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Legalities Surrounding Unpaid Freight

Published on : September 2017
Author(s):George SK

Mr. DEBT’s hello to Mr. DAMAGE: Case Analysis on Freight Industry

Suppose an individual has borrowed a specific sum of money against an asset of a reciprocal value as security. However, the debtor fails to fulfill his obligation; and subsequently, the creditor exercises his lien and disposes of the former’s asset to retrieve the due amount. Unfortunately, the sale proceeds of the debtor’s assets were not sufficient to cover his claim. Ergo, a substantial question arises as to whether the creditor would continue to have a claim against the debtor? Better yet, could one opine that the creditor would have a valid claim if the underlying issue was outstanding freight charges and not a loan and the security sold was the cargo? Let’s read further to find out.

The graceful commercial effect of globalization paved the way for various industries that were primarily intended to facilitate the process of international trade. By then, sea cargo was already a major player in the logistics supply chain employing thousands of container ships over most of the earth’s waters. However, the convoluted technicalities of the industry raised substantial ambiguity in the legal relationship between the parties in a charter party agreement. Further, the complexity of the legality surrounding the industry along with the multiplicity of jurisdictions involved in a maritime dispute has led to numerous circumstances which questioned the fundamental principles of maritime jurisprudence. One such situation arose in 2016 when the Commercial Court in Singapore had to identify the characteristics of freight in the infamous case of D’Amico Shipping Italia SPA v Endofa DMCC and Another. The primary argument before the court was if outstanding freight charges in a charter-party would amount to damages or unpaid debt. This case felt the paparazzi chills due to the undeniable universal concept that awards damages to the ship owners when the other party of a charter party agreement does not pay freight charges, or demurrage. The industry was unfamiliar with this technique due to the general perception that the concept of debt would arise only when a party undertakes a monetary loan for a security of similar value. However, this case established a nexus between outstanding freight and unpaid debt by comprehending the underlying asset in both the circumstances viz. cargo and security, respectively.

Once Upon a Time…

The story unfolded when Endofa DMCC (the Charterer) chartered a voyage to transport a cargo of crude oil (the Cargo). The Cargo was being shipped by a third-party shipper from Ghana to Germany through a vessel owned by D’Amico Shipping Italia SPA (the Ship Owner) vide a charter party agreement (the Agreement) between the parties. The Agreement consisted of a before breaking bulk clause and provided the Ship Owner with a lien over the Cargo until all freight and demurrage charges were paid off by the Charterer and the third-party shipper. Further, the before breaking bulk clause granted the former with a right to withhold the Cargo until the time of payment of all due amounts by the other parties.

However, things went south due to the failure of the Charterer to meet its obligations and pay the freight charges after the vessel reached its destination in Germany. The Charterer and the third-party shipper also failed to provide necessary instructions regarding the discharge of the Cargo. Therefore, the aggrieved Ship Owner decided to exercise its lien to meet the outstanding amount that arose from the Agreement. Consecutively, the Ship Owner obtained a court order and disposed of the Cargo for USD 3.2 million after a period of five (5) months. However, the tale did not end there since the sale amount did not meet the wholesome claim amount of the Ship Owner. Therefore, a suit for summary judgment was instituted by the Ship Owner with the view to obtain the balance amount in freight and demurrage from the Charterer and the third-party shipper.

The Undeniable Characteristics of Unpaid Freight

In this instance, the court faced with the mammoth task of determining the characteristics of outstanding freightage amount while analyzing the provisions of the Agreement. Therefore, the court had to comprehend the precise moment when the freight became due to ascertain if the balance amount could be recoverable as the outstanding debt. One might wonder, why all this hassle over a few technical terms like unpaid debt and damages when the whole debacle surrounds a charter-party dispute. Recapping to the earlier mentioned complexity surrounding charter-party agreements, it is imperative to note that mitigation is a substantial factor that the court takes into consideration while ruling a suit for damages. That means that the court would consider the measures adopted by a party to curtail the potential losses of the other party in a suit for the award of damages arising from a tort. However, this rule does not have any standing in a suit to recover debt since the burden is generally not on the creditor to minimize the debtor’s losses.

In this case, the Charterer was placed with the burden to prove that the Ship Owner was negligent in its attempt to mitigate the losses that the other parties could incur. Therefore, the Charterer argued that the freight charges were payable as damages and further would not become due until the Cargo had been discharged or was made available to them by the Ship Owner. They also contended that freight had not accrued when the vessel had reached its destination, due to a breach of the Agreement that resulted from their failure to provide necessary instructions regarding discharge. Further, the Charterer claimed that the Ship Owner had not taken appropriate measures to mitigate the potential losses that they could incur since the former had exercised its right to lien only after (5) five months from the date of arrival of the vessel. Further, the Charterer argued that the sale receipts of the Cargo would be adequate to cover the costs of freight and minimize the claim against the third-party shipper if the Ship Owner had disposed of the Cargo earlier.

However, the court comprehended that charter-party agreements consist of tailor-made provisions such as the before breaking bulk clause and hence, should concentrate on the specific provisions of the Agreement while analyzing the characteristics of the freight involved. However, the court also took the opinion that the provisions of general law and commercial practice should also be taken into consideration while determining the payment of freight in this case. Therefore, the Commercial Court scrutinized the provisions of the Agreement and held that shipment would be due before the Cargo is ready for discharge under the Agreement. Further, the court observed that the Agreement had granted the Ship Owner the right to withhold the discharge of the Cargo unless the Charterer paid the freight amount. The court also took the opinion that the freightage would be due from the moment the Ship Owner was ready to discharge the Cargo since the Agreement had provided that the former could retain the possession of the Cargo until the other partied cleared all payments. Therefore, in the present case, the amount of freight was payable as debt since the Charterer and the third-party shipper did not pay due amounts and provide the Ship Owner with relevant information regarding the discharge of the Cargo. Further, the court also rejected the contention of the Charterer relating to the duty of the Ship Owner to mitigate a separate loss, by stating that the alleged failure of the latter to dispose of the Cargo promptly cannot be the defense to a different suit for unpaid freight.

Conclusion

This case is expected to establish a global standard regarding the payment of freight as an outstanding debt. Therefore, the owner of a ship would not be under the duty to minimize the losses of the other parties as long as the freight had become due by the charter-party agreement. Further, it is imperative to note that courts interpret the relationship between the parties and the characteristics of the subject matter of a maritime dispute by analyzing the ambit of the underlying charter-party agreement. Therefore, parties in the contract should scrutinize disputes relating to charter-party agreements establish a clear nexus between rights and obligations against one another. The bespoke legal advice of an international law firm with a dedicated legal team is expected to support the cause of the parties in such an agreement.

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