Factual circumstances

In the spring of 2020 FSUE “Atomflot” (Claimant) carried out maritime transportation of goods for Zapsibgazprom-Gasification Ltd. (Defendant) on the nuclear-powered lighter carrier-container vessel “SEVMORPUT”.

At the ports of loading and unloading, as a result of exceeding the laytime, the claim for demurrage and penalty arose. Claimant addressed the Defendant. Defendant did not comply with the claim, so the Claimant took the case to court.

Judgements

The court of the first instance confirmed the detention of the vessel and concluded that there were grounds for collecting a demurrage, and in connection with the violation of the obligation to pay demurrage on time, that there were grounds for collecting a penalty for late payment of demurrage. And, due to the breach of the obligation for timely payment of demurrage, the court concluded there were grounds for penalty recovery. The court found in favour of the Claimant in full.

Defendant appealed against the judgement in terms of penalty. However, the court of appeal upheld the judgement.

Commentary

Russian judicial practice on the issue of accruing interest on the amount of demurrage has been contradictory. For a long period of time, there was a tendency to reject such claims, judges qualified demurrage as civil liability. In most cases, the courts did not explain the reasons they regarded demurrage as a consequence of a breach of contract. Based on the texts of judgements, it can be assumed that in the vast majority of cases the conclusions that interest cannot be charged on demurrage are based on the terms of specific contracts in which demurrage was explicitly referred to as liability. In such cases, demurrage was often either included in the liability section or demurrage was expressly referred to as a penalty (e.g., see case No. A40-128757/2021), fine (e.g., see case No. A46-10464/2021), or, vice versa, penalty or fine were referred to as demurrage. The latter case is the most common courts’ qualification of demurrage as a sanction for breach of contract. Much less often demurrage is seen as losses. For example, in case No. A32-49247/2021 the court stated that demurrage was in essence neither freight (payment, remuneration) under the carriage of good by sea agreement nor compensation for losses since its recovery was not made conditional on whether or not the carrier actual suffered the losses and its amount. It is noteworthy that this judgement was rendered at the same time as the judgement in the commented case.

The reverse position (demurrage as payment) used to be rather reluctantly supported by judges, but it seems that the practice is slowly changing in the opposite direction.

The question posed is not only theoretical but also has practical importance. By the example of commented case, this is the question of the possibility of accruing a penalty on the amount of demurrage. Obviously, there are other practical facets of the question, for example, the different subject matter of evidence depending on the approach to the nature of demurrage, or the possibility of applying Art. 333 of the Civil Code of Russia for the purposes of reducing demurrage, or the fate of demurrage included in the register of creditors of a bankrupt debtor. The latter issue was the subject of attention, for instance, in the recent bankruptcy case No. A56-42311/2021 where the court found no reason to recognise the demurrage as penalty and qualified it as actual damage and included it in the third priority of the debtor’s creditor claims register. It should be mentioned that it was a similar provision in Art. 120 of the Inland Water Transport Code of the Russian Federation (hereinafter – the IWTC RF) which provides exactly for compensation damages for excessive detention time. In other words, the same phenomenon has different qualification in the Merchant Shipping Code of the Russian Federation (hereinafter – the MSC RF) and IWTC RF.

At first glance, the case commented is unremarkable and its circumstances are as simple as possible. Nevertheless, it is interesting because the appeal against the judgement is not based on the economic interest of the Defendant in the violated rights. It is obvious from the fact that the Defendant disagreed with the judgment only as regards the miserable sum of interest, and not the principal debt (5,456 rubles of interest against 6,820,000 rubles of demurrage). There is a clear well-directed interest in clarification one specific issue, i.e., the possibility of imposing a penalty on the amount of demurrage. This question depends entirely on the legal nature of demurrage. The Defendant’s approach to the issue is curious, but, unfortunately, did not seem to be understood by the court in terms of the purpose of the Defendants’ appeal (obtaining a detailed explanation of why demurrage is not a measure of liability).

Nevertheless, the court of appeal emphasised that the dispute between the parties essentially boils down to determining the legal nature of demurrage and, accordingly, the absence or presence of a basis for accruing penalty on the amount of demurrage. Thus, the present case can be attributed to the attempt to form a certain judicial practice.

Unfortunately, this attempt was left without cassation appeal.

The Claimant’s position was that demurrage was not a liability for breach of carriage of good by sea agreement, but an independent civil obligation that allowed the imposition of a penalty on the amount of demurrage.

The Defendant, on the contrary, insists that demurrage is a civil sanction for improper performance of obligations in the form of penalty and, therefore, imposition of the penalty on the amount of demurrage would result in double liability for one violation of the obligation.

Interpreting the Art. 132 of the MSC RF, the court of appeal concluded that demurrage was neither fine nor a penalty but a payment for vessel detention for the demurrage time and was an independent civil obligation of the charterer.

Apparently, this inference is based on a literal interpretation of the above article and equivalent provisions of the treaty which refer to demurrage as a payment charge for ship demurrage. Such wording may indicate that the legislator while constructing demurrage in Russian law likely took into account the French model of demurrage (extra payment for additional cargo operations along with the obligation to make a payment for the freight which, by default, includes the payment for the period of cargo operations) rather than the English model (liquidated damages caused by a breach of the duty to perform cargo operations within a limited laytime). In addition, Article 132 of the MSC RF is contained in Paragraph 2 of Chapter VIII of the Code, dealing with the performance of the contract of carriage by sea, while the provisions on liability under the contract are provided in a separate Paragraph 8. Based on the appellate court’s judgment, it can be concluded that the court did not consider demurrage as liability for breach of contractual obligations due to the following considerations.

