DAMAGES IN ADDITION TO DEMURRAGE
K LINE PTE LTD v PRIMINDS SHIPPING (HK) CO., LTD. (2020) - THE ETERNAL BLISS
INTRODUCTION
From time to time, a case comes to court which provides the opportunity to resolve a significant long-standing uncertainty on a point of law.
The Eternal Bliss (2020) is such a case for the law of laytime and demurrage.
This meticulous 33-page judgement considered the judgments of the Court of Appeal inAkt. Reidar v Arcos [1927] KB 352, Suisse Atlantiqued'Armement Maritime SA v N.V. RotterdamscheKolen Centrale [1967] 1 AC 361) The Altus [1985] 1 Lloyd's Rep 423. and The Bonde [1991] 1 Lloyd's Rep 136) amongst others. The judgement seeks to resolve a long-standing judicial and academic debate, going back almost 100 years, on the recovery of damages in addition to demurrage.
THE JUDICIAL AND ACADEMIC DEBATE
This debate centered on whether a shipowner must establish;
to claim damages in addition to demurrage.
In The Eternal Bliss (2020) the High Court concluded that damages for delay are available to a shipowner, in addition to demurrage, where the only breach by the charterer is the failure to discharge cargo within the agreed laytime, provided that the damages are fundamentally different from the damages payable for detention of the tanker beyond the agreed laytime.
This long-standing debate has been resolved. The principles of this judgement are applicable to both charterpartiesand sale and purchase contracts. The circumstances in which a party can claim damages, in addition to demurrage, has been clarified. The following is a brief guide on this decision.
THE FUNCTION OF DEMURRAGE
Understanding the function of demurrage is the key to understanding the judgement in The Eternal Bliss (2020)because a focus on the role of demurrage in a charterparty is the basis of the practical approach which the judge took.
If a party fails to load and/or discharge within laytime, it is a breach of charterparty (or sales contract). If loading and discharging are not completed within laytime, the ship would have been unable to earn freight under a subsequent charterparty and (hopefully) make a profit. In claiming damages for breaching the laytime obligation the shipowner, therefore, seeks compensation for this net loss of freight.
Rather than the owner and charterer putting each other through the time-consuming and difficult exercise of establishing what the net loss of freight would be - with so many points on which they could disagree/debate and with so many variables - the shipowner and charterer fix the amount of damages per day. This is the rate of demurrage. Factored into the demurrage rate are costs of the ship being at anchor in port, such as bunkers and port costs.
Demurrage is, by its nature, liquidated damages. Such damages fix the amount payable for the owner’s loss caused by the detention of its ship in the laytime and demurrage regime. A party which agrees a liquidated damages clause cannot claim more than the liquidated damages rate for loss which flows from the breach it applies to.
There is a mutual benefit derived from the rate of demurrage. The charterer knows the amount to be paid for this breach and the owner knows the amount that he will receive.
THE ETERNAL BLISS (2020)
InThe Eternal Bliss (2020) the shipowner commenced arbitration proceedings, claiming its US$1.1 million-dollar settlement of a cargo claim, from the charterer,as damages caused by the 31-day delay in discharging in addition to demurrage for the delay. The owner argued that the demurrage rate only liquidates the damages for the detention of the vessel, which prevent it from earning freight. The cargo claim, it argued, are liabilities of a totally different type of loss to detention of the ship and that the claim was recoverable as damages in addition to demurrage. Without deciding whether the charterer was, in fact, liable to pay damages, the court held that as a matter of English law, where a shipowner
the owner does not need to establish a separate and independent breach of contract in order to recover damages in addition to demurrage.The different type of loss was the liability to pay a cargo claim. The Judge did not decide that the claim was recoverable. This is a matter for the Arbitration Tribunal to decide.
In the oil and gas industry, liquid cargoes generally do not deteriorate over time –certain products can layer over time – especially at anchor, resulting in varying cargo qualities through the tank which impact on yields and quality. Some cargoes can, apparently, develop precipitation over time (cfThe Mercini Lady (2012)). Cargo claims are possible.
Many oil voyage charterparties contain clauses permitting the charterer the right to issue instructions to wait, in return for the payment of demurrage. In one notable London arbitration, which was appealed, the judge noted that the Tribunal was prepared to imply a right to ask a vessel to wait without deciding that point. We think that it is highly doubtful that such an implied right exists in the absence of an express right.
Cargo claims against the ship, arising from delay, in the oil and gas industry are possible, but there are issues to be addressed; especially if the alleged damage occurs, is caused by or contributed to using permitted waiting time. Reconciling the charterer’s rights to issue orders to wait, and recovery of cargo claims caused by waiting, is necessary.
