including extracts from ship's logs, reports from ship's master and chief engineer, and surveys of the vessel establishing values, et al.; and 3) a schedule of sacrifices and disbursements containing both the contributing interests and the balance owed by or to each interest. The Adjuster's services are a Maritime Interest and as such the contract for these services are under Admiralty jurisdiction.
Given that the General Average Adjuster is hired by a party in the controversy to create this statement and the lack of judicial oversight in the process of creating the General Average statement which acts as a 'judgment,' the natural question is to ask what authority the statement has, is it enforceable, and will it be recognized?
As one can tell by the description of the statement's contents, the statement is a determination of law and fact. It is extraordinary in effect in that the General Average Adjuster's findings are rarely disputed. From a strictly legal perspective, the General Average statement is a provisional estimate made by the Adjuster acting as agent of a party. Yet, unless otherwise provided for, the party hiring the Adjuster need not accept the conclusions nor is he bound by them. This is because, technically, the General Average Adjuster only acts as an agent of the owner to aid and assist the owner in gathering and stating information needed to make or receive contributions.
This role of agent-adjuster shapes the legal effect of the statement. Generally, in the absence of an agreement to the contrary, the statement has no binding effect, however this point is in controversy. The General Average statement is complicated, but that complexity does not in itself give rise to legal effect; the statement is ex parte and offered only prima facie proof. In these holdings, the courts have made General Average statements appear to have less effect than they actually have in practice.
However, if there is an agreement giving the statement binding authority, the situation is much different. Of course, such an agreement is not operative if there has been no General Average act. Otherwise, with a valid agreement, the statement is binding. In case of ambiguity in the agreement, the courts have ruled that the ambiguity should run in favor of giving the statement effect: "[T]he complexities of general average and the high standing of the profession of average adjuster are such that the Court is not prepared to concluded that the parties contemplated the preparation of a highly elaborate but legally worthless scrap of paper."
This naturally leads to a discussion of the respected reputation that the General Average Adjusting profession holds. Why is this so? First, adjusting is a complex process. Second, it may take a long time to complete, so long that the General Average statement can run into statute of limitations problem. And lastly, despite the fact that Adjusters are hired by one of the parties, they have a remarkable reputation for fairness. The reputation for fairness comes from the observation that the profession is controlled by rules, the high level of experience of the practitioners, and the general "esprit de corps" of the profession. The complexity and magnitude of the task and the past performance of practitioners have combined to create quite a remarkable reputation.
The question is, what exactly is the role of the General Average Adjuster? Are they Judges, Masters, Magistrates? It seems clear that the function of a General Average Adjustor is judicial in nature, settling claims on the facts and the law. It would also seem that a General Average Adjuster is most like a non-binding Magistrate since the Adjuster acts as factfinder, yet the "findings" (the General Average statement) can be legally binding in a contract cause of action.
The nature of General Average Adjusting has gone through some transformation over time. Under the "old" perspective, the General Average Adjustor is a profession of "modern" origin. Formerly, an insurance broker would perform the function of preparing the General Average statement. No special skill was considered necessary, using an Adjustor was a matter of convenience. It was thought that shipowners could do all the work themselves. Times have changed in that courts now recognize that the preparation of a General Average statement is a "highly complex matter" that it is unlikely that any court would now state that a shipowner ought to be able to do the work themself. Currently, the place of the Adjuster is a fixture in General Average practice.
The next question is one of Due Process (that is, issues of fairness and a right to a hearing); what is the standard of proof, is there any Due Process, is there a waiver of rights? As to the standard of proof, the burden is clearly on the party claiming contribution.
There is an interesting Due Process facility which exists as a committee in New York to review individual General Average statements. Why is this done? Since a modern container ship may have over 3,000 bills of lading from over 200 shippers, it does not make sense to have all 200 parties review the statement especially when they do not fully understand the General Average Adjustment process. The committee does this as a routined part of the adjusting process.
There is always a right to a hearing. Since the General Average statement's legal effect is only that of prima facie proof, the parties may take any controversy regarding the statement to the court if there has not been any agreement to the contrary. The waiver of these rights are expressed by the Bill of Lading agreement.
A General Average statement is only rarely challenged due to the General Average Adjusters' reputation for fairness. It is "striking" that litigation rarely reaches the courts any more. As a practical matter, all claims are settled under York-Antwerp Rules and processed by professional adjusters thereby mitigating the need for litigation.
