There are various occasions in the shipping business where parties to carriage contracts must pay additional container charges for prolonged container use. Some examples include demurrage charges, which are levied on consignees by the shipping line when they fail to unload the container within their allotted free time after the container arrives at the terminal; detention charges, which are levied on consignees by the shipping line when they fail to return the container to the shipping line within the free days after the container arrives at the terminal; and storage fees, which are imposed on consignees by the port when they fail to unload the container within the free period offered by the port after arriving at the terminal. Likewise, the party that levies the charges and the party that pays the charges may differ according to the circumstances.
A few years ago, shipping lines would flexibly waive surcharges for demurrage, detention, etc. However, after the COVID-19 pandemic in 2021, the shipping industry experienced an increasingly serious global shortage of available shipping containers due to severe port congestion, and more shipping lines began to charge fees for delays in container use.
Port congestion has also caused various contractual disputes between Korean and foreign companies, which are increasingly ending up in court. A frequently arising issue is who will pay the extra charges for demurrage and storage at terminals and to what extent.
While social factors may be the cause of container congestion, charges for the prolonged use of containers still accrue on a per-day basis. Consequently, these fees can increase exponentially the longer the delay. In Korea, there are endless disputes over whether the shipper or the consignee is responsible for paying these extra charges for demurrage, detention, storage, etc., and to what extent. This article will view how the Commercial Act of South Korea and Korean courts interpret disputes over container charges and explain who is responsible for how much of these surcharges from the perspective of Korea Law.
The first question is who is responsible for container surcharges. The Commercial Act of South Korea does not explicitly stipulate matters related to who is responsible for additional container charges. However, the responsible party has to be a party to the contract of carriage, which means the identification of the parties in the contract should precede the determination of the responsible party. While carriage contracts are generally signed between the shipping line and the owner of goods, the shipper and the consignee can both be referred to as the owner of the goods, making it difficult to determine which party should be considered the contracting party. In this regard, Korean courts have referred to the Incoterms to determine whether the shipper or consignee is a party to the carriage contract.
The Incoterms, International Commercial Terms, are rules on international commercial transactions published by the International Chamber of Commerce (ICC) that determine the responsibilities of the seller and consignee for risks during the transfer of goods. Parties to the carriage contract generally adopt the Incoterms when negotiating the time of transfer of risk liability from the seller to the consignee during the shipping progress.
On this matter, the South Korean Court ruled that the consignee is responsible for charges due to the prolonged use of containers if risk liability had been transferred to the consignee in accordance with the Incoterms before the demurrage, detention, etc. In this particular case, the contracting parties had agreed on Delivered at Place (DAP) as the transportation condition, which meant that the shipper was responsible for all costs incurred during the transportation process until the agreed place of delivery. The court held that under this condition, the shipper was liable for all costs, including container demurrage fees and any risks of loss, damage, etc., that may occur to the cargo until it is delivered to the consignee. (See Seoul Central District Court Decision 2017Gahap530941 Decided April 20, 2018).
The Incoterms are essentially no more than terms to facilitate trade, which has led to criticism of the above ruling for determining the contracting party based on trade terms. Nevertheless, this ruling is anticipated to act as an important precedent for future disputes of similar nature.
Another issue that needs to be discussed is to what extent the responsible party must pay additional container charges. On this matter, we will look into a recent landmark decision by the Supreme Court that overturned an existing legal doctrine. (Supreme Court Decision 2020Da280685 Decided December 1, 2022).
Article 814 of South Korea's Commercial Act prescribes, "the claims and obligations of a carrier against a consignor or consignee shall be terminated, whatever the causes for the claims may be, within one year from the date when the carrier delivered or will deliver the cargo to the consignee unless no judicial claim has been made." Maritime transportation involves multiple parties and is often multinational by nature, making it essential to clarify the complex legal relationships between parties swiftly. Therefore, precedents have considered the one-year as the limitation period of claim to urge the carrier to bring claims promptly, thereby quickly establishing the legal relationship between parties.
However, there had been an ongoing issue on whether this short limitation period should also apply to container demurrage and storage claims. Before the aforementioned Supreme Court's decision, Korean courts had uniformly viewed the right to claim charges for demurrage, detention, storage, etc., to be terminated on the date that is one year from the delivery date of the cargo to the consignee. Therefore, even if the cargo is still loaded in the container and stacking up on additional charges, if one year passes from the day the carrier delivers the cargo to the consignee, the carrier's right to claim the additional charges will be terminated.
However, it is realistically difficult for shipping lines to respond promptly to overstaying cargo scattered worldwide. Moreover, negotiations take a considerable time for the shipping line and cargo owner to decide how to dispose of the cargo. Due to these practical difficulties, the shipping industry has long criticized the court's decisions as it can be considered unreasonable that carriers have to claim for container surcharges without properly determining the value due to the limitation period.
The recent Supreme Court decision presented a different stance on the matter. It ruled that even if a year passes from the delivery date of the cargo, in cases where the container is still being used, the right to claim payment for charges incurred from the additional use of containers shall not be uniformly rejected, and the right to claim for charges occurred within a year since the suit was filed shall be considered valid.
This decision is significant in that it obtained concrete validity in clarifying the scope of claimable charges for container and storage use. In future cases, it is highly anticipated that Korean courts will acknowledge the carrier's right to claim for container charges that occur within a year from the date that the suit was filed in accordance with the judicial interpretation of the Supreme Court Decision 2020Da280685.
We have examined who is considered the liable party and the scope of liability for container surcharges in accordance with the Commercial Act of Korea and the interpretation of Korean courts. Significant social costs are incurred by delays in cargo due to container congestion, which has also been the cause of legal disputes triggered by rising freight rates and delays in delivery. Therefore, contracting parties should reduce the risks arising from delays in cargo by including force majeure and frustration of contract clauses when entering a carrier agreement. Furthermore, it is crucial for contracting parties to preemptively identify the potential legal risks under the contract's governing law and prepare an effective response plan.
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.
