November, 2021 - THE ETERNAL BLISS: damages and demurrage – as you were?

The Court of Appeal has unanimously overturned the High Court decision in The Eternal Bliss [2021] EWCA Civ 1712, ruling that demurrage is an owner’s exclusive remedy for failure to complete cargo operations within laytime.

The underlying facts

The case arose from the carriage of a cargo of soybeans from Brazil to China under a voyage charterparty. As a result of congestion at the discharge port and a lack of storage space there was a 31-day delay to discharge. Demurrage was therefore incurred.

After discharge, the cargo receivers brought a claim against the owner for alleged damage to the cargo. The owner settled the claim for more than US$1 million and then brought a claim against the charterer for the settlement sum.

The owner claimed the settlement sum as damages arising from the charterer’s failure to discharge the cargo within laytime. The charterer resisted the claim on the basis that the owner’s sole remedy for that failure was the demurrage that had been incurred.

The issue in dispute

The question therefore was: is demurrage an owner’s only remedy for the exceeding of laytime?

The prevailing view had been that demurrage, being liquidated (i.e. pre-agreed) damages for the exceeding of laytime, was an owner’s sole remedy – without a separate breach by the charterer, the owner was only entitled to the accrued demurrage. The opposing view was that where laytime is exceeded and this causes a different type of loss to the owner in addition to the detention of the ship, the owner would be entitled to claim such loss in addition to demurrage.

Somewhat surprisingly, few English law cases had considered this question. The only relatively recent case was the 1991 High Court ruling in The Bonde [1991] 1 Lloyd’s Rep 136. In that case, the High Court found that demurrage was an owner’s exclusive remedy, and the owner’s claim for additional losses (additional charges under a sale contract) therefore failed.

However, being a High Court case, the decision in the The Bonde was not binding when the High Court came to consider The Eternal Bliss.

The High Court ruling

In the High Court, Baker J concluded that the The Bonde was wrongly decided and should not be followed, finding that demurrage was not the owner’s exclusive remedy. The owner’s additional claim for the settlement sum was therefore valid.

The judge reached this conclusion on the basis that demurrage was only intended to compensate an owner for the detention of the ship. Where the owner had suffered a different kind of loss in addition to the detention of the ship (in The Eternal Bliss, the settlement sum which the owner paid to the receivers) this could be claimed in addition to the demurrage.

The charterer appealed the judge’s decision to the Court of Appeal.

The Court of Appeal ruling

The Court of Appeal noted the difficulties and disagreements among judges and commentators regarding this issue. The court reviewed the available case law prior to The Eternal Bliss and considered that it was inconclusive.

Consequently, the court approached the issue as one of principle. The key question was: what would the parties have considered was covered by demurrage? The Court of Appeal decided that the parties would have intended demurrage to cover all types of loss arising from laytime being exceeded, so the owner’s additional claim for the settlement sum was not valid.

The Court of Appeal provided a number of reasons for its conclusion:

First, the court thought it would be surprising if the parties considered that liquidated damages (such as demurrage) would only respond to some of the damages arising from a breach. The benefit of agreeing liquidated damages is that it provides certainty in the event of a breach. If an owner was entitled to bring separate claims for the same breach, that certainty would be lost.

Second, the owner had argued that because the demurrage rate is often fixed by reference to freight rates, this showed that it was only intended to cover damages for detention (and not any other type of loss). The court noted this, but considered that it did not answer the question. Demurrage may be higher or lower than the relevant freight rate, and in any case a link to freight rates does not rule out demurrage being intended to cover other types of loss as well as detention.  

Third, if demurrage did not cover “other types of loss”, this would inevitably lead to disputes as to what types of loss are covered by demurrage, creating uncertainty.  . Owners and charterers would of course be free to agree in their charterparties that an owner might bring additional claims for other types of loss. However, absent such wording the parties would be taken to have agreed that demurrage is the owner’s sole remedy for the exceeding of laytime

Fourth, whereas an owner will usually have P&I Club cover against cargo claims arising as a result of laytime being exceeded, a charterer will not normally have insurance against unliquidated damages arising from a failure to complete cargo operations within laytime. That is why a charterer would seek to protect itself by having demurrage cover all losses arising from any such failure. The court concluded that to allow an owner to bring other claims against a charterer would “disturb the balance of risk inherent in the parties’ contract”.

Finally, the court considered that The Bonde had been correctly decided, and Baker J’s criticism of it was incorrect.

Conclusion

The Court of Appeal’s ruling has resolved the question of what demurrage does and does not cover. Owners and charterers can now be certain that absent specific wording, there can be no question of the owner claiming anything other than demurrage in the event that laytime is exceeded. It does not matter what kinds of loss the delay causes - demurrage covers any and all of them.

Such clarity is welcome, given the fertile ground for disputes that would have existed under the High Court’s approach. However, this may not last. It seems likely that the owner will appeal the Court of Appeal ruling to the Supreme Court, who could still decide that the High Court approach was correct. We may therefore not have heard the last of The Eternal Bliss.

As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.