However, this is not to say that the statements are immune from challenge. If the statement is challenged, it is first done informally. This is all part of the small "club" atmosphere: "In such an atmosphere it was possible to amicably resolve disputes, to nip potential problems in the bud before they got in the hands of the 'dreaded lawyers'. . . ." The challenges that are brought before the court system are usually about whether a General Average event took place at all, not the details of the statement. Part of this reluctance to go to the courts may be due to the fact that courts have been naive in General Average matters and have given bizarre results. This wary attitude highlights the importance of the York-Antwerp Rules to govern the practice of General Average adjusting rather than leaving matters of adjustment to the courts.
What has been the effect of this "presumption" for the validity of a General Average statement? The first is one of judicial economy; if General Average Adjusters did not exist, the courts would be further burdened. The second is that Adjusters have a reputation for competence and fairness, and therefore, the statements carry the patina of accuracy and justice. Third, there is a lower costs to insurance companies since only one investigation and only one set of time-consuming calculations need be done, rather than the same work being multiplied by each insurance carrier for each interested party - as many as 200!
One effect of the use of General Average Adjusters has been that it provides all the benefits of an "alternative" method of dispute resolution - lower costs, shorter time, more control of the process by the parties, and better justice.
General Average is practiced differently in other jurisdictions. While General Average is very similar in both the United States and Great Britain - owing to their common basis of a Common Law legal structure, General Average takes on a slightly different texture in Civil Law countries. Sweden is a good example because it is both a Civil Law country and has a significant tradition of contribution to the General Average field.
In terms of actual General Average law, the United States relies on the Federal Supreme Court. However, General Average law in Sweden developed in typical civil manner of codes and statutes. Sweden adopted York-Antwerp Rules into its code in 1950 and again in 1974.
The role of the General Average Adjuster differs as well. In the United States, the Adjuster is party appointed and the result has no legal effect absent prior agreement. In Sweden, an "official" General Average Adjuster can be appointed by the government. This is because the independence of the Adjuster from the parties is taken very seriously and a 'private' adjuster does not have the same presumption of independence. However, there was only one official Adjuster remaining in 1981. There are "unofficial" General Average Adjuster members of the "Swedish Club", the leading Swedish hull underwriter.
Consequently, the effect of the General Average Adjuster's results, the General Average statement differs. In the United States, the statement is prima facie evidence. This is not peculiar to the United States, or even Common Law countries; there is a similar effect in Denmark and Norway. In Sweden, by contrast, if the statement is not quickly contested, it becomes legally binding thus prompting one to observe that Sweden not only takes Adjuster's independence from parties very seriously, it also takes the concept of Latches seriously! This is because the General Average Adjuster functions as a court of first instance, if not quickly 'appealed,' the statement is presummed accepted. There is a similar effect in Finland.
The next question to be asked is how did this situation evolve; and if the General Average environment is preferable, can the model of the General Average Adjuster be transplanted to other areas of law? Key to the unique nature of General Average is its intimate connection to Admiralty law. Being different allowed Admiralty itself to create different jurisdictions and processes to meet its unique needs.
Admiralty is different from traditional court structures. This is due to both its age and its subject matter. Admiralty is older than the sovereignty-based jurisdictions (ie: the king's Court) of the traditional court systems. A brief survey of the history of Admiralty Law is useful to establish this point.
Admiralty dates from antiquity and its rules and its courts can be traced back to 1800 B.C. It was developed out of necessity and traces its roots to the mercantile customs of the early sea powers that arose not long after the death of Christ. Going back further, admiralty shows up in Babylonia and was present in the area of the Tigris-Euphrates river valleys. The Egyptians, the civilizations of the Mediterranean, and specifically the Greeks all apparently had developed rules of Admiralty. The Romans took their sea law from the Greeks, specifically the law of General Average, and gave us the term, "maritime" meaning "of or pertaining to the sea". Admiralty was continued in the Medieval Sea Codes and courts where leadership passed to Italian cities and then to Scandinavian cities. The Oleron Code came with Eleanor of Poitou (Aquitaine), the extraordinary bride of the even more extraordinary Henry II, to England in the mid-1100's. By that time, each port city had created its own code and administered it by special maritime judges or officials.
Though not originally a sea power, by the thirteenth century England had set up separate courts of Admiralty in seaport towns. England distinguished itself from the continental practice by injecting the Crown's authority into Admiralty Courts, first done by Richard II.
