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Charterers’ liability for demurrage where receivers refuse to discharge cargo with @incelaw

By • Nov 20th, 2012 • Category: Ince & Co Podcasts by Coracle, Shipping Law

Maritime Law Podcast from Coracle Online and international law firm Ince & Co

In this podcast we look at charterers’ liability for demurrage where receivers refuse to discharge cargo

DGM Commodities Corp v. Sea Metropolitan SA (MV Andra) [2012] EWHC 1984 (Comm)

Owners claimed US$3.6 million of demurrage from their charterers when the receivers at St. Petersburg refused to discharge all the ship’s cargo of frozen chicken legs, claiming
quite rightly that some of this had been contaminated by gasoil.

A six month “stand-off“ followed, until the owners eventually gave in to the receivers’ demand for a cash settlement of US$2.3 million. The charterers argued that they were not
responsible for the receivers’ conduct and that the charterparty had been frustrated, but this argument failed. The judge found that the charterers had a non-delegable duty under the charterparty to discharge the cargo. The receivers acted as the charterers’ agents in discharging the cargo and the charterers remained responsible for the receivers’ conduct. The outcome would, however, probably have been different had the receivers arrested the ship and prevented her from sailing.

The background facts
The vessel was voyage chartered on the Gencon form for the carriage of a cargo of frozen chicken leg quarters from the US to St. Petersburg. There was a delay in berthing and the vessel was already on demurrage before discharge commenced on 23 February 2008. On 8 April, discharge of hold no. 2 started.

Some of the cargo was found to be contaminated by gasoil and discharge from that hold was immediately interrupted. The vessel completed discharge on 14 April except for the cargo in hold no. 2. On 21 April, the local Veterinary Service imposed an order suspending the movement of cargo subject to their control.

There was subsequently a dispute between the parties as to how to deal with the damaged cargo. The receivers insisted on a cash settlement, whilst the owners offered security in the form of a P&I Club Letter of Undertaking (“LOU”). Discharge of the cargo only resumed once the owners had agreed to pay cash on 21 October 2008. On 13 November 2008, the
Veterinary Service gave permission authorising the re-export of the cargo (although it appears that the vessel was never prevented from sailing) and the vessel finally sailed from St. Petersburg on 25 November 2008.

The owners claimed demurrage. The charterers sought to argue that the charterparty had been frustrated.

The tribunal’s decision
The tribunal held that the contamination was due to the unseaworthiness of the vessel, for which the owners were strictly liable under the charterparty. From 14 April, when
discharge of the remaining holds (bar hold no. 2) had been completed, the charterers’ liability for demurrage was interrupted because the delay was due to the owners’ fault.
The receivers should have accepted a Club LOU, rather than demand a cash settlement and a reasonable period to agree the terms of the LOU would not have expired until 25 April.
Consequently, the period from 15 to 25 April did not count as time on demurrage because the cause for the delay was not the failure to discharge the cargo, but the need to negotiate and agree the terms of a LOU.

Furthermore, the owners’ breach had caused the intervention of the Veterinary Service and it was reasonably foreseeable that this would cause a delay up to 19 May. From that date onwards, the vessel was back on demurrage. Any further delay after that was too remote to be recoverable as damages arising out of the unseaworthiness of the vessel.

Whilst the order of the Veterinary Service had prevented discharge, the real and effective cause of that order remaining in place, and not being lifted, was the receivers’ unwillingness to have it lifted because they were insisting on a cash settlement.

Had the receivers wished to have the order lifted sooner, in order to discharge the cargo at an earlier stage, they would have been able to do so. Neither the Veterinary Service order nor the receivers’ conduct was held to be a frustrating event, as the charterers argued, and the charterers were liable to pay demurrage in respect of the delay from 19 May 2008 to 25 November 2008. The charterers appealed.

The Commercial Court decision
The appeal was dismissed. The judge held that, under the terms of the charterparty, the charterers had a non-delegable duty to discharge the cargo. The charterparty provided that the vessel was to be discharged by the receivers’ stevedores and the receivers acted as the charterers’ agents in discharging the cargo. The charterers, therefore, remained responsible for the receivers’ conduct. The judge also dismissed the argument that
the Veterinary Service order frustrated the charterparty.

The judge distinguished The Adelfa [1988] 2 Lloyd’s Rep 466. That was a case where the receivers of cargo, which had sustained wet damage, had refused to take delivery and had
arrested the ship. The vessel was eventually released and allowed to leave the port after the owners had settled the claim.

In The Adelfa, the charterparty was held to be frustrated. In the present case, the judge said that a failure to discharge cargo was something for which a charterer is liable in demurrage or damages for detention because he has undertaken in the charterparty to discharge the cargo, even if he uses the receiver as his agent to do so. On the other hand, the charterer does not undertake in the charterparty to prevent the receivers from
arresting the ship and an arrest is not attributable to the charterer. The frustrating event in The Adelfa was the arrest of the vessel, not the failure to take delivery of the cargo. There was, therefore, no frustration in this case.

This case is a good illustration of the importance of trying to contain the quantum of such cargo claims and, for that matter, all disputes. The contamination of about US$2 million of frozen chicken was unfortunate, but the failure to get the ship out of
St. Petersburg for six months added a further US$3.6 million or so to the dispute. The owners eventually won, but it took them an arbitration and a court hearing to do so. Had the order from the Veterinary Service prevented the vessel from discharging or exporting the cargo, then the result may well have been different.

This case also illustrates the difficulty for owners in negotiating with receivers in such circumstances. The original demand from the receivers to settle was for US$2 million. Having dug in and waited six or so months, the owners were eventually forced to
settle for US$2.3 million.

What is unclear to us from the law report is why the ship did not sail, given that the contaminated chicken was presumably of very little value. Perhaps the charterers will be able to pass on this liability to the receivers under their sale contract, so at the
end of the day, the receivers will pay for their failure to discharge the cargo or accept a Club letter to secure the claim.