MarIus

2.4.1 Introduction

The nature of demurrage under English law has been the subject of discussion for decades. The definition of demurrage as “an agreed amount payable to the Owner in respect of delay to the vessel beyond the laytime for which the Owner is not responsible”, as presented in the Introduction, does not indicate whether or not a failure to complete loading and discharging within the stipulated laytime in itself constitutes a breach of the charter, and this aspect has previously been unclear under English law.(1) Schofield, p. 439.

The way in which demurrage clauses are phrased goes hand in hand with how the understanding of demurrage as a contractual term has evolved over the years, going from being understood as “extended freight” to today’s view of demurrage as “liquidated damages”. This evolution provides useful background for the analysis of the issue presented by the Eternal Bliss.

2.4.2 The evolution from extended freight to liquidated damages

As anticipated above, there essentially exist two frequent formulations of demurrage: A fixed time on demurrage, on the one hand, and an agreed rate, without a definite period being specified, on the other.

In the earlier days, the parties used to indicate a fixed period on demurrage, i.e., “ten working days”. The consequence of such wording was that, once the predetermined period had expired, the owner was prevented from claiming demurrage from then on. After the demurrage period had elapsed, the owner could only make a claim for the detention of the vessel.(2) The claim for detention will follow the usual test. Damages will thus have to compensate the owner for his actual loss and will be subject to ordinary rules of remoteness and causation. The burden of proving the actual loss suffered lies on the owner. See J. Cooke et al., p. 448. This type of formulation suggests that demurrage is a payment for the use of the vessel for an extended period of laytime. It, therefore, reflects the understanding of demurrage as ‘extended freight’ rather than as damages for breach of the charterparty.

In this regard, the dictum of Lord Trayner in Lilly v Stevenson is significant. He states that

“days stipulated […] on demurrage are just lay days, but lay days that have to be paid for. If a charterparty provides that the charterer shall have 10 days to load cargo, and 10 days further on demurrage at a certain rate per day, the shipper has 20 days to load, although he pays something extra for the last 10. […]”(3) (1895) 22 R. 278.

Eventually, the parties generally opted for not indicating a specific duration of demurrage but only an agreed rate, leaving the period unspecified. This formulation remains more common nowadays, as can be observed from the Asbatankvoy clause presented above.

In the early twentieth century, however, the view of demurrage as extended freight was eventually set aside under English law. In the first instance judgement in Aktieselskabet Reidar v Arcos,(4) [1926] 25 Ll L Rep 513, Vol. 25-31.Greer J indicated that the view expressed in the dictum of Lord Trayner in Lilly v Stevenson was no longer suitable. On the contrary, the failure to complete loading or discharging within the fixed time constituted a breach of contract by the charterer which entitled the owner only to claim damages.(5)Ibidem, at 31.

Demurrage then started to be conceived as “agreed damages” to be paid as a consequence of the delay in completing cargo operations beyond the predetermined period. The dictum of Lord Brandon in The Lips is authoritative in this context. Here, demurrage is described as follows:

“I deal first with what demurrage is not. It is not money payable by a charterer as the consideration for the exercise by him of a right to detain a chartered ship beyond the stipulated lay days. If demurrage were that, it would be a liability sounding in debt. I deal next with what demurrage is. It is a liability in damages to which a charterer becomes subject because, by detaining the chartered ship beyond the stipulated lay days, he is in breach of his contract. Most, if not all, voyage charters contain a demurrage clause which prescribes a daily rate at which the damages for such detention are to be quantified. The effect of such a clause is to liquidate the damages payable: it does not alter the nature of the charterer’s liability, which is and remains a liability for damages, albeit liquidated damages. In the absence of any provision to the contrary in the charter the charterer’s liability for demurrage accrues de die in diem from the moment when, after the lay days have expired, the detention of the ship by him begins. These propositions of law are so well established that the citation of authority for them is perhaps unnecessary.”(6) [1987] 2 Lloyd’s Rep 311, at 315. (emphasis added)

It is now almost undisputed that the charterer generally has no contractual right to delay the vessel beyond laytime and pay demurrage accordingly. If the charterer delays the vessel beyond lay days, he is in breach of contract(7) See e.g. [1962] 2 Lloyd’s Rep 175; [1964] A.C. 868 at 191 and 899. See also Todd, p. 132 or Scrutton, para 15-004, p.382. and, specifically, of the “laytime warranty”.(8) Under English law, the obligation to load and discharge within the laytime has been classified by the vast majority of English authors as a warranty, see e.g. Schofield, p. 447 para 6.31. Breach of a warranty is generally not repudiatory and does not give the right to the owner to terminate the contract or to affirm it. The only remedy available for the non-breaching party will be damages.

