This article is written by Snehil Balani, pursuing Certificate Course in International Commercial Arbitration and Mediation from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Table of Contents
Contract of Sale: It is an agreement between a seller and a buyer in which the seller agrees to deliver or sell something to a buyer for a set price that the buyer has agreed to pay.
Shipper: A shipper is a person who enters into a contract with a shipping line or a shipowner for the carriage of goods. The Hamburg Rules define a ‘shipper’ as “any person by whom or in whose- name or on whose behalf a contract of carriage of goods by sea has been concluded with a carrier, or any person by whom or in whose name or on whose behalf the goods are actually delivered to the carrier in relation to the contract of carriage by sea”.
It can be a buyer, a seller, or a third party (for e.g., a company) that solely arranges the transportation of the cargo.
Carrier: The Hamburg Rules define a ‘carrier’ as “any person by whom or in whose name a contract of carriage of goods by sea has been concluded with a shipper.”
Generally, it is a shipowner or a charterer (depending upon the type of chartering).
Contract of Carriage: It is the contract that is entered between the shipper and the carrier. The Hamburg Rules define a ‘contract of carriage by sea’ as “any contract whereby the carrier undertakes against payment of freight to carry goods by sea from one port to another”.
Bill of Lading: ‘Bill of lading’ is the formal document that evidences the contract of carriage between the shipper and the carrier. It details the type, quantity, and destination of the goods being carried. A bill of lading imposes legal obligations on the carrier to care for the goods.
Charterer: Charterer is the legal entity that hires/rents a ship from the shipowner for a voyage or a period of time, to carry its cargo. The charterer is the middleman between the shipper and the shipowner.
The role of a charterer can be understood through this example: if the vessel is to load 50000 tons of cargo, there could be 10 shippers, say each of them with 5000 tons of cargo. Alone none of the shippers would want to hire the entire vessel of 50000 tons capacity for their 5000 tons of cargo. So, they contact a charterer for transporting their cargo. The charterer’s job is to find a vessel for the cargoes they have from different shippers and maximize the space on the ship they plan to hire.
Charter-Party Agreement: It is the agreement that is entered between the charterer and the shipowner. Loading and discharging cargo from the ship within laytime is one of the essential obligations (among others) which is put upon the charterer through the charter party agreement.
Laytime: The time limit within which a charterer is supposed to load/discharge cargo at a port.
Demurrage refers to the amount which is paid by the charterers to the shipowner in case the charterers do not abide by the laytime and extend the process of loading/discharging the cargo at the port. BIMCO under laytime definitions for charter parties 2013 defines ‘demurrage’ as “an agreed amount payable to the owner in respect of delay to the Vessel once the Laytime has expired, for which the owner is not responsible.”
In this article, we will look into the legal nature of demurrage in the light of international principles and case laws.
Reason for payment of demurrage
The purpose of demurrage is compensation for the owners’ loss of the use of the vessel. Detention of the vessel prevents the owners from using the vessel as a freight-earning instrument. In addition to this loss, the expenses of the owner increase due to the increased time of the whole voyage. Expenses like wages of the crew, salaries of the professional staff on board, etc. also increase with the delay in the whole voyage.
On proof of detention exceeding laytime, the owners are entitled to the demurrage payments without proof of the loss they have suffered as a consequence. In Chandris v. Isbrandtsen-Moller Company, Devlin J. observed that the demurrage rate presumably reflects the parties’ estimate of the loss of prospective freight which the owners are likely to suffer if the ship is detained beyond the lay days.
Legal nature of demurrage : breach or penalty?
A glimpse at the case laws and tribunal decisions on demurrage make it clear that two schools of thought are present regarding the legal nature of demurrage. Different schools of thought also give different reasoning for the payment of demurrage to the shipowner. The school of thought are as follows:
1. Breach of Charter-Party: Some tribunals and courts consider demurrage as a breach of a contract because the charterer agreed to load/discharge the cargo within a stipulated time under the charter-party agreement. And as the charterer has failed in abiding by the contract, he is in breach of the charter-party agreement. Thus, damages are to be paid by the charterer for the breach of contract.
Lord Brandon in President of India v. Lips Maritime Corp. stated that “demurrage is a liability in damages to which a charterer becomes subject because, by detaining the chartered ship beyond the stipulated lay days, he is in breach of his contract.”
