K Line v Priminds Shipping HK - The Eternal Bliss
K Line Pte Ltd v Priminds Shipping (HK) Co Ltd (The “Eternal Bliss”)
Court of Appeal: Sir Geoffrey Vos (Master of the Rolls), Newey and Males LJJ:  EWCA Civ: 7 November 2021
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWCA/Civ/2021/1712.html
Simon Rainey QC and Tom Bird (instructed by Reed Smith LLP) for K Line (Owners)
Christopher Hancock QC and 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
The Court of Appeal, in overturning the High Court on a preliminary question of law, held that demurrage liquidates/satisfies all of the damages arising from Charterers’ breach in not discharging the vessel with the laytime, where that is the sole breach of the voyage charter contract. As a result, Charterers were held not liable to pay to Owners damages in addition to demurrage for a cargo claim that had been caused (on the assumed facts) by the delay in discharging.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, Mediator, LMAA Supporting Member and International Contributor to DMC’s Case Notes
The fuller facts and background to the case can be found in the background section of the High Court case note, which can be found here []
Males LJ, who allowed Charterers’ appeal for the following reasons, delivered the judgment of the Court of Appeal:
Having introduced the topic under consideration, the relevant charter terms, the assumed facts, the judgment of the High Court, an outline of the parties’ respective submissions, the nature of the issue and noted that demurrage is liquidated damages (that is, a pre-determined sum agreed in the contract that must be paid if a party breaks it), the Court sought to analyse the case law and practitioner works on the subject.
The conclusion reached on the case law was that the issue in contention had not been directly addressed and that it was inconclusive. But on balance, in the Court’s view (which differed from that of the High Court) the preponderance of those comments - which were not central to the decisions in the cases involved - did not indicate that demurrage serves to liquidate/satisfy the loss of earnings resulting from the delay and nothing more; if anything, the balance tipped the other way.
In particular, the Court thought that it was far better to recognise the fact that the reason for the decision in the case that is at the heart of the present controversy, namely Reidar v Arcos (fn.1), was obscure, rather than to continue to search for a clarity that the Court considered did not exist.
In turning to consider the practitioner works, the Court thought, overall, that little more could be said than that a number of highly experienced shipping lawyers, some of whom became distinguished judges, had taken different views about what the three judges in Reidar v Arcos decided and what the right answer ought to be.
On that basis, in the absence of a decisive answer in the cases and no clear consensus in the textbooks, the Court considered that the issue had to be approached as one of principle.
The Court concluded that, in the absence of any contrary indication in a particular charter, demurrage liquidates the whole of the damages arising from a charterer’s breach of a voyage charter in failing to complete cargo operations within the laytime and not merely some of them.
Accordingly, if a shipowner were to seek to recover damages in addition to demurrage arising from delay, it must prove a breach of a separate obligation. The reasons in outline for that conclusion were as follows:
First, while it is possible for contracting parties to agree that a liquidated damages clause should liquidate only some of the damages arising from a particular breach, that struck the Court as an unusual and surprising agreement for commercial people to make which, if intended, ought to be clearly stated. Such an agreement would forfeit many of the benefits of liquidated damages clauses that, in general, provide valuable certainty and avoid disputes. There was nothing in the charter terms and the standard definitions of demurrage to suggest the parties here had such an intention.
Second, whilst accepting that statements can be found in cases to the effect that demurrage is intended to compensate a shipowner for loss of prospective freight earnings suffered as a result of the charterers’ delay in completing cargo operations, that does not mean that this is all that demurrage is intended to do. Such statements were made in cases where the present issue was not being considered. It would be wrong to place weight on an assumption that, although it may sometimes be true, cannot be regarded as having anything like the status of a finding of fact as to general market practice.
Third, if demurrage is limited as the High Court suggested, such that demurrage does not apply to a different type or kind of particular loss, there will inevitably be disputes as to whether particular losses are or are not of the type or kind covered by the demurrage clause.
Fourth, as Newey LJ stated in argument, the cost of P&I insurance is one of the normal running expenses that the shipowner has to bear, which is intended to protect it against precisely the loss suffered in this case. The perception of the Court was that, conversely, a charterer will not typically protect itself from liability for failing to complete cargo operations resulting solely from a failure to complete cargo operations within the laytime. As such, a decision to the contrary seemed to disturb the balance of risk inherent in the parties’ contract.
Fifth, the decision in The “Bonde” (fn.2), in which the High Court held that demurrage in a sales contract liquidated all the damages for failing to load within laytime, such that carriage charges thereby arising were not also recoverable in addition to demurrage for the same sole breach. That decision had stood for some 30 years without apparently causing any dissatisfaction in the market and was treated as correctly stating the law in The “Luxmar” (fn.3), another sales contract case related to demurrage, even if that was not necessary for the decision.
Sixth, the fifth reason would have less force if they agreed with the High Court that the reasoning in The “Bonde” was clearly faulty; but the Court did not accept that criticism.
Finally, allowing the appeal produces clarity and certainty whilst leaving it open to individual parties or to industry bodies to stipulate for a different result if they wish to do so by drafting clauses stating expressly what demurrage covers.
This judgment appears to defy the expectations of many in the market and suggests that section 45 of the Arbitration Act 1996 cannot necessarily be put to good use in the absence of agreed facts or supplementary evidence related to general market practice, at which the second and final reasons above hint.
Whilst clarity and certainty are nominally achieved this is a lost opportunity to make a decision that reflects the reasonable expectations of many market users which would have left the law to develop naturally in the fullness of time to address the further questions that would follow from affirming the High Court.
As a counter-point to the final reason, whether or not a party is able to counter the common law position is wholly dependent on market economics, namely the supply of and demand for vessels, which is outside the direct control of parties.
While the Court of Appeal refused leave to appeal to the UK Supreme Court, it is hoped that there is an opportunity for this judgment to be challenged in future.
Footnote 1:  KB 352 (C.A.)
Footnote 2:  1 Lloyd's Rep 136
Footnote 3:  2 Lloyd's Rep 543 and  2 Lloyd’s Rep. 542 (C.A.)