There seems to be nothing in the wording of Article 132 of the MSC RF to directly state that it is a breach of contract on the part of the charterer. The term “ship demurrage” should not necessarily be considered a breach if the logic of providing a vessel for cargo operations on payment during the agreed main and additional time is accepted (although that is not absolutely true, as it can be quite easily demonstrated by the difference between a voyage charter and a time charter in terms of the economics of these contracts). The logic of the court can also be supported by Article 135 of the MSC RF, which, in contrast to Article 132 of the MSC RF, clearly states that beyond the demurrage time (which is regarded as additional time for cargo operations at the agreed rate of charge) comes liability. In other words, there is no breach of contract by the charterer until the completion of demurrage time. However, the last point disproves the argument that the code contains rules on demurrage outside the liability provisions (argument in favour of demurrage as a contractual payment). However, it is rather a problem of legislative technique. Another issue is that, in practice, it is more common for parties to establish a “once on demurrage, always on demurrage” rule. The application of this rule in the “demurrage-as-fee model” can lead to curious situations. For example, in conditions of substantial delays in cargo operations (weeks or even months). Since these delays would not be considered as breach of contract and would be paid at the demurrage rate, the shipowner could be left in a situation where the contract cannot be withdrawn, for example, due to a substantial breach by the charterer in the form of delay of cargo operations, while the freight market could increase significantly during this substantial period of delay. It would cause losses to the shipowner and offset the demurrage in the current contract. This would create an unreasonable imbalance of interests between the parties.

An objection to demurrage as additional payment for cargo time is also the fact that in the lack of an agreed demurrage rate its amount is determined by the costs of the vessel’s and its crew’s maintenance. On the one hand, this clearly shows the compensatory function of demurrage as a liability and clearly lacks the element of remuneration for additional cargo time. On the other hand, demurrage in practice is always set by the parties and it almost always includes not only vessel and crew costs, but also possible loss of profit from delay in the current voyage either at current market prices or even higher ones in case of a possible market upturn (in particular, due to this reason, English law sees in demurrage liquidated damages, not only losses from vessel and crew maintenance costs (actual damage) but also loss of profit). Demurrage may also be defined by rates generally accepted in the concerned port without the parties’ agreement (the author does not know how such rates are formed but suggests that it is likely to be the maintenance cost of the vessel and its crew since the consideration of lost profits by the shipowner in demurrage is based on his commercial interest which the port lacks). Therefore, this case can be less considered as an argument in favour of demurrage as an additional payment.

The explanation for the court’s reasoning for allowing a imposition interest on demurrage in the commented case does not seem well formulated and may become problematic in future enforcement if the case is referred to in other disputes. As a result of the court’s statement that demurrage is not considered as liability for breach of contractual obligations by the parties themselves, it appears that the parties may formulate a reversed condition whereby they agree on demurrage as a sanction for breach of contract by their agreement. Consequently, the court comes to the controversial conclusion that Article 132 of the MSC RF sees demurrage as a payment for additional time of cargo operations but also considers demurrage to have the meaning of a sanction. Obviously, Article 132 of the MSC RF can only presume one of these two options, the parties cannot change the legal nature of demurrage by their agreement and at their own discretion. If demurrage is treated in the court practice in the context of Article 132 of the MSC RF as a separate payment obligation under the transportation services agreement, then the contracts’ provisions on demurrage as a liability for breach of contract will be reclassified by the courts into penalty depending on the specific terms of the contracts, which will be applied along with the demurrage as a payment provided by the contract or law (in most cases parties actually agree on an ordinary penalty and wrongly refer to it as demurrage in contracts). In such a case, a shipowner claiming penalty and wrongly considering it as demurrage risks losing the right to the actual demurrage, which even in the absence of contractual provisions and reclassification of ‘contractual demurrage’ as a regular penalty, is provided by law, for example, due to shortened limitation periods. Although there is a different view that demurrage should always be agreed by a contract and Article 132 of the MSC RF, only provides for the amount of demurrage if it is absent in the contract, but not for the right to demurrage itself.

Consequently, it should be recognised that the legislative regulation of demurrage does not provide an explicit answer to the question of its nature and it is possible to argue both for demurrage as liability and for demurrage as an additional charge. Parties to maritime transportation should take these circumstances into account while formulating demurrage clauses in contracts under Russian law and attempting to subordinate “demurrage” to the liability or additional charge regime of the contract.

Because of the low significance of the issue in question for the market as a whole, a point-by-point change in the MSC RF rules does not seem appropriate, therefore it would be preferable to address this issue as a part of a long overdue global reform of the Code. It requires significant resources, and for many reasons it is unlikely. The more reasonable way would lie through clarifications from the highest court. It would be appropriate to notice that the clarifications of the MSC RF application were given much time ago (Information letter of the Supreme Arbitration Court of the Russian Federation of 13.08.2004 № 81 “Review of the practice of arbitration courts on the application of the Merchant Shipping Code of the Russian Federation”). Undoubtedly, over the years of enforcement of the MSC RF a sufficient number of issues have accumulated which could be reflected in the new clarification of the Supreme Court of the Russian Federation.

One can only complain that, for various reasons, Russian courts, while considering even a specific isolated issue of the legal nature of demurrage, do not provide detailed analysis and detailed explanations of the raised questions, unlike, for example, the English court, which recently applied “legal archaeology” in analysing of demurrage in the Eternal Bliss case [K Line Pte Limited v Priminds Shipping (HK) Co Limited (The Eternal Bliss) [2021] EWCA Civ 1712]. Such approach with elaborate the judgement reasoning on the legal nature of demurrage would help to reduce conflicting judicial practice and increase legal certainty. Otherwise, economic agents will continue to see conflicting judgements that appear from time to time as regards the interpretation of the MSC RF rules on demurrage. ■