The English Court of Appeal recently delivered an important judgment on a major point of shipping law directly relevant to Australian exporters of bulk commodities. In K Line Pte Ltd -v- Priminds Shipping (HK) Co Ltd (a.k.a. The Eternal Bliss), the Court allowed the charterer's appeal, confirming that in the absence of any contrary indication in a particular charter party, demurrage liquidates the whole of the damages arising from a charterer's breach of charter in failing to complete cargo operations within the laytime.
Judgment brings clarity and certainty for Australian exporters
The judgment confirms:
- a shipowner that has entered into a charter party with an exporter; and
- a FOB buyer that has entered into a sale agreement with an exporter,
will, in most instances, need to establish distinct breaches, with separate heads of loss, if they are to have any hope in succeeding with a claim against the exporter for damages in excess of demurrage. As a consequence, the judgment provides exporters with a considerably greater level of certainty as to their potential liability for delays associated with the loading and discharge of bulk cargoes.
About demurrage
Voyage charter parties and contracts of affreightment (COAs) are the means by which most bulk commodities are shipped out of Australia.
A voyage charter party is a contract for the carriage of cargo by sea on a single voyage. The ship may be chartered for the voyage by either:
- an exporter, in accordance with its obligations under a CIF sale contract; or
- a buyer of the cargo, in accordance with its obligations under a FOB sale contract.
In some instances, an exporter or buyer responsible for procuring sea carriage will elect to arrange carriage by way of a COA (also known as a volume contract), providing for a series of voyages. In either scenario, the charterer will usually:
- be liable to pay demurrage to the shipowner - a sum agreed by the charterer to be paid as liquidated damages for delay beyond a stipulated or reasonable time for loading or unloading (usually referred to as laytime); and
- ensure that the related sales agreement provides that the counterparty must reimburse it for any demurrage payable to the shipowner when the counterparty is responsible for the delay that has triggered the liability for demurrage.
Demurrage can result in a charterer incurring very significant liability, often within a short period and due to circumstances entirely beyond the control of the charterer. In many instances, a force majeure clause in a charter party or COA will not shield the charterer from liability for demurrage.
Avoiding and minimising liability for demurrage has become an especially problematic issue for exporters over the past 18 months due to unprecedented levels of port congestion, COVID-19 related disruptions and recent unofficial, ad hoc trade embargoes by one of Australia's major trading partners.
The Eternal Bliss - background facts
The relevant voyage was one of a series performed pursuant to a COA between K-Line as shipowner and Priminds as charterer. The COA concerned the carriage of bulk cargoes of heavy grain, soya or sorghum from South American ports to the Far East.
The 'Eternal Bliss', a dry bulk carrier, was nominated by K-Line for the voyage and she loaded 70,133 mt of soybeans at Tubarao in Brazil for discharge at Longkou in China. Due to port congestion and lack of storage space at the discharge port, the vessel was kept at anchorage for some 31 days before berthing. As a result of the delay completing discharge, the cargo suffered significant moulding and caking and the receiver brought a claim against K-Line which K-Line subsequently settled for US$1.1 million. K-Line then commenced arbitration proceedings against Priminds seeking damages or an indemnity in respect of the amount paid to the receiver.
Question of law referred to English High Court
It was agreed between the parties that the matter be referred to the High Court for determination of a question of law, in accordance with the relevant provisions of the Arbitration Act 1996. As reformulated in the course of the hearing, the question of law for determination was whether, on the facts assumed, Priminds was liable to compensate or indemnify K-Line for the cost of settling the receiver's claim by way of:
- damages for breach of contract in not completing discharge within the permitted laytime; and/or
- an indemnity in respect of consequences of complying with Priminds' orders to load, carry and discharge the cargo.
The Court summed up the issue for consideration as follows:
"The main point of principle involved asks what it is that demurrage liquidates. It is well-established that demurrage is by nature liquidated damages, but in respect of what does demurrage, calculated in accordance with the voyage charter, fix (and therefore limit) the owner's recovery?"
It was common ground between the parties that the only breach committed by Priminds was the breach of its obligation to discharge within the agreed laytime.
Judgment at first instance
The Court concluded that the demurrage rate:
- is intended to liquidate only K-Line's loss of earnings arising from the loss of use of the ship to earn freight; and
- therefore does not liquidate a claim for a different type of loss arising out of the same breach.
