IN-CLASS EXERCISE: LIQUIDATED DAMAGES

Please read the facts and further materials provided below, and answer the following questions:

1. On a reading of the facts, the award of the arbitrator and the contention of the Appellant, how would
you quickly summarise the essential contention on which the answer to the case depends? In other
words, how would you frame an appropriate question of law, which – when answered – will make
everything else clear?

2. What are the arguments you can think of on behalf of the Respondent, to uphold the arbitral award?

3. If you were to decide the case, would you accept any/all of the arguments raised by the Appellant
(which are summarised below)? In other words, how would you decide the case? What portions of
ONGC or Kailash Nath would you rely on?

This is again not meant to be an exercise in legal research: so, for the purposes of the in-class exercise, please
do not rely on anything over and above Fateh Chand, Mulla Bux, ONGC and Kailash Nath: in fact, if you wish,
you can concentrate on only ONGCandKailash Nath.

(This exercise will require you to understand what is the concept of ‘demurrage’ in shipping law, and from that
to try and develop arguments on how section 74 applies to that concept. The goal is to try and see how lawyers
in commercial disputes need to apply principles such as s. 73/74 etc. to different types of clauses which they
may not necessarily have had detailed knowledge of before.)

Background Facts

- The Respondent (Respondent before the court, Claimant before the arbitrator) is a company
incorporated in Australia having its principal place of business in Sydney. At the material time, it was
represented in India through its representative M/s. Ensource Energy (India) Private Limited. The
business of the Respondent was inter alia of supplying non- coking coal.

- The Appellant (formerly known as Larsen & Turbo Ltd., Appellant before the court but Respondent in
the arbitration: so be careful about the terminology of ‘Respondent’) had entered into contract dated 18
September 1999, with the Respondent, for bulk purchase of ‘Steaming non-coking coal’. The coal to be
supplied by the Respondent was of South African origin.

- There is no dispute that under clause 4 of the contract the cargo size was agreed and that the cargo was
to be discharged at the Appellant's jetty at Pipavav Port. The contract also provided for the discharge of
the cargo at Chennai Port as also the cargo size for discharge at the said location.

- Clause 8 of the contract provided for “Timing” for five items of firm cargo and option cargo to be
separately indicated at a later date. Clause 10 of the contract provided for issuance of an arrival notice
at the discharge port, tendering of notice of readiness, commencement of laytime at discharge port,
 discharge rate, payment of demurrage/despatch, etc. The dispute between the parties arose under clause
10(v) relating to demurrage. These clauses are reproduced below.

- It is not in dispute that under the contract and in compliance with the schedule of shipment of cargoes
incorporated in the contract, the Respondent shipped to the Appellant from the Port of Richards Bay,
South Africa, five firm cargoes as under:-
Bill of Lading No. &
Vessel Quantity M/T Discharge Port
Date
mv“Dakshineshwar” 1 - 10.10.1999 39206 Pipavav
mv “Rishikesh” 1 - 22.12.1999 37306 Chennai
mv
1 - 05.02.2000 39123 Pipavav
“Dakshineshwar”
mv“Pataliputpra” 3&4 - 06.04.2000 13981 Pipavav
mv“Pataliputpra” 1 - 11.05.2000 36617 Chennai

- The cargoes were discharged from the vessels by the stevedores appointed by the Appellant and the
‘statement of facts’ were signed by the Master, the vessel's agents and the agents of the Appellant who
were the receivers.

- The Respondent's case is that in each of the aforesaid shipments, the vessels went on demurrage. For
what is meant by ‘going on demurrage’, see the extracts from Halsbury and other authors below.

- The Respondent accordingly prepared laytime calculations based on the ‘statement of facts’ and
submitted the same to the Appellant alongwith the other documents and commercial invoices for
demurrage claims, for settlement.

