K Line Pte Ltd v Priminds Shipping (HK) Co Ltd - The Eternal Bliss

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DMC/SandT/21/09

England

K Line Pte Ltd v Priminds Shipping (HK) Co Ltd (The “Eternal Bliss”)

English Commercial Court: Andrew Baker J: [2020] EWHC 2373 (Comm): 7 September 2020

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2020/2373.html

Tom Bird (instructed by Reed Smith LLP) for K Line (Owners)

Alexander Wright (instructed by Penningtons Manches Cooper LLP) for Priminds (Charterers)

CONTRACT OF AFFREIGHTMENT: CHARTERERS IN BREACH OF OBLIGATION TO DISCHARGE VESSEL WITHIN LAYTIME AND LIABLE TO PAY DEMURRAGE: CHARTERERS NOT IN BREACH OF ANY OTHER OBLIGATION –“SOLE BREACH”: DELAY LED TO CLAIM BY RECEIVERS AGAINST OWNERS FOR CARGO DETERIORATION: WHETHER OWNERS ENTITLED TO RECOVER SUM PAID TO SETTLE CARGO CLAIM AS DAMAGES OR UNDER IMPLIED INDEMNITY AGAINST CHARTERERS: WHETHER DEMURRAGE PAID BY CHARTERERS THE EXCLUSIVE REMEDY FOR CONSEQUENCES OF BREACH: DETERMINATION OF PRELIMINARY QUESTION OF LAW UNDER SECTION 45 OF THE ARBITRATION ACT 1996

Summary

The High Court, in answering the preliminary question of law, held that, where Charterers were in breach of the voyage charter solely by reason of their failure to discharge the cargo within the laytime and the prolonged delay did not amount to a repudiation of the charter, Owners were, in principle, entitled to claim compensation by way of damages from Charterers for the cost incurred by Owners to settle Receivers’ cargo claim because demurrage (i) was not the exclusive remedy for the sole breach, and (ii) did not encompass loss of an additional and different kind from that for which demurrage compensated (for detention to the vessel itself as a freight-earning chattel), and there was no need at law to prove an additional and different (separate) breach of the charter to claim unliquidated damages for such loss.

The above conclusion relied on assumptions (that were yet to be proven in the arbitration) that (a) but for the failure to discharge the cargo within the laytime the cargo would not have deteriorated, (b) Owners were not at fault for the cargo deterioration having arisen, and (c) Owners had reasonably settled the claim for the deterioration of the cargo.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, LMAA Supporting Member and International Contributor to DMC’s Case Notes

Note: this decision is presently (30 March 2021) under appeal, DM-C.

Background

K Line and Priminds entered into a contract of affreightment on the basis of the 1974 amended Norgrain form for a number of voyages to carry grain cargoes from South America to Asia, which included, amongst other terms, clause 18, which set a contractual discharge rate of 8,000 MT per weather working day Saturday, Sunday and Holidays excepted even if used (Friday 1700 hours to Monday 0800 hours not to count), thus determining the laytime allowed and fixing the point at which the chartered vessel went on demurrage at the discharge port.

The bulk carrier “Eternal Bliss” was nominated and accepted for one of the voyages, on which she loaded about 70,000 MT of soybeans at Tubarao, Brazil for discharge at Longkou, People’s Republic of China. On her arrival there, the port was congested and there was a lack of storage space ashore, which meant the vessel was kept at anchorage for about 31 days.

Upon discharge, the cargo exhibited significant moulding and caking throughout the stow in most of the cargo holds, which led to a USD6 million letter of undertaking being put up as security for Receivers’ cargo claim, in return for their refraining from arresting the vessel.

K Line later settled Receivers’ claim at a total cost of USD1.1 million and commenced arbitration in London, in accordance with the dispute resolution clause in the contract of affreightment, seeking damages or an indemnity in respect of the cost, in which the only allegation of breach of contract made against Priminds was that it failed to discharge the cargo at the rate specified in clause 18.

The possibility of taking the question of law (below) as a preliminary issue was identified, and the parties in due course brought it straight to the High Court under section 45 of the Arbitration Act 1996. For the purpose of answering the question of law, the following facts, which were to be determined in the arbitration in due course, were assumed:

(a) but for the failure to discharge the cargo within the laytime the cargo would not have deteriorated;

(b) Owners were not at fault for the cargo deterioration having arisen; and

(c) Owners had reasonably settled the claim for the deterioration of the cargo.

Judgment

The judge first outlines the facts (above) and identified the preliminary question of law for determination as:

"Where a voyage chartered vessel has been detained at a discharge port beyond the laytime, and such delay has caused deterioration of the cargo and led to the vessel’s owners suffering loss and damage and being put to expense (including in the form of liabilities to third parties), are the owners in principle entitled to recover from the charterers, in addition to any amounts payable as demurrage, such loss/damage/expense by way of:

(a) damages for the charterers’ breach of contract in not completing discharge within permitted laytime; and/or

(b) an indemnity in respect of the consequences of complying with the charterers’ orders to load, carry and discharge the cargo?”