By comparison, other substantive law can be dated far later; for example property law as understood by first year law students in the United States was created very soon after 1066 as a result of William, Duke of Normandy's conquest of England and his desire to consolidate his power as king there. Additionally, much of tort is traceable; the "great grand-parent" of all assault cases was reported in 1348, the cause of action for privacy is dated to a law review article in 1890, the cause of action for third party emotional distress within California was created in 1968. One could also argue that the various legal systems can also be dated. The Common Law began in 1154 with the reign of Henry II, and the Civil Law began with Justinian in 533. In contrast, Admiralty seems to reach so far back that 'the mind of Man runneth not to the contrary.'
Admiralty is unique due to its subject matter. There is the fact that Admiralty deals with moving property, which creates different rules such as that maritime lien precedents are reversed from other kinds of liens'. Admiralty is trans-national in character. Admiralty has different expectations of human conduct; for example, the exceptional discretion of ship's master to control the voyage while at sea.
Admiralty law has peculiar doctrines and practices due to its long history and the unique requirements of its subject matter. Admiralty, through the twists and turns of its history and tradition, has independently developed unusual means of resolving General Average questions. While the general law of Admiralty is ancient and unique, one of the oldest doctrines of Admiralty has been General Average. The fundamental concept of General Average has remained remarkably unchanged from the "Rhodian law" to the present. From the ancient method of risk sharing to the complex requirements of the cargo container age, General Average has developed the independent, practically binding factfinding Adjuster.
The driving force behind the granting of the General Average Adjuster's broad powers to determine fact, liability, and damages is the perceived complexity of "modern" General Average claims. Given the intimidating complexity of determining the value, calculating the loss, and contribution of 3,000 bills of lading among 200 shippers, it is no wonder that the court system, parties, and lawyers have quietly handed over this task to specialists. It is also predictable that courts have both retained some level of control (General Average statements are only prima facie evidence!) and have at the same time allowed Adjusters to perform their tasks and parties to rely on the Adjuster's results (General Average Adjusters are competent to process the complex claims.). It is this author's contention that the courts, wanting to retain some jurisdiction, are not yet willing to admit that General Average adjusting is beyond their ken. This author submits that General Average Adjusters have gotten their broad powers over General Average events due to the general math anxiety of the legal profession (attorneys, judges, and justices) and the parties involved.
Before the modern ADR movement and its tenets are discussed, it might be useful to note the place of Admiralty in context of "historical" ADR. The relationship of legal institutions to ADR methods has been one of a Hegelian dialectic. Certainly the evolution of the Common Law is a continuous exercise of ADR: we have never been satisfied with the system and continuously attempt to reform it. Even from the earliest implementation of the Common Law, "legal" remedies were quickly augmented with "equity".
Few attorneys are currently used to thinking about the distinction between Law and Equity. However, it is useful to consider that equity was a form of Alternative Dispute Resolution in its treatment of how a dispute could be resolved, that is, the process and the result. The "law," in the narrow remedial sense, was the judgment of the King's judges by virtue of the authority vested in certain members of his household staff who spoke "in the King's name;" ie: the Chancellor. In this sense, the "law" is a "distinct and complete act of positive law; doctrine or procedure of the common law, from which equity is a departure." Then, as now, law tends to become - either in fact or in the eyes of its subjects - inadequate for justice. Therefore, a new mechanism is created (an "alternative"), usually ad hoc, to remedy the shortcomings of the existing legal structure. Consider that "It cannot be helped . . . that the law is behind the times."
In contrast, Equity was considered to be a just mitigating influence on the technical manipulation or strictness of the legal perspective. "[L]aws were like cobwebs; where the small flies were caught, and the great brake through." Or, "[t]his is in fact the nature of the equitable; it is a rectification of law where it fails through generality." Again, equity is "[a] system of jurisprudence collateral to, and in some respects independent of, 'law' properly so called: the object of which is to render the administration of justice more complete, by affording relief where the courts of law are incompetent to give it . . . ."
Basically, the courts applying equitable principles acted when the common-law courts either would not act or reached results that were so strict and technical to be unjust. The net result of their activities was the creation of a new set of principles to be applied when the common law did not provide a suitable remedy . . . .
