Eternal Bliss did not last forever for shipowners Court of Appeal overturns decision narrowing scope of demurrage

The High Court decision last year in The Eternal Bliss changed the landscape for owners and voyage charterers by establishing that damages in excess of demurrage can be claimed by owners, even where the only breach was the failure to load and discharge within the laytime. Demurrage had previously been thought to be a complete code for damages caused by that breach. Judgment has now been handed down in the Court of Appeal overturning that decision.

In voyage charterparties, it is trite law that demurrage represents liquidated damages for the failure of the vessel to load and discharge within the agreed period, i.e. the laytime. However, this is where consensus ends.

By failing to give clarity on the issue, the venerable ­authority of Reidar v Arcos [1927] 1 K.B. 352 set the stage for arguments as to whether a separate breach of charterparty as well as damage of a different kind from delay was required in order to obtain damages in excess of demurrage. The members of the Court of Appeal in that case came to their decisions on varying grounds, leaving this question open.

Charterers invariably argued that demurrage is a complete code of damages for delay, and that in order to claim damages over and above the demurrage rate, it is necessary to show both a breach of a separate obligation (distinct from the obligation to load and discharge within the agreed laytime) and a different type of loss. This is the view set out in Voyage Charters, one of the leading texts on this subject.

However, that view had always been open to criticism. Owners would counter that demurrage is compensation for lost employment only, and therefore that damages in respect of a different type of loss can be recovered even where there is no separate breach of charterparty. Owners’ view has been supported by other leading academic texts, including Scrutton on Charterparties, and by the lack of clear authority making demurrage a complete and exclusionary code.

This has remained a hot button issue in circumstances where ­rapidly changing market rates can leave owners, and disponent owners, with a demurrage rate that does not adequately compensate them for delay.

High Court

The High Court decision of Mr Justice Andrew Baker in The Eternal Bliss ([2020] EWHC 2373 (Comm)) came down on owners’ side.

In doing so, the Judge rejected The “Bonde” [1991] 1 Lloyd’s Rep 136, a High Court case of 30 years’ standing, in which it had been held that it would be necessary to show not only damage of a different kind from delay but also breach of a separate obligation to the obligation to load and discharge within the agreed laytime.

In doing so, the Judge held that demurrage “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 the laytime, nothing more”.

It followed that owners could claim damages in addition to demurrage arising out of a single breach if they had suffered losses other than delay. In coming to this decision, the Judge relied on the reasoning of Lord Justice Bankes in Reidar v Arcos – a minority judgment which has come in for some criticism (particularly in an article by one of the authors of Voyage Charters, Michael Ashcroft QC).

Permission was granted to appeal to the Court of Appeal.

Court of Appeal

The Court of Appeal heard charterers’ appeal of the first instance decision at the end of October 2021, just over a year after judgment had been first handed down by the High Court. The Court of Appeal was made up of the Master of the Rolls, Geoffrey Vos, Lord Justice Newey and Lord Justice Males, and the hearing was live-streamed on various channels (including YouTube).
The Court of Appeal’s judgment was handed down less than a month later, on 18 November 2021, with Lord Justice Males delivering the judgment ([2021] EWCA Civ 1712) .

The Court of Appeal held that demurrage liquidates all damages arising from a charterer’s failure to complete cargo operations within the laytime, in breach of charter, for the following reasons:

  • It would be “unusual and surprising” to liquidate only some of the damages arising from a particular breach (paragraph 53 of the judgment). Such an arrangement would need to be clearly stated.
  • Demurrage is intended to compensate owners for the loss of prospective freight, “but that does not mean that this is all demurrage is intended to do (…) it is more accurate to say that the demurrage rate is the result of a negotiation between the parties where the loss of freight is likely to be one factor, but is by no means the only factor (…)” (paragraph 54).
  • The alternative would “inevitably be disputes as to whether particular losses are of the ‘type’ or ‘kind’ covered by the demurrage clause” which would lead to further litigation (paragraph 55).
  • The Bonde, overturned by the first instance decision in The Eternal Bliss, had stood almost unchallenged for over 30 years, and hence could be seen as settled law – itself a “powerful reason” not to overturn that decision (paragraph 57). The Court of Appeal further held that (unsurprisingly in light of the above) they did not accept the criticisms of The Bonde made by the High Court (paragraph 58).
  • The Court of Appeal therefore thought that allowing owners to claim damages in addition to demurrage would disturb “the risk inherent in the parties’ contract” which was already balanced between commonly insured losses on the one hand and demurrage on the other. In particular: “a charterer will not typically have insurance against liability for unliquidated damages resulting solely from a failure to complete cargo operations within the laytime. Rather, the charterer has protected itself from liability for failing to complete cargo operations within the laytime by stipulating for liquidated damages in the form of demurrage. Accordingly the consequence of the shipowner’s construction is to transfer the risk of unliquidated liability for cargo claims from the shipowner who has insured against it to the charterer who has not.
  • Finally, 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 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” (paragraph 59).

The Court of Appeal did not grant permission to appeal to the Supreme Court, but it is expected that the claimant owners will petition the Supreme Court directly.

Comment

In the months since the first instance decision in The Eternal Bliss, we have seen a sharp increase in claims from owners for sums in addition to demurrage. These often relate to attempts to pass on liability for cargo claims, which are usually brought against owners as carriers under the bill of lading contract in the first instance, and which often run into the millions of dollars. These claims previously struggled to find a separate breach (other than delay) to link the damages suffered. However, following the rejection of The Bonde, this obstacle had been cleared.

Now, however, the floodgates have firmly closed on those claims (at least until the Supreme Court weighs in). It follows that, per the Court of Appeal, the state of the law on demurrage now is that “if a shipowner seeks to recover damages in addition to demurrage arising from delay, it must prove a breach of a separate obligation” (paragraph 52).

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