In order to determine whether Owners were entitled to claim compensation for the cargo claim from Charterers, the judge had to consider the long-standing (90-year) debate about whether a separate (additional and different) breach of the charter must be proven (aside from the failure to complete cargo operations within the laytime), in order to recover a loss that is additional to and different in kind from that for which demurrage compensates.

That debate arose in view of the generally accepted conclusion that an additional and different breach of contract was necessary if unliquidated damages were to be recoverable. This conclusion was based on the majority opinion of the Court of Appeal in Aktieselskabet Reidar v Arcos (fn.1). In that case, the Court of Appeal had held that the deadfreight claim, which arose as the delay to loading meant less cargo had to be loaded to comply with winter load line regulations, had itself arisen out of a separate breach, by failing to load a full and complete cargo (Sargant and Atkin LLJ being the ‘two breach’ majority – Bankes LJ expressing a contrary ‘one breach’ view – but all unanimously dismissing the charterer’s appeal).

The judge undertook the difficult task of addressing this issue by reference to and through a detailed analysis of the plethora of judgments and practitioners’ works touching upon the issue in contention.

In summary, the judge concluded that Reidar v Arcos was not authority for the proposition that Bankes LJ’s ‘one breach’ approach was wrong as regards the scope and effect of the demurrage clause. That was because the conclusion of the majority, that there was in that case a separate breach which was causative of the loss, sufficed for the owner’s deadfreight claim to succeed; it was not a conclusion that such a breach was necessary. That question only arose on the minority approach of Bankes LJ that there was no additional and different breach, and he decided it in favour of the owner (i.e. a separate breach was not necessary). As such, the question did not arise for the majority, and they did not decide it or express a view on it, whether agreeing or disagreeing with Bankes LJ. That analysis and conclusion, in effect, meant that the answer to the point of law in contention had not been decided by Reidar v Arcos and could, therefore, be decided at first instance by the High Court, subject to the doctrine of precedent.

Accordingly, the judge next had to consider The “Bonde” (fn.2), in which Potter J had come to the opposite conclusion. The judge considered that The “Bonde” was wrongly decided because Potter J came to his conclusion on the faulty basis that Reidar v Arcos meant (and so had decided) that a separate breach was in law required before damages for an additional and different head of loss may be recovered. However, for the reasons explained by the judge as summarised above, that was simply not the case.

Accordingly, the judge determined the question of law in Owners’ favour, entitling them to recover the damages claimed.

Comment

This judgment is a rare example of section 45 of the Arbitration Act 1996 being put to good use, leading to the High Court making a determination on a point of law early in the case. More often, appeals on questions of law are made from final arbitral awards, which only indirectly and less definitively answer the questions of law raised, as they are addressed from the perspective of whether or not the tribunals had made clear errors of law, which is not the same thing.

The very detailed and careful analysis, and end result, of this judgment has a strong sense of being correct, although there is now pending an appeal before the Court of Appeal, on which a further case note will follow in due course.

On the presumption that the judge is correct, one way or the other, the type of questions that readily come to mind, in a one breach scenario of this kind, are does demurrage also compensate for: (1) additional port charges incurred during the period of detention; and (2) the consequences of fouling from marine growth on the hull during the period of detention (e.g. both the time and expense involved to inspect and clean the hull, if required, and any underperformance claims that may arise before the cleaning can be done)?

To the extent that the charter does not allocate the expense of port charges to the charterer (as is sometimes the case), the anwer to (1) is likely “yes”, as port charges are part and parcel of the time lost; and, the answer to (2) is likely “no”, as the consequences of the hull fouling are separate from the time lost itself, just like the cargo claim.

What follows from (1) is that any cost incurred by the owner as part and parcel of earning the demurrage during the time lost is likely to be consider as compensated for by the demurrage.

However, it is less clear whether more specific circumstances or less common consequences would fall within the scope of what demurrage usually or ordinarily compensates for, given issues related to causation, assumption of responsibility, remoteness and mitigation.

Also, while the consequences of hull fouling, which is readily to be expected from prolonged stays in warmer waters, seem unlikely to be compensated for by demurrage, this does not necessarily mean that additional compensation due to extra time, expense and loss flowing from fouling, due solely to the charterer’s breach of the obligation to load or discharge cargo within the laytime, is recoverable, as the law on this topic related to time charters demonstrates.

As is evident from the above, if the Court of Appeal affirms the High Court judgment, and if no contrary view is provided by the UK Supreme Court, then solving this issue alone raises a whole range of subsidiary questions that will, in the fullness of time, need to be worked out.


Footnote 1: [1927] KB 352 (C.A.)

Footnote 2: [1991] 1 Lloyd’s Rep. 136