ASG Law

Category: Shipping Law

  • Philippine Shipping Law: Deadfreight and Demurrage Liability in Charter Parties

    Clarity is Key: Understanding Deadfreight and Demurrage in Philippine Shipping Contracts

    TLDR: This Supreme Court case clarifies that in shipping contracts, charterers are liable for deadfreight if they fail to load the agreed cargo quantity, even with ‘more or less’ clauses. Conversely, if a contract explicitly states ‘no demurrage,’ ship owners cannot claim demurrage for delays, even under ‘Customary Quick Dispatch’ terms. Clear, unambiguous contract terms are paramount in shipping agreements to avoid disputes.

    G.R. No. 96453, August 04, 1999

    INTRODUCTION

    Imagine a scenario where a ship is hired to transport goods, but the agreed cargo doesn’t fully materialize. Or picture a vessel waiting at port longer than expected due to delays. Who bears the financial burden in these situations? Philippine shipping law, particularly concerning charter parties, addresses these issues through the concepts of deadfreight and demurrage. The Supreme Court case of National Food Authority vs. Hongfil Shipping Corporation provides critical insights into how these principles are applied, emphasizing the importance of clearly defined terms in shipping contracts. This case serves as a crucial guide for businesses involved in maritime transport, highlighting the potential financial implications of imprecise agreements.

    LEGAL CONTEXT: DEADFREIGHT AND DEMURRAGE IN CHARTER PARTIES

    At the heart of this case lies the concept of a charter party, a contract where a shipowner agrees to lease a vessel to a charterer for the carriage of goods. Specifically, the case involves a ‘contract of affreightment,’ where the shipowner retains control of the vessel, and the charterer simply hires space for cargo. Two key elements often disputed in such contracts are deadfreight and demurrage.

    Deadfreight arises when a charterer fails to load the full quantity of cargo they agreed to ship. Article 680 of the Code of Commerce explicitly addresses this:

    “Art. 680. A charterer who does not complete the full cargo he bound himself to ship shall pay the freightage of the amount he fails to ship, if the captain does not take other freight to complete the load of the vessel, in which case the first charterer shall pay the difference, should there be any.”

    This provision establishes the charterer’s responsibility to compensate the shipowner for lost freight when the agreed cargo is not fully loaded. The phrase ‘more or less’ in cargo quantity clauses is also relevant, intended to accommodate minor discrepancies, not substantial shortfalls.

    Demurrage, on the other hand, is compensation for delays in loading or unloading a vessel beyond the agreed timeframe. While not always expressly stated in contracts, Article 656 of the Code of Commerce implies its applicability:

    “Article 656. If in the charter party the time in which the loading or unloading are to take place is not stated, the usages of the port where these acts are to take place shall be observed. After the stipulated customary period has passed, and there is no express provision in the charter party fixing the indemnity for delay, the Captain shall be entitled to demand demurrage for the lay days and extra lay days which may have elapsed in loading and unloading.”

    However, the Supreme Court has clarified that liability for demurrage, in its strict sense, requires an explicit contractual stipulation. Terms like ‘Customary Quick Dispatch (CQD)’ indicate that loading and unloading should be done within a reasonable time, considering port customs and circumstances, but do not automatically equate to demurrage liability if ‘demurrage’ is expressly waived.

    CASE BREAKDOWN: NFA VS. HONGFIL SHIPPING CORPORATION

    The National Food Authority (NFA), a government agency, entered into a ‘Letter of Agreement for Vessel/Barge Hire’ with Hongfil Shipping Corporation. NFA hired Hongfil to transport approximately 200,000 bags of corn grains from Cagayan de Oro to Manila. Key terms of the agreement included:

    • Cargo: Corn grains in bags
    • Quantity: Two Hundred Thousand bags, more or less
    • Laydays: Customary Quick Dispatch (CQD)
    • Demurrage/Dispatch: None
    • Freight Rate: P7.30 per bag, total of P1,460,000.00 based on 200,000 bags

    The vessel arrived in Cagayan de Oro, and loading commenced. However, a strike by arrastre workers significantly delayed the loading process, taking 21 days instead of the estimated 7 days. Upon arrival in Manila, unloading was also delayed due to unavailability of berthing space, taking 20 days instead of the projected 12 days.

