Laytime & Demurrage - Indemnity or independent provision.

My answer would be that the sellers have an independent obligation, as the Board of Appeal held. I do not find it surprising that a buyer should contract to receive demurrage at a different rate, or on different conditions, than those governing his liability to pay a shipowner or a sub-buyer. Normally one might perhaps expect the terms to be the same, … but they may be different.
R. Pagnan & Fratelli v Finagrain Co. Com. Agricole et Financiere SA (The Adolf Leonhardt) [1986] 2 Ll.R. 395, per Staughton J.

Comparative analysis of case law

There are two conflicting constructions said to be able to achieve the commercial purpose of the laytime and demurrage clause in the contract of sale: a) provisions operating as an indemnity and b) independent provisions. The difference between these two approaches is that if viewed as indemnity the injured party is to be indemnified for the same amount of demurrage as it suffered under the charterparty, and if viewed as independent provision the injured party will be compensated for any demurrage incurred only to extent of laytime and demurrage provision containing in the sale contract.

Several conclusions related to operation of laytime and demurrage provision were articulated by Mance LJ who delivered the majority’s view in Fal Oil Co Ltd & Anor v Petronas Trading Corporation SDN BHD [2004] EWCA Civ 822 combined in shorten form below:

i) The scope and effect of such provisions is a question of construction.

ii) The underlying rationale of any sale contract demurrage provision is that the receiving party may suffer loss under a charter or other third party contract.

iii) The precise nature and effect of any demurrage provision depends upon the context and wording of the particular provisions, including the scope of any reference to or incorporation of the demurrage provisions of any charterparty or other third party contract.

iv) In the absence of any cross-reference in the sale contract provisions to a charterparty the natural inference is that laytime and demurrage clause in the sale contract is an independent provision.

v) In cases where there is some form of cross-reference to a charterparty there are two broad situations. The first is one where the sale contract creates a liability for demurrage by way of "indemnity", that is to pay only if and so far as such a liability exists under the charter or other third party contract. The second is one where the sale contract provisions simply refer to or incorporate provisions of a charterparty in an independent sale contract scheme.

Finally, I would offer two short lines from Prof. J. Chuan work Laytime and demurrage clauses in contracts of sale crystallizing the main difference between both contracts:

The law of charterparty is highly developed but its primary focus is on the ship, not the goods being carried. The sale contract on the other hand deals principally in the goods.

However, to have a full picture it is necessary to note that there are also some strong arguments for Laytime and Demurrage provisions to be considered as indemnity clauses in sale contracts. The main argument is that, in some instances at least, similar for example to one considered by the Court of Appeal in Fal Oil Co Ltd & Anor v Petronas Trading Corporation SDN BHD [2004] EWCA Civ 822, where C&F seller has to arrange carriage by chartering vessel on terms that will expose him to a potential liability to pay demurrage to the owner. Then if the laytime or demurrage clause operates as an indemnity, its linkage with the charterparty is stronger than a free-standing, independent laytime and demurrage clause and as a result it is reasonable that the buyer should protect him for the value of damages suffered. Whilst operation of independent clause may in some instances exceed that objective, by conferring on the seller the possibility of a windfall profit if he does not incur demurrage liability at all. From dissenting judgment of Buxton LJ at paras 60-61:

60. …The price is a C&F, delivered, price, the cost of delivery therefore resting with the seller. There are no provisions as to time of delivery, or as to delay in delivery, until the vessel arrives at the port and gives notice of readiness: as to the time and reasonableness of which there are no express obligations between buyer and seller. In that context and against that background, the sudden intervention of delay provisions at one stage of the contract appears to be anomalous. The reason for such provisions is as explained by my Lord in §33 above: the seller will have to arrange carriage, and he may, and very likely will, do so by chartering vessels on terms that will expose him to a potential liability to pay demurrage to the owner.

61. That rationale strongly disposes me to think that the demurrage provisions in the sale contract should be viewed as being in the nature of an indemnity. They are included, not because of any inherent characteristic of the C&F contract itself, but because the seller, in performing that contract, may suffer collateral and as yet unquantified expense against which it is thought reasonable that the buyer should protect him. That is the very essence of an indemnity. Of course it is the case that, as Lord Atkinson said in Houlder Bros in the passage quoted in §28 above, once launched upon a demurrage clause the parties are free as a matter of law to make any bargain that they please securing to the seller, or withholding from him, a profit under that clause. But why should it be assumed, or even be likely, that the parties would have used that freedom to formulate provisions, included in the contract in order to protect the seller against demurrage liability, in terms that far exceed that objective, by conferring on the seller the possibility of a windfall profit if he does not incur demurrage liability at all?

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