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Court considers scope and effect of demurrage clause

Insights / 16-09-2020

K Line Pte Ltd v. Priminds Shipping (HK) Co Ltd (Eternal Bliss) [2020] EWHC 2373 (Comm)

In a significant, albeit first instance judgment, the Court has found that where a vessel is delayed beyond the expiry of laytime, the demurrage rate represents no more than a figure quantifying the owner’s loss of use of the ship to earn freight by further employment. It, therefore, provides an agreed measure by which the parties are bound for the owner's claim for damages for detention, but it does not seek to measure or therefore affect any claim for different kinds of loss.

The Owners in this case were, therefore, entitled in principle to be compensated by the Charterers in respect of a cargo damage claim brought by cargo interests where the deterioration of the cargo had resulted from its prolonged retention on board after the Charterers had failed to discharge within the laytime allowed. This was so even though there was no additional breach of charterparty by the Charterers.

The background facts

In July 2014, the parties entered into a contract of affreightment that provided originally for nine (and subsequently 12) separate voyages, with each individual voyage charter to be on an amended Norgrain form. In respect of one of the voyages, the Eternal Bliss was nominated by the Owners for a June 2015 laycan. The vessel loaded a cargo of soybeans at Tubarao for discharge in China. Loading was completed and bills of lading issued on 11 June 2020.

At the discharge port, the vessel arrived at anchorage and tendered NOR on 29 July 2015. However, she was kept at the anchorage for about 31 days due to port congestion and lack of storage space ashore for the cargo. Discharge commenced on 30 August, upon which the cargo was found to have suffered mould damage and caking. The vessel was arrested, an LOU provided to secure her release and, in due course, the Owners settled cargo interests’ claim. The Owners then sought to recover the amounts paid out to cargo interests from the Charterers by way of damages and/or an indemnity.

Although the dispute was subject to arbitration, the Court was asked to deal with a preliminary issue. This was whether, in addition to paying demurrage, the Charterers were also liable to compensate the Owners for other losses arising out of the Charterers’ breach of contract in failing to complete discharge within the permitted laytime. Alternatively, if there was no other breach of charter, whether demurrage was the exclusive remedy for the Owners’ losses, irrespective of the type of loss in question.

The Commercial Court decision

The Court considered whether, if damages in addition to demurrage were to be recovered, it was necessary to show breach of a separate obligation as well as damage of a different kind from delay in completing loading or discharge.

In deciding the issue, the Court undertook an extensive review of the relevant authorities. Its conclusions can be summarised as follows:

Same loss or different loss?

The Court dismissed the Charterers’ argument that this was not in fact a case of different loss and that the claim was still only one for detention of the vessel because the cargo damage and consequent loss all arose from the delay of the vessel beyond the laydays. It stated that the damage to the cargo was quite distinct in nature from, and additional to, the detention of the vessel, as a type of loss.

One breach or two?

The Court referred to the Court of Appeal decision in Reidar v. Arcos [1927], where the majority ratio was that a demurrage clause did not defeat a claim for deadfreight for breach of the full load obligation even where that breach itself resulted from a failure to load at the loading rate required by the charter. The Court of Appeal had unanimously found in the Owners’ favour. While the majority thought that there were two breaches and the minority thought that there was only one, this did not mean that owners’ claim for deadfreight would have failed had it been unanimously concluded that there was only one breach.

However, The Bonde [1991] was authority for the proposition that an additional and different breach was necessary. That case involved a sale contract which provided for daily carrying charges where the buyer’s ship on arrival for loading filed with the authorities outside the shipment period. The ship filed late, so carrying charges were payable. However, the period for which they were payable was prolonged because the seller failed to load at the rate specified in the contract. The seller claimed the carrying charges calculated as per the contract. The buyer resisted liability for carrying charges that resulted from the seller's failure to load at the charter rate. The Court held that the buyer could not recover damages beyond demurrage because the only breach by the seller had been the failure to load at the contractual rate.

The Court did not think that this decision could be distinguished but decided that it was wrongly decided and concluded that it should not follow it. In the Court’s view, the demurrage rate in a voyage charterparty was intended to be no more than an agreed measure of the value of the ship's lost time. It would not occur to commercial parties that agreeing a demurrage rate liquidated, for example, claims in respect of physical injury to ship, cargo or crew. Rather, they would understand that the demurrage rate simply compensated the owner for the use of the ship beyond the laytime, which use was not being paid for by the freight.

The Court, therefore, rejected any suggestion that a demurrage rate liquidates the damages recoverable, whatever the nature of the loss suffered, in respect of a breach of the obligation to load or discharge within the laytime. As a result, it concluded that, in principle, the Owners were entitled to be compensated in respect of their losses and expenses arising out of the cargo claim. It did not, therefore, need to determine whether there was an implied indemnity for the consequences of complying with the Charterers’ orders to load, carry and discharge the cargo.

Comment

The judgment is detailed and comprehensive. Demurrage provisions liquidate delay and use of vessel claims, but not others caused by the extended delay. The question now is where that “others” line is to be drawn and whether any appeal court, which seems likely to be involved, will embrace the potential ramifications or not. It remains to be seen, therefore, whether the Eternal Bliss will become the newly established authority on this issue, and where this now ultimately takes us.

What presumably remains the case is that the causal link between the delay and the “other” claim still needs to be proven, as well as satisfying standard issues of recoverability; so those checks and balances remain. On that basis, subject to any appeal court reviewing the authorities as analysed by the judge, it will come down to seeing whether this routing for other claims is attractive,  or whether the parties should only  look to  other provisions of the contract for potential remedies. Maybe charterers will now use their allowable laytime with a little more care so as not to overrun!

Paul Griffiths

Paul Griffiths Partner

Reema Shour

Reema Shour Professional Support Lawyer

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Tags:

Maritime / Charters / Charterparties / Cargo claims