Introduction

In our previous article, we discussed the English High Court decision of K-Line Pte Ltd v Priminds Shipping (HK) Co., Ltd [2020] EWHC 2373 (Comm) which concerns a breach of contract of affreightment by a charterer who failed to complete loading / discharging cargo within laytime. The English Court of Appeal recently overruled the High Court decision and held that the ship owners’ claim falls outside the scope of the demurrage clause contained in the contract.

High Court decision

In this case, the ship owners seek to recover a settlement sum of US$ 1.1 million paid to some third party cargo receivers for deterioration of the cargo as a consequence of detention of the vessel caused by the charterer’s failure to complete loading / discharging cargo within laytime. The High Court considered whether the demurrage clause contained in the contract only liquidates part of the damages flowing from the charterer’s breach i.e. loss of earnings resulting from detention of the ship, or liquidates all damages flowing from the breach. The High Court held that a demurrage clause “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”. Accordingly, the High Court allowed the ship owners’ claim to recover a settlement sum paid to the receivers as unliquidated damages falling outside the scope of the demurrage clause on the basis that it is “a different kind of loss”.

The issue at appeal

The charterer appealed and contended that demurrage operates as a liquidated and exclusive remedy for all the consequences of its failure to complete cargo operations within the agreed laytime. On that basis, a shipowner who wish to recover unliquidated damages in addition to demurrage must prove a breach by the charterer of a separate and distinct obligation.

The Court of Appeal therefore has to decide on the proper meaning of the term “demurrage” as it is used in the charterparty and what exactly it liquidates. At the outset, the Court of Appeal stated that in principle, it is open to the parties to agree that a liquidated damages clause should cover all or only some of the losses flowing from a breach of contract. As the charterparty itself in this case does not expressly address this question, the question is what these parties have agreed by the charterparty in the present case.

The English Court of Appeal’s decision

After considering relevant case laws and textbooks, the Court of Appeal concluded that the case laws do not provide a decisive answer and there is no clear consensus in the textbooks. As such, the Court of Appeal approached the issue as one of principle and concluded that, in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime and not merely some of them. Accordingly, a ship owner must prove a breach of a separate obligation in order to recover damages in addition to demurrage arising from delay, for the following reasons:-

1. The Court of Appeal held that while it is possible for contracting parties to agree that a liquidated damages clause should liquidate only some of the damages arising from a particular breach, such is an “unusual and surprising” agreement for commercial people to make which, if intended, ought to be clearly stated. The Court of Appeal opines that such an agreement forfeits many of the benefits of a liquidated damages clause including certainty of contract and avoiding dispute. There is nothing in the charterparty in the present case to suggest that the parties in this case had such an intention;
   
2. While the loss of prospective freight earnings suffered as a result of the charterer’s delay in completing cargo operations is the primarily contemplated loss to be covered by a demurrage clause, this is not the only loss occurring and all that demurrage is intended to cover. A demurrage is the result of a negotiation between the parties in which the loss of prospective freight earnings is likely to be one factor, but by no means the only factor;
   
3. If demurrage quantifies “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”, as held by the High Court judge and does not apply to a different “type of loss”, there will inevitably be disputes as to whether particular losses are of the “type” or “kind” covered by the demurrage clause;
   
4. While a shipowner will typically have insurance against cargo claims (as the cost of protection and indemnity insurance covering liability to cargo claims is a standard expense for ship owners), a charterer will not typically have insurance against liability for unliquidated damages resulting solely from a failure to complete cargo operations within the laytime. Instead, the charterer protects itself from liability for failing to complete cargo operations within the laytime by stipulating for liquidated damages in the form of demurrage. As such, adopting the ship owners’ construction of demurrage would transfer the risk of unliquidated liability for cargo claims from the ship owners who have insured against it to the charterer who has not. The Court of Appeal is of the view that this disturbs the balance of risk inherent in the parties’ contract;
5. The High Court previously held that the decision in The Bonde is “premised on the faulty reasoning” and should not be followed. It was held in The Bonde that in order to recover damages in addition to demurrage, the owner was required to demonstrate that any additional loss stems from breach of an additional and/or independent obligation in addition to the breach of the charterers’ obligation to complete loading within the laytime. The Court of Appeal considered this long-standing authority and is of the view that as The Bonde has stood for some 30 years and does not appear to have troubled commercial people engaged in the relevant market, there is a powerful reason not to depart from the decision;
6. The Court of Appeal held that to allow the appeal will produce clarity and certainty, while leaving it open to individual parties or to industry bodies to stipulate for a different result i.e. a demurrage that only liquidates part of the damages flowing from a breach of contract if the parties so wish. The Court of Appeal opines that it should not be difficult for clauses to be drafted stating expressly that demurrage only covers certain stated categories of loss.

Takeaway

Under the previous High Court decision, where charterers have failed to load or discharge within the permitted laytime, ship owners are entitled to recover damages from charterers for a claim other than for detention of the vessel, such as the settlement sum paid to cargo receivers in this case, even if the failure to load or discharge within the allowed laytime is the only breach of contract by charterers. Such decision by the High Court creates uncertainty in the scope of demurrage clause which is a common clause in charterparties. The Court of Appeal decision has now settled the debate in this area by clarifying that as a matter of principle, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter and accordingly, a ship owner must prove a breach of a separate obligation in order to recover damages in addition to demurrage arising from delay. However, it remains to be seen whether the ship owners will appeal to the Supreme Court and for this issue to be ultimately decided by the Supreme Court.  In any event, if a party wishes to recover damages in addition to demurrage, it is advisable to state expressly in the demurrage clause that a party is entitled to recover all other loss and damages apart from demurrage.