MarIus

3.4.1 The industry perspective

In the Eternal Bliss, the Court of Appeal concludes that demurrage covers all losses arising from a breach of laytime. In the view of this writer, however, it is not clear whether this conclusion represents the most coherent solution from the perspective of the market actors.

The judges in the Court of Appeal appear aware of the importance of the topic from a commercial perspective and are concerned with finding a solution in line with the needs of the industry. In para 17 of the judgement, it is thus affirmed that the issue “depends on the meaning of the word “demurrage” as that would be understood by those involved in the shipping business” and, thus, that it “is not helpful to consider how liquidated damages clauses in other fields such as construction law have been construed”. However, what the Court of Appeal ultimately does is precisely treat demurrage as any other liquidated damages clause, which – in the absence of indication to the contrary – is generally construed as an all-damages clause. The premise of considering the industry perspective and the special features of demurrage clauses is then disregarded and gives place to a solution taken in the name of legal certainty.

3.4.2 How do market actors set the demurrage rate?

In the view of this writer, the Court of Appeal thus wounds up placing too little weight on elements suggesting how demurrage is considered by the actors of the shipping business. For instance, one question that should have been given consideration is “how is demurrage calculated”? This indeed represents a key question for anyone seeking to establish the business’ view on this market-sensitive topic, which at its heart is one of interpretation of commercial contracts.

The determination of demurrage rates is generally highly based on freight. To this writer, it does not appear that there are frequently used approaches to calculating demurrage rates that deviate from this pattern. It is of course possible that demurrage is assessed in other ways, as for instance in Suisse Atlantique where the demurrage rate was the result of a settlement of a previous dispute between the parties and, therefore, was fixed at an artificially low rate. However, besides certain isolated cases, the determination of the demurrage rate is generally a market-based assessment where the owner’s approach is to predict what they will lose in terms of freight by reference to the expected market rate for the vessel during the period of detention, together with additional daily running costs incurred in port if laytime is exceeded (such as bunker consumed in ports, daily port charges etc.).

When a broker negotiates a demurrage clause, his calculation will thus primarily be inspired by the fact that the vessel will be out of market for the period when the charterer exceeds laytime, and that the owner will be paying the running costs of the vessel. As for other losses, they may or may not occur, depending on the specific circumstances of each case, and are generally not considered when setting demurrage rates.

An interesting point made by the Court of Appeal deals with the difficulty to determine what other “types” and “kinds” of losses are in the absence of articulate demurrage clauses. The appellate court states that, following the High Court’s construction of demurrage as only covering some losses, it is doubtful where to draw a line between what is covered and what is not covered by demurrage. This concern is legitimate in the absence of clear criteria or clear indications by the parties of what is covered and what falls outside the demurrage calculation.

Some authors, such as Robert Gay, suggest that a criterion which may guide in understanding what losses are covered by the demurrage rate should be to discern between “normal” consequences of the detention as such, and consequences that are influenced by external factors or depend on specifics such as the type of cargo or conditions of particular ports, with only the former losses being liquidated by demurrage.(1) See Gay, Damages in addition to demurrage, pp. 88 and ff.

It is submitted here that applying this criterion in order to identify what losses demurrage is intended to cover would represent a solution more in tune with the reasoning made by commercial parties when negotiating demurrage clauses.

3.4.3 Insurance coverage

In para 56 of its decision, the Court of Appeal puts forward an argument related to insurance coverage. The Court affirms that while a shipowner will typically take out insurance against cargo claims, a charterer will generally not do so. In the Court’s view, the charterer will generally protect himself only from liability for failing to complete cargo operations within lay days by agreeing to pay liquidated damages for that. However, he will generally not have insurance against liability for unliquidated damages resulting from the same delay.

In the view of the Court, letting the charterer bear the risk of cargo claims, will then “transfer the risk of unliquidated liability for cargo claims from the shipowner who has insured against it to the charterer who has not” and this is seen as disturbing “the balance of risk inherent in the parties’ contract.”.