    Ultimately, only 166,798 bags of corn were unloaded in Manila, falling short of the 200,000 bags stated in the agreement. Hongfil billed NFA for both deadfreight (for the undelivered bags) and demurrage (for the loading and unloading delays). NFA refused to pay, leading Hongfil to file a case.

    The case journeyed through the courts:

    1. Regional Trial Court (RTC): Ruled in favor of Hongfil, ordering NFA to pay deadfreight and demurrage.
    2. Court of Appeals (CA): Affirmed the RTC decision but removed the award for attorney’s fees.
    3. Supreme Court (SC): Partially reversed the CA decision.

    The Supreme Court tackled three main issues:

    1. Deadfreight Liability: Was NFA liable for deadfreight?
    2. Demurrage Liability: Was NFA liable for demurrage?
    3. Personal Liability of NFA Officers: Could NFA officers be held personally liable?

    On deadfreight, the Supreme Court sided with Hongfil. The Court emphasized that the contract was for the charter of the entire vessel and for the transport of 200,000 bags of corn. The phrase ‘more or less’ was deemed to cover only minor inaccuracies, not a significant shortfall of over 33,000 bags. Quoting from the decision:

    “The words ‘more or less’ when used in relation to quantity or distance, are words of safety and caution, intended to cover some slight or unimportant inaccuracy. It allows an adjustment to the demands of circumstances which do not weaken or destroy the statements of distance and quantity when no other guides are available.”

    Therefore, NFA was held liable for deadfreight for the 33,201 bags not loaded.

    However, on demurrage, the Supreme Court ruled in favor of NFA. The Court highlighted the explicit contractual provision: ‘Demurrage/Dispatch: NONE.’ Despite the ‘Customary Quick Dispatch’ term and the delays, the clear waiver of demurrage was controlling. The Court stated:

    “Furthermore, considering that subject contract of affreightment contains an express provision ‘Demurrage/Dispatch: NONE,’ the same left the parties with no other recourse but to apply the literal meaning of such stipulation. The cardinal rule is that where, as in this case, the terms of the contract are clear and leave no doubt over the intention of the contracting parties, the literal meaning of its stipulations is controlling.”

    The Court reasoned that ‘Customary Quick Dispatch’ set a standard for reasonable time, but the ‘no demurrage’ clause acted as a waiver of any demurrage claims, even if that ‘reasonable time’ was exceeded due to circumstances not entirely attributable to NFA. The Court also absolved the NFA officers of personal liability, finding no evidence of bad faith or gross negligence on their part.

    PRACTICAL IMPLICATIONS: LESSONS FOR SHIPPING CONTRACTS

    The NFA vs. Hongfil case offers several practical takeaways for businesses engaged in shipping and charter party agreements:

    Clarity in Quantity Clauses: While ‘more or less’ clauses are common, they should not be relied upon to excuse substantial deviations from the agreed cargo quantity. Charterers should aim for accurate estimations and be prepared to load close to the specified amount to avoid deadfreight liabilities.

    Explicit Demurrage Terms are Crucial: If parties intend to waive demurrage, it must be explicitly stated as ‘Demurrage: NONE’ or similar unambiguous language. Conversely, if demurrage is intended, the contract should clearly define the demurrage rate and triggering conditions. ‘Customary Quick Dispatch’ alone does not automatically imply demurrage liability, especially if waived elsewhere in the contract.

    Due Diligence, Not Absolute Insurance for Berthing: Charterers are expected to exercise due diligence in securing berthing space. However, they are not absolute insurers against all berthing delays, especially those arising from port congestion or unforeseen events beyond their direct control. ‘Customary Quick Dispatch’ considers the prevailing conditions at the port.