Lord Guest in Union of India v. Compania Naviera Aeolus SA (The Spalmatori) stated that “lay days are the days which parties have stipulated for the loading or discharge of the cargo, and if they are exceeded the charterers are in breach.”
2. Penalty for Detention of the Ship: Some courts and tribunals consider demurrage as a contractual penalty that is payable by the charterer as he detained the ship at the port extending the lay days agreed in the charter-party agreement. Another side of the same coin could be stating the detention as ‘use of the ship beyond laytime’.
In the case of Steel Young & Co. v. Grand Canary Coaling Co., Collins MR said that “payment of demurrage is merely a payment for the use of the ship and not damages for the breach of the charter party. Matthew LJ in the same case stated that “there is no ground for suggesting that the obligation to pay demurrage is by way of damages for breach of the charter party. It is merely a payment for use of the ship”.
When does the laytime begin?
There are three requirements for laytime to commence in the common law. In order to begin the laytime, the ship must be an “arrived ship”. If the three requirements mentioned below are satisfied then the ship is considered to be an “arrived ship” and the laytime for loading and discharging cargo commences.
The vessel must arrive at the agreed destination
The agreed destination is generally a berth, a dock, or a port. As ports are larger than berths or docks, in case of a berth or a dock the risk of delay to commence the load or discharge process is borne by the shipowner. This is because often the ports are congested and it takes a few weeks to months (after arriving at the port) for the ship to get a berth where cargo can be loaded or discharged. So, as the agreed destination is a berth, the laytime will only commence once the ship has arrived at the particular berth.
The scenario is vice-versa in cases where the agreed destination is a port. In such cases, the risk is borne by the charterer and if the port is congested or busy, it is the charterer’s liability to get the job done and the laytime can begin once the ship arrives at the port.
The vessel must be ready to load or discharge the cargo
The concept of ready to load/discharge is taken to be on a case-to-case basis, but generally speaking, the ship must be at the charterer’s disposal in order to commence the load and discharge of the cargo.
Kennedy J. in the case of Leonis Steamship Company Ltd. v. Rank Ltd. interpreted the concept of “arrived ship” in the ‘commercial sense’ and stated that “to be that area of the named port of destination on arrival within which the master can effectively place his ship ‘ at the disposal of charter’, the vessel herself being then, so far as she is concerned, ready to load, and as near as circumstances permit the actual loading spot, be it quay or wharf, or pier, or mooring, and in a place where ships waiting for access to that spot usually lie”.
Lord Reid in the case of Johanna Oldendroff gave a very wide meaning to the term ‘at the disposal of the charterer’ by stating that “If the vessel lies in the usual waiting place in the port, the vessel is presumed to be effectively at the disposal of the charterer”. This interpretation might act against the charterers as the ship might not be ready to load or discharge at its designated berth but is presumed to be so even when it is not and is just at the usual waiting place.
The ‘notice of readiness’ must be given to the charterers or their agents
Notice of readiness is a notification that is given by the shipowner to the charterer that the ship is ready to load and discharge cargo. The notice of readiness can only be given to the charterer once the above two conditions are met.
Generally, there is a 6-hour time given to the charterer after the notice of readiness is given. The laytime ‘usually’ begins after 6 hours from the time when the notice of readiness is given to the charterer by the shipowner.
Where does the dispute arise?
This is the stage where arbitration steps in and dispute resolution commences. Arbitration has played a significant role in waterborne commerce. Today, this mode of settling disputes is extremely popular in the maritime sector.
The reasons due to which dispute regarding demurrage occurs between the parties are manifold. But a glimpse of the following cases will help in better understanding of how situations practically go wrong due to which disputes arise.
Commencement of laytime
One of the most common disputes regarding demurrage is with respect to the commencement of the laytime. For e.g., in the case of Ets Soules v. Intertradax, the ship arrived at the port but was unable to berth for 13 days as the port was congested. So, the issue arose whether the laytime began when the ship arrived at the port or when it arrived at the berth. And finally, it was held that the laytime did not run against the charterer whilst the ship was waiting to berth as the ship was not at the disposal of the charterer to load/discharge the cargo.
