In the recent decision in The Eternal Bliss [2020] EWHC 2327 (Comm), the English High Court (the “Court”) determined a point of law regarding liquidated damages in the context of a standard form shipping contract. This followed the referral to the Court by the parties under s45 Arbitration Act 1996 (the “Act”) of two questions of law that arose in the course of arbitral proceedings.

The decision of the Court is notable for involving a rare invocation of s45 which provides for the Court to determine a point of law during the course of arbitral proceedings by agreement of all parties, or on the application of a party with the permission of the tribunal.

Background

Priminds Shipping (HK) Co., Ltd (“Priminds”) and owner K-Line Pte Ltd (“K-Line”) entered into a contract of affreightment for nine separate voyages, to be performed under the standard Norgain form (as amended by the parties). Clause 18 of that contract (“Clause 18”) determined the laytime allowed for loading and unloading. The contract also provided (at Clause 19) for the rate of demurrage (liquidated damages) to be paid where loading or discharge of the cargo was not completed within laytime. A vessel (the “Eternal Bliss”) was nominated by K-Line for one of the agreed voyages to carry soybeans (the “Cargo”) for discharge in China.

Owing to port congestion and a lack of storage space ashore for the cargo in China, discharge of the cargo was delayed. Upon the cargo eventually being discharged, it was discovered that it was damaged, having “exhibited a significant amount of moulding and caking”. K-Line settled the claims of the cargo’s receivers and their insurers at a cost of US$1.1million (the “Settlement Costs”), before bringing a claim in arbitration against Priminds seeking damages or an indemnity for the amount of the Settlement Costs, alleging that Priminds’ breach of contract was its failure to discharge the cargo at the rate specified in Clause 18. No further breach of contract was alleged.

The parties agreed to bring the following two questions (collectively the “Parties’ Questions”) (as formulated at the hearing) before the Court as a preliminary issue:

“Was… [Priminds]…liable to compensate or indemnify…[K-Line]… in respect of the loss, damage and expense referred to therein by way of:

(a) damages for… [Primind’s] … breach of contract in not completing discharge within permitted laytime [“Question A”];

(b) an indemnity in respect of the consequences of complying with… [Primind’s] … orders to load, carry and discharge the cargo? [“Question B”]

These questions were referred to the Court under s45 of the Act, which provides that parties can apply (subject to some qualifications) to the Court to determine any questions of law that arise during the course of arbitral proceedings seated in England and Wales or Northern Ireland. S45 provides, inter alia, that:

(1) “Unless otherwise agreed by the parties, the court may on the application of a party to arbitral proceedings (upon notice to the other parties) determine any question of law arising in the course of the proceedings which the court is satisfied substantially affects the rights of one or more of the parties…

(2) An application under this section shall not be considered unless—

(a) it is made with the agreement of all the other parties to the proceedings, or

(b) it is made with the permission of the tribunal and the court is satisfied—

(i) that the determination of the question is likely to produce substantial savings in costs, and

(ii) that the application was made without delay…

Decision

The Court (Andrew Baker J) commended the parties for seeking the Court’s decision on the questions submitted, “so that the law may be clarified” (although noting that it may take a judgment from the Court of Appeal to settle the law definitively). The Court had noted that there was “long-standing uncertainty” on these points of law which were “of significance in a particular field of commerce”.

The Court observed that the issues at the heart of the Parties’ Questions were the issues of what loss precisely demurrage liquidates (which was a matter of construction of the demurrage provision in the relevant charter (here, Clause 19)) and the type of loss that K-Line had suffered.

The Court’s jurisdiction under s45:

The Court considered that the necessary jurisdictional hurdles under s45 had been met in order for the Court to be able to “entertain and determine the question” because (i) the questions were coming before the Court by agreement of the parties; (ii) the issue substantially affected the rights of the parties as “K-Line’s claim for the compensation it seeks … requires the answer it gives to that question to be correct”; (iii) the parties agreed that the Court had jurisdiction; and (iv) subject to a qualification in regards to Question B, it was “just and convenient as a matter of discretion” to entertain the issue.

Question A

Turning to Question A, the Court answered in the affirmative, considering that:

  1. the damage to the cargo was a different type of loss to the mere detention of the vessel; and
  2. a separate breach of contract was not needed (i.e. in addition to the breach of failing to discharge within the permitted laytime) for the vessel’s owner (here, K-Line) to be able to recover damages beyond demurrage for a different type of loss (loss that was beyond mere detention of the vessel).

In regard to (i), the Court considered that the damage to the cargo was in fact a different kind of loss to the mere detention of the Eternal Bliss. Whilst Priminds had tried to argue that the damage to the cargo was consequential on the delay beyond the laydays, and that K-Line’s claim could only be for detention of the ship, the Court considered the “damage to the cargo is quite distinct in nature from, and is additional to, the detention of the ship, as a type of loss”.

In respect of (ii), the Court considered that K-Line had surpassed the “high bar” required for the Court to depart from an earlier High Court authority on the point.

Question B

Having found in K-Line’s favour on Question A, the Court considered that the “strong policy” of English law that the courts should “interfere in the arbitral process only where justice truly demands” and that this was “still in play even though the parties jointly came to the court invoking s45”. Given this, it was considered better to interpret the Parties’ Questions as only requiring an answer to Question B if Question A had been answered in the negative.

The Court nevertheless indicated that had it not found in favour of K-Line on Question A, the Court would not have found there to be an implied indemnity for the purposes of Question B.

Comment

While the decision of the Court is of considerable importance for the maritime sector, in arbitration terms the case is also significant as illustrating the operation of the preliminary issue referral procedure under s45 of the Act.

The English courts’ power to determine questions of law under s45 has been a relatively rarely used provision of the Act. This is likely to reflect arbitration users’ confidence in the tribunal’s determination of legal issues, with most parties content for legal questions to be decided by the tribunal, within the privacy of the arbitration proceedings themselves.

However, there may be circumstances, as in this case, where the relevant area of law is unsettled and one or both parties take the view that the courts are best placed to provide an answer to the legal questions concerned. This may be particularly useful where the dispute concerns the interpretation of a standard form contract which the parties concerned are using regularly. In those situations, the s45 preliminary issue process provides a public judgment on the points concerned, which can provide much-needed certainty for the parties and the relevant business sector.

For more information, please contact Nicholas Peacock, Partner, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Nicholas Peacock

Nicholas Peacock
Partner
+44 20 7466 2803

Rebecca Warder

Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418