Background

The Eternal Bliss was fixed to carry a cargo of soybeans from Brazil to China on an amended Norgrain form charterparty. On arrival at the discharge port, the vessel was delayed due to congestion and a lack of storage space for around 31 days, and demurrage was incurred at a fixed rate under the charterparty in the usual way.

Damage to the cargo came to light upon discharge, leading to a claim against the owners by cargo interests. The owners ultimately settled the claim for around US$ 1.1 million. The owners then sought an indemnity from the charterers in London arbitration, alleging a failure to discharge within the laytime but no other breach.

The charterers’ defence was that demurrage was the owners’ exclusive remedy for breach of the charter in failing to discharge within the laytime. However, the owners argued that they were entitled to be compensated for their liability to cargo claimants in damages, in addition to demurrage, because it was an entirely different type of loss never intended to be compensated by demurrage, which only liquidates damages for detention of the vessel as a freight-earning asset.

The parties agreed to refer the question of whether the owners were, in principle, entitled to recover damages in addition to demurrage to the High Court under section 45 of the Arbitration Act 1996.

One breach or two?

The Court of Appeal judgment in Aktieselskabet Reidar v. Arcos [1927] KB 352 has been the cause of nearly 100 years of debate as to an owner’s right to damages in addition to demurrage.

In that case, the shipowners were found to be entitled to damages for deadfreight as a result of the laytime being exceeded. However, in reaching that conclusion, the Lord Justices differed as to whether there had been one breach (a failure to load within the laytime) or two breaches (a failure to load within the laytime and a failure to load a full cargo), and ever since, there has been much debate as to whether the majority found there to have been one or two breaches.

Subsequently, and in particular following what was said about the judgments in Reidar v. Arcos in Suisse Atlantique Société d’Armement Maritime v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361, many commentators have reached the view that two breaches (i.e., a breach of the laytime plus a separate breach) are required in order for an owner to recover damages in addition to demurrage.

The 1991 case of The Bonde seemed then to settle the issue. There, Potter J considered the judgments in Reidar v. Arcos and held that for an owner to recover damages in addition to demurrage, it must show that (a) those damages were of a loss of a different character from loss of use, and (b) they resulted from a breach of an additional obligation. In other words, two breaches were needed. This, he said, was the correct reading of Reidar v. Arcos and the subsequent line of cases, but it is not a view that has been universally held since.

It therefore fell to the owners in the Eternal Bliss to persuade the Court to depart from the 30 year-old conclusion reached in The Bonde, itself dependent on the view taken of previous cases.

The judgment

The matter came before Mr Justice Andrew Baker, who recognised the significance of the question, stating at the outset: “From time to time, a case provides the opportunity to resolve a long-standing uncertainty on a point of law of significance in a particular field of commerce. This is such a case.”

The judge concluded that the correct reading of Reidar v. Arcos was that the majority had concluded that there were two breaches by the charterer. Importantly, however, he also said that the case was not authority for a requirement for two breaches to maintain a claim for damages in addition to demurrage.

That left the decision in The Bonde, which the judge concluded had been wrongly decided because it was based on “faulty reasoning” of the majority view in Reidar v. Arcos. He was therefore not bound to follow it and was free to consider the key question of what demurrage is intended to compensate as liquidated damages in order to answer the parties’ question.

He concluded that demurrage “serves to liquidate loss of earnings resulting from delay to the ship through failure to complete loading or discharging within the laytime” but that “it does not seek to measure or therefore touch any claim for different kinds of loss, whatever the basis for any such claim.” This had been the tentatively expressed view of only a minority of the authors of the leading textbooks in the field.

Accordingly, the Court said that there was no requirement for the owners to prove a separate breach (in addition to the failure to load or discharge within the laytime) to recover damages, in this case for a liability to cargo interests, this being a different type of loss not related to the use of the vessel.

Looking ahead

As it stands, this judgment brings some long-awaited certainty to a much debated question. It will be welcomed by owners – particularly those carrying perishable goods – who, through no fault of their own, may become exposed to cargo claims following discharging delays and who may have no realistic prospect of defending the claim due to the jurisdiction they are in, whatever the terms of the bill of lading.

Voyage charterers, on the other hand, now have a clear exposure to cargo claim liability if operational delays for which they bear responsibility lead to a deterioration of the cargo. They may take some comfort that any such claim against them will be subject to issues of causation and remoteness in the usual way.

An appeal of the judgment will be heard by the Court of Appeal in 2021. In granting the charterers permission to appeal, Andrew Baker J recognised that it would be desirable, for reasons of certainty, for the Court of Appeal to settle the issue, but said he did not believe the appeal had a real prospect of success. We shall have to await the judgment of the Court of Appeal to know whether he is correct.

Client Alert 2020-547