- As per the Respondent as per clause 10(v) of the contract (supra), the demurrage payable by the
Appellant to the Respondent in US dollars was as under:
Vessel Invoice Date Amount US $
mv“Dakshineshwar” 29.06.2000 41027.78
mv “Rishikesh” 29.06.2000 94684.72
mv
29.06.2000 16678.48
“Dakshineshwar”
mv“Pataliputpra” 14.07.2000 01159.44
mv“Pataliputpra” 14.07.2000 91787.50
245337.92

- Respondent’s case was that as per clause 10(v) of the contract, the demurrage claim was required to be
settled within sixty days after submission of laytime statement with supporting documents like Notices
of Readiness, Statement of Facts and Time Sheet. Further, according to the Respondent, clause 10(v) of
the contract also provided, that any disagreement over laytime statement must be raised by the other
party within thirty days after such statement is transmitted and received, otherwise, the statement
would be accepted as correct.
 - The Respondent's case is that though invoices alongwith the supporting documents were submitted by
the Respondent to the Appellant, there was no disagreement on the part of the Appellant and thus as per
Clause 10(v) the Appellant was under an obligation to settle the demurrage within sixty days of the
submission of the invoices, which it failed to do.

Relevant clauses of the contract between the parties:

Clause 8 reads:
8. Timing:
FIRM CARGO NO. LOADING AT LOAD PORT DISCHARGE PORT
aa) AROUND 25thSeptember, 1999 to 30th L&T JETTY-PIPAVAV
bb) DECEMBER, 1999 CHENNAI PORT
cc) FEBRUARY, 2000 L&T JETTY-PIPAVAV
dd) APRIL, 2000 L&T JETTY-PIPAVAV
ee) JULY, 2000 CHENNAI PORT
ff) Option Cargo OPTION CARGO TO BE SEPARATELY INDICATED AT A LATER DATE

Clause 10(v) reads:

10(v) Demurrage/Despatch:

At the discharging port, buyers shall pay demurrage to the Seller or Vessel owners through sellers if
required, at the rate not exceeding US $ 8000.00 per day or pro-rata for part of the day and sellers
shall pay despatch to buyers if earned, at a rate of 50% of demurrage rate, not exceeding US $ 4000.0
per day or pro-rata for part of the day.

All demurrage or despatch to be settled within 60 days after laytime statement submitted with
supporting documents, like Notices of Readiness, Statement of Facts and Time Sheets.

Any disagreement over the laytime statement must be raised by the other party within 30 days after
such statement is transmitted and received, otherwise, the statement is accepted as correct.

Some further correspondence between the parties

Letter of 6th March 2000 sent on behalf of theRespondent to the Appellant

Dear Sirs,

Sub: Steaming (non-coking) coal in Bulk from South Africa L & T Jetty Pipavav -

Your P.O. No: IMP/990520 dd) cargo

Our Principals have please to nominate the following vessel for L&T Jetty-Pipavav. M.V.

PATALIPUTRA OR SUB
INDIAN FLG BLT 1986
47,175 MT DWT ON 11.825M SSW
LOA/BEAM 189/30.4M
 5HO/HA
4 × 25T CRANES + 4 × 8 CBM GRABS
55215 CBM GRN
ALL DTLS ABT
LOADABLE QUANTITY: 40,000MT+10%
LOADPORT LAYCAN: 21stMARCH-4thAPRIL 2000
DEM/DES RATE: US $ 7000/DHD
FTA RBCT: 29th/30thMarch 2000 AGW WP

KINDLY SEND US YOUR ACCEPTANCE AT THE EARLIEST.

Best regards,
Yours faithfully,

for ENSOURCE ENERGY (INDIA) PVT. LTD.

N. Dhanaraj

CC to: Shri. D.S. Patwardhan VP, Awarpur Cement Works.”

Appellant’s response to the above letter

“This has reference to the fax message dated 06 thMarch 2000 received today as regards nomination
of vessel “m.v. Pataliputra” for L&T Jetty Pipavav. The vessels specifications are generally
acceptable to us and we hereby convey our approval to the same...”

