Incorporation, Indemnity & Implied Term - Gunvor v CruGas
Posted on 16th January 2019 at 14:27
A court decision, only recently reported, in July last year considers all of these concepts in relation to a very large demurrage claim.
In previous commentaries, such as our 19 March 2018 posts Drafting is better than disputing and Rights and responsibilities - freight payable BBB and demurrage, we have discussed linkage between the sale contract and the charterparty as regards demurrage liability. This came up again in Gunvor SA v CruGas Yemen Ltd  EWHC 2061 (Comm), which examines two established points and one wholly novel one.
The parties had concluded a term contract for the sale of gasoline by twelve monthly consignments, CIF Hodeidah, and amid detailed terms the buyer had to pay the seller demurrage “as C/P rules.”
The seller fixed vessels under a COA, by which a related company chartered in tonnage as required. After several liftings the buyer was in default as regards demurrage (USD5.5m) and several other large payments, such that the term contract came to an end and the seller sought to recover substantial losses.
The buyer raised three defences to the demurrage part of the claim:
1. Time bar, based on such a provision in the COA;
2. The seller must prove that it had previously paid the claimed demurrage to its own counterparty, i.e. the buyer’s liability here was to provide an indemnity; and
3. There was an implied term that the rates claimed were “in line with the market rate” (the demurrage rate contained in the COA was USD30k PDPR for the first seven days, rising to USD32.5k PDPR thereafter).
The court, however, rejected all of these.
The COA time-barring provision was not incorporated into the term contract. It was well established that, in a sales contract, words of general incorporation of the demurrage provisions of a separate charterparty - here, simply that demurrage was payable “as C/P rules” - only bring in terms as to the rate and accrual mechanism.
General words like this did not carry across terms which have been described as ancillary, such as a time bar on presentation of a claim. This was clearly set out in the 1995 decision in OK Petroleum AB v Vitol Energy SA, where the sale contract contained the very common brief wording “ … Demurrage As per Charter Party”. Such words did not “clearly express a mutual intention to incorporate into [the sale contract a CP provision] which is not part of the demurrage subject-matter … but is merely ancillary to it”.
The nature of the buyer’s liability was “free-standing and not an indemnity”, such that the seller did not have to prove that it had paid the demurrage claimed. In Glencore Energy (UK) Ltd v Sonol Israel Ltd in 2011, the judge said it was clear that:
“ … where a sale contract incorporates the terms of a charterparty relating to demurrage … the obligation in the sale contract is generally to be construed as an independent demurrage obligation and not as an indemnity”.
There was nothing in the term contract that suggested anything different, so the buyer was liable to pay, rather than merely to indemnify the seller as regards prior payments.
Finally, in dealing with the novel argument as to an implied term, there was no justification for a provision that demurrage rates should be “in line with the market rate”, whatever that might be. (The judge rightly recorded that there is no such thing as a demurrage market rate, in the sense of published figures, unlike for example freight rates or commodity prices.)
According to the test established nearly 130 years ago, such wording was not necessary for the business efficacy of the term contract. Nor was it needed to initiate the obvious but unexpressed intentions of the parties when that contract was made.
Plainly a debtor will struggle to imply a term that a demurrage rate is other than that provided, whether under a primary charterparty or a sale contract that incorporates its related provisions. There will seldom if ever be any basis on which a court or tribunal can alter that.
Also, clear words will be needed to change the general position that a buyer under a sale contract must pay the seller demurrage as provided, rather than being allowed to get the seller to prove what he has paid, as part of an indemnity claim.
Finally, the discussion of the effect of the commonplace “demurrage as per charterparty”, or similar, reminds parties that something more than this contract shorthand will usually be needed if demurrage time bar provisions are to be reliably transposed from one contract to another.
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