2.4.3 Is demurrage limited to a reasonable period of time?

An issue that may arise in the presence of an unlimited-days wording is where a limit is to be found after which demurrage can no longer be claimed. In the beginning, when moving from a clause stating limited days on demurrage to one contemplating an unlimited period of demurrage, only fixing an agreed rate, certain English authority affirmed that it was implied that demurrage runs for a “reasonable” period of time.(9) See (1895) 22 Rett 278.

This view has since been set aside. The current view is that the owner may claim demurrage until i) loading or discharging operations are ended, ii) the delay is so protracted as to frustrate the contract, or iii) the contract becomes repudiated by one of the parties, with acceptance by the other party.(10) Schofield, p. 9, para 1.41. The owner will thus not be entitled to claim damages at large after a “reasonable” time on demurrage has expired.(11) Schofield, p. 445, para 6.22.

2.4.4 Practical implications of the legal classification of demurrage

The classification of demurrage in one way or another may seem more interesting from an academic point of view rather than from a commercial perspective. However, it could have several practical consequences.

On the one hand, if demurrage is conceived as “extended lay days”, the sum agreed as demurrage aims at giving the charterer the contractual right to detain the vessel against the payment of a predefined sum, in this way compensating the owner for the amount of time he is prevented from exploiting the vessel’s earning capacity. Such compensation is paid on a strict-liability basis and functions as an extension of the freight. In such a scenario, if additional and independent damages arise as a consequence of the delay, they will most likely be recoverable, as demurrage will be conceived, in essence, as a debt claim rather than a claim for damages for breach of contract.

If, on the other hand, demurrage is considered liquidated damages for breach of the charterparty, as ultimately affirmed under English law,(12) Other jurisdictions express a different view on demurrage provisions. For a detailed overview of how demurrage clauses are classified in other legal systems, see Tiberg, 2013, pp. 511 and ff. See also Solvang, 2009, where the author examines the issue in light of English, American and Norwegian law. it will function as a pre-estimate of the loss the owner would suffer if the charterer breaches the laytime provision. In this case, one has to clarify what kind of losses are included in the pre-estimate that the parties agree on as demurrage. This understanding is essential in order to ascertain whether and to what extent damages over and above demurrage are potentially recoverable.

However, as it will appear from the following, even classifying demurrage as liquidated damages does not answer the question of whether other damages may be recovered in addition to demurrage when a single breach of the charterparty, namely the exceeding of laytime, causes further losses than the loss of time directly connected to the concept of demurrage. This was precisely the scenario presented in the Eternal Bliss.

Lastly, although highly relevant for understanding the nature and function of demurrage, these classifications may appear of limited significance if one looks at the issue from the point of view of the shipping business. The commercial understanding of the clause and the way in which demurrage is practically calculated play a fundamental role when trying to scrutinise its meaning and function.

It is noted here that even if the view of demurrage as a liquidated damages clause is now almost undisputed, some have expressed the view that seeing demurrage as payment of “additional freight” is “sounder” and “more in tune with the way in which the market views demurrage”.(13) See [1990] 1 Lloyd’s Rep 425, at 431 as per Steyn J.

To name some authors affirming this view, Bischoff in 1974 suggested in an article that demurrage provisions should be regarded as part of the consideration, meaning that detaining a ship beyond laytime was a part of the bargain of contract between the parties. He points out that the exceeding of laytime is more reasonably an exercise of an option, or an additional performance of the contract, rather than a breach of contract or warranty.(14) See further A.G. Bischoff, pp. 126 and ff.

Also Trappe, in 1986 when the view of demurrage as liquidated damages under English law had already been settled, held that it is “doubtful” whether the parties consider that keeping the vessel longer than the allowed laytime represents a breach of contract. In his view, “[p]arties usually are, rather, in agreement that the charterer may keep the vessel longer against payment of extra compensation (called “demurrage”)”, and that “[i]n many cases, for instance, parties agree upon a low freight, upon a very short laytime, and upon a high demurrage rate, just to keep the freight rate low but to allow the carrier nevertheless to collect sufficient overall remuneration.”(15) J. Trappe, p. 255.

In more recent times, Tiberg has suggested that it is a question of construction of the particular contract which of the two meanings of demurrage is intended, since the expressions used in the contract “may be such as to not justify the normal assumption that the charterer’s use of the demurrage time is a breach.”(16) Tiberg, 2013, p. 513, footnote 11.

Although these may be seen as isolated positions, they indeed show how important it is to consider the market’s perception of demurrage, as the market operators may look at the issue from a slightly different perspective than the English legal doctrine.

2.4.5 Legal implications of demurrage as liquidated damages