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What does demurrage cover?

The Court of Appeal has handed down an important judgment in K Line PTE Ltd v. Priminds Shipping (HK) Co Ltd (Eternal Bliss) [2021] EWCA Civ 1712 in which it overturned a first instance decision as to when an owner can claim damages for delay, as well as demurrage.

Demurrage provisions provide an agreed or liquidated figure for the damages payable for detaining the vessel beyond the agreed laydays. Typically, an owner’s loss will be the loss of income during this overrun and demurrage is often thought to be a pre-estimate of this loss, binding on both the owner and the charterer. What is the position if the owner also suffers an entirely different type of loss? Can the owner recover this as well or is the owner bound by and limited to the agreed demurrage rate?

Such losses can arise in two different situations. It may be that the charterer has committed two breaches of contract – failure to load or unload within the laydays and another separate breach. If this is the case and the loss flows from the separate breach, the loss is recoverable. However, what if there was only one breach? That was the situation that the Court had to assume had happened in this case.

In previous cases and articles, there have been two schools of thought – one of which considered that demurrage covered all losses and the other that it only covered the claim for the loss of use of the vessel during the detention.

The background facts

The owner chartered the vessel to carry soya beans to China. After tendering notice of readiness at the discharge port, the vessel remained at anchor for 31 days because of congestion and lack of storage space. Once it started discharging, the cargo receiver alleged that the cargo was caked and mouldy. They demanded security and eventually the cargo claim was settled for approximately $1 million. Could the owner recover this sum from the charterer for breach of their obligation to discharge the vessel within the laydays?

The Commercial Court conducted an exhaustive review of the authorities. It held that damages could be recoverable in addition to demurrage, even where there was only one breach of contract if the nature of the damage suffered by the owner was of an entirely different type to the loss of use of the vessel as a freight-earning chattel during the period of detention.

On appeal, the Court of Appeal unanimously overturned this decision. The Court of Appeal stated that it was open to parties expressly to agree that demurrage covered all or only some of the losses flowing from a breach of the laytime obligation. However, its task was to decide what the term “demurrage” was understood to mean by those involved in shipping in a case such as this one, where there was no express statement as to what was covered by the term.

Similarly to the Commercial Court, the Court of Appeal reviewed the key decisions but took a different view and decided that those authorities and the text books did not provide a decisive answer. The Court of Appeal, therefore, approached the issue as a matter of principle. It decided that unless the contract indicated otherwise, demurrage covered all losses. Therefore, if the owner sought to recover damages in addition to demurrage arising from delay, they had to prove a breach of a separate obligation.

Decisions for decision

The Court of Appeal came to this view for a number of reasons including the following:

• The owner’s construction would deprive the demurrage provision of some of the certainty that liquidated damages clauses are intended to provide and which avoid disputes of this nature. Therefore, if the parties want only certain losses to be covered, they should use clear words to say so.

• Any other decision would inevitably lead to arguments as to whether a particular loss was or was not of a type covered by the clause.

• Insurance, including P & I insurance was part of the costs of running the vessel and the consequence of the owner’s interpretation would be to “transfer the risk of unliquidated liability for cargo claims from the owner who has insured against it to the charterer who has not”.

• Allowing the appeal would produce clarity and certainty while leaving it open to individual parties or industry bodies to stipulate for a different result if they wished to do so.

We may not have heard the last of this matter as the owner is seeking to appeal the decision to the Supreme Court. If the decision is not disturbed, it is likely to provide certainty as the Court of Appeal predicted. However, it will be interesting to see whether, in future, owners or BIMCO take up the Court’s invitation to stipulate a narrow definition of demurrage in their voyage charterparties and whether charterers will accept this.

The decision may also lead to owners arguing that other breaches of charterparty have been committed, including breaches of implied terms.
Source: Baltic Exchange

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