FOB sale – demurrage clause – the nature of demurrage as liquidated damages
A parcel of wheat was sold FOB Damman, Saudi Arabia.
The contract provided for demurrage, a guaranteed loading rate, sellers’ carrying charges if vessel arrived late and a right on behalf of the buyers to extend the delivery date.
The buyers exercised their right to extend the delivery date. At the same time, the sellers defaulted on the guaranteed loading rate.
The sellers were happy to pay demurrage but claimed carrying charges which they incurred as result of the extended delivery date.
The buyers’ case was that they were not liable for carrying charges incurred as result of the sellers’ failure to load at the agreed rate ie those charges incurred during the extra time taken to load (in the extended delivery period). The sellers contended that their failure to load at the agreed rate was compensated by demurrage and that their claim for carrying charges remained intact.
The GAFTA Appeal Board found for the sellers. Potter J dismissed the buyers’ appeal on a point of law.
The essential point was the nature of demurrage in this context – was it simply an indemnity to be paid by the sellers to cover the buyers’ liability as charterers of the carrying vessel or was it liquidated damages which extended to all the consequences of the sellers’ default on the loading rate.
If the former, the buyers’ argument that they suffered damages equal to the carrying charges for the sellers’ default (the circuity of action argument) would prevail. If the latter, the sellers’ argument that their default was purged by the payment of demurrage and that the carrying charges were a separate issue, would be good.
Potter J examined Aktieselskabet Reidar v Arcos (1926 Court of Appeal) and Suisse Atlantique (1967 House of Lords) and concluded that payment of demurrage blots out the breach of the loading rate obligation. Additional damages may only be recovered if they arise from the breach of a separate obligation ie separate from the load rate.
The reasoning is circular, determining consequences from standard nomenclature instead of focussing on the singular facts of the case and at the same time applying first principles.
This decision was found to be wrong in the Eternal Bliss (2020 Commercial Court).
The decision is an important milestone in the development of the law with regard to the nature of demurrage as liquidated damages, particularly in the context of FOB contracts.
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