The Court then concluded that since:
- the damage to the cargo was distinct from the detention of the ship as a type of loss; and
- the demurrage rate did not seek to liquidate this type of loss,
Priminds was therefore liable to K-Line in damages for the full amount K-Line paid to the receiver (in addition to the amount it had already paid to K-Line for delay unloading, calculated by reference to the demurrage rate).
As the Court held that Priminds was liable in damages, it was unnecessary for the Court to decide whether there was a viable indemnity claim. However, it was noted that if demurrage was liquidated damages for all consequences of Priminds' delay at the discharge port, it would be inconsistent with that element of the parties' bargain to imply an indemnity rendering Priminds liable for one of those consequences.
Judgment of the Court of Appeal
Priminds appealed the decision of the first instance judge. The Court of Appeal handed down its judgment on 18 November 2021, allowing the appeal. The Court of Appeal concluded that:
"…in the absence of any contrary indication in a particular charter party, 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, if a shipowner seeks to recover damages in addition to demurrage arising from delay, it must prove a breach of a separate obligation"
A number of reasons were articulated in support of this conclusion but two of them are particularly noteworthy.
Firstly, 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, it would be an unusual and surprising agreement for commercial people to make which (if intended) ought to be clearly stated. Such an agreement forfeits many of the benefits of a liquidated damages clause which, in general, provides valuable certainty and avoids disputes. In that regard, it was noted that there was nothing in the charter party or in the standard definitions of demurrage to suggest that the parties in this case had such an intention.
Secondly, although loss of prospective freight earnings suffered as a result of a charterer's delay in completing cargo operations is undeniably a key reason for the inclusion of a demurrage clause, it does not follow that this is the only loss to which demurrage is intended to apply. Noting that demurrage is frequently either higher or lower than an estimated daily freight rate, the Court of Appeal suggested that an agreed demurrage rate should be seen as the result of a negotiation between the parties in which the loss of prospective freight earnings is likely to be one factor, but is by no means the only factor.
The principles applied in the judgment are equally applicable to demurrage provisions in sale contracts between an exporter and its FOB buyer.
English judgments and Australian exporters
Although delivered by a foreign court, the judgment in The Eternal Bliss is directly relevant to all Australian exporters of bulk commodities who enter into either a charter party, COA or a sale contract that is either subject to the laws of:
- England (a choice of law option which is still very common, even in relation to cargoes shipped from Australia to China, Japan, South Korea and many other Asian jurisdictions); or
- Australia or another Commonwealth jurisdiction, including New Zealand, Singapore and India, which tend to closely adhere to English law regarding charter parties.
Proper analysis of contractual terms remains critical
Although the judgment is a welcome development for Australian exporters, it does not diminish the importance of carefully considering, prior to execution, the many clauses in charter parties and sales contracts that are likely to impact on liability for demurrage. As noted by both the Court of Appeal and the first instance judge, the liability of charterers and FOB sellers for delay will turn on the proper construction of several clauses including, but not limited to, the demurrage clause.
Shipowners are frequently the party responsible for the drafting of voyage charter parties and other sea carriage contracts. They have created many now-customary clauses as a reaction to significant judgments regarding contractual allocation of risk between owner and shipper. It remains to be seen how owners respond to this slightly mischievous observation in the penultimate paragraph of the Court of Appeal judgment:
"[T]o 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 if they wish to do so. If our judgment does not meet with approval in the market, it should not be difficult for clauses to be drafted stating expressly that demurrage only covers certain stated categories of loss".
Exporters should be on the lookout for nascent attempts by shipowners and FOB buyers to insert into (respectively) charter parties and sale contracts clauses attempting to 'reverse' the Court of Appeal's judgment.
It is also important to keep in mind that The Eternal Bliss merely limits the potential liability of exporters for delay; the possibility of incurring significant liability for demurrage, particularly at a time when lengthy port delays remain ubiquitous, remains a substantial risk. Whenever reviewing the terms of a charter party as a CIF seller, or a sale contract with an FOB buyer, exporters should therefore always carefully consider (along with many other issues pertinent to the allocation of risk) the following matters:
- are the vessel loading and discharge rates realistic?
- is the laycan spread likely to be problematic?
- what will amount to an interruption or exception to laytime?
- if there is a force majeure clause, can it be relied upon to avoid liability for demurrage in circumstances where the vessel is already on demurrage?
- if a CIF seller - does the sale contract have back-to-back demurrage terms?
- if a FOB seller - does the demurrage clause in the sale contract operate as an indemnity for liability for demurrage under the charter party?
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