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Can ship owners claim damages for loss of cargo in addition to demurrage when a ship is detained beyond laytime?

2020-11-01

Introduction

In a recent English High Court decision K-Line Pte Ltd v Priminds Shipping (HK) Co., Ltd [2020] EWHC 2373 (Comm), the Court considers whether an owner is entitled to claim damages in addition to demurrage where the only breach of contract of affreightment by the charterer is the failure to complete loading / discharging cargo within laytime. It was held that ship owner has a right to claim damages over and above its right to demurrage without the need to prove a separate breach.


Background

K-Line Pte Ltd (“K-Line”) and Priminds Shipping (HK) Co., Ltd (“Priminds”) entered into a contract of affreightment for 9 separate voyages and all voyages were performed. By an agreement on 2 July 2015, 3 additional voyages were added (the “COA”). The COA was subjected to the terms amended from a Norgrain form. Clause 19 of the COA was a demurrage clause. K-Line nominated the dry bulk carrier, Eternal Bliss, as the chartered ship for June 2015 laycan, loading approx. 70,000 m.t. soybeans at Tubarao, Brazil for discharge in China. Due to port congestion and a lack of storage space onshore in the Chinese port, Eternal Bliss was kept at anchorage for 31 days. Upon discharge, the cargo was found to have developed significant moulding and caking. To prevent a ship arrest, the insurer of K-Line provided a letter of undertaking for USD 6 million as security for the release of the cargo.

K-Line subsequently settled the receivers’ and insurers’ claim at USD 1.1 million and commenced arbitration against Priminds, seeking damages or an indemnity in respect of the loss. The parties took 2 questions of law to the Court as preliminary issues pursuant to section 45 of the 1996 Arbitration Act. The agreed facts between parties in the arbitration included the following:-

(1)   Eternal Bliss was detained beyond laytime due to congestion and lack of port storage;

(2)   Priminds breached its duty to complete discharge within laytime but not any other separate breaches; and

(3)   the cargo deterioration was a result solely due to detention beyond laytime but not any breach of duty by the ship owner.


Issues

When a voyage chartered vessel has been detained at a discharge port beyond laytime, while the delay has caused deterioration of the cargo and led to vessel’s owners suffering loss and damage and being put to expense (liability to third parties), are the owners in principle entitled to recover from the loss / damage / expense by way of:-

(1)   damages for the charterers’ breach of contract in not completing discharge within permitted laytime; and/or

(2)   indemnity in respect of consequences of complying with the charterers’ orders to load, carry and discharge the cargo?


Decision

In terms of the nature of the losses, the Court stated that the cargo claim is a separate and distinct loss in addition to the loss for the detention of the ship since the cargo claim is a by-product of the detention of the ship. Regarding the nature of demurrage, the Court confirmed that it was an agreed rate of compensation given by the charterer to the ship owner for the loss when the ship was detained and could not be utilised to earn extra freight. Therefore, demurrage as liquidated damages fixed the amount of damages concerning delay to the vessel but it was never intended to preclude any other kind of losses. The Court mainly looked into 2 previous judgments including Aktieselskabet Reidar v Arcos, Limited [1927] 1 KB 352 (“Reidar v Arcos”) and The Bonde [1991] 1 Lloyd’s Rep 136.

The Bonde was a case where carrying charges under the F.O.B contract were incurred by the buyer. The buyer resisted liability of the carrying charges and argued that the carrying charges were incurred due to seller’s breach of the demurrage clause in the F.O.B contract. Potter J ruled that an additional and different breach was necessary for claiming damages other than demurrage. It was an authority in favour of Primands. However, the Court ruled The Bonde to be wrongly decided as the decision and analysis of Potter J in the case was problematic since Potter J has misread the case Reidar v Arcos.

Reidar v Arcos is a case where there was a breach of charterparty by demurrage and failure to load a full cargo of timber. The majority of the Court of Appeal decided that the demurrage clause does not defeat a claim for breach of the full load obligation even when both breaches stems from the failure to load at the loading rate required by the charter. The Court viewed that the correct reading of Reidar v Arcos showed that it was a case with 2 breaches of contract which is different from the current case in K-Line which has only 1 breach of contract. Most importantly, the majority judgment of Reidar v Arcos did not rule that a party needed to establish a separate breach by the charter party other than the breach by the detention of the vessel if damages are to be obtainable over and above the demurrage payments. It was on this point that the Court thought Potter J has erred his decision in The Bonde. As a result, Baker J found that Priminds was in principle liable to compensate K-Line the loss and damages suffered for Priminds’ breach of contract in not completing discharge within permitted laytime.

In terms of the 2nd issue, Baker J reserved the matter to be determined in the arbitration.


Conclusion

The case settles a long-standing debate in shipping law and clarifies the legal position of the court that there is no need to prove a separate breach to claim losses when the losses are caused by charterer’s failure to load or discharge cargo within the allowed time. Ship owners may now claim damages in addition to demurrage even if the only breach by the charterer is the failure to load/discharge within laytime. Due to COVID-19, it is common for ships to face delays in loading or discharging cargo at the port as a result of the quarantine procedures implemented by the port authorities. Charterers should be more cautious towards laytime as the ship owner may now sue for consequential loss from a delay. While there is no need to prove separate breach of contract, causation remains a hurdle towards the claimants especially when it is alleged that the ship owner has breached its duty of care towards the cargo during the voyage.


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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

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