    Key Lessons:

    • Be Precise in Cargo Quantities: Avoid significant underloading to prevent deadfreight claims.
    • Clearly Define Demurrage: Explicitly state ‘Demurrage: NONE’ to waive it, or detail rates and conditions if intended.
    • Understand ‘Customary Quick Dispatch’: It sets a reasonable time standard but doesn’t override express demurrage waivers.
    • Document Everything: Maintain records of all communications, delays, and justifications to support your position in case of disputes.

    FREQUENTLY ASKED QUESTIONS (FAQs)

    Q: What is a Charter Party?

    A: A charter party is a contract where a shipowner leases their vessel to a charterer for the transport of goods. It defines the terms and conditions of the shipping arrangement.

    Q: What is Deadfreight?

    A: Deadfreight is the payment a charterer must make to a shipowner for failing to load the agreed-upon quantity of cargo. It compensates the shipowner for lost freight revenue.

    Q: What is Demurrage?

    A: Demurrage is compensation paid by the charterer to the shipowner for delays in loading or unloading the vessel beyond the agreed laytime. However, it must be explicitly stipulated in the contract to be claimed.

    Q: What does ‘Customary Quick Dispatch (CQD)’ mean?

    A: CQD means loading and unloading should be done as quickly as is customary at the specific port, considering typical port operations and conditions.

    Q: If a contract has ‘CQD’ but also ‘Demurrage: None,’ can the shipowner claim demurrage for delays?

    A: No. As clarified in this case, an explicit ‘Demurrage: None’ clause overrides the ‘CQD’ term regarding demurrage claims. The waiver is controlling.

    Q: How binding is the ‘more or less’ clause in cargo quantity?

    A: ‘More or less’ allows for minor variations, but not substantial deviations. Charterers are generally expected to load close to the stated quantity to avoid deadfreight.

    Q: Who is responsible for berthing space in a charter party?

    A: Generally, the charterer is responsible for ensuring berthing space is available, but they are only required to exercise due diligence, not guarantee availability under all circumstances.

    Q: What are the key elements to include in a shipping contract to avoid disputes?

    A: Clearly define cargo quantity, laytime, demurrage terms (or waiver), responsibilities for loading/unloading, and procedures for delays or unforeseen events.

    ASG Law specializes in Maritime and Commercial Law, providing expert guidance on shipping contracts and dispute resolution. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • Shipping Delays: When the 1-Year COGSA Limit Doesn’t Apply in the Philippines

    Beyond Physical Damage: When Shipping Delay Claims Fall Under the Civil Code, Not COGSA

    TLDR; Philippine law distinguishes between claims for physical damage to goods during shipping and claims for purely economic loss due to delays that affect market value. This Supreme Court case clarifies that while the Carriage of Goods by Sea Act (COGSA) has a strict one-year limit for ‘loss or damage,’ claims based solely on market value depreciation from shipping delays, without physical damage to the goods, are governed by the longer ten-year prescriptive period under the Civil Code for breach of contract.

    G.R. No. 119571, March 11, 1998: MITSUI O.S.K. LINES LTD. VS. COURT OF APPEALS AND LAVINE LOUNGEWEAR MFG. CORP.

    Introduction

    Imagine a garment manufacturer preparing for a crucial fashion season, only to have their goods arrive months late due to shipping delays. This delay isn’t due to damaged goods, but purely logistical inefficiencies, causing significant financial loss from missed market opportunities. Is this manufacturer limited to a strict one-year window to file a legal claim, or do they have more time to seek recourse? This is the core question addressed in the Supreme Court case of Mitsui O.S.K. Lines Ltd. v. Court of Appeals, clarifying the nuances of prescription periods in shipping disputes under Philippine law.

