This case raised interesting and important questions as to the nature and duration of an obligation to pay ‘container demurrage’.
The Carrier contracted with the Shipper to carry a total of 35 containers of raw cotton by sea from ports in the Middle East to Chittagong in Bangladesh. The Shipper sold the cotton to a consignee in Bangladesh called Regent Spinning Mills Ltd. Payment was by confirmed letter of credit.
Though the shipper was paid under the letter of credit the consignee never collected the goods which remained at the Port of Chittagong, still packed inside the containers and out of the control or ownership of the shipper.
The dispute was about whether the Shipper was liable to pay the Carrier a daily charge, described as “demurrage”, for each day that the containers remain unavailable to the Carrier because they are still being used to hold the goods.
The containers were supplied by the carrier and the judge found that at all material times the Carrier could have bought replacement containers for immediate delivery at Chittagong at a cost of US$3,262 per container or less.
The Carrier’s claim for ‘container demurrage’ was founded on clause 14.8 of its standard terms of carriage which were printed on the back of the bills of lading. Clause 14.8 provided:
“The Carrier allows a period of free time for the use of the Containers and other equipment in accordance with the Tariff and as advised by the local MSC agent at the Ports of Loading and Discharge. Free time commences from the day the Container and other equipment is collected by the Merchant or is discharged from the Vessel or is delivered to the Place of Delivery as the case may be. The Merchant is required and has the responsibility to return to a place nominated by the Carrier the Container and other equipment before or at the end of the free time allowed at the Port of Discharge or the Place of Delivery. Demurrage, per diem and detention charges will be levied and payable by the Merchant thereafter in accordance with the Tariff.”
Clause 14.9 provided:
“The Merchant shall redeliver, to a place nominated by the Carrier, the Containers and other equipment in like good order and condition, undamaged, empty, odour free, cleaned and with all fittings installed by the Merchant removed and without any rubbish, dunnage or other debris inside. The Merchant shall be liable to indemnify the Carrier for any and all costs incurred reinstating or replacing Containers and other equipment not returned in the condition as specified above, including the reasonable legal expenses and costs of recovering the costs incurred and interest thereon.”
Thus, clause 14.8 specified the time within which containers must be returned (and the consequences of non-compliance), while clause 14.9 specified the condition in which containers must be returned (and the consequences of non-compliance).
Clause 14.8 of the bill of lading terms did not state when, once demurrage begins to accrue in the specified daily amount, the Merchant’s obligation to pay demurrage would cease. On the face of it, therefore, the payment obligation was completely open-ended and continued indefinitely but the judge found that as demurrage is intended to be a charge for the detention of the containers by the Merchant, it is implicit that demurrage will cease to be payable if and when the containers are no longer detained.
He found that would occur if the Merchant’s obligations to unpack the goods and return the containers to the Carrier were belatedly performed or if the Carrier exercised its self-help remedy under clause 20.2 of the bill of lading terms to unpack the containers itself. It would also occur if the contract was brought to an end.
It was not in dispute that the period of free time provided for in clause 14.8 commenced on the dates mentioned earlier when the containers were discharged from the vessels at Chittagong.
An agreement recorded on the front of each bill of lading provided that the period of free time allowed at the port of destination was 14 days. The demurrage/detention charges specified in the tariff applicable to the containers were: US$10 per container per day for the first 10 days; US$18 per container per day for the next 10 days; and US$24 per container per day thereafter.
The term “Merchant” was defined in clause 1 of the bill of lading terms as including “the Shipper, Consignee, holder of this Bill of Lading, the receiver of the Goods and any Person owning, entitled to or claiming the possession of the Goods or of this Bill of Lading or anyone acting on behalf of this Person.” The definition of “Goods” includes the cargo but does not include containers where, as here, they are provided by the Carrier and are not owned or leased by the Merchant.
Clause 2 provided that every person defined as “Merchant” is jointly and severally liable to the Carrier for all the various undertakings, responsibilities and liabilities of the Merchant under or in connection with the bill of lading. Accordingly, the Shipper had all the liabilities of the “Merchant” under the contracts evidenced by the bills of lading, including any liability under clause 14.8 to pay demurrage.
On the Carrier’s case, demurrage started to accrue at the end of the free period of 14 days following the discharge of each lot. Thus, demurrage started to accrue for the 19 containers used to carry the first lot on 29 May 2011, for the 12 containers used to carry the second lot on 5 June 2011, and for the four containers used to carry the third lot on 13 July 2011. At the time when the action was begun on 10 June 2013 the amount of demurrage claimed by the Carrier was US$577,184. The Carrier’s case was that demurrage continued to accrue at the daily rate of US$840 (US$24 x 35 containers) so that as at 1 January 2015, the amount of the claim had reached US$1,090,424 plus interest from the date when each daily payment accrued. Thus, the demurrage claimed is now around 10 times the value of the containers.
The judge had to decide two issues; namely whether demurrage began to run at all and if it did, when – if at all – did demurrage cease to run.
The judge reached the following conclusions:
- Under the terms of the contracts of carriage, demurrage began to accrue in this case at the end of the agreed 14 days of ‘free time’ following the discharge of the containers at Chittagong.
- Thereafter, on the proper interpretation of the contracts, demurrage continued to accrue until (a) the Merchant took delivery of the containers and returned them to the Carrier, (b) the containers were unpacked by the Carrier in the exercise of its contractual right to do so, or (c) the contract was terminated.
- As the demurrage clause fixed the sum payable in respect of the Shipper’s breach of contract resulting from the failure to return the containers within the period of free time, there was no scope for any argument that the amount payable should be reduced either on the ground that the Carrier did not in fact suffer any financial loss after a particular date or on the ground that it would not have suffered such financial loss if it had taken reasonable steps in mitigation.
- By 27 September 2011 it was clear that the Shipper had repudiated the contracts of carriage because it was impossible for the Shipper to procure collection of the goods and the delay in collecting them had in any event become so prolonged as to frustrate the commercial purpose of the venture.
- The right of the Carrier to keep the contracts in force and claim demurrage in such circumstances depends on whether it had any legitimate interest in doing so. Given that the proper purpose of a demurrage clause is to quantify the damages payable for loss caused by the Merchant’s detention of the containers, it was illegitimate to keep the contract open for the sole purpose of claiming demurrage if it is clear that no such loss is being suffered.
- As at 27 September 2011, there was no basis for supposing that the Carrier was suffering any financial loss as a result of the detention of the containers at Chittagong, and that in these circumstances keeping the contracts alive when the only purpose of doing so could be to claim demurrage was wholly unreasonable.
- If he had concluded that the Carrier’s right to keep the contracts alive was unfettered, he should have held that the clause was unenforceable as a penalty because it is impossible to justify on compensatory grounds a provision which allows demurrage to be recovered indefinitely even when no reasonable Carrier would be suffering a loss.
In the result the judge found that the Carrier is entitled to be paid demurrage from the dates and at the rate claimed until 27 September 2011 but not beyond.