APPLYING THE DECISION – DUTY BREACH DAMAGES
The first issue to consider when assessing a claim for damages, in addition to demurrage, is to identify what duties have been breached. Is there a single breach of the obligation to load and discharge within laytime, or is there a separate breach?
In The Eternal Bliss (2020),the court was unequivocal in stating that if there was a separate breach because if, for example,if the moisture content of the cargo on shipment had put charterers in breach of an obligation under the voyage charter as to cargo specification, and if the cargo damage was due to that moisture content as alleged by owners (in combination with the delay caused by charterers' failure to discharge at the contractual rate), charterers could not have suggested that it could invoke the demurrage clause to defeat the owners claim.
However, where a separate breach results only in detention of the vessel at the loading or discharge port beyond the expiry of the laydays, the demurrage liquidates the damages, limiting owners to the demurrage rate.Inverkip Steamship Co v Bunge & Co [1917] 2 KB 193. This is often referred to asThe Inverkip Rule.
Thus, where dangerous cargo was shipped in breach of contract, but the only consequence harmful to the owner was delay to the ship beyond the laydays, there was no recovery beyond the demurrage provided for by the charter: Chandris v Isbrandtsen Moller Co Inc [1951] 1 KB 240.
After the breach,it is then necessary to consider the contractual demurrage provisions to see if they act as a limit on claims. If the charterparty clearly states,(for example), that the owner can “only recover demurrage for all failures to load and discharge within laytime whatsoever and howsoever arising under the charterparty and at law”, the ship owners’ claim could be limited to demurrage only.
In practice, looking at the current standard form charterparties currently in use by the oil and gas industry, this is highly unlikely. The oil and gas charterparties in day-to-day widespread use – ASBATANKVOY BPVOY 4/5 SHELLVOY 5/6 EXXONMOBILVOY 2012- do not say that the charterer is to make a payment, by way of liquidated damages, for all and any breaches of the obligation to load and discharge within the agreed laytime. Most clauses specify the rate at which "Demurrage …, if incurred", is to be paid. In other words, it is often seen, clauses do not say what demurrage is, or what it seeks to liquidate. In these circumstances, the principles of The Eternal Bliss (2020) apply and the nature of the loss is then to be considered (see type of loss 3 below).
The position with sale and purchase contracts can be different. BP’s General Terms and Conditions 2015 FOB Section 7. Clause 7.1 DELAYS states that the “Buyers claims against the seller however they may arise shall be limited in all circumstances whatsoever to a claim for the payment of demurrage as specified below, and the Buyer shall not be entitled to complain directly or indirectly of any delay except for the purpose of founding a claim to such demurrage.”
The key to triggering arecoverable claim for damages in addition to demurrage, where the only breach is the failure to load and discharge within laytime, is that the loss must be one which is unrelated to the loss of the use of the ship to earn freight. That is distinct in nature from, and additional to, the detention of the ship, as a type of loss.
The damages that can be claimed for e.g. in respect of a cargo claim, for example, are not liquidated. They are what is called “at large”. They must be assessed. They are damages that arise from the detention - they are not for the detention. General Exceptions and Force majeure clauses may apply to limit such claims. The Hague/Hague Visby Rules, which are incorporated into oil and gas voyage charterparties via a Clause Paramount, may apply. Finally, the application of time-bar provisions will need to be considered. Some time-bar clauses will apply - others will not. It’s a matter of construction and likely to give rise to lively debate.
ISSUES THAT WILL ARISE FOR THE OIL AND GAS INDUSTRY – WHAT DOES DEMURRAGE ACTUALLY COVER?
In relation to a discussion in the judgement concerning port charges incurred during the detention, the High Court held that these were within the purview of demurrage and could not be recovered as damages in addition to demurrage.
What is within the scope of the demurrageis now likely to give rise to debate between ship owners and charterers. We know that ordinary port dues are within the scope of demurrage; but what if port and other charges increase over time, as is the case in the port of Singapore?
Are we, yet again, going to see a debate over bunkers consumed whilst waiting? Such as bunker claims arising, from having to take on bunkers, during a prolonged period of waiting. Heating claims in cold weather? What of hull cleaning claims caused by a protracted period of waiting?
There is limited guidance in the judgement on what is, or is not, included in demurrage.A case of note in this area is the first instance judgement in The Nikmary(2003), which confirmed that bunkers consumed by a vessel at anchor are notionally included in the rate of demurrage.
Parties will need to apply the fundamental principles on which The Eternal Bliss (2020) was decided, and commercial practice, to decide such issues.
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