Invalid notice of readiness
Dispute regarding invalid notice of readiness arises when the shipowner issues the notice of readiness even when the 2 conditions precedent to it i.e., arrival at the agreed destination and ready to discharge/load, are not met. For eg. in the Agamemnon case, the notice of readiness was tendered to the charterers when the ship was 170 miles away from the port. The premature notice was held to be invalid and the reasoning for the judgment was taken from Mexico I and stated that Mexico I made it clear that when a notice is to be given in order to start laytime running, this must be a valid notice and not an ‘inchoate’ or ‘delayed action device’ seeking to commence laytime automatically on the happening of a certain event.
If an invalid notice of readiness is tendered to the charterers and the charterers do not object to it and continue the course of load/discharge as if the notice was valid, then even an invalid notice can be considered to be valid notice of readiness. This was first seen in the case of Survey Shipping Company Ltd. v. Compagnie Continentale (France) S.A. here the court of appeal held that “the notice was supposed to take place after clearing customs and the fact that it got accepted without being fully “valid” commenced laytime the next working day”.
Once on demurrage, always on demurrage
The phrase ‘once on demurrage, always on demurrage’ has been very clearly explained by Scrutton on Charter-parties as “When once a vessel is on demurrage no exceptions will operate to prevent demurrage continuing to be payable unless the exceptions clause is clearly worded so as to have that effect.”
This principle was reiterated by Hobhouse J. in the case of The Forum Craftsman and also by Lord Reid in The Spalmatori.
The repercussions of this phrase can be ascertained from the case of Ricardo Trading v. Spliethoff’s where a vessel was at port 1 when her lay-time expired and it was agreed that she would divert to port 2 in order to save time due to congestion at port 1. The court held that the shipowner was entitled to the demurrage during the passage of the vessel from port 1 to port 2. As the demurrage started at port 1, it continued till the cargo was discharged at port 2, including the time of the voyage from port 1 to port 2.
Another example of the phrase can be seen in the case of Bewind-White Coal Mining Co. v. Solleveld. In this case, the court held that demurrage ran continuously after lay-time expired, even during a two and one-half months waiting time when all loading of coal had been placed under a government embargo.
Also, once demurrage starts to accrue due to no fault of the ship-owner and subsequently, the vessel is further delayed due to the ship owner’s fault, demurrage will keep accruing; the chain of causation cannot be said to have been broken.
It is quite paradoxical to see that the phrase states ‘no exceptions shall apply once demurrage begins’ and eventually it has certain exceptions that apply and demurrage cannot be accounted for under these circumstances. The author of Benedict on Admiralty opines about the maxim that “although this maxim once received almost unquestioning acceptance, its strength has been eroded in recent years”.
Mentioned under the charter-party agreement
This exception is even mentioned in the meaning of the phrase that demurrage shall continue until there is a ‘clearly worded exception’ under the charter-party agreement to that effect which states that demurrage shall not occur in the following circumstances. For e.g., demurrage cannot occur on public holidays, Sundays, hurricanes, strikes, etc. is mentioned in the charter-party agreement. This exception was stated in the case of Union of India v. Compania Naviera Aeolu as “there is no insuperable difficulty in providing for relief from demurrage liability if either loading or discharging after the lay-days have gone by is prevented by some stipulated cause.”
The demurrage will not occur in circumstances where the delay was caused by the owner’s fault. The arbitral panel in the case of The Cities Service Valley Forge did not apply the maxim as the delay was caused due to the fault of the shipowner. The same was done by the England and Wales H.C. in the case of Alphapoint Shipping Ltd. v. Rotermamfert Nergv Ltd. & anr.
U.S. court in the Sun Oil Company case highlighted ‘three exceptions’ under the ASBATANKVOY form (one of the most widely used tanker charter-party forms in the world) and stated that demurrage will not occur under these three conditions. The three conditions are:
- Six-hour free time: This is the time given to the charterers after the notice of readiness is issued by the ship owners to commence the load/discharge of cargo. The laytime begins after 6 hours have been passed since the issuance of the notice of readiness.
- Time spent shifting: This refers to the time spent in shifting the vessel from the anchorage to the berth. This time was also excluded while calculating the demurrage.