Pleadings of the parties before the arbitrator

Respondent's claim for demurrage was for a sum of US $ 2,45,337.92 being the demurrage payable on the
vessels hired by the Respondent under the contract with the Appellant, as also an interest claim payable by the
Appellant at 8% per annum on each of the demurrage claims, from the respective due dates till payment or
realisation.

The Appellant resisted the Respondent's claim by filing a reply to the statement of claim and disputed its
liability to pay any demurrage to the Respondent interalia on the ground that under Clause 10(v) of the contract,
demurrage was payable to the vessel owner. The Appellant, thus asserted that the right of the Respondent to
claim demurrage was only in the form of an indemnity and there was no evidence to show that the Respondent
had made payment of any demurrage to the vessel owner, and unless the Respondent establishes and/or proves
that it had paid demurrage to the vessel owner, the Appellant was not liable to pay any demurrage.

Findings of the arbitrator:

The operative award is as under:-

(1) The Claimant is entitled to recover from the Respondent and the Respondent is liable to pay to the
Claimant an amount of US $ 2,45,337.92.
 (2) The Claimant is entitled to interest at 5% per annum in US Dollars from 15 thSeptember, 2000 till
the date of the Award and thereafter till payment.

In addition, the arbitrator also noted as follows in the course of the reasoning:

(i) There is no dispute that the Statements of Facts, on the basis of which the Invoices and lay
time calculations have been made, have all been signed by the representative of L & T. It is
also not in dispute that the lay time calculations in the case of each of the five vessels are
made on the basis of the Statements of Facts. The Statements of Facts and the corresponding
Invoices in respect of the vessels, m.v. Dakshineshwar Voyage 1, Rishikesh, Dakshineshwar
Voyage 2, Pataliputra Voyage 1 and Patliputra Voyage 2 are at pages 35, 40, 52, 32 and 60,
respectively of the pleadings compilation, and the corresponding Invoices are at pages 36, 46,
55, 64 and 73, respectively. These Statements of Facts are admittedly signed by the Master of
the vessel, the vessels’ Agent and “the agents of the receivers” i.e. the Respondent. In the
Reply to the Statement of Claim, in paragraph 9, L & T has specifically admitted as correct
the contents of paragraph 5 of the Statement of Claim, in which one of the statements made
was that “the Statements of Facts were signed by the Master, vessels’ agents and agents of
the receivers”, namely, the Respondent.

(ii) When a person signs a document, he is taken to have agreed to the correctness of the
statements made in the document and since the Agent of L & T has signed the Statements of
Facts, the statements made therein must be held to be binding on L & T. It must, therefore, be
held that the vessels in question had gone on demurrage as alleged in paragraph 6(a) of the
Statement of Claim.

(iii) …

(iv) The question as to the nature of the liability created by the first part of Clause 10(v) must
necessarily be considered on a reading of the Clause as a whole. The first part of Clause
10(v) creates an absolute obligation against the buyer to pay demurrage to the seller or vessel
owner through the seller if required at a rate not exceeding US$ 8000.00 per day. At the same
time a provision was also made that the seller shall pay despatch to buyers if earned, at a rate
of 50% of demurrage rate, not exceeding US $ 4000.00 per day or pro-rata for part of the
day. The manner of working out the claim for demurrage or despatch is set out in the second
paragraph of Clause 10(v), the effect of which, plainly, is that the amount to be paid by way of
demurrage or despatch has to be settled within 60 days after lay time statement is submitted
with supporting documents, like notices of readiness, statement of facts and time sheets. There
is not a whisper in Clause 10(v) of the contract that the liability to pay demurrage is
dependent upon demurrage being paid by the seller to the vessel owner. The contract in
question is between the seller, namely the Claimant, and the buyer, L & T. When the first
paragraph of Clause 10(v) provides that the demurrage shall be paid “to the seller or vessel
owners through the sellers if required”, it obviously contemplated that the party which
requires demurrage to be paid to the vessel owner is the seller through whom the demurrage
is to be paid. There is no privity of contract between L & T and the vessel owner and the
obligation to pay directly to the vessel owner any amount of demurrage would arise only if the
buyer is so directed by the seller.

