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Sale Contracts. Laytime & Demurrage.

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.

Laytime and Demurrage in Sale Contracts
Last updated: 12-Jun-2015

Fal Oil Co Ltd & Anor v Petronas Trading Corporation SDN BHD [2004] EWCA Civ 822 per Mance LJ at para 42-46:

42. This examination of the authorities leads to conclusions, which I can summarise as follows:
i) Provisions in a sale contract regarding laytime and demurrage should be approached without any pre-conceptions or presumption as to their likely nature. That follows from general principle, as well as from the passage quoted above from Houlder Bros.
ii) The scope and effect of such provisions is a question of construction: see Suzuki.
iii) 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. However, this is consistent with the provision operating either by way of indemnity or independently. An independent provision can, subject to the law on penalties, be justified as a genuine pre-estimate of the receiving party’s exposure.
iv) Although the authorities distinguish generally between (a) provisions operating as an indemnity and (b) independent provisions, 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.
v) In the absence of any cross-reference in the sale contract provisions to a charterparty or other contract under which demurrage liability may arise, the natural inference is that the sale contract fall within category (b): cf Houlder Bros and also the dicta in Ets, Soules. But it is of course conceptually possible to have an implied as well as an express cross-reference of this nature.
vi) In cases where there is some form of cross-reference to a charterparty or other third party contract under which demurrage liability may arise, the nature, purpose and effect of the cross-reference become critical. There are two broad situations, corresponding with categories (a) and (b) mentioned in conclusion (iv) above. In the first, 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 (although Suzuki is the only clear reported example in the authorities). It would no doubt also be conceptually possible for sale contract provisions to operate by way of "indemnity", but subject to the additional qualification or precondition that any liability for demurrage can and should only arise so far as consistent with other sale contract terms (e.g. as to the length of permissible laytime). But such a construction is likely to lead to the practical problems identified in Houlder Bros. and the authorities provide no positive example of it. The second situation (exemplified by a number of authorities) is one where the sale contract provisions simply refer to or incorporate provisions of a charterparty or other third party contract (or at least one of such provisions, e.g. as to the rate of demurrage) in an otherwise independent sale contract scheme. The extent of any such reference or incorporation is then itself of course a matter of construction.
vii) Thus, for example (although it is unnecessary to express a view on the correctness or otherwise of the actual construction put on any previous contract differently worded to the present), in Suzuki the words "demurrage as per charterparty or freight agreement" were interpreted as meaning that the case fell within category (a). In contrast, in Gill & Duffus Clarke J considered that the particular provisions for demurrage there in view brought the sale contract within category (b). It is also unnecessary to comment on Staughton J’s obiter view in The Adolf Leonhardt that the obligation "Demurrage/Despatch as per C/P" in the particular contract there in issue was also to be construed as independent. However, the existence in a sale contract of its own laytime code is clearly a relevant factor (even though it was also present in Suzuki), and I find useful Staughton J’s general explanation as to why it may be appropriate to treat sale contract laytime and demurrage provisions as an independent code.

43. Applying these principles to the present case, I conclude that the present sale contract provisions constitute an independent code, falling clearly within category (b). First, the sale contract was made independently of, and without knowledge of the terms of, any charterparty. Since the sale contract covered four shipments, there might well have been four very different charterparties. The sale contract contained a specific laytime code (clause 10), which would not necessarily coincide with whatever charterparty had been or might in future be made. The two did not coincide in the case of the first shipment with which we are concerned, since laytime was under the charterparty reversible and so allowed a total of 72 hours for loading (with which Petronas were not concerned at all) and discharging.

44. Second, as soon as one has a situation where the laytime provisions may not coincide, problems (identified in Houlder Bros.) arise about treating sale contract demurrage provisions as operating by way of indemnity in respect of charterparty liability. In effect, in order for the present sale contract to fall within category (a), the sale contract laytime would have to be read, not as a period after which demurrage would become payable, but as a minimum discharging period which must elapse before demurrage might become payable; it would then only actually become payable, provided that demurrage was at the same time payable under the charterparty. On this basis, in the present case, demurrage would only be payable if and when the whole reversible laytime of 72 hours had been used up under the Fal Oil charterparty. Thus, if Fal Oil loaded the Devon in, say, 24 hours, Petronas would in effect have laytime of 48 (not 36) hours available before they could have to pay demurrage in respect of slow discharging. On the other hand, if the charterparty entered into had only allowed 48 hours reversible laytime, and Fal Oil had used up 24 hours laytime at the load port, Fal Oil would become liable to Fal Shipping under the charter for demurrage after a further 24 hours of discharging, but Petronas could not become liable for demurrage to Fal Oil until after 36 hours discharging. The sale contract cannot be construed by reference to the charterparty that was actually made. But the existence in the sale contract of its own laytime code, likely to create such problems in the event that the demurrage provisions are construed as operating by way of indemnity, is a relevant factor: see paragraph 42(vii) above.

45. Thirdly and most importantly, the present sale contract demurrage clause (clause 11) in my view clearly incorporates a rate, and no more. In that regard, the present case is on any view readily distinguishable from Suzuki, where demurrage was provided to be "as per charter-party or freight agreement" simpliciter. The reference to a rate takes one to clause I in Part I of the present charterparty, providing for $18,000 per day and pro rata. It may also take one to the more detailed provisions of clause 8 in Part II, which I have set out in paragraph 26 above, although this was not the subject of specific submissions before us. If so, the references in clause 8 to loading would have to be ignored, but otherwise there would seem to be no problem in incorporating into or applying under the sale contract the provision that demurrage should be at half rate under the conditions specified in clause 8 of Part II.

46. Fourthly, once it is concluded that the express words of the laytime and demurrage provisions do no more than refer to the charterparty rate, their natural reading and effect is as an independent obligation. So read, they have an understandable and acceptable rationale as a code containing an agreed approximation or pre-estimate of the loss which the sellers, Fal Oil, would be likely to suffer in the event of delay in discharging. There is no need to force them into category (a).


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