- De-ballasting: Ballast or ballast water is seawater carried by vessel in its ballast tanks to ensure its trim, stability and structural integrity. The process of removing this water from the ship is known as de-ballasting. The time required to de-ballast a ship is not included while calculating the demurrage.
Scope of damages
Demurrage is paid by the charterer as ‘liquidated damages’ to the shipowner for the delay beyond the laytime. Liquidated damages are damages whose amount the parties to a contract quantify and designate during the negotiation of a contract for the non-breaching party to receive as compensation upon a specific breach (e.g., non-performance, late performance or inadequate performance).
But an issue arises when due to the delay on part of the charterer the shipowner occurs extra losses beyond those calculated under demurrage. Can the shipowner seek damages in addition to the demurrage?
There are various contrasting judgments regarding the question posed above. The crux of the different stands by different courts is given below.
Breach in addition to detention of the vessel
The availability of damages in addition to demurrage in cases where the charterer has committed more than one breach is very clear and the ‘shipowners are entitled to damages in addition to demurrage’ in such circumstances.
The house of lords in the case of Aktieselskabet Reidar v. Arcos Ltd. held that “The provisions as to demurrage quantify the damages, not for the complete breach, but only such damages as arise from the detention of the vessel … If, however, for reasons other than the shipowner’s default, the charterer becomes unable to do that which he contracted to do … the breach is never repaired, the damages are not completely mitigated, … the shipowner may recover the loss that he has incurred in addition to his liquidated damages or his unliquidated damages for detention.”
Also, in The Bonde case the court stated that “where a charter-party 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 lay days, it is a requirement that the plaintiff demonstrates that such additional loss is not only different in character from loss of use but stems from the breach of an additional and/or independent obligation.”
Thus, the shipowner is entitled to damages in addition to demurrage if he can prove that “a breach additional to or separate from that of failing to load within the lay days and/or at the agreed rate of loading, so as to establish a separate right not circumscribed the right to demurrage.”
Single breach, multiple damages?
Earlier, the law regarding damages in addition to demurrage in cases where the charterer has committed only a single breach, i.e., detention of the vessel beyond laytime was laid down in the case of Inverkip Steamship Co. Ltd. v. Bunge & co. In this case, the court held that “where the only consequence of the breach is detention and the damages for detention are agreed in the charter party, the owners must accept compensation at the fixed rate in respect of the detention and can recover no more”. The same was affirmed in The Luxmar case where the court stated that “where a demurrage figure is contained in a contract it is intended to cover loss for the delay and general damages for delay cannot be awarded as well”.
But recently, another view was seen in the Eternal Bliss case (2020) where Andrew Baker J. took an opposite view and held that it is unnecessary to prove a separate breach in order to recover damages in addition to the detention of the ship, i.e., demurrage, and proceeds to find that “Agreeing a demurrage rate 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. Where such delay occurs, the demurrage rate provides an agreed measure by which the parties are bound for the owner’s claim for damages for detention, but it does not seek to measure or therefore touch any claim for different kinds of loss [emphasis added], whatever the basis for any such claim”.
However, the charterers (defendants) have been granted permission to appeal the judgment to the Court of Appeal, thus, for now, Eternal Bliss cannot be said to be the rule of law.
Duration until which the demurrage is calculated : when does the clock stop ticking?
The duration for calculation of demurrage will end in the following circumstances:
Completion of loading/discharging
This is the most common way in which the duration for calculation of demurrage finally comes to an end and the clock stops ticking against the charterer. Once the agreed cargo (between the shipowner and the charterer) is loaded/discharged and the work is completed on part of the charterer, the clock stops ticking and the demurrage is calculated until that point in time.
Charter party agreement provides for a limited period on demurrage
This is not a very common practice nowadays, but in some instances, the charter party provides for only a limited period for demurrage, just like lay days. So, in case of delay, first, the lay days come to an end, then the demurrage days also come to an end, after the time period for demurrage comes to an end, then, after the end of the period of demurrage, the ship owners can seek damages for “undue detention”.
Bankes LJ in the case of Aktieselskabet Reidar v. Arcos Ltd. mentioned demurrage as the damage for “allowed detention” and the period beyond the period of demurrage (in case of a limited period of demurrage) as “undue detention” and stated that “It will be noted that the learned judge draws the distinction between the “allowed detention”, and the “undue detention”. It may well be that where a charter party … provides for a given number of days … on demurrage, and days stipulated for by the merchant on demurrage are just lay days, but lay days that have to be paid for, are well-founded.”