(v) That L & T also understood Clause 10(v) as not providing for an indemnity is also clear from
the evidence of witness Patwardhan. Patwardhan was asked in cross-examination with regard
to the payment already made by L & T. Patwardhan was the person who, on his own
admission, was concerned with the decision to pay demurrage and such demurrage had been
paid earlier. He unambiguously stated, as already pointed out, that the claim for demurrage
paid to Glencore International was on the basis of three documents, namely, (1) statement of
facts given by Glencore, (2) verification thereof and, if necessary, correction thereto, and (3)
charter party agreement. With reference to these statements, he stated “the above documents
are generally documents which I considered while determining whether demurrage is to be
 paid or not”. These statements of Patwardhan and the fact that demurrage was decided to be
paid by L & T earlier on the basis of the documents referred to above clearly indicate that
even L & T had never understood the clause relating to payment of demurrage as being in the
nature of an indemnity. Admittedly, the amount of demurrage claimed by the Claimant is at
the rate which is payable by the Claimant to the ship owner under the contract of
affreightment. It is also important to point out that the agreement between the parties that the
claim for demurrage/despatch should be settled within 60 days after lay time statement was
submitted with supporting documents also militates against the contention that the contract is
one in the nature of an indemnity.

(vi) It is also important to point out that so far as the amount of demurrage is concerned, it was L
& T's representative who insisted upon the figure of demurrage being intimated to it. L & T
wrote to Ensource Energy (India) Pvt. Ltd., agent of the Claimant, on 16 thSeptember, 1999 in
reply to a Fax message dated 15 thSeptember, 1999 relating to nomination of the vessel m.v.
Dakshineshwar. This nomination was made by Ensource Energy by Exhibit C-24 on
15thSeptember, 1999 and L & T was asked to send acceptance before noon of 16 thSeptember,
1999. By Exhibit C-25 dated 16 thSeptember, 1999, among the various items, information was
sought by L & T from Ensource Energy with regard to demurrage/despatch amount and item
No. 6 of this letter refers to “demurrage/despatch rate to be indicated”. It was in pursuance
of this letter that the demurrage rate of US $ 7,000 was intimated. On the facts of the present
case, therefore, it is clear that the figure of demurrage did not and was never intended to
present an amount of liquidated damages. Consequently, the argument of the learned Counsel
for L & T that the claim for demurrage must be rejected as no loss has been proved has to be
rejected.

Challenge to the Award: Appellant’s arguments

The Appellant challenged the award by filing a petition under Section 34 of the Act. The Appellant submitted as
follows:

1. The claim for demurrage is in the nature of liquidated damages. It is submitted that the learned
Arbitrator had committed an error in holding that the demurrage did not represent liquidated damages
but was in the nature of a fixed charge. It is submitted that it is a universally accepted concept that the
demurrage is in the nature of liquidated damages which is well recognized in the private international
law.

2. It is next submitted that proof of damages was necessary as the claim for damages is a claim arising in
the event of breach of the contract namely detention of the vessel beyond the agreed period of time. It
is submitted that as such, any amount agreed to be paid under the contract for such a breach (whether
such sum specified by way of liquidated damages or an upper limit fixed) would be governed by the
provisions of Section 73 and 74 of the Indian Contract Act. It is submitted that the Respondent being a
seller, if had suffered any damages, the Respondent could have easily proved the same by producing
the claim or on demand made by Glencore-the owners of the vessels and any payment made
thereunder. In support of this submission, reliance is placed on the observations of the Supreme Court
in paragraph 50 in the case of “Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd.”. Then
reliance is placed on the observations of the Supreme Court in paragraph 43 of the decision in the case
“Kailash Nath Associates v. DDA”

