We have encountered several instances where ship owners have been unsure when they can claim damages for detention. As a general rule, detention cannot be claimed for a delay when a vessel is already on demurrage. The demurrage rate is the agreed penalty for exceeding the laytime allowance so regardless of how long the vessel is delayed, the owners will not be able to claim additional damages provided the voyage is eventually performed, Inverkip Steamship Company Ltd. v. Bunge & Co [1917] 2KB 198. However, if the vessel is delayed when laytime and/or demurrage is not running and the compensation for the delay has not been agreed in advance, the ship owners can claim for the true cost of their damages. Examples of delays that may give rise to a detention claim include:
a) Any action by the charterers that delays the vessel from reaching its specified destination.
b) Failure by the charterers to nominate a discharge port so that the vessel has to go to anchor to await orders.
c) Using the vessel as floating storage without prior agreement.
d) Delaying the vessel unduly after loading or discharge has been completed, even if not all of the laytime has been used up, unless this time is defined as counting as demurrage in the charter party (e.g. BPVOY4 cl.7.3.3).
e) Ordering the vessel to slow steam (when this has not been agreed in the charter party).
Although owners and charterers will often agree to use the charter party demurrage rate to calculate detention claims, owners are entitled to recover their costs and lost market opportunities at their true level. On occasions, the daily rate may be lower or higher than the demurrage rate. Owners can claim for extra bunkers consumed to maintain the temperature of the cargo or used while drifting when no anchorage is available. Under the terms of ExxonMobil’s and Shell’s charter parties, detention is a separate calculation, but the demurrage rate will be used plus the replacement cost of any additional bunkers. BP charter parties stipulate that most delays that would otherwise be claims for detention will count as laytime or demurrage.
There are some other important differences between claims for detention and claims for demurrage. For example, exceptions to laytime or demurrage do not apply when the vessel is on detention. Time bar clauses that only refer to demurrage claims will not apply to claims for detention. A charterer cannot use a general exception clause, such as clause 19 of Asbatankvoy, to reject a claim for demurrage unless it is very clear that the clause also applies to demurrage. However, a charterer may be able to rely on such a clause to avoid a claim for detention costs, Ellis Shipping Corporation v. Voest Alpine Intertrading (The "Lefthero")[1992] 1 Lloyd’s Rep 109. Ship owners are entitled to claim damages for detention in isolation. They do not have to deduct any unused laytime allowance.
Most oil sales contracts avoid any mention of detention. However, according to The Bonde [1991] 1 Lloyd’s Rep 136, there appears to be nothing to prevent a claim for damages for detention, provided it arises from a breach of the contract that is separate and independent of the laytime clause.
(This article was provided by Andrew Wilding, Managing Director of Asdem Asia Pte. Ltd.).
The majority of payments in the oil industry are made in US dollars. All transfers of US dollars must clear, albeit briefly, via the Electronic Funds Transfer (EFT) network in the United States. Creditors pursuing US$ claims can use a device called a “Rule B” attachment to obtain security for their claims before judgment. The creditor is not required to notify the debtor in advance. As a result, defendants only become aware that their funds are frozen after they have been seized. This makes Rule B an extraordinary remedy. A Rule B attachment can only be granted in New York, but it can be used to obtain security for London shipping arbitrations when the defendant is not resident in New York. As a result of the recession which has gripped the shipping industry, the courts in the US have been swamped with applications to seize monies. The amounts seized are estimated to total several hundred million dollars. US financial institutions are reported to spend as much as US$14 million a year in staff salaries to monitor and check for transfers daily.
However, two very recent decisions might have a significant impact on the use of Rule B. The first decision, STX Panocean (UK) Co Ltd v. Glory Wealth Shipping Pte Ltd [2009] 08-6131-cv, held that if a company registers with the Department of State pursuant to New York Business Corporation Law 1304 for authority to conduct business there and appoints an agent to accept service of claims, that company is deemed to be resident in New York and a creditor cannot obtain a Rule B attachment against such a company. This may result in a large number shipping and trading companies applying to register. The second decision is Cala Rosa Marine Co. Ltd. v. Sucres et Denrées Group - 09 Civ. 425 (SAS). Under New York law, a Rule B attachment is only effective if the funds are at the bank at the exact time the writ is served. A practice has developed where the courts have been willing to treat the Rule B attachment order as served repeatedly and continuously for 24 hours from the time of presentation. As long as the order is reserved every day by facsimile or e-mail, the debtors funds will be attached. In the Cala Rosa case, the court removed this fiction of continuous 24 hours service. This means that the funds can only be attached if they are transferred through the EFT at exactly the same time as papers are served. In practice, this would make attachment almost impossible. Whether this highly restrictive condition is followed in future judgments remains to be seen. For the time being Rule B applications are dealt with on a case-by-case basis and the success of the application depends on whether or not the particular judge favours Rule B attachments.
Making a profit from demurrage is not a new phenomenon. 101 years’ ago in the case of Houlder Brothers and Co Ltd. v. Commissioner of Public Works [1908] AC 276 the English Courts confirmed that a seller is entitled to make a profit from a demurrage claim if his contracts allow him to do so. This was confirmed by the Court of Appeal, albeit only in a majority decision, in Fal Oil Co. Ltd. v. Petronas Trading Company, The “Devon” [2004] 2 Lloyd’s Rep 282 - see News Update No.26.
However, in order to recover any demurrage at all, a sales contract must incorporate a demurrage rate. The leading case is Mallozzi v. Carapelli S.P.A. [1976] 1 Lloyd’s Rep. 407 where the CIF contract said “demurrage as per charterparty terms”, but there was no demurrage rate in the charter party and the Court of Appeal held that no demurrage was recoverable. Therefore, if the carrying vessel is time chartered or company owned, the sales contract must specify either a demurrage rate or the terms of reference for calculating a rate. The standard method is to agree a formula such as “The demurrage rate specified in "Worldscale" for the applicable size of vessel, adjusted by the last published AFRA rate, again for the applicable size of vessel”. In Preamble Part C of Worldscale (The New Worldwide Tanker Nominal Freight Scale), demurrage rates are set out for different sizes of tankers and are based on "Worldscale 100". The AFRA rates (average freight rate assessment), quoted as percentages of Worldscale, are published monthly by The London Tanker Brokers Panel. This gives a demurrage rate, although it is often lower than the prevailing spot rates.
This formula does not provide any other terms for calculating demurrage and the courts will only infer the minimum terms necessary to make a contract workable. We often see clauses that say “other demurrage terms as per Asbatankvoy”. However, Asbatankvoy is not a workable charter party without at least 50 additional clauses. We would recommend that if the terms cannot be incorporated by reference to a company’s General Terms & Conditions, they should at least be taken from a more modern charter party where fewer amendments are required, such as BPVOY4 or ExxonMobil Voy2005.