Some questions of law remain for a long time undecided by higher authority, despite their importance. For example:

• If, under a voyage charter:
  • a charterer breaches its obligation to complete the discharge of cargo within the agreed laytime,
  • the charterer commits no further breach, but
  • the charterer’s breach causes the shipowner loss and damage in addition to the detention of the ship,
• Then, can the shipowner recover damages for the additional loss over and above the amount stipulated in the contract as demurrage?

In K Line Pte Ltd v Priminds Shipping (HK) Co Ltd (Eternal Bliss), the High Court[1] (Andrew Baker J) held that such additional loss was recoverable. The Court of Appeal reversed this decision, in a judgment[2] handed down on 18 November 2021, holding that demurrage is “liquidated damages for all the consequences of the charterer’s failure to load or unload within the laytime.”[3]

Facts

K Line is the owner of the M/V Eternal Bliss. K Line and Priminds entered into a contract of affreightment dated 30 July 2014 for nine separate voyages, each to be performed by tonnage to be nominated by K Line, with one laycan per month from February 2015 to October 2015 inclusive and otherwise on materially identical terms. The Eternal Bliss was the vessel nominated for the June 2015 laycan. 70,133 MT of soybeans were loaded at Tubarão, Brazil, and bills of lading were issued on 11 June 2015. The ship arrived at Longkou, China, on 29 July 2015, but due to port congestion and lack of storage space ashore for the cargo, discharge only commenced on 30 August 2015. Upon discharge, the soybeans exhibited significant moulding and caking. Claims were intimated by the cargo receivers and K Line later settled the receivers’ and their insurers’ claims at a total cost of around USD 1.1 million.[4]

In January 2019, K Line commenced arbitration proceedings against Priminds, seeking damages or an indemnity in respect of the costs it had incurred due to Priminds’ failure to discharge cargo within the agreed laytime. The parties identified the possibility of bringing a claim under s 45 of the Arbitration Act 1996 for a preliminary determination of a question of law. Such a claim was brought by K Line with Priminds’ agreement. The court therefore proceeded on the basis of assumed facts, which were, in summary[5]:

• The vessel was detained at the discharge port beyond the contractual laytime.
• The charterer was in breach of its obligation to discharge within the laytime.
• The vessel’s cargo deteriorated as a result of the detention beyond the laytime, not due to any fault on the shipowner’s part.
• The shipowner suffered loss and damage as a result, including by dealing with and settling the cargo claims brought by the cargo receivers[6].
• The shipowner’s losses were reasonably incurred, were suffered as a consequence of compliance with the charterer’s orders to load, carry and discharge the cargo, and were not caused by any separate breach of the charter or some causation-breaking event.

The charterparty was on a Norgrain 1973 form with amendments[7]. Neither the unamended form nor any of the amendments defined the word “demurrage”[8] – the charterparty provided simply that demurrage, if incurred, was to be paid by the charterer. Hence, as Males LJ, delivering the judgment of the Court of Appeal, stated, the case turned “on the proper meaning of the term “demurrage” as it is used in the charterparty”[9] and as that word “would be understood by those involved in the shipping business”[10].

The courts’ decisions

The only previous case directly in point was The Bonde[11], in which Potter J had decided that:

“where a charterparty contains a demurrage clause, then in order to recover damages in addition to demurrage for breach of the charterers’ obligation to complete loading within the laydays, it is a requirement that the plaintiff demonstrate that such additional loss is not only different in character from loss of use but stems from breach of an additional and/or independent obligation”[12]

In the present case, the High Court held:

• The “damage to the cargo is quite distinct in nature from, and is additional to, the detention of the ship, as a type of loss.”[13]
• Nevertheless, The Bonde was authority for deciding the point in the charterer’s favour[14] (since there was no breach of an additional obligation).
• But “the reasoning in The Bonde is clearly faulty” and The Bonde had been “wrongly decided and should not be followed”[15]. Specifically, Andrew Baker J held[16] that no case prior to The Bonde had decided that there was a requirement to demonstrate breach of “an additional and/or independent obligation” as well as demonstrating that the additional loss was “different in character from loss of use”. It followed that unliquidated damages for loss that was different in character from loss of use/ detention of the ship were recoverable.