3. It is next contended that the Respondent has not suffered any loss. Admittedly the Respondent-seller
was not the vessel owner and the goods were shipped in a third party vessel under the Contract of
Affreighment (COA). Therefore, between two alternatives in clause 10(v) of the contract, the relevant
portion of the clause applicable is the portion relating to payment of demurrage to the vessel owner. It
is submitted that the quantum of damage would be exclusively within the knowledge of the Respondent
 and in order to claim the same from the Appellant, the burden of proof under Section 106 of the Indian
Evidence Act was heavily on the Respondent to prove such loss/damage. It is submitted that thus it is
apparent that the Respondent has not incurred any loss or as such the question of award of any damage
did not arise. It is submitted that the contention of the Respondent that it is difficult/impossible to prove
extent of damage suffered by him relying on the passage from 18thEdition of McGregor on Damage is
misconceived. It is submitted that the following extract in the 18 thEdition of McGregor on Damages in
fact supports the Appellant's contention that the demurrage is in the nature of damages:-

“27-075. ....... the normal measure of such damages will be constituted by the amount lost
through loss of use of the ship. For this, one illustration - they are quite numerous - is
provided by GatoilAnstlat V. Omenial, The Balder London (No. 2) where the owners of a ship,
wrongfully prevented by the charterers from withdrawing her from a charter, were awarded
as damages the difference between the charter rate and the market rate of hire for the period
in question.”

The submission is that the above extract deals with the scenario where the shipowner is itself claiming
demurrage which is distinct from the present case where the Respondent is not the owner and has
chartered another's Vessel. In this situation, the Respondent could have proved damage suffered by it
by merely producing the amounts or demurrage paid by it to the vessel owner.

4. The next submission is that the Respondent cannot profiteer or make windfall out of claim for
damages. It is submitted that very word “damages” is meant that the party suffering due to breach of
contract is compensated for the loss suffered by it. This submission is stated to be supported by relying
on paragraph 44 of the judgment of the Supreme Court in the case Kailash Nath Associates

5. It is next submitted that in any case under Clause 10(v) of the contract the obligation of the Appellant
to pay demurrage relates to the demurrage payable by the Respondent-seller to the vessel-owner, as the
said clause of the contract specifically recognizes payment of demurrage to the vessel owner, as the
clause provides that “Buyer shall pay demurrage to the seller or vessel-owner through the seller, if
required”. The clause is required to be interpreted in such a manner that the word “if required” are not
rendered otiose. The use of words “if required” indicate that in a case where the seller transports the
goods by a ship belonging to a third party (vessel owner), the demurrage, would be payable to the
vessel owner and, therefore, the words “if required” relate to the liability, if any, of payment of
demurrage to the vessel owner. In contrast, if the seller himself is the vessel owner, then obviously, the
demurrage is payable to the seller as he would suffer loss by reason of vessel being detained beyond
the agreed period of time

Additional materials which may be of relevance

In Halsbury's laws of England, Fourth Edition (Vol. 43(2) in Chapter 14 Heading (H) describes “Terms as to
loading and discharge” and (J) describes “Terms as to demurrage and damages for detention”.