- and finally, "[n]othing short of true and complete justice satisfies equity, and, always assuming these allegations to be true, there seems to be no way of achieving total justice except by the procedure used here."
There were earlier motivations to develop a remedy that worked by the authority of the King himself, yet equity soon became the "King's conscience;" an alternative intended to give relief where the strict law's result was unfair, inadequate, or inconsistent. Before Equity, English common law had become rigid and technical. Equity sprang up as a discretionary power of the sovereign where law and justice did not coincide.
Besides Equity, there have been other deviations from traditional legal models. There is the related rise of the law merchant - "Lex Mercatoria". "Out of his own needs and his own views the merchant of the Middle Ages created the Law Merchant." The Law Merchant was a practical attempt to facilitate trade. From "antiquity," merchants have created business practices and regulated their own members. The implication is that the existing legal structure of the time was not adequate for needs of commercial society, therefore an alternative to law and equity developed. The scattered rules of trade center towns grew into dominant codes of custom in trans-national commercial intercourse.
As discussed above, there is the example of the evolution of Admiralty law. Admiralty was a separate and unique body of rules catering to the unique needs of a unique kind of activity. Though Admiralty was eventually assimilated into Common Law courts, it still retained a separated identity. With a more recent perspective, it can be seen that the alternative court of English Admiralty is declared in the United States Constitution to be part of federal court jurisdiction, that is, it has now been integrated into the traditional "legal" system of the sovereign's court.
Yet Admiralty still retains some of its ADR flavor since it has successfully maintained the practice of foreign arbitration (and, of course, General Average Adjusting), especially during the 20th century. Admiralty remains most common form of international Arbitration. The preferred international forum has been London but London has fallen into disfavor by some as it has become longer and more expensive than litigation in the United States. Domestically, within the United States, the preferred forum is New York.
Admiralty has had a traditional desire to avoid traditional courts. This attitude still exists: "When I started in shipping it was fun. We trusted each other. Now you cannot trust anyone. There is nothing but claims and disputes. There are too many lawyers." Even now, Admiralty disputes are mostly settled on informal basis. There is a "natural" or in-bred propensity to have merchants, including shippers, solve their own problems amongst themselves.
Not only are there the "alternative" dispute resolution jurisdictions of law, equity, merchant, and admiralty, there are other "courts" as well. In a review of Black's Law Dictionary, a scan of the listing of "courts" finds that each entry implies a difference in structure, rules, enforcement, even of jurisprudence. Listed first are the British courts: Court-Leet, Court-Marstial, Court of Ancient Demesne, Court of Archdeacon, Court of Attachments, Court of Audience, Court of Augmentation, Court of Brotherhood, Court of Chivalry, Court of Commissioners of Sewers, Court of Common Pleas, Court of Conciliation, Court of Convocation, Court of Delegates, et cetera. Not to be outdone, and to make clear that it is not just "those eccentric British" that multiply their courts, the United States has its own series of courts which include: all administrative hearings, court of bankruptcy, court of claims, court of customs and patent appeals, and so forth.
All of these court represent alternative jurisdictions. Some of these are alternatives due to their process, others, alternative due to their subject matter. In each case, there must have been some motivation to create a new jurisdiction rather than take the dispute to the traditional trial court. Some of the jurisdictions are quite obscure befitting their subject matter - that the subject matter was so unique that only experts versed in the rules and procedures surrounding it could be competent to decide disputes.
The point of this review is to show that these different jurisdictions were created or evolved to meet a need that the existing dispute resolution structure did not address adequately. This was due either because of the subject matter (merchandizing and admiralty) or the process' approach to dispute resolution (equity and legal). These jurisdiction developed in an ad hoc manner for purely pragmatic purposes. This is the essence of the Alternative Dispute Resolution movement - there is nothing new about it!
Our current environment, the so-called litigation "explosion" has rallied another cry for a pragmatic alternative to the traditional legal system. In this case, the process of litigation. Clearly, litigation is a part of our society. Even that most eminent and prescient observer of American society, deTocqueville, "commented on the tendency of most social problems in the U.S. to devolve eventually into legal problems." Another comment; "The consuming American reverence for legal symbols . . . in which law not only reinforces, but imposes, an atomistic, combative vision of reality." Though some have thoughtfully challenged this notion of a litigation explosion, there continue to be calls for court reform.
