ENGLISH COURT OF APPEAL DECIDES QUESTION OF LAW ARISING FROM APPLICATION TO DETERMINE PRELIMINARY POINT OF LAW UNDER S45 ARBITRATION ACT 1996

The English Court of Appeal (the Court) has recently decided a key question of shipping law in The Eternal Bliss [2021] EWCA Civ 1712, following an appeal from the decision of the High Court. The question arose last year before the High Court following the parties to an arbitration bringing an application under s45 Arbitration Act 1996 (the 1996 Act) for the determination of two preliminary points of law. Departing from the High Court's decision, the Court of Appeal found that, absent any indication in the charterparty to the contrary, demurrage is liquidated damages for all losses arising from the charterer's failure to load or unload cargo within laytime.

S45 Arbitration Act 1996

S45 – a rarely used section of the 1996 Act - allows the parties to an arbitration (or, with the permission of the tribunal, one of the parties to the arbitration) to apply to the English courts to determine a question of law which arises in the course of arbitration proceedings which " substantially affects the rights of one or more of the Parties".

Applications under s45 will only be considered where the English courts are satisfied that "the determination of the question is likely to produce substantial savings in costs" and that the application was "made without delay".

S45 is a non-mandatory provision of the 1996 Act and can therefore be excluded by the parties in their arbitration agreement. Many sets of institutional rules (such as the LCIA Rules) and other arbitral rules exclude the operation of s45, and any agreement to dispense with reasons for the award will also be taken to exclude s45. ­­­

Background

The full background to the decision can be found in our previous post on the High Court's decision here.

In summary, due to port congestion and lack of storage space ashore, discharge of the cargo carried on a vessel chartered by Priminds Shipping (HK) Co Limited (the Charterer) was delayed. Upon the cargo eventually being discharged, it was discovered that it was damaged, having “exhibited a significant amount of moulding and caking”. The vessel's owner settled claims with the cargo's receivers and sought to recover these costs by way of a claim in arbitration against the Charterer.

Decision

While the High Court found that damage to cargo was "quite distinct in nature from, and is additional to, the detention of the ship, as a type of loss”, and therefore was not covered by the demurrage liquidated damages clause, the Court of Appeal considered that, "in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime and not merely some of them."

In order to recover damages in addition to the agreed demurrage arising from delay, an owner must demonstrate a breach of a separate and distinct obligation in the charterparty.

In the eyes of the Court of Appeal, as the case law authorities were not settled on this point, the question of the damage demurrage liquidates should be determined from "first principles".

Among other reasons, the Court notably considered that:

• 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, this would be "an unusual and surprising agreement for commercial people to make" and should therefore be "clearly stated";
• while loss of freight earnings would be the "loss which is primarily contemplated, and in most cases will be the only loss occurring", this did not mean that it was the only loss demurrage was intended to liquidate;
• insurance is "one of the normal running expenses which the shipowner has to bear", including P&I cover which is intended to protect the ship owner "against precisely the loss suffered in this case". To find demurrage did not liquidate all losses arising from delay would thereby "disturb the balance of risk inherent in the parties’ contract"; and
• the rule of construction formulated by the Court produced "clarity and certainty", while at the same time allowing parties to "stipulate a different result if they wish" as it would "not be difficult for clauses to be drafted stating expressly that demurrage only covers certain stated categories of loss."

Comment

The Court of Appeal's decision on the nature of demurrage is significant in arbitration terms, not only because s45 applications are rare, but also because s45 itself provides limited grounds of appeal to the Court of Appeal from the decision of the High Court on the substantive point of law.

Permission to appeal will not be given "unless the court considers that the question is one of general importance, or is one which for some other special reason should be considered by the Court of Appeal." As we noted in our blog post on the High Court decision, the question of law that arose in this case was of considerable importance to the maritime sector, and therefore the clarity of a Court of Appeal judgment is to be welcomed.

More generally, where it is not excluded, s45 operates narrowly, and cannot be used by parties as a way of avoiding their agreement to arbitrate. The jurisdiction of the court is limited and, unless the parties agree to the contrary, the arbitral tribunal may continue the arbitration proceedings and make an award while the s45 application is still pending.

For more information, please contact Craig Tevendale, Partner, Liz Kantor, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

The authors would like to thank Luke Hard for his assistance in preparing this blog post.