The frustration of Charter-Party Agreement
Frustration occurs when, without default of either party, the performance of a contract is rendered impossible or changes the party’s principal purpose for entering into the contract so as to render it “radically different”.
A charter may be frustrated if the performance of the charter is sufficiently delayed. The main factor is whether the interruption will be, (or likely to be) substantial in relation to the remainder of the charter period. The type of delaying events capable of causing frustration are: Requisition war, strikes, ice.
The court in The Luxmar case applied a principle of charter-party law that “although the charterers had failed to load within laytime, a right to terminate would only arise upon the expiry of a ‘frustrating time’ and until then, the remedy was limited to demurrage”.
Thus, the period for the calculation of demurrage will end at the expiry of the ‘frustrating time’ i.e., the frustration of the charter-party agreement.
Demurrage clause in contracts of sale
The demurrage clause is often included under a sale contract between the buyer and the seller. In these circumstances, the charterer of the vessel is not a third-party, but one of the parties to the contract i.e., the seller or the buyer. The reason for incorporating a separate demurrage clause under the sale contract in addition to the one already incorporated under the charter-party agreement can be understood in the following way:
Let us consider that the parties had a “FOB (Free on Board) Origin contract” and the seller was the charterer. In a ‘FOB origin contract’, the seller’s obligation and responsibility towards the cargo ends once the cargo is on board and the risk is shifted to the buyer after the onboarding until the cargo arrives at the destination port. Further, it is the responsibility of the buyer to discharge the cargo once it arrives at the destination.
As the seller is the charterer in the present case, he would not want to pay demurrage to the shipowner in case the buyer delays in discharging the goods at the destination port. This is the reason; a demurrage clause is inserted in the sale contract in order to shift the liability of demurrage (for discharging the cargo) upon the buyer.
Let us take for instance that buyer was the charterer in the above example, then the buyer would not want to pay the demurrage to the shipowner in case the seller fails in his obligation to load the cargo at the starting port. So, a clause in the sale contract will be added to pass on the liability of demurrage (for starting port) upon the seller.
Sale Contract v. Charter-party agreement
Sometimes a conflict arises between the demurrage clauses contained under the sale contract and the charter-party agreement as they provide different details. For example, both of them provide a different rate for the calculation of demurrage. So, which one will prevail in such circumstances or is there a midway?
The English courts have consistently held that these clauses must be given an interpretation best to coincide with the commercial sense.
For e.g., in the case of Fal Oil v. Petronas a similar situation arose where the sale contract and charter party were inconsistent with each other and provided for different rates for calculation of demurrage and also different laytime. The majority held that although much depended on the precise wording of laytime and demurrage clause in the sale contract, especially the presence of cross-reference to or explicit incorporation of the charter party, the clause in the “sale contract should be treated as an independent clause”.
Treating the sale contract as an independent clause from the charter-party agreement means that the liability of demurrage imposed under the sale contract is independent of the liability imposed under the charter-party agreement and the sale contract does not act as an indemnity against the liability incurred under the charter-party agreement.
Thus, the default position is very aptly explained in the case of OK Petroleum v. Vitol Energy that “a laytime and demurrage clause in a sale contract liquidates damages caused by delay as between the sellers and buyers: it does not indemnify them against liabilities incurred towards the shipowner under a different clause with a different contract (charter-party contract)”.
The origins of maritime arbitration can be traced as far back as the voyages of ships owned by Phoenicians carrying the cargo of Greek traders. Ever since arbitration has played a significant role in waterborne commerce. Today, this mode of settling disputes is extremely popular in the maritime sector.
Maritime arbitration has witnessed great success in the field of arbitration and has pushed international maritime trade to further progress and prosperity. Today arbitration has become a basic legal system for solving disputes both domestically as well as internationally.
Demurrage claims under international maritime arbitration also form a healthy number of disputes for which law is progressing day-by-day and adapting to the needs of the present time. Development of law is a constant process and this article was intended to give a glimpse of the overall scenario regarding demurrage claims in international arbitration.
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