Not only is this broadly defined view of ADR manifested in a historical analysis of the Common Law, but ADR is a trans-cultural phenomena as well. This is especially true in the Oriental cultures where Occidental notions of formalized dispute resolution were actively discouraged. This current expression of the "Alternative Dispute Resolution" was named in 1970's and had the following goals: 1) to reduce court congestion, 2) to encourage "warmer" ways of dispute resolution, and 3) to encourage the use of community Dispute Resolution centers. In the 1980's, the movement expressed more specific goals, received its first real opposition, and was able to influence court rules and start statutory programs which required the use of ADR.
As currently defined, ADR includes any dispute resolution process other than litigation. ADR uses a variety of methods. The three most well known are negotiation, mediation, and arbitration. Negotiation is when parties control the process of dispute resolution and create their own solutions. Mediation ( or "Conciliation") is when a third party neutral is used to facilitate negotiation. This is especially effective where the parties in dispute have a continuing relationship. The hopeful result of a mediation session is an agreement. Arbitration is when third party neutral(s) are used to make the decision (called an "award"). An arbitration award may or may not be binding, depending on the intent of the parties before the arbitration commences. There are other hybrid forms of ADR used such as "Med-Arb," Summary Jury (or "Mini") Trial, et al.
ADR is almost a different philosophy of dispute resolution with a separate jurisprudence. There are some controlling precepts of ADR. First of all, the resolution of a dispute is made more personal. This is done by stressing party autonomy (party control of the process); facilitation over enforcement (process over positions); and the role of the third party neutral as facilitator, risk analyzer, issue narrower, translator, and as an 'agent of reality.'
The emphasis on modern ADR is on process. The ADR movement is dominated by two groups; attorneys who focus on the resolution of disputes, and mental health professional who focus on the resolution of relationships. Even though the ADR movement is currently controlled by attorneys (they hate the legal process, too); the movement is clearly dominated by process orientation. That is, can disputes be resolved using other processes than the formalized battlefield or ritualized trial by ordeal? Both of the groups within the ADR movement look for other less "trying" techniques to move through the process of resolving a dispute.
This paper now turns to the question, can the ADR movement be broadened again by presenting more than just alternative processes? That is, can ADR recognize that subject matter can determine a specific alternative to litigation? This is the issue of "Taxonomy," that disputes can be categorized by some criteria and the appropriate process applied. This is popularly stated as matching the "forum to the fuss." The idea is that some kinds of disputes are not amenable to Court-style resolution; but it also follows that some kinds of disputes are not amenable to process-oriented ADR. This was the touchstone of Owen Fiss' protestations Against Settlement
Consequently, does it make sense to create smaller dispute resolution structures tailored to types of disputes? This is already being done with separate courts for the subjects of Patents, Bankruptcy, Administrative law, and others. In carving up disputes by subject matter and assigning new jurisdictions, we follow the time-honored tradition of new courts for different types of disputes. Yet can the ideas of separate forums or processes where disputes are categorized by subject matter and a non-trial metaphor co-exist? In other words, can we attempt to more creatively match a process to the subject matter?
General Average has created an alternative to the traditional courts and their litigation process. This alternative, the General Average Adjuster as discussed above, does not easily fit within the broad ADR categories of negotiation, mediation, or arbitration. General Average Adjusting is a different process that comes to us via a unique subject matter jurisdiction: Admiralty.
There is an ADR spin to General Average Adjusting in that the current practice attempts to resolve questions without resort to legal squabbles in a "professional way". Even more than that, the Adjuster can even be seen to meet the goals of the 1970's ADR movement referred to above: 1) reduction of court congestion, 2) "warmer" processes of dispute resolution, and 3) use of localized "community dispute resolution centers." As seen previously, the General Average Adjuster's work reduces the load on the court system by making determinations, acceptable to the parties, of law and fact. The consistent references to the "professionalism" of the Adjusters, the need to maintain business relationships between shipowners and their freight clients, and the resolution of complicated disputes without resort to adversarial processes certainly qualify as a "warmer" process than the 'alternative' of suing in court. Even the use of "community dispute resolution centers" can be seen if the reader is willing to acknowledge the analogy of the tight "clubby" shipping industry community, the practice of using Adjusters who are located near the port where the voyage ends, and the "esprit de corps" of the practitioners.
