The word ‘demurrage’ has existed for hundreds of years and is well known to all involved in the shipping industry and in international trade. It is defined in Scrutton on Charterparties, 24th Edn (2020) as “… a sum agreed by the charterer to be paid as liquidated damages for delay beyond a stipulated or reasonable time for loading or unloading…”.
If the delay in loading or unloading of cargo beyond the agreed laytime resulted in additional losses to the shipowner, can the shipowner claim against the charterer for the additional damages on top of the claim for demurrage?
The English High Court in The Eternal Bliss [2020] 2 Lloyd’s Rep 419 held that the shipowner is entitled to claim for the additional losses suffered by the shipowner on top of demurrage. The rationale for the High Court’s decision was that demurrage was liquidated damages for the shipowner’s loss of future freight and was not intended to be liquidated damages for all losses suffered by the shipowner arising from delay.
The English Court of Appeal overturned the High Court’s decision in The Eternal Bliss [2021] Lloyd’s Rep. Plus 122. In summary, the Court of Appeal held that absent any express wording to the contrary, demurrage was the agreed liquidated damages for all loss arising from any delay in loading or unloading beyond the agreed laytime. If the shipowner wants to claim for any additional losses on top of demurrage, the shipowner has to show that the charterer was in breach of some other separate and distinct obligation which caused the additional damages claimed by the shipowner.
Facts of the case
The facts of the case is fairly simple. K-Line as owner entered into a charterparty with Priminds as the charterer on an amended Norgrain 1973 form containing the standard demurrage clause.
The vessel loaded 70,133 mt of soybeans at Tubarao in Brazil for discharge at Longkou in China, where she arrived and tendered NOR on 29 July 2015. Due to port congestion and lack of storage space ashore she was kept at the anchorage for some 31 days before berthing. Upon discharge, the cargo exhibited significant moulding and caking throughout the stow in most of the cargo holds. Discharge was completed on 11 September 2015.
The receivers claimed against the shipowner for damage to the cargo which the shipowner settled against the receivers at US$1.1 million. The shipowners then sought to claim this amount from the charterers in arbitration. The only allegation of breach made against the charterer was that it had failed to discharge the cargo within the agreed laytime.
As the appeal was on a point of law, it was assumed that the condition of the cargo deteriorated as a result of the detention beyond the agreed laytime and not due to any want of care by the shipowner, and that the charterer was in breach of its obligation to complete discharge within the agreed laytime.
The discussion
Before we examine the decision of the Court of Appeal, it is helpful to summarise the arguments made by the shipowner and the charterer.
The charterer argued that demurrage is a liquidated damages clause, and in principle, liquidated damages clause are intended to cover all losses flowing from that breach. It was emphasised that the purpose of a liquidated damages clause was to achieve certainty and to avoid controversy in the assessment of unliquidated damages and to enable the parties to know where they stand at an early stage, not dependent on the vagaries of litigation.
The shipowner’s argument was that the starting point must be to identify what demurrage is and is intended to be. It was argued that the origin of demurrage was a payment to compensate the shipowner for loss of opportunity to earn freight as a result of not getting its vessel back at the end of the laytime. It was submitted that demurrage should be restricted to compensating the shipowner for the loss of freight but not for other types of damages suffered as a result of the delay.
The Court of Appeal observed that since the case of Reidar v. Arcos in 1926, it has been accepted in English law that demurrage was regarded as liquidated damages for breach of the obligation to load within the agreed laytime.
The Court of Appeal went on to examine the past cases over the last hundred years that touched on this issue and noted that apart from the High Court case of The Bonde, there were no other cases which held that unliquidated damages can be recovered in additional to demurrage when the only breach is a failure by the charterer to load or discharge within the laytime. Apart from The Bonde, which the Court of Appeal was not bound by, it noted that the other cases were inconclusive on this issue.
As for the case of Reidar v. Arcos, it was further observed that since that decision, subsequent judges have struggled without success to discern a ratio decidendi on this issue.
After noting that the other cases were inconclusive, and that there were no binding precedents on the Court of Appeal on this issue, the Court of Appeal went on and decided this issue on first principles. In support of their decision, the Court of Appeal made seven points:-
- While it is possible for contracting parties to agree that liquidated damages clause should liquidate only some but not all of the damages arising from a particular breach, it would be quite surprising for commercial people to make such an agreement.
- Although demurrage was intended primarily to compensate the shipowner’s loss of prospective freight, it does not mean that this is all that it is intended to do. Demurrage is frequently either higher or lower than an estimated freight rate. As such, it would be more accurate to say that the loss of prospective freight earnings is one factor to be considered when negotiating demurrage rates but it is not the only factor.
- If demurrage only compensates for loss of future freight but not other types of losses, it will lead to disputes in future as to what are the types of losses that are covered by the demurrage clause.
- Shipowners are usually insured against liability for cargo claims. On the other hand, charterers will not typically have insurance against liability for unliquidated damages resulting solely from a failure to complete cargo operations within laytime. If the shipowner’s interpretation is adopted, it would result in the transfer of risk of unliquidated liability for cargo claims from the shipowner who has insured against it to the charterer who has not. This disturbs the balance of risk inherent in the parties’ contract.
- The Bonde has stood for more than 30 years without causing dissatisfaction in the market. That was seen as a powerful reason for the courts not to depart from that decision.
- Unlike the High Court, the Court of Appeal does not agree that the reasoning in The Bonde was faulty.
- Adopting the charterer’s argument would produce clarity and certainty. If the parties wanted a different result, it is not difficult for the parties in future to draft the appropriate clauses in their charterparties to achieve that.
Our Comments
The clarification from the English Court of Appeal is a welcome development on the issue, largely because it produce clarity and certainty. Delays in cargo operations can potentially result in a number of different consequences for shipowners and charterers depending on the prevailing circumstances.
One situation which we have encountered arose from the ban on the import of Australian coal into China, which resulted in a number of vessels carrying Australian coal to be stuck at discharge ports in China for an extended duration of time. If the demurrage rate is more or less equivalent to the prevailing freight rate, this does not pose a problem for the shipowner in financial terms.
For cases where the head owners time chartered the vessels to the charterers, any delays would not have any impact on the charter hire payable by the charterers. It is however very common for the time charterers to sub-charter the vessel on voyage charter down the line. In such situations, if the demurrage rates are below the charter hire rates, it would mean that the disponent owner may be looking at suffering huge losses as a result of the delay, and would attempt to look to the voyage sub-charterer for compensation.
With the guidance from this case, for future charterparties, if shipowners are concerned about any additional losses arising from delays in cargo operations, shipowners should be advised to word the demurrage clause accordingly during their negotiations. Charterers on the other hand would be able to rely on this case as an answer to any claims for additional damages by shipowners arising from delay, unless the shipowners are able to establish a breach of a separate and distinct obligation apart from delay.
Disclaimer: This article is for general information only and not intended to constitute legal advice. We shall not be liable for any errors or omissions, nor shall we be liable for reliance on the contents of this article.
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