The New South Wales Consumer, Trader & Tenancy Tribunal's recent decision in D V Kelly Pty Ltd v China Shipping (Australia) Agency Co Pty Ltd [2010] NSWCTTT 136 has caused considerable debate and cast doubt over the enforceability of container detention charges. The case concerned the distinction between liquidated damages and penalty clauses in contracts, and has already caused ripples throughout the entire Australian shipping industry. But the long term effect of the decision remains unclear as it is subject to an appeal and it seems the case for the enforceability of the charges was not put as well as it might have been at the initial hearing.
Background
D V Kelly Pty Ltd (DV Kelly) imported furniture from Vietnam as containerised cargo. The contract with China Shipping (Australia) Agency Co Pty Ltd (China Shipping) provided that the container was to be returned within a certain number of days of it becoming available for collection. In the event that the container was retained beyond that fixed period (the free-period), the contract provided for the imposition of 'detention fees', calculated on a daily basis and increasing over time.
DV Kelly returned the container to China Shipping 72 days after the freeperiod had expired and its agent was charged $8,514 in container detention charges.
DV Kelly's explanation for not returning the container within the free-period was that it was unable to access the container because it had not been released by the supplier as the supplier had not been paid by DV Kelly due to impecuniosity caused by the global financial crisis.
DV Kelly applied to the New South Wales Consumer Trader and Tenancy Tribunal (the Tribunal) seeking a declaration that the detention fees constituted unenforceable penalties as distinct from enforceable liquidated damages. DV Kelly argued that the quantum of the charges did not represent a genuine pre-estimate of China Shipping's loss from the late return of the container and submitted that:
- The daily costs for China Shipping of renting containers from a third party was far less than the daily detention fee charged and that the hire charge was the true measure of China Shipping's loss.
- If the detention fees were a genuine pre-estimate of loss, the fees would be expected to fluctuate in line with market conditions.
China Shipping in response submitted that:
- All shipping lines charge detention fees and have done so for many years.
- When detention fees are calculated and the demand for containers is pre-estimated it could not be known that the global financial crisis would occur.
The Decision
Member Meadows of the Tribunal cited the leading Australian authority on the distinction between liquidated damages and penalties, being the High Court decision in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 where the Court endorsed the principles expounded by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motors Co Ltd [1915] AC 79.
Member Meadows stated:
It was held that the detention charges did not represent a 'genuine pre-estimate of loss' and regard was had to the fact that China Shipping could have rented a container for the period of detention at considerably less cost.
Is the decision fundamentally flawed?
The published decision does not include the relevant contractual clause imposing the container detention charges. However, it is clear from previous decisions, both in Australia and the United Kingdom, that the liquidated damages/penalties distinction only becomes relevant where there has been a breach of the relevant contractual terms. While DV Kelly submitted that the failure to return within the free-period constituted a breach of the contract, many similar contracts in the shipping industry provide free use for a certain period and then provide for increasing daily charges after that period. In those circumstances, failure to return the container within the free-period does not constitute a breach of the contract but rather leads simply to the imposition of escalating usage fees.
Accordingly, the first basis for questioning the wider application of this decision is a consideration of whether shipping line contracts concerning container use are breached if containers are not returned within the freeperiod or whether higher usage charges merely apply. If a breach has occurred, then it is reasonable to consider whether the charges constitute a genuine pre-estimate of loss, failing which they will be regarded as penalties. But if no breach has occurred, then there is nothing wrong at law in setting rates on an escalating scale depending upon the period of use.
Even if a breach is found to have occurred, it seems misleading to regard the cost of renting a container as a genuine estimate of a shipping company's loss for late return of its containers. Shipping companies need to be able to forecast and plan their export bookings around their available equipment stock. The loss which results from late return of containers can be lost profits and diminished goodwill, both of which may be significantly greater than the cost of renting a substitute container.
In addition, the question of whether charges represent a genuine pre-estimate of loss is to be determined at the time of contract formation, not at the time of breach. It is also likely that a court would not regard it as reasonable for a shipping company to adjust its charges for each and every shipment, but rather to do so on an annual basis as the cost of conducting a 'loss- analysis' can be considerable.
It is understood that China Shipping has appealed the decision to a higher court. It will be interesting to see whether the above arguments are put forward and result in the Tribunal's decision being overturned. However, regardless of the result, shipping companies would be well advised to review the basis of their own container detention charges. The Courts will allow companies to avoid the doctrine of penalties, permitting them to offer their customers financial rewards for prompt return of equipment and higher charges for delayed return, through properly drafted contract terms.
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