K Line Pte Ltd v Priminds Shipping (Hk) Co. Ltd. m.v. “Eternal Bliss” [2021] EWCA 2373 Civ 1712.

A. Background / history

A year ago this month (November 2021) I provided a summary of the High Court decision of Mr Justice Andrew Baker in respect of a preliminary point regarding the nature of demurrage and what losses, in essence, it liquidates.

Demurrage is, of course, a sum agreed by a charterer to be paid as liquidated damages to owners for delay in loading or unloading beyond the agreed laytime.

It may be recalled that the relevant facts in the High Court case were as follows:

The claimant shipowners had entered into a voyage charter with the defendant charterers for the carriage of soybeans from Brazil to China. The vessel arrived at the Longkou, discharge port anchorage and tendered notice of readiness on 29 July 2015. She was kept at anchorage for 31 days due to port congestion and lack of storage space for her cargo ashore. She finally commenced discharge on 30 August 2015. By such time her cargo displayed significant moulding and caking.

Owner’s insurers provided cargo receivers with a Letter of Undertaking (LOU) for US$ 6 million as security for their cargo claims and to avoid the vessel being arrested. Owners settled with receivers and their insurers claims for c. US$1.1 million and sought to recover this sum as unliquidated damages, or an indemnity, from charterers in addition to demurrage of US$ 20,000 per day for the period of delay (as stipulated in the charteparty).

The question was whether owners were entitled to do so, as the damages all related to only one breach, namely a failure to load within the permitted laytime.

The claim was subject to LMAA arbitration. The issue was referred as a preliminary point and by mutual agreement to the High Court.

It was agreed that certain facts would be assumed by the court for the purposes of the preliminary point, namely:

(1) the reason for the detention;

(2) charterer’s breach of their obligation to discharge within the permitted laytime;

(3) the soybeans deterioration as a result of the detention beyond laytime, and not due to any want of care by owners;

(4) owner’s relevant losses sustained as a consequence of charterers failure to load within the permitted laytime and not due to any separate breach; there was no cause which broke the chain of causation and the losses were reasonably incurred and

(5) the losses were as a consequence of compliance with charterer’s orders to load, carry and discharge the cargo.

The court found that the main point of principle was to ask what precisely was liquidated, in the context of the particular charterparty, by agreeing a demurrage rate.

Mr Justice Andrew Baker made reference to various cases and textbooks on the point, to include the principal authority on which charterers relied, namely Richco International Ltd v Alfred C Toepfer International GmbH (The Bonde) [1991] 1 Lloyd’s Rep. 136.

In relation to The Bonde, the judge cited the argument made for the seller / owner that demurrage is not and/or should not be the exclusive compensation when a failure to load within the contractual laytime has consequences other than the detention of the ship.

The court found the argument as made in The Bonde, which accorded with the authorities on the nature of the demurrage rate, to be sound and was something Potter J in the The Bonde was free to adopt, but declined to do so. Rather it was stated in the judgment that Potter J had misread the speeches of the House of Lords in Suisse Atlantique (Suisse Atlantique Societe d’Armement SA v NV Rotterdamsche Kolen Centrale [1966] 2 All E.R. 61) as saying that it was necessary for a party to establish a separate breach, other than the detention of the vessel if damages are to be payable in addition to demurrage.

Consequently, the High Court found that an additional and different breach is not required for owners to recover their additional losses and as such the The Bonde reasoning was faulty and wrongly decided and would not be followed. The court acknowledged that it had stood for nearly 30 years and the extent to which it had since been followed, nonetheless it was firmly of the view that it was not the correct answer.

Accordingly, owners were successful and entitled to recover the sum paid to settle the receivers’ claims, in addition to demurrage.

B. Charterers appeal to the Court of Appeal

Charterers have been successful – the appeal was allowed.

Further, owner’s application for permission to appeal to the Supreme Court was refused by the Court of Appeal. Lord Justice Males delivering the judgment of the Court of Appeal.

The court stated the issue was one of principle. It found that demurrage liquidates the whole of the damages/losses relating to charterers’ breach for failing to complete cargo operations within the laytime and not merely some of them.

Such that owners were confined to the liquidated, per day, demurrage agreed with charterers and could not claim the additional unliquidated damages for the settlement reached with receivers (unless of course they could establish a separate breach from which those damages flowed which they could not, as there was none).

The succinct judgment was reached on seven grounds, namely:

1. Commercial reality – it would be an unusual and surprising outcome if demurrage was only to cover some losses due to charterers delay and not others. The benefit of a liquidated damages clause is it provides certainty and avoids disputes as to which losses may be covered; the agreed demurrage covers all.

2. The court acknowledged that case law referred to demurrage as compensation for a shipowner’s loss of prospective freight earnings suffered as a result of charterers delay in completing cargo operations, however that did not mean that is all demurrage covers.

3. Uncertainty and a proliferation of disputes as to what “type of loss” demurrage covers if not all.

4. Commercial reality: P & I cover – a standard insurance cover for shipowners – is intended to protect owners against precisely the losses covered in the subject case, namely liability for cargo claims. Conversely a charterer will not typically have insurance for unliquidated damages resulting solely from a failure to conduct cargo operations within laytime.

5. The Bonde had stood for some 30 years without causing dissatisfaction in the market. Mr Justice Andrew Baker’s “legal archaeology” may have realised it was not finally settled but its reasoning does not appear to have troubled commercial people engaged in the market for an extended period.

6. The Court expressly did not accept the judge’s criticism of The Bonde.

7. Finally, to allow the appeal would produce clarity and certainty, whilst still allowing contracting parties to stipulate for a different result if they wished to do so. Consequently, parties could specify if demurrage would only cover specific losses.

As such and based on the assumed, agreed, facts as stated above, any kind of loss suffered by owners and associated with charterers delay in loading or unloading will be confined to the agreed demurrage rate / liquidated damages.

The judgment should sit well, based on the commercial nature of shipping and the need and desirability for clarity and certainty in the market. It will also, no doubt, offer some comfort for charterers, confining their liability for losses to the demurrage rate when they exceed laytime.

LARA HICKS © 2021

BARRISTER

33 BEDFORD ROW

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