Disputes upon small demurrage: to apply to arbitration or not?

• International Trade

Resolving demurrage and other conflict situations where the disputed amount is quite small can be a real dilemma for the parties. In some cases, it is easier and less expensive for the injured party to forgive and to forget than to apply to arbitration for reimbursement.

However, if the opponent stubbornly rejects well-founded demands and proposals for amicable settlement, the initiation of arbitration proceedings can make the right impression and incline it to out-of-court dispute settlement as soon as possible. Interlegal lawyers recently dealt with such a case.

The Seller under the CIF contract applied to Interlegal for legal assistance in reimbursing the funds paid to the shipowner as demurrage. The Client delivered the goods to the Buyer within the specified time and performed all other relevant terms of the contract.

The contract stipulated that the Buyer should pay for the goods within 48 hours from the date of receiving the contract documents by the bank, but the latter insisted on replacing the bank by the Seller.

The client agreed to replace the bank, which caused a delay in delivery of contract documents, while the vessel with the goods on board arrived at the port of discharge in due time. The seller, having received no payment and by securing its rights, prohibited to discharge the goods, which caused demurrage amounting to 50,000 USD.

The buyer paid for the goods only 6 days after delivery of the documents via the new bank, when the laytime had already expired. After cost remittance to the bank account, the Seller allowed cargo discharge. Finally, the shipowner sent to the Client a demand on demurrage payment. The client fully paid such costs in favor of the shipowner.

Since the contract provided payment of demurrage by the Buyer, the Client sent thereto a corresponding demand. The Customer’s claims were rejected. The Buyer’s principal argument was based on the fact that the Seller itself agreed to replace the bank and therefore all the delays that occurred should be payable at the latter’s expense. That is, the Buyer believed that the Seller did not 

receive prompt payment due to its own fault, since it was looking for a new bank for a long time and delayed transfer of documents.

Having thoroughly studied all the case circumstances, Interlegal team filed a claim to the Buyer, in which it set out in detail its own arguments upon the Seller’s position and demanded reimbursement of costs actually paid as demurrage. When the Buyer did not respond, Interlegal experts recommended the Client to apply to the arbitration.

Soon after initiating arbitration proceedings, the Buyer’s lawyers made an offer on pretrial dispute settlement. The parties agreed, paid costs were reimbursed to the Seller, while arbitration proceedings got terminated.

With considerable experience in the market, both parties clearly understood the risks of resorting to arbitration upon a small amount.

The seller, who had to pay arbitration fee and legal service costs, preferred not to spend time and money on arbitration, but to cover the demurrage amount with subsequent contracts. The Buyer, for its part, was aware thereof and counted on the Seller’s reluctance to freeze funds in the framework of arbitration proceedings.

It should be noted that the disputed amount directly affects the parties’ decision to initiate arbitration proceedings. In GAFTA cases with three arbitrators involved, the claimant shall make a standard deposit, which may vary depending on membership in a certain association: e.g. 12,000-15,000 GBP for GAFTA and 5,000 GBP for FOSFA. Such amounts are listed on their respective official websites.

Unfortunately, it is impossible to fully predict arbitration cost in advance, so the parties shall carefully study and forecast their financial capabilities. In case of a small demurrage amount (whether not exceeding or slightly exceeding the amount of deposit), there is a reluctance to freeze funds. Although arbitration institutions are treated as effective means of dispute settlement, proceedings can last for several months.

Having thoroughly analyzed the situation, having set out solid arguments in favor of lawfulness of the Client’s demands and having applied a clear consistent strategy, Interlegal lawyers were able to incline the Buyer to out-of-court dispute settlement which is profitable to both parties. Therefore, the Client’s legal and contractual rights were restored in the most favorable way and without unnecessary costs.

Finally, we note that small demurrage amount is not a reason to turn a blind eye to non-fulfillment of obligations. English contract law has been formulated for years and is one of the most reasoned, systematic and regulated ones. Based on a fundamental principle of contract law, a party who has entered into a contract shall be bound by its terms and should fulfill its certain obligations thereunder. Such positive obligations are also supported by the doctrine of pacta sunt servanda, i.e. contract performance is mandatory.

If you still have certain doubts concerning your right on demurrage recovery, you may contact us: Interlegal law team is always ready to provide comprehensive legal assistance.