In terms of the ADR jurisprudence, General Average Adjusting makes the dispute resolution more personal, encourages process over enforcement, and grants a major role to the third party neutral. Adjusting is made more personal by granting party autonomy to the shipping interests in that they contract in bills of lading for General Averaging events, if they occur, to be decided by an Adjuster. The parties encourage process over enforcement in that they would rather have the matter decided by a competent expert who has, in himself, no power to enforce his findings rather than a judge in a typical court of law who has the whole power of the state behind his decision. The actual role of the General Average Adjuster as a third party neutral is more ambiguous, but the same result is achieved: all the parties have confidence in the Adjuster to come up with an accurate and unbiased, therefore fair, result.
How to best categorize the Adjuster within the the current ADR models? General Average attempts to avoid litigation over liability, and especially damages, by relying primarily on the General Average Adjuster to find facts. As discussed above, there is a shift in the analogy of General Average adjustment to ADR, in the 1920's it was written that the Adjuster acted as a Mediator, but currently the Adjuster seems to act as a Factfinder.
The role of Factfinder within the ADR movement has not received great attention. The Factfinder is defined as a third party neutral used to find facts to aid in negotiation, mediation, or adjudication. Factfinders can be used voluntarily or involuntarily, the results are non-binding but admissible, they are third party neutrals with expertise selected by parties or the court, the process is informal, resembles an investigatory proceeding, the outcome is a report or testimony, and both the use and results of the Factfinder are kept private, unless disclosed in court. Factfinders are used overwhelmingly in public disputes where there may be a statutory requirement to submit to factfinding after a failed mediation. The use of the Factfinder can lend air of precision to process. In a public dispute, the recommendations of the Factfinder are usually made public. If the dispute goes on to arbitration, Arbitrators tend to follow Factfinder's results or demand to "show cause" why they should not. A recent example is that of the Los Angeles teacher's strike and the use of a Factfinder before State Assembly Speaker Willie Brown stepped in as Mediator.
The General Average Adjuster's role is very like that of the Factfinder. The Adjuster is generally used voluntarily, unless the bill of lading requires the use of an Adjuster. Even when the bill of lading has a General Average Adjusting clause in it, the question is still open as to whether such a contract is 'adhesive.' The result of the Adjuster's work, the General Average statement, is not binding (in absence of an agreement to the contrary), but is recognized by the courts as admissible prima facie evidence of the facts asserted. The Adjuster is a third party and thought to be neutral, even though initially hired by one of the parties in the dispute. The Adjuster is a person of special expertise in the subject matter of the dispute. The Adjuster's methods are informal and occur as an investigatory process. The Adjuster's outcome is a report and the report can be kept private, if desired by the parties in the dispute. The only differences are that the Adjuster in General Average situations is pervasive and that the current ADR Factfinder model is generally limited to certain public, quasi-political, disputes.
Can the Factfinder model be applied beyond Public Interest disputes? To answer that question, we must determine what are the characteristics that allow the General Average Adjuster model to work.
First, it seems clear that the General Average Adjuster is a third party. The Adjuster may not have all the attributes generally granted to one who is "neutral" (they are employed by one of the interested parties), yet at the very least the Adjuster enjoys a good reputation for competence, objectivity, fairness, and even independence - despite the initial payment of their fees by one of the parties. Additionally, the Adjuster conducts the investigation on his own initiative with no court control or guidance. This allows the Adjuster to make a finding of fact whether the General Average act actually occurred (analogous to a finding of liability) and, if there actually was a General Average event, then determine the losses suffered and the contributions to be made by other parties (analogous to determining damages).
Second, the parties have continuing, "professional", relationship (ie: insurance companies, cargo interests, and ship owners). The parties also have great confidence in the Adjuster to grant a fair result and they cooperate with the Adjuster on investigation. Though the parties are legally able to able to contest results, as seen previously, they rarely exercise that "appeal."
Third, the Law regarding General Average is "clear," in that there is no mystery as to where it comes from, or that there is a significant risk of unpredictability. The added factor is that the complexities of General Average adjusting are so daunting that parties would be loath to attempt it on their own. Nonetheless, the parties are confident that the Adjuster will submit to the few statutory requirements applicable, use the York-Antwerp Rules, and the rules of the port, all according to the terms worked out in advance by the parties in the bill of lading. When the applicable "law" is clear, the issues are clear as to both liability and damages. In other words, the result is certain.
To apply the model to more general areas of dispute resolution, the same three elements must also be present: an independent third party evaluator, a continuing relationship between the parties, and clarity in issues of liability and damages.