1506. Demurrage days and payment of dispatch money. At the expiration of the lay days, the
charterer may be allowed, in consideration of an additional payment called ‘demurrage’, a further
number of days, known as ‘demurrage days'. Sometimes no further time is expressly allowed, but it is
simply provided that the charterer is to pay demurrage at the rate of so much a day for every day that
the ship is detained beyond the lay days. Conversely, it is often provided that the charterer is to be paid
‘dispatch money’ for days saved in loading or discharging. It is, therefore, important, for the purpose
both of ascertaining when the lay days expire and the liability for demurrage begins and of calculating
the amount of demurrage payable, to define what is meant by the word ‘day’ in a charterparty. In
practice, its meaning is usually made more or less clear by the insertion of qualifications. Once a ship
is on demurrage, the charterers are in continuing breach of contract and may claim exemption from
liability to pay demurrage only under clearly worded exemption clauses to that effect…
 1508. Charterer's right to demurrage days. The specification of lay days and demurrage days in the
charterparty is equivalent to a contract on the part of the charterer that he will not delay the ship for a
further period, and also to a contract on the part of the shipowner that during those days the ship is to
be at the charterer's disposal. The charterer has, therefore, the right to make use of both the lay days
and the demurrage days for the due performance of his obligation either to load or to discharge, and it
would seem that he commits no breach of contract in detaining the ship until the expiration of the
demurrage days. If the charterparty does not specify the number of lay days, demurrage, where
provided for, will become payable at the expiration of a reasonable time, and will continue to be
payable, if the charterparty does not specify the number of demurrage days, as long as the ship is
detained by the charterer.

However, detention after the lay days or after the demurrage days, where either are specified, and, in
other cases, detention after the expiration of a reasonable time for loading or discharging, constitutes
a breach of contract on the part of the charterer. In respect of this breach of contract the charterer is
liable for any damage actually suffered by the shipowner in consequence of the delay and not merely
for the agreed rate of demurrage, which will only be applicable to a claim for damages for the actual
detention of the ship.

The detention does not, however, entitle the shipowner to treat the contract as repudiated and sail
away forthwith; it seems that he may only do this if the charterer's conduct is such as to show that he
does not intend to perform the charterparty, or if the detention lasts so long as to frustrate the
commercial purpose of the adventure.

1509. When the demurrage is payable.

Demurrage in the strict sense of the word is payable only where there is an express term to that effect.
In the absence of any such term the shipowner is not entitled to claim demurrage as such, nor is the
charterer justified in detaining the ship beyond the expiration of the time allowed by the charterparty
for loading or discharging, as the case may be. If, therefore, he detains her for any further time, he is
guilty of a breach of contract, and is liable to pay damages for her detention as soon as the lay days
expire.

The distinction between demurrage and damages for detention is that the first is liquidated and the
second unliquidated damages. Demurrage being liquidated damages, no damages are recoverable for
delay in payment of demurrage as there is no cause of action for late payment of damages.”

An extract from John Schofield, “Laytime & Demurrage” is as follows:

The Charterparty Laytime Definitions 1980 define demurrage as follows:

“DEMURRAGE” means the money payable to the owner for delay for which the owner is not
responsible in loading and/or discharging after the laytime has expired.

However, this definition avoids what at one time was unclear, namely whether a failure to complete
loading and discharging in the allowed laytime of itself constituted a breach of charter. The current
view is that demurrage is liquidated damages for such a breach. In origin, however, demurrage did not
mean a sum payable for breach of contract but a sum payable under and by reason of a contract for
detaining a ship at the port of loading or discharge beyond the allowed time. In Lockhart v. Falk,
(1875) LR 10 Ex.132, at page 135, Baron C Cleasby said:

The word demurrage no doubt properly signifies the agreed additional payment for an
allowed detention beyond a period either specified in or to be collected from the instrument;
but it has also the popular or more general meaning of compensation for undue detention;
and from the whole of each charterparty containing the clause in question we must collect
what is the proper meaning to be assigned to it.”

…
 More recently, in Union of India v. CompaniaNaviera Aeolus SA (The Spalmatori) (1964) AC 868 at
p.899, Lord Guest said:

Lay days are the days which parties have stipulated for the loading or discharge of the cargo,
and if they are exceeded the charterers are in breach; demurrage is the agreed damages to be
paid for delay if the ship is delayed in loading or discharging beyond the agreed period.(Lord
Reid also took the view that failure to complete loading/discharging within the allowed
laytime was a breach of contract.)

Whether the claim for demurrage is in the nature of liquidated damages? If yes, is the respondent under
an obligation to show actual loss or damage caused to it in order to trigger clause 10(V) of the contract.