Court of Appeal gives broad meaning to demurrage in claim for liquidated damages

K Line Pte Ltd v Priminds Shipping (HK) Co Ltd (The Eternal Bliss) [18.11.21]

The Court of Appeal has recently handed down judgment, overturning the decision of the Commercial Court, in The Eternal Bliss. The case came before the courts as a preliminary issue to determine whether demurrage constitutes liquidated damages for all the consequences of the charterer’s failure to load or unload cargo within the permitted laytime, or only some of them (as the Commercial Court had held).

Background

Charterers had delayed in discharging a cargo of soybeans which led to deterioration of the cargo. This resulted in a claim by the cargo receivers against the vessel owners which owners settled for approximately US$1.1 million. The contract of affreightment contained a demurrage clause and charterers had paid demurrage in full.

The court was asked to consider whether, despite charterers having paid demurrage in full, owners were entitled to recover the sum paid to cargo interests from charterers on the basis that it was “a different kind of loss”.

The Commercial Court held that the owners were entitled to recover the sum paid to settle the receivers’ claim as unliquidated damages from charterers. It adjudged that this claim fell outside the scope of the demurrage clause and could be claimed in addition to the demurrage of US$20,000 per day paid by charterers.

The charterers appealed the Commercial Court judgment arguing that demurrage operates as a liquidated and exclusive remedy in respect of the failure to complete cargo operations in time. Accordingly, they argued that if a shipowner seeks to recover unliquidated damages in addition to demurrage, the owner must illustrate a separate and distinct breach by the charterer.

The question of law before the Court of Appeal was whether the charterer can be liable to compensate or indemnify the owner for costs in settling cargo claims by way of (a) damages for the charterer’s breach of contract in not completing discharge within the permitted laytime; and/or (b) an indemnity in respect of the consequences of complying with the charterer’s orders.

Court of Appeal decision

The court identified that the key issue was on the meaning of the word “demurrage” and how that is understood by those involved in the shipping business. The court stated the charterparty did not indicate whether demurrage was intended to cover all or only some of the losses flowing from a failure to complete cargo operations within the laytime. It did note, however, that if the parties intended demurrage to cover only some losses, the clause did not state which losses were intended to be covered and which were not.

Aside from The Bonde [1991], there were no previous cases giving clear guidance on the issue; additionally, there was no consensus in the relevant textbooks. Therefore, the court approached the issue as one of principle. The court’s conclusion was that, in the absence of any contrary provisions in a charterparty, demurrage liquidates the whole of the damages arising from a failure to complete cargo operations within the laytime, not just some of the damages.

The court gave the following reasons for its decision:

  • If a liquidated damages clause liquidates only some of the resulting damages, that would be an unusual and surprising agreement for commercial people to make. If this is the intention, then this ought to be clearly stated in the clause.
  • It accepted that statements can be found in the case law to the effect that demurrage is intended to compensate a shipowner for the loss of prospective freight earnings suffered as a result of the charterer’s delay in completing cargo operations. In terms of compensation, the demurrage rate is the result of a negotiation between the parties in which the loss of prospective freight earnings is likely to be one factor taken into consideration.
  • If the Commercial Court approach was correct, there will inevitably be disputes as to whether particular losses are of the “type” or “kind” covered by the demurrage clause.
  • The owner must arrange insurance as a matter of course, to insure against cargo claims, for example. The charter, on the other hand, agrees liquidated damages in the form of demurrage for failing to complete cargo operations within the stipulated laytime. If the owners’ construction was adopted, this would disturb the balance of risk inherent in the parties’ contract.
  • The Bonde has stood for around 30 years without causing any discernible dissatisfaction in the market and therefore the Commercial Court’s criticism of the case was not accepted.

Comment

This case provides clarity around the availability of general damages in addition to demurrage arising from delay for owners and charterers, pending an appeal by owners to the Supreme Court. As a result of this judgment, owners should consider drafting bespoke demurrage clauses stating that the demurrage rate is agreed compensation for lost time, not other claims for loss.

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