First, the third party evaluator. We can compare the inappropriateness of a factfinder in the current method of resolving personal injury disputes. Personal injury cases are frequently settled using negotiation, mediation, or arbitration, yet there is also a kind of factfinder in the process: the insurance company adjuster. However, insurance company adjusters have relatively little influence in a determination of fact and damages. Why is this so and can claims adjusters become more effective?
The General Average Adjuster is considered to be independent and especially competent to determine not only the value of the losses, but also to find facts to determine who should bear the loss. In the tort area, insurance companies employ "adjusters" who are skilled at determining the value of a loss. However, there are several problems with these adjusters. They are not independent; they are usually full-time employees of (rather than occasionally employed by) the insurance carrier and act as agents for the insurance company. By contrast, General Average Adjusters are hired by the claimant (shipowner), are not tied to one employer, and recover their fees (in some cases) from all parties for their services. Insurance adjusters are not generally held in high repute as competent to deal with any but the most routine claims. This can be understood by observing the practice of insurance adjusters when they recommend a value for a claims that is below what the claim is actually settled or litigated for. Not only are the adjusters' results not taken seriously, but their results are not in line with the apparent real value of the claim.
Second, the General Average Adjuster works for "clients" who have continuing relationships. The shipowner, cargo owner, and insurance carriers must all continue dealing with each other after, and even during the resolution of the dispute. All the parties therefore have high interest in resolving the dispute in a amicable, "professional" manner. The parties involved in a typical personal injury case generally have only the event to create their relationship. Insurance adjusters rarely take much time to investigate the full scope of a claimant's facts, though this may be due to the claimant's desire to not reveal much to the adjuster since the adjuster is seen to be a representative of the other adverse party. In contrast, the General Average Adjuster has the full confidence of the parties to pursue a full independent investigation and to arrive at an accurate result.
Third, the law and practice of General Average Adjusting is clear: it is somewhat regulated by statute, profoundly influenced by the York-Antwerp Rules, and any additional guidance is available by the port rules where the voyage (or severable interests) ends. The rules are clear, though the process is lengthy - due to its complexity - running to several years before a General Average statement is issued by the Adjuster. A fully litigated personal injury claim will also be a lengthy process stretching over several years. However, that is where the similarity ends. A personal injury claim is fraught with all the uncertainty that the Common Law is heir to. How is the claim to be approached: Negligence, warranty, strict liability, intentional tort? What is the effect of assumed risk? Is there a government actor who may have immunity? Is there a potential claim for third party emotional distress? And so forth. Not only is there an "issue spotting" problem, but the law, once identified, can be unsettled or unclear.
Fourth, since the parties have no other relationship except that caused by the loss event, there is no reason for them to adopt any other attitude than that of adversaries. Each side proposes its own differing version of the facts, the liability for the damage, the severity of damage, the amount of loss, and even the applicable law. In contrast, a General Average event is only a temporary disruption of relationships that must continue if business is to be pursued. The parties give their versions of facts, but they fully cooperate with the Adjuster and it is left up to the Adjuster to make a final determination. The laws are clear and to the point, rather than relying on wordy court opinions, and the Adjuster can go straight to statutes and rules that have a minimum of ambiguity - at least as compared to court opinions.
There are, therefore, several barriers to the uniform adoption of the General Average factfinder model. Here are some responses.
First, we consider the adjuster. If insurance adjusters are to ever gain credibility, they must be perceived to be more competent. Most insurance adjusters, while hard working and intelligent, are not well regarded in the plaintiff's bar (which can be expected) but also suffer a bad reputation with the claimants - sometimes the insurance company's own customers! In the case of the General Average Adjuster, there is a sense of the complexity of the process and great respect given to those who can navigate its path. "Insurance" adjusters must heighten their own reputations. This would be a long-term and incremental process. Perhaps, whatever national association of insurance adjusters exists could start by creating an initial pool of talent that can take on the title of independent "Factfinders". This new group would promote themselves as a new generation of adjusters.