    In this case, Lavine Loungewear Manufacturing Corp. (Lavine) contracted Mitsui O.S.K. Lines Ltd. (Mitsui) to ship goods from Manila to France. Due to delays in transshipment, the goods arrived in France significantly late, causing Lavine to suffer financial losses because the consignee paid only half the value due to the off-season arrival. When Lavine sued Mitsui, the shipping company argued the claim was time-barred under the Carriage of Goods by Sea Act (COGSA), which mandates a one-year prescriptive period for claims of “loss or damage.” The Supreme Court had to determine if the claim fell under COGSA or general civil law principles.

    Legal Context: COGSA and Prescription Periods

    The Carriage of Goods by Sea Act (COGSA) is a crucial piece of legislation governing maritime transport of goods. It sets out the responsibilities and liabilities of carriers and shippers in international trade. A key provision, Section 3(6), establishes a one-year prescriptive period for filing suits related to loss or damage of goods. This short period is designed to address the unique exigencies of maritime commerce, where evidence can quickly become stale, and disputes need swift resolution.

    Section 3(6) of COGSA states:

    (6) Unless notice of loss or damage and the general nature of such loss or damage be given in writing to the carrier or his agent at the port of discharge or at the time of the removal of the goods into the custody of the person entitled to delivery thereof under the contract of carriage, such removal shall be prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading. … In any event the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered…

    The critical point of contention in Mitsui was the interpretation of “loss or damage.” Does it encompass all types of losses arising from a breach of a shipping contract, including purely economic losses due to delay, or is it limited to physical loss or damage to the goods themselves? Philippine jurisprudence, particularly in cases like Ang v. American Steamship Agencies, Inc., has clarified that “loss” in the context of COGSA typically refers to the physical disappearance or deterioration of goods. In Ang, the Supreme Court held that misdelivery was not “loss” under COGSA, emphasizing that “loss” contemplates goods perishing, going out of commerce, or disappearing in an unrecoverable manner.

    However, previous cases like Tan Liao v. American President Lines, Ltd. established that deterioration of goods due to delay does constitute “loss or damage” under COGSA, triggering the one-year prescriptive period. This is because such deterioration directly impacts the physical condition and value of the goods. The crucial distinction hinges on the nature of the damage and its direct link to the physical state of the cargo.

    Case Breakdown: Delay vs. Physical Damage

    In the Mitsui case, the facts were straightforward. Lavine’s goods were shipped by Mitsui but arrived in France significantly later than agreed due to transshipment delays in Taiwan. The goods themselves were not physically damaged or deteriorated. The loss suffered by Lavine was purely economic: the consignee reduced payment because the goods arrived “off-season,” diminishing their market value in France.

    Lavine filed a complaint against Mitsui more than one year after the goods should have been delivered, but within ten years of the breach of contract. Mitsui moved to dismiss the case, arguing that Lavine’s claim was prescribed under COGSA’s one-year rule. The Regional Trial Court (RTC) denied Mitsui’s motion, and the Court of Appeals (CA) upheld the RTC’s decision.

    The Supreme Court affirmed the Court of Appeals, firmly distinguishing the nature of Lavine’s claim. The Court emphasized that:

    In the case at bar, there is neither deterioration nor disappearance nor destruction of goods caused by the carrier’s breach of contract. Whatever reduction there may have been in the value of the goods is not due to their deterioration or disappearance because they had been damaged in transit.

    The Supreme Court clarified that while COGSA’s one-year prescriptive period applies to claims for physical loss or damage to goods, it does not extend to claims for purely economic loss arising from delays that do not result in physical deterioration. The Court reasoned that Lavine’s claim was not about the physical condition of the goods upon arrival, but about the breach of contract concerning the agreed delivery time, which resulted in market value depreciation. This type of claim, the Court held, falls outside the scope of “loss or damage” as contemplated in Section 3(6) of COGSA.

    Crucially, the Supreme Court pointed out that:

    Indeed, what is in issue in this petition is not the liability of petitioner for its handling of goods as provided by §3(6) of the COGSA, but its liability under its contract of carriage with private respondent as covered by laws of more general application.

    Therefore, the Supreme Court concluded that the applicable prescriptive period was not the one-year period in COGSA, but the ten-year period for breach of written contracts under Article 1144 of the Civil Code of the Philippines. Since Lavine filed its suit within ten years, the action was not time-barred.

