On 2 August 2023, the Fifth Arbitrazh Court of Appeal (Vladivostok, Russia) considered the claim of SDS Shipping LLC against Vostok Trans Logistic LLC for the recovery of damages in the amount of 2.3 million Roubles and 43,000 US dollars as a penalty.
The parties entered into a sea charter agreement. The freight rate was USD 165,000 for the entire cargo, the demurrage rate was USD 8,000 per day or proportionally. Payment should be made in Russian Roubles at the exchange rate of the Central Bank of the Russian Federation on the day of payment. In case of late payment of freight and other payments, the parties provided for a penalty in the amount of 0.1% for each day of delay.
The respondent delayed the payment of the freight, and the claimant brought an action for the recovery of the amount of the exchange difference that arose on the date of payment, as well as a claim for the recovery of a penalty for both freight and demurrage.
At first instance, the claims were satisfied in part. The claimant was disappointed with the decision and appealed to the Court of Appeal.
The Court of Appeal resolved the issue of whether the exchange rate difference is a risk of the claimant's business activities or is it a loss caused by the respondent's actions, whether the penalty agreed upon by the parties can compensate for the consequences of late payment, including the exchange rate difference. The court determined that the losses claimed for recovery are the usual consequence of the breach of obligation committed by the respondent, and therefore the causal relationship between the losses incurred by the claimant and the breach committed by the respondent is obvious. The court decided that the respondent should pay an exchange difference in the amount of 2.3 million Roubles.
The second question that the court decided was whether demurrage is a measure of civil liability or is it compensation for the costs of daily maintenance of the vessel during its idle period and an independent obligation of the charterer. The court determined that demurrage is a measure of liability and charging a penalty for demurrage is impossible and unacceptable.
The court clarified that demurrage is paid during counter lay time, that is, the basis for the obligation to pay demurrage is the excess by the charterer of the agreed lay time of loading, which is an extraordinary, not expected dynamics of legal relations.
Consequently, the payment of demurrage is a protective obligation aimed at satisfying the property interest of the claimant affected by the violation of the legal relationship associated with the usual actions of its participants.
Comments
What damages are the usual consequence of certain violations is an important issue that can only be established in judicial practice. In this decision of the Russian court, the amount of the exchange difference is attributed to losses that have a causal relationship with late payment, which is good news for market participants. Such decisions can be relied upon to prove which losses are ordinary, foreseeable, and which losses are within the liability of the debtor.
In Russian law, there is a different approach to the legal nature of demurrage. In some court decisions, the courts refer to demurrage as a sum payable by reason of the shipping contract (or charterparty) for detaining the ship at the port beyond the agreed time and an independent obligation of the charterer, in other court decisions, demurrage is called a penalty, a sanction for violation of a charter agreement.
The second approach is closer to the French understanding of the nature of demurrage. From this approach, it follows that a penalty cannot be charged on demurrage, but in addition to demurrage, it is possible to demand compensation for expenses caused by the ship's demurrage.
The third approach is peculiar to English law, and in English law demurrage is considered as damages for breach of contract (damages agreed in advance, covering all costs).
In determining the legal nature of demurrage, it is not so much what is behind it, but it is important that court decisions on this issue are predictable and consistent. If the law is predictable, then this will favorably affect the development of the economy and the relations of the parties to the contract.
The parties entered into a sea charter agreement. The freight rate was USD 165,000 for the entire cargo, the demurrage rate was USD 8,000 per day or proportionally. Payment should be made in Russian Roubles at the exchange rate of the Central Bank of the Russian Federation on the day of payment. In case of late payment of freight and other payments, the parties provided for a penalty in the amount of 0.1% for each day of delay.
The respondent delayed the payment of the freight, and the claimant brought an action for the recovery of the amount of the exchange difference that arose on the date of payment, as well as a claim for the recovery of a penalty for both freight and demurrage.
At first instance, the claims were satisfied in part. The claimant was disappointed with the decision and appealed to the Court of Appeal.
The Court of Appeal resolved the issue of whether the exchange rate difference is a risk of the claimant's business activities or is it a loss caused by the respondent's actions, whether the penalty agreed upon by the parties can compensate for the consequences of late payment, including the exchange rate difference. The court determined that the losses claimed for recovery are the usual consequence of the breach of obligation committed by the respondent, and therefore the causal relationship between the losses incurred by the claimant and the breach committed by the respondent is obvious. The court decided that the respondent should pay an exchange difference in the amount of 2.3 million Roubles.
The second question that the court decided was whether demurrage is a measure of civil liability or is it compensation for the costs of daily maintenance of the vessel during its idle period and an independent obligation of the charterer. The court determined that demurrage is a measure of liability and charging a penalty for demurrage is impossible and unacceptable.
The court clarified that demurrage is paid during counter lay time, that is, the basis for the obligation to pay demurrage is the excess by the charterer of the agreed lay time of loading, which is an extraordinary, not expected dynamics of legal relations.
Consequently, the payment of demurrage is a protective obligation aimed at satisfying the property interest of the claimant affected by the violation of the legal relationship associated with the usual actions of its participants.
Comments
What damages are the usual consequence of certain violations is an important issue that can only be established in judicial practice. In this decision of the Russian court, the amount of the exchange difference is attributed to losses that have a causal relationship with late payment, which is good news for market participants. Such decisions can be relied upon to prove which losses are ordinary, foreseeable, and which losses are within the liability of the debtor.
In Russian law, there is a different approach to the legal nature of demurrage. In some court decisions, the courts refer to demurrage as a sum payable by reason of the shipping contract (or charterparty) for detaining the ship at the port beyond the agreed time and an independent obligation of the charterer, in other court decisions, demurrage is called a penalty, a sanction for violation of a charter agreement.
The second approach is closer to the French understanding of the nature of demurrage. From this approach, it follows that a penalty cannot be charged on demurrage, but in addition to demurrage, it is possible to demand compensation for expenses caused by the ship's demurrage.
The third approach is peculiar to English law, and in English law demurrage is considered as damages for breach of contract (damages agreed in advance, covering all costs).
In determining the legal nature of demurrage, it is not so much what is behind it, but it is important that court decisions on this issue are predictable and consistent. If the law is predictable, then this will favorably affect the development of the economy and the relations of the parties to the contract.