Laytime & Demurrage - Charterparty and sale contract.

… in the present case the seller is the recipient of the benefit of the carriage of the goods under the charter-party, whereas the same party is the provider of that benefit under the c.i.f. sale of goods contract. In particular, under the charter-party, he has undertaken to pay demurrage should he fail to discharge the ship within the laytime, whereas under the sale of goods contract the seller is entitled to recover demurrage if the buyer fails to discharge the goods within the laytime.
OK Petroleum v Vitol Energy [1995] 2 Lloyd’s Rep. 160, per Colman, J. at p.163.

Liability for delay in sale contract

International transaction for the sale of goods has underlying contract of sale between the seller and the buyer and a contract of carriage between either seller or the buyer with the carrier, so there are two different contracts between different parties. In case of FOB contract it is usually the buyer who enters into the contract of carriage, i.e. charters the vessel, and in case of CIF the seller. Liability to pay demurrage under a sale contract can arise only from operation of express provision contained in the contract. In absence of such express clause in the sale contract, demurrage accrued under charterparty terms does not affect mutual obligations of the seller and the buyer under the contract of sale.

It is obvious that all parties to these two contracts, i.e. contract of sale and contract of carriage, are eager to avoid delays. Thus, for the injured party be it the buyer or the seller, delay in shipment or delivery can bring about significant shift in the price of commodity which can make the contract uneconomic, and/or cause the loss of an on-sale due to missed delivery dates. For example, as the authors of Laytime and Demurrage in the Oil Industry acknowledge as being a &custom of the trade&, it is the general rule that the buyer can only expect his late ship to be accepted for loading at the seller’s convenience. In some cases lengthy delay can accrue not because of late arrival of the vessel, but due to ship’s tanks or holds being not ready and not accepted for loading, see for example Triton Navigation Ltd v Vitol SA (The Nikmary) [2003] EWCA Civ 1715.

Now, from the carrier’s perspective, any delay may reduce the owner’s profit margin and disrupt vessel’s next employment. Therefore charterparties commonly contain express provisions (links for laytime and demurrage in voyage charters) stipulating that the charterer (either seller or buyer) should compensate the owner for delays in the course of cargo operations, when time utilized for loading and discharging exceeds the time specified in the contract of carriage, by way of liquidated damages, also called demurrage. This cost of demurrage paid by the charterer to the shipowner is allocated in the contract of sale between the seller and the buyer so, as to be remunerated by the side who makes the chartering counterparty liable for delay.

Availability of such remuneration was for the first time in principle adopted by the House of Lords in Houlder Bros. v The Commissioners of Public Works [1908] AC 276 and later confirmed in judgment of Lord Guest in Union of India v Compania Naviera Aelous SA [1964] AC 868 at p. 899:

In the context of a C&F sale contract, where the seller is not the shipowner, the underlying rationale of the inclusion of any laytime and demurrage provisions (whether on an independent or indemnity basis) is that the seller will have to arrange carriage on terms which may expose the seller to liability for demurrage to a shipowner or other third party. Parties may, however, find it simpler and more acceptable to agree and operate an independent scheme which means that, in the event that delay occurs, they will know precisely where they stand, rather than to contract on a basis which makes their rights inter se depend upon the rights and liabilities of one of them, and possible disputes under some actual or future contract with a third party.

Two laytime/demurrage regimes

Existence of two different contracts demands for two laytime/demurrage regimes; one stipulated in contract of sale and another in contract of carriage. Depending on trade and choice of parties these regimes can be fairly close to each other, but not necessarily so. It is also pertinent to remember that where the incorporated contract does not exist when the incorporating contract is entered into, the established approach to construction is that general words of incorporation will not normally be construed as wide enough to incorporate any provision from the other contract unless that provision is part of the subject-matter of that contract and not merely ancillary to it, such, for example, as an arbitration clause or a jurisdiction clause. Therefore the wording in the contract of sale that &Demurrage - as per charterparty& will signify only that time permitted under this contract would be as specified by laytime clause and demurrage incurred is a matter to be determined by reference to those provisions of the charter-party which stipulate when laytime is exceeded and rate at which demurrage to accrue.

When there is no reference at all to a charterparty in sale contract, then a reference to the law of charterparties can assist to the parties, but only in very limited way and only with those stipulations as to the time of discharge as contract of sale provided to be between seller and buyer. Otherwise there is no any implied link between these two contracts. In NYK Bulkship (Atlantic) N.V. v Cargill International S.A. [2014] EWCA Civ 403 per Gross LJ said at para 43:

… if it be necessary to match the obligations of a [charterer’s] delegate (whether [seller] or [buyer]) under a very different contract to a [charterer’s] obligation under the charterparty, then I do not think I would have been able to do so.

Prof. J. Chuan formulated general principle that non-shipper party to the sale contract is usually expected to be unwilling to get involved in the making of the contract of carriage and in any legal or commercial complexities it may present. It follows that despite his agreement to paying demurrage for delays caused in the loading or unloading of goods, the trader does not wish to be caught up in the terms of the charterparty to which he is not privy.

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