- K Line PTE Ltd v Priminds Shipping (HK) Co Ltd (“Eternal Bliss”) [2021] EWCA Civ 1712, the Court of Appeal has revisited the Commercial Court decision.
- In overturning the Commercial Court decision, the Court of Appeal has seemingly given a wide interpretation to the losses that demurrage will liquidate.
- The Court of Appeal noted that it was open to the parties to agree that a liquidated damages clause should cover all or only some of the losses flowing from a breach of contract.
In K Line PTE Ltd v Priminds Shipping (HK) Co Ltd (“Eternal Bliss”) [2021] EWCA Civ 1712, the Court of Appeal has revisited the Commercial Court decision that sought to resolve a ‘long-standing uncertainty on a point of law’ in the shipping and offshore industries of what damages demurrage liquidates, says an article published on cms law website.
Case represents new law
In overturning the Commercial Court decision, the Court of Appeal has seemingly given a wide interpretation to the losses that demurrage will liquidate, absent express words to the contrary. Significantly, the Court of Appeal decided that the existing case law did not provide a decisive answer.
Also, there was no clear consensus in the textbooks. Therefore, it approached the issue as one of principle. The case represents new law on a key feature of charterparties.
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 the 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 1.1m 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. In other words: the main point of principle asks what is it that demurrage liquidates’.
Demurrage is “a sum agreed by the charterer to be paid as liquidated damages for delay beyond a stipulated or reasonable time for loading or unloading, generally referred to as the laydays or laytime” (Scrutton on Charterparties, 24th edition (2020), Art 170)”.
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 Commercial Court decided that it would not 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 … 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’.
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.
This decision of the Commercial Court was appealed.
Court of Appeal Decision
The Court of Appeal decided that the existing case law did not provide a decisive answer. Also, there was no clear consensus in the textbooks. Therefore, it approached the issue as one of principle.
Its conclusion was that, in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime and not merely some of them.
Accordingly, if a shipowner seeks to recover damages in addition to demurrage arising from delay, it must prove a breach of a separate obligation.
The Court of Appeal’s reasons were, in summary, as follows:
First, it is possible for contracting parties to agree that a liquidated damages clause should liquidate only some of the damages arising from a particular breach
Second, however, that struck the Court of Appeal as an unusual and surprising surprising agreement for commercial people to make which, if intended, ought to be clearly stated.
Such an agreement forfeits many of the benefits of a liquidated damages clause which, in general, provides valuable certainty and avoids dispute.
There is nothing in the charterparty or in the standard definitions of demurrage (including that from Scrutton on Charterparties) to suggest that the parties in this case had such an intention.
Third, 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.
However, the cases show that demurrage is frequently either higher or lower than an estimated daily freight rate. It is more accurate to say that 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, but is by no means the only factor.
Moreover, it appears that while freight rates move up and down sensitively to market conditions, the same is not necessarily true of demurrage rates.
Fourth, if demurrage quantifies “the owner’s loss of use of the ship to earn freight by further employment in respect of delay to the ship after the expiry of laytime, nothing more”, as the Commercial Court decided, and does not apply to a different “type of loss”, there will inevitably be disputes as to whether particular losses are of the “type” or “kind” covered by the demurrage clause.
Fifth, the cost of insurance is one of the normal running expenses which the shipowner has to bear. Thus, a shipowner will typically have insurance against cargo claims, while a charterer will not typically have insurance against liability for unliquidated damages resulting solely from a failure to complete cargo operations within the laytime.
Accordingly, the consequence of the shipowner’s construction is to transfer the risk of unliquidated liability for cargo claims from the shipowner who has insured against it to the charterer who has not. That seems to us to disturb the balance of risk inherent in the parties’ contract.
Sixth, in The Bonde [1991] 1 Lloyd’s Rep 136 the Commercial Court decided: “where a charter-party contains a demurrage clause, then in order to recover damages in addition to demurrage for breach of the charterers’ obligation to complete loading within the lay days, it is a requirement that the plaintiff demonstrate that such additional loss is not only different in character from loss of use but stems from breach of an additional and/or independent obligation”. This decision has now stood for some 30 years, apparently without causing any dissatisfaction in the market.
Seventh, the Court of Appeal did not accept the Commercial Court’s criticisms of The Bonde.
Finally, to allow the appeal will produce clarity and certainty, while leaving it open to individual parties or to industry bodies to stipulate for a different result if they wish to do so.
Comment
Recognising the significance of its decision, the Commercial Court noted: ‘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 practical impact of the Court of Appeal’s decision would seem to be that absent words to the contrary, demurrage clauses in a charterparty will usually be construed as liquidating all losses arising from delay.
The decision of the Court of Appeal takes on even more significance as, being a decision of the Court of Appeal, it constitutes new law and is (generally speaking) binding on all other English courts, save the Supreme Court. That said, each contract will remain to be interpreted on its own terms.
The Court of Appeal stressed that the issue before it depended on the meaning of the word “demurrage” as that would be understood by those involved in the shipping business.
For that reason, it was not helpful to consider how liquidated damages clauses in other fields (such as construction law) have been construed: “The question is what these parties have agreed by the charterparty in the present case (and because their agreement is in standard terms, what commercial people generally have agreed by using such terms).”
The Court of Appeal noted that it was open to the parties to agree that a liquidated damages clause should cover all or only some of the losses flowing from a breach of contract.
In light of that consideration, it was significant that the demurrage provision 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.
If the parties intended demurrage to cover only some such losses, they gave no express indication of which losses were intended to be covered and which were not.
The Court of Appeal’s final reason for its decision – that it would produce clarity and certainty – underlines the importance of clear drafting.
Whether the decision proves popular in the market or not, should a party wish to limit the reach of a demurrage provision such that it liquidates some but not all losses arising from a failure to complete cargo operations within the laytime, this will likely need to be expressly set out in the charterparty in question.
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Source: cms law
