UK: Commercial Court Considers The Nature Of Laytime And Demurrage Provisions In A Sale Contract

Last Updated: 23 November 2011
Article by Jamila Khan and Carl Walker

Glencore Energy (UK) Limited v. Sonol Israel Limited (Team Anmaj) EWHC 2756 (Comm)

The Commercial Court has recently issued a judgment in the above matter involving a consideration of the incorporation of laytime and demurrage provisions from a charterparty into separate sale contracts and, in particular, the time at which the obligation to pay demurrage accrued under the sale contracts.

The background facts

This dispute arose out of contracts for the sale of gas oil from Glencore ("sellers") to Sonol ("buyers") on a DDU basis. The parties concluded two contracts providing for the goods to be delivered between 1 and 12 January 2005 at the port of Ashkelon, Israel.

The sale contracts set out a regime for the commencement and running of laytime and, as regards demurrage, they provided "Demurrage: As per charter-party rate, terms and conditions". It is not necessary to set out the laytime and demurrage provisions from the relevant charterparty in this article, save to say that the charterparty laytime provisions did not coincide with those contained in the sale contracts.

The vessel arrived and tendered notice of readiness at Ashkelon on 28 December 2004 but no berth was available until 9 January 2005 and discharge was not completed until 11 January 2005. The sellers issued a demurrage invoice to the buyers on 28 April 2005 and eventually issued proceedings on 19 April 2011. The buyers sought to have the claim struck out on the basis that it was time-barred under Section 5 of the Limitation Act 1980, as the proceedings had not been commenced within 6 years from the date on which the cause of action accrued.

The issues for the Commercial Court

The key question for the Commercial Court was the date on which the sellers' cause of action accrued. The buyers contended that the relevant time was either (a) the completion of discharge or (b) the last day for which demurrage was claimed. In either case, the claim fell foul of the Limitation Act and was time-barred.

The sellers, on the other hand, contended that the cause of action did not accrue until the demurrage invoice was issued on 28 April 2005. In this case, the proceedings would have been issued (just) in time.

The issue turned on the nature of the laytime and demurrage provisions contained in the sale contracts and whether these created an independent obligation for the buyers to pay demurrage or merely an obligation to indemnify the sellers for any demurrage that they themselves had incurred. The buyers submitted that the sale contracts created a free-standing independent obligation for them to pay demurrage, in which case it was common ground that this obligation accrued day by day pro rata from the moment that laytime had expired.

The sellers argued that the sale contracts created an obligation for the buyers to indemnify them against any demurrage liability that they themselves incurred. Alternatively, they argued that the sale contracts' laytime and demurrage provisions were "contractual payment provisions" reflecting the risk that the sellers may be liable for demurrage and passing that risk and the payment obligation on to the buyers. The argument followed that the payment obligation could only accrue once the buyers had been presented with the relevant documents, including the demurrage invoice.

It was contended by the sellers that presenting a properly documented demurrage claim was important because the sum due as demurrage could not be calculated until there was one and, as such, at the completion of discharge there was no quantified and documented claim. The argument followed that the buyers' obligation to pay demurrage under the sale contracts was triggered by the presentation of the relevant documents, including an invoice which itself stated that payment was to made "upon presentation of invoice".

The Commercial Court decision

The judge rejected the sellers' arguments, ruling that the claim was time-barred and should be struck out. He concluded that the sale contracts imposed an independent obligation on the buyers to pay demurrage rather than an obligation to indemnify the sellers against any demurrage liability that they may incur. In this regard, the judge referred to the decision of the Court of Appeal in The Devon [2004] 2 LLR 282, in which Lord Justice Mance stated that "as soon as one has a situation where the laytime provisions may not coincide, problems...arise about treating sale contract demurrage provisions as operating by way of indemnity in respect of Charterparty liability".

The judge noted that the sale contracts in this case contained separate laytime provisions which did not coincide with those in the charterparty and stated that this provided considerable assistance to the buyers' argument that the sale contracts created an independent obligation to pay demurrage rather than an indemnity obligation.

He also considered the earlier decisions in Gill and Dufuss SA v. Rionda Futures [1994] 2 Lloyd's Rep. 67 and OK Petroleum AB v. Vitol Energy SA [1995] 2 Lloyd's Rep. 160 and noted that it was clear from those authorities that where a sale contract incorporates the terms of a charterparty relating to demurrage in an otherwise independent sale contract containing, for example, provisions about laytime, then the obligation in the sale contract is generally to be construed as an independent demurrage obligation and not as an indemnity.

The judge went on to conclude that even if the obligation to tender payment depends on the presentation of a documented claim, then that does not necessarily affect the accrual of the cause of action or the general rule that an obligation to pay demurrage accrues day-by-day pro rata from the moment when the laydays have expired. He noted that if the sellers' case that no cause of action accrued until it presented its claim for demurrage was accepted, this would permit the sellers to present a claim long after discharge was complete and thus prevent the cause of action accruing until that time.

Comment

The Commercial Court in this case has confirmed the general principle that when a sale contract incorporates laytime and demurrage provisions from a charterparty which are inconsistent with laytime and demurrage provisions already contained in the sale contract, the sale contract will generally be construed as imposing an independent obligation to pay demurrage rather than an obligation to indemnify the other party to the sale contract in respect of demurrage they themselves have incurred.

The judge unsurprisingly concluded that, in those circumstances, the cause of action accrued day-by-day pro rata from the expiry of laydays, notwithstanding that the obligation of the buyers to pay demurrage was triggered by the presentation of a properly documented claim by the sellers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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