Oil & Gas / Shipping: what loss does demurrage liquidate?

International

In K Line Pte Ltd v. Priminds Shipping (HK) Co Ltd (Eternal Bliss) [2020] EWHC 2373 (Comm), the Commercial Court has taken the opportunity to resolve a “long-standing uncertainty on a point of law” in the shipping and offshore industries.  Where a vessel is delayed beyond the expiry of laytime, it is typical for demurrage to be paid. The issue the Commercial Court has sought to resolve is precisely what the demurrage rate represents, i.e. whether it is no more than a figure compensating the owner for loss of the use of the vessel or whether it also covers any claim for different kinds of loss. The issue is an important one as it can leave the door open to a claimant to bring a damages claim for other losses in addition to the demurrage claim.

Facts

The parties entered into a contract of affreightment that provided for a number of separate voyages on an amended Norgrain form. The Owners nominated the Eternal Bliss for a June 2015 laycan, loading 70,133 m.t. of soybeans at Tubarao for discharge in China. Loading was completed and bills of lading issued on 11 June 2015.

The Eternal Bliss arrived at the discharge port anchorage and tendered a 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 only commenced on 30 August. As is the terrible fate with many a bean appearing in case law, the perishable cargo was found to have suffered mould damage and caking. After posting security in favour of receivers as security for their cargo claim, the vessel sailed away on 11 September 2015.  The Owners settled the receivers’ claim for c.USD 1.1 million and then sought to recover this cost from the Charterers.

The Commercial Court was asked a question of law for determination: whether, in addition to paying demurrage, the Charterers were also in principle liable to compensate the Owners for other losses by way of damages for breach in failing to complete discharge within the permitted laytime. The Judge put this another way: “[t]he main point of principle asks what is it that demurrage liquidates”.

Decision

The Owner of the Eternal Bliss did not allege a breach by the Charterer other than a failure to discharge within the laytime. 

The Charterer argued, in turn, that the Owner’s claim was only one for detention of the vessel because the cargo damage arose from the delay of the vessel. The Commercial Court dismissed this argument, holding that the damage to the cargo was quite distinct in nature from – and additional to – the detention of the vessel.

Therefore, the Commercial Court had to consider 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 discharge.

The Commercial Court referred to the Court of Appeal decision in Reidar v. Arcos [1927] 1 KB 352, where it was held that recovery was possible even if an extra breach is caused by a failure to complete the discharge within the laytime. While the majority thought that there were two breaches and the minority thought that there was only one, this did not mean the owners’ claim for damages would have necessarily failed had it been unanimously concluded that there was only one breach.

However, The Bonde [1991] 1 Lloyd’s Rep 136 was authority for the proposition that an additional and different breach was necessary to recover damages beyond demurrage.

The Commercial Court noted that it was not bound by The Bonde, itself a first instance decision, and declined to follow that decision.

The Commercial Court decided that the demurrage rate was intended to be an agreed measure of the value of the ship’s lost time – but no more than that. The Judge decided: “I do not think it would occur to commercial parties unaware of the case law that agreeing a demurrage rate liquidated, for example, claims in respect of physical injury to ship, cargo or crew, as they would understand, I suggest, that the demurrage rate simply compensated the owner for the use of the ship beyond the laytime, that use not being paid for by the freight”.

Therefore, the Commercial Court rejected the suggestion that a demurrage rate liquidates all damages recoverable, whatever the nature of the loss suffered, in respect of a breach of the obligation to complete within the laytime. As such, the response to the question of law was that, in principle, the Owners were entitled to be compensated in respect of their losses and expenses arising out of the cargo damage claim.

To adapt a table created by the Judge in this case:

Can Owners Recover Beyond Demurrage?

Claim other than for ‘detention of the vessel’?

Yes

No

Separate Breach?

Yes

Recovery Possible

Recovery Not Possible

No

The principal question in this case:

 

Recovery Possible

Recovery Not Possible

Comment

Recognising the significance of the decision, the Judge, Andrew Baker J, said: “From time to time, a case provides the opportunity to resolve a long-standing uncertainty on a point of law of significance in a particular field of commerce. This is such a case.”

The Owners in this case were entitled in principle to be compensated by the Charterers in respect of a cargo damage claim even though the deterioration of the cargo had resulted from its continued stowage aboard after the Charterers had failed to discharge within the permitted laytime. This was the case despite the fact that there was no additional breach of the charterparty by the Charterers.

The judgment is the first to consider the issue, and consider the difficulties of previous decisions dating back to Reidar v Arcos in 1927, in this level of detail.

In deciding not to follow The Bonde, perhaps considered by many to have settled the issue 30 years ago, the Judge acknowledged that “[i]t is a strong thing for a judge of first instance to refuse to follow a prior decision at first instance that has stood without direct criticism in later case law for a substantial period of time.”

This is a significant decision for the shipping and offshore industries. Owners will now have an authority to point towards when considering how to recover losses unrelated to the vessel’s earning potential (e.g. cargo deterioration) as a result of a failure to load or discharge within the laytime.

These losses might be wide ranging and include damages relating to a change in the value of the goods. The Judge specifically explained that where in an f.o.b. contract a delivery date is stated, as such, but time is not of the essence (either on the proper construction of the particular contract or because the buyer does not choose to terminate for late delivery though entitled to do so), and the seller delivers late on a falling market, the buyer will have a claim for damages for late delivery unaffected by any laytime/demurrage clause. He went on to explain “There is to my mind no rational basis for saying that the position is different merely because the effectively warranted delivery date is a function of the laytime provisions rather than a delivery date separately stated as such. The idea that by agreeing also a demurrage clause, typically referable to the charterparty demurrage rate, the buyer is agreeing to forgo his normal late delivery claim under s.53 of the Sale of Goods Act 1979 is startling and, in my respectful view, not at all likely to be the intention of traders agreeing f.o.b. sales”. It goes without saying that absent an express exclusion of such loses, the Commercial Court decision opens the way for significant claims.

The judgment contains a thorough and comprehensive examination of the case law. The response to the question: “what does demurrage liquidate?” in this context could now be said to be that it liquidates delay and use of vessel claims, but not others caused by the delay.  From this perspective, the decision bears strong similarities with recent case law on liquidated damages: GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm), which considered Reidar v. Arcos in permitting the recovery of damages for certain other losses in addition to liquidated damages for delay (even though the only breach was one of delay), albeit much will depend on the particular drafting.

As noted at the start of his discussion, the Judge made the “obvious point” that parties to a contract could use language in their demurrage clause that answers the issue in this case.  As with many standard forms (including Asbatankvoy and Gencon), the Norgrain form does not contain such language. Parties would need to make an amendment to the form to address the issue in this case.  In addition, a claimant must still prove that there is the necessary link of causation between the breach and the losses claimed.  

It remains to be seen whether the Charterers wish to appeal the decision.  Certainly a decision from the Court of Appeal, in the light of conflicting High Court authorities, would be welcome.  In the meantime, charterers under existing arrangements may potentially be exposed to greater losses than they had considered, should they overrun the allowed laytime.