The Court of Appeal held:

• Agreeing with the High Court, there was no case apart from The Bonde that decided this point as a matter of ratio. Further, The Bonde was (of course) not binding on the Court of Appeal, and the other authorities were inconclusive. In particular, the ratio of Reidar v Arcos[17] “on this issue is obscure [and it] is better to recognise that fact than to continue to search for a clarity which does not exist.”[18]
• Since the cases did not provide a decisive answer and there was no clear consensus in the textbooks, the court would approach the issue as one of principle. For seven reasons, enumerated at paras 53–59, the better view is that “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.”[19]
• In summary, those reasons were that:
  • an agreement that a liquidated damages clause only liquidates some of the damages arising from a particular breach is an unusual agreement which would need to be clearly spelt out;
  • statements in the case law that demurrage was intended to compensate the shipowner for loss of freight earnings were not decisive and were made in cases where the present issue was not being considered;
  • trying to define which “type of loss” was or was not covered by a demurrage clause would create uncertainty;
  • the shipowner’s construction was inconsistent with the expected allocation of risk, since it would usually be the shipowner who had insurance against cargo claims, not the charterer;
  • The Bonde had stood for 30 years, apparently without dissatisfaction in the market;
  • Andrew Baker J was wrong to say that the reasoning of The Bonde was “clearly faulty”; and
  • allowing the appeal would promote clarity and certainty, while leaving it open to individual parties or industry bodies to contract for a different result if they so desired.

Takeaways

The obvious takeaway from the case is that things are more or less back to the way they were prior to 7 September 2020, when the High Court’s judgment was handed down. The promises of “Eternal Bliss” for shipowners made in much of the commentary on the first instance judgment have proved short lived (pending any further appeal). Charterers can, perhaps, breathe a little more easily.

On a practical level, where a shipowner and charterer agree that the demurrage clause should only liquidate loss of prospective freight earnings, they should ensure that this is spelt out clearly in the charterparty. This will usually require an amendment to a standard form, since most standard forms refer simply to “demurrage”, without defining what damages it liquidates.

On a wider view, it is notable that, despite the High Court and Court of Appeal agreeing an analysis of liquidated damages clauses from other areas of law was of limited or no assistance[20], the end result in this case is to (re-)assert the basic similarity of a demurrage clause with, say, a liquidated damages for delay clause in a construction contract. This seems to be for practical, rather than doctrinal reasons: the commercial certainty created by the shipowner’s interpretation featured heavily in the Court of Appeal’s reasoning. To that extent, the decision is of a piece with the English courts’ increased focus on commercial practicalities over the past few decades.

[1] [2020] EWHC 2373 (Comm); [2021] Bus LR 213.

[2] [2021] EWCA Civ 1712.

[3] Paragraph 1 of the CA judgment.

[4] Taken, in the main, from paras 8–16 of the HC judgment.

[5] Paragraph 17 of the HC judgment and para 9 of the CA judgment.

[6] As Males LJ points out, “if, as is usually the case, the bills of lading were subject to the Hague-Visby Rules, the shipowner ought not on these facts to have been under any liability to the cargo receivers, particularly if the shipowner is able to make good its allegation about the high moisture content of the cargo. It may be, therefore, that the facts of the present case are unusual”: para 12.

[7] The demurrage clause, as amended, provided that: “Demurrage […], if incurred, to be declared by Owners upon vessel nomination but maximum USD 20,000 per day […] and shall be paid by Charterers […]”: para 13 of the HC judgment and para 6 of the CA judgment. In unamended form, the Norgrain 1973 demurrage clause provides: “Demurrage […], if incurred, to be paid at the rate of […] and shall be paid by Charterers […]”.

[8] Paragraph 28 of the HC judgment.

[9] Paragraph 5 of the CA judgment.

[10] Paragraph 17 of the CA judgment.

[11] [1991] 1 Lloyd’s Rep 136.

[12] [1991] 1 Lloyd’s Rep 136 at 142, as quoted in [2020] EWHC 2373 (Comm); [2021] Bus LR 213 at para 126(v).

[13] Paragraph 45, emphasis original.

[14] Paragraph 51.

[15] Paragraphs 127 and 128.

[16] Paragraph 126(v).

[17] [1927] 1 KB 352.

[18] Paragraphs 23 and 30.

[19] Paragraph 52.

[20] Paragraph 22 of the HC judgment and para 17 of the CA judgment.