Second, these new Factfinders' connection to the insurance companies must be re-structured. It is clear that while even the payment of fees by a party threatens neutrality, much more so does full-time employment by a party. The new Factfinder must develop individual consultant-like practices. It is entirely reasonable to expect that an old-style insurance adjuster, whose paycheck is under the control of the insurance carrier, will give results only in accordance with the interests of the carrier - his employer. The adjuster is not seen as independent, objective, or neutral but only as a "mouthpiece" for the 'stingy' insurance company. In the case of the General Average Adjuster, the Adjuster's fee is usually initially hired by the claimant, but the fee may eventually be shared as part of the General Average loss as a General Average expense (as seen before, the claimant being indemnified for the initial fee liability). The sharing of the General Average Adjuster's fees between all the parties goes far in imputing objectivity and fairness to the Adjuster. That the Adjuster may not be hired by the same employer over and over again reinforces the Adjuster's independence. The new model Factfinder must cease to be paid exclusively by one party and some system of the parties' sharing of the Factfinder's costs must be implemented to reinforce the Factfinder's independence.
Third, the law on liability and damages is not clear. This is a jurisprudential problem; both the desirability and the development of certainty in the law has been hotly contested and may not ever be resolved. Nevertheless, this lack of certainty does not completely preclude the adoption of the General Average Adjuster model to Factfinders. If competent, independent, and neutral Factfinders can make initial findings of fact, liability, and damages, those results can be used as prima facie starting point for settlement. The insurance industry would contend that this is exactly what the current adjuster system is supposed to accomplish! However, without the results coming from competent, independent, and neutral sources, there will always be room to doubt the fairness and accuracy (ie: its "certainty") of the result, hence the temptation to prolong negotiations, initiate discovery, and look to litigation.
The fourth and last problem is more difficult. In a General Average event, the parties involved willingly co-operate with the General Average Adjuster by handing over whatever materials are needed for the Adjuster to make the required determinations. This party co-operation in the matter of "discovery" is one reason that General Average adjustments go so smoothly - and at far lower costs than would be true otherwise. In normal tort actions, party co-operation is hindered by discovery concerns. As one law professor put it, "There is no way to make the discovery process a collaborative effort!" The author concedes that this is a difficult obstacle. Nevertheless, there is no reason to suppose that if a truly effective system of competent, independent, and neutral Factfinders were created, used, and that the results coming from that system were recognized as fair and accurate, parties would become more confident of the Factfinders and co-operate with them in providing the information the adjuster would require to make determinations of fact, liability, and damages. Eventually, the Factfinders would likely see an evolution of resistance to release any information give way to co-operation from parties.
An indispensable requirement would be an attorney-like privilege of confidentiality as the Factfinder would receive information from opposing parties. This requirement of confidentiality is required since parties (especially as they are building confidence in this new model of Factfinders) will most likely be looking past the Factfinder's statement to possible litigation (such old habits die hard). The parties will be hesitant to reveal potentially case-threatening information to the Factfinder if that information might find its way to the other party by way of the resulting non-binding report. This also has impact on how the 'transitional' Factfinder-adjusters would present his results. Does the report reveal too much about one side's potential case to the other? Perhaps the report's format could be restricted as to the basis of the conclusary 'judgment' and focus only on the "bottom line".
Lastly, after the new Factfinder's results become recognized as being fair and accurate, the court system should begin to 'resist' such cases being litigated by granting a presumptive status to the results.
The author first admits that this paper has covered a great deal of ground. First, we have explored the law of General Average and defined it as an event, loss, or contribution that occurs when a ship's master causes an interest in the voyage to suffer a willing sacrifice or other extraordinary expense to preserve the voyage for the other interests. General Average is enforced by agreement and broadly implemented by Adjustors. Its peculiar risk-sharing model has been shaped by the peculiar history of Admiralty law itself.
Second, we explored Alternative Dispute Resolution as an historical process. Prior efforts to provide an alternative to the "Sovereign's Court" have been based on the dispute's subject matter, such as the shipping concerns of Admiralty. More recent efforts have been motivated to alleviate congestion in the courthouse and have been based on the process of resolving the dispute.
Last, we have asked whether there can be a General Average Adjuster analog in a wider Alternative Dispute Resolution setting? We have attempted to identify what factors makes General Average Adjusting successful and have proposed requirements for the creation of a new Factfinder model to incorporate those factors into the broader tort dispute arena.
It is hoped that this paper will 1) affirm the practitioners of General Average law - attorneys and Adjustors - that they are part of an ancient, yet far-reaching, development in dispute resolution, and 2) stimulate the Alternative Dispute Resolution discipline to explore, broaden, and strengthen the Factfinder model.