    Practical Implications: Understanding Your Rights in Shipping Disputes

    The Mitsui case provides crucial clarity for businesses involved in international shipping. It highlights that not all claims arising from shipping contracts are subject to COGSA’s stringent one-year prescriptive period. Specifically, if your claim stems from economic losses due to shipping delays that did not cause physical damage to the goods, you likely have a longer period to file a lawsuit – ten years under the Civil Code.

    This distinction is vital for businesses because delays in shipping can lead to significant financial losses, especially for time-sensitive goods or seasonal products. Understanding that claims for market value depreciation due to delay fall under the Civil Code provides shippers with more time to assess their losses, negotiate with carriers, and, if necessary, pursue legal action.

    Key Lessons from Mitsui O.S.K. Lines Ltd. v. Court of Appeals:

    • Distinguish between types of claims: Understand whether your claim is for physical “loss or damage” to goods or for purely economic loss due to delay affecting market value.
    • COGSA’s one-year rule is limited: The one-year prescriptive period under COGSA Section 3(6) primarily applies to claims related to the physical condition of the goods.
    • Civil Code’s ten-year rule for breach of contract: Claims for economic losses from shipping delays, without physical damage, are generally governed by the ten-year prescriptive period for breach of written contracts under the Civil Code.
    • Document everything: Maintain thorough records of shipping contracts, delivery schedules, and any communication regarding delays and resulting losses.
    • Seek legal advice promptly: If you experience significant losses due to shipping delays, consult with a maritime law expert to assess your rights and the applicable prescriptive period.

    Frequently Asked Questions (FAQs)

    Q: What is the Carriage of Goods by Sea Act (COGSA)?

    A: COGSA is a Philippine law that governs the rights and responsibilities of shippers and carriers involved in the maritime transport of goods. It is primarily based on international conventions and sets standard rules for bills of lading, liability, and limitations of actions.

    Q: What does COGSA Section 3(6) say about prescription periods?

    A: Section 3(6) of COGSA states that carriers are discharged from liability for “loss or damage” unless a lawsuit is filed within one year after the delivery of the goods or the date when the goods should have been delivered.

    Q: What kind of “loss or damage” is covered by COGSA’s one-year rule?

    A: Generally, “loss or damage” under COGSA refers to physical loss, damage, or deterioration of the goods during transit due to maritime perils or improper handling by the carrier.

    Q: Does the one-year COGSA limit apply to all shipping-related claims?

    A: No. As clarified in Mitsui, claims for purely economic losses due to delays that do not result in physical damage to the goods may not fall under COGSA’s one-year rule and may be governed by longer prescriptive periods under general civil law.

    Q: What is the prescriptive period under the Civil Code for breach of contract?

    A: Article 1144 of the Civil Code of the Philippines provides a ten-year prescriptive period for actions based on a written contract.

    Q: What if the goods deteriorated because of the shipping delay?

    A: If the delay caused physical deterioration of the goods, that would likely be considered “loss or damage” under COGSA, and the one-year prescriptive period would apply, as established in cases like Tan Liao.

    Q: What should businesses do to protect themselves from losses due to shipping delays?

    A: Businesses should:

    1. Clearly define delivery timelines and responsibilities in shipping contracts.
    2. Obtain cargo insurance to cover potential losses.
    3. Maintain detailed records of shipments and any delays or issues.
    4. Communicate promptly with carriers regarding delays and potential losses.
    5. Consult with legal counsel if significant delays or losses occur to understand their rights and options.

    Q: Is it always clear whether a claim falls under COGSA or the Civil Code?

    A: Not always. The distinction can be nuanced and fact-dependent. Legal interpretation is often required to determine the proper classification of a claim and the applicable prescriptive period. Consulting with a lawyer specializing in maritime or commercial law is crucial in such situations.

    ASG Law specializes in Shipping and Maritime Law, and Commercial Litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.