MarIus

3.1.1 Introduction

The preceding analysis shows that the question of which losses are liquidated by demurrage cannot be solved solely by attaching to demurrage the label of ‘liquidated damages’ under English law. It will still have to be clarified which losses are ultimately intended to be covered by the demurrage rate. This uncertainty is detrimental to the shipping market and, therefore, deserves to be resolved.

The Eternal Bliss proves to be a good point of departure for resolving the matter. As Andrew Baker J states in the introduction to the Commercial Court’s decision, the “case provides the opportunity to resolve a long-standing uncertainty on a point of law of significance” within the shipping field.(1) [2020] EWHC 2373 (Comm), para 1.

3.1.2 The background facts

The dispute of the Eternal Bliss originates from a voyage charter concluded between K Line Pte Ltd (hereinafter, “K-Line”) – the owner of the vessel “The Eternal Bliss” – and Priminds Shipping (HK) Co Ltd (henceforth, “Priminds”) – the charterer – for the carriage of 70,133 mt of soybeans from Tubarao, Brazil to Longkou, China. The contract, based on the Norgrain 1973 standard form, was one of a series of such charterparties between the same parties. In Clause 18 and 19, the charter stipulated the laytime allowed for cargo operations and the rate of demurrage to be paid where cargo operations were not completed within the agreed time.

After tendering notice of readiness at the discharge port in Longkou, the Eternal Bliss was kept at anchorage for 31 days as a result of port congestion and lack of storage space ashore. When Priminds eventually completed the discharge of the cargo, this occurred outside the agreed laytime. In addition, upon discharging, significant caking and moulding of the soybeans was observed.

The shipowner, K-Line, was eventually faced with a claim from the receiver of the goods. The causation between the detention of the cargo and its deterioration was not in dispute. The cargo receivers’ claim and insurance were settled at a cost of US $1.1 million. K-line then brought a claim in arbitration against Priminds seeking i) demurrage from the charterer for having exceeded laytime by 31 days and ii) damages or an indemnity for the amount of the settlement costs paid to the receiver of the goods.

As it was undisputed that Priminds’ only breach of the charterparty was their failure to discharge the cargo at the rate specified in the laytime clause, the charterer argued that the deterioration of the cargo was caused by the very same detention which entitled the owner to claim demurrage. As demurrage, in their view, was an exhaustive remedy for all consequences arising from such delay, no separate damages could be claimed. The owner, on the other hand, argued that damages for the deterioration of the cargo were recoverable above demurrage, as they represented a ‘different type of loss’ than the vessel’s loss of time and earnings covered by the demurrage rate.

3.1.3 The High Court decision

Although K-Line’s claim was originally brought in arbitration, the parties agreed to bring the case before the High Court as a preliminary issue according to section 45 of the 1996 UK Arbitration Act.(2) Sec. 45 of the 1996 Arbitration Act allows the parties to an ongoing arbitration – either by agreement among themselves or with the permission of the tribunal – to apply to the English Courts to determine a preliminary point of law that “substantially affects the rights of one or more of the Parties”. It is used where the relevant area of law is unsettled and the parties – or the party – deem that the courts are better suited to provide an answer to uncertain legal issues.

The dispute thus arrived before Andrew Baker J of the Commercial Court. The question was whether the charterer was liable to compensate the owner for the costs of settling the cargo claims with the receivers by way of i) damages for the charterer’s breach of contract in delaying discharge; and/or ii) an indemnity in respect of the consequences of complying with the charterer’s orders to load, carry and discharge the cargo.(3) The judge eventually determined that the charterer was liable by way of damages, therefore the viability of an indemnity claim was not examined.

The main point of principle which ought to be answered was: What does demurrage liquidate? Upon conducting a detailed review of previous case law on the matter and examining the position in legal theory, Baker J held that

“[a]greeing a demurrage rate gives an agreed quantification of 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” and “[…]it does not seek to measure or therefore touch any claim for different kinds of loss, whatever the basis for any such claim”(4) [2020] EWHC 2373 (Comm), para 61. (emphasis added)

In other words, he held that the charterer had exceeded laytime and that this breach had resulted in losses to the owner which were separate from his loss of use of the vessel. Since the cargo damage was, therefore, ‘a different kind of loss’, i.e., different in nature from and additional to the detention of the ship, the shipowner was entitled to recover the sum paid to settle the receivers’ claim as unliquidated damages falling outside the scope of the demurrage provision. These damages were, thus, held recoverable, in addition to the demurrage paid by the charterer at US$20,000 per day for the period of delay.

3.1.4 The Court of Appeal’s decision

On 18 November 2021, the Court of Appeal, composed of Sir Geoffrey Vos, Newey and Males LJJ, overturned the High Court’s judgement.(5) [2021] EWCA Civ 1712. Given the inconclusiveness of previous case law and the lack of consensus in legal theory on the matter, the Court approached the issue as one of principle. According to the Court, demurrage liquidates

“[…] the whole of the damages arising from a charterer’s breach of contract 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.”(6)Ibidem, para 52. (emphasis added)

The Court presented several reasons for this conclusion:

1. A liquidated damages clause covering only some of the damages arising from the delay would be an “unusual and surprising” agreement for commercial people to make.(7) Ibidem, para 53. If the parties wish to make such an arrangement, it must be clearly spelled out.

2. Demurrage is a result of negotiations between the parties. The loss of freight is undoubtedly the primary loss which is contemplated, but nothing prevents the parties to include something more than this loss when agreeing on demurrage.

3. The construction of demurrage presented by the High Court leaves disputes open as to what a different “kind” and “type” of loss is and when they are covered by demurrage rates.

4. Entitling shipowners to pass cargo claims on charterers will ultimately disturb “the risk inherent in the parties’ contract”.(8)Ibidem, para56. A shipowner will typically take out insurance against cargo claims, while the same is not necessarily true for charterers.

5. The Bonde, a first-instance decision stating that demurrage is the exclusive remedy in situations similar to the one at hand, has stood for 30 years without dissatisfying the market. In the Court’s opinion, this was itself a “powerful reason” not to overturn it.(9)Ibidem, para 57.

6. Construing demurrage as an “all-damages clause” will improve certainty in commercial relationships. If the market is not satisfied with this view, then the parties are free to agree on a different wording of demurrage clauses.

Although the Court of Appeal did not grant permission to appeal to the Supreme Court, permission to appeal was, in August 2022, granted at the direct petition of the owners. Later in May 2023, following a commercial settlement between the parties, the appeal to the Supreme Court was, however, finally dismissed.