In this respect, it is not evident that the reasoning of the Court is sound. First, although it is true that owners generally have P&I coverage for cargo claims, nothing prevents charterers from taking out insurance against cargo claims.(2) On the contrary, prudent charterers frequently take out liability insurance both for time and voyage-chartered vessels, see Leighton J. Second, the fact that the owner has taken out insurance covering cargo claims does not equate to acceptance of responsibility for such. Even if the owner takes out insurance for this loss, he (or his insurer) may attempt to pass this claim on to the charterer, who in principle has caused the loss. Again, the decision of the Court of Appeal seems to oversimplify certain commercial aspects.

3.4.4 A questionable legal certainty?

In its decision, the Court of Appeal places much weight on the need for legal certainty. In para 59, it is stated that legal certainty would be favoured by seeing demurrage as an all-damages clause. In the view of this writer, this statement may be open to criticism.

A solution like the one suggested by the Court of Appeal will not completely eliminate the legal uncertainty in the field. The Court states in para 59 that the parties may contract around a certain wording offered by a given standard form if they wish to do so. The Court only reaffirms the right to the party to tailor the contract to their needs, a necessary corollary of the freedom of contract the parties benefit from under English law.

However, the parties must be assumed to be aware of their freedom to modify standard forms as they deem fit, but the general assumption that standard forms are self-sufficient indicates that parties usually will not contract around the wording provided in standard charterparties. To the knowledge of this writer, there is no evidence of an increased trend of demurrage clauses being rewritten after the Court of Appeal’s decision.

Instead of reaffirming that the parties have the right to contract around the standard clauses, a better solution would have been to suggest an amendment of standard clauses for instance by specifying that demurrage covers “all damages” or, if the contrary view has to be preferred, that demurrage only covers loss of freight and normal running expenses for keeping the vessel in port.

In addition, under the assumption that market actors perceive demurrage as covering merely the loss of future freight, then it could be argued that a decision confirming this view would contribute to the ‘certainty’ of the industry.

Against this background, it is fair to say that the Court of Appeal’s decision leaves many questions unanswered and that it appears doubtful whether it has found a solution in line with the market actors’ perception of market actors. When interpreting commercial contracts, this should be an important guideline. A clarification from the English Supreme Court would thus have represented a welcome development on the issue.

3.4.5 A parallel to time charterparties?

In addition, when analysing the recoverability of damages under voyage charters, it could be of interest to look at how cargo claims are treated in time charterparties. In the recent decision in Yangtze Xing Hua, charterers were found liable for cargo claims originating from the delay at the discharge port.(3) [2018] 1 Lloyd’s Rep 330.

The case shares more than one similarity with the factual scenario of the Eternal Bliss; a cargo of soybeans was damaged due to overheating while the vessel was sitting at anchorage at the discharge port, following to the orders of the charterer. The damage, thus, originated from the charterer’s act and was ultimately held 100% responsible for the cargo damage under the Inter-Club Agreement.(4) In a time charterparty, the owner and the charterer will usually both take out insurance and their insurers would enter an inter-club agreement (ICA) where they apportion between themselves certain costs their assured may incur. The charterparty will generally incorporate such an Interclub agreement between the insurance of the owner and the insurance of the charterer, where there is an apportionment of the losses, for instance for cargo claims, between the insurances of the owner and the charterers.

As discussed in section 2.2.3 above, it must be admitted that there are significant differences between time charterers and voyage charterers and there will be no Inter-Club Agreement between the insurers of the contractual parties. Nonetheless, one could have sympathy for the view that the charterer, as the party responsible for the conduct leading to the damage, should equally be held responsible under a voyage charter. In both charterparties, the loading and discharging operations are in the hands of the charterer and placing the responsibility with him may provide a further incentive for performing cargo operations within laytime.