Claim For Demurrage As Liquidated Damages Does Not Constitute Debt Until Liability Is Determined: Andhra Pradesh High Court

The Andhra Pradesh High Court refused to grant interim relief for attachment of goods and security under section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) holding that the liquidated damages in the form of demurrage does not constitute debt until the liability is determined by an arbitral award. Justice Challa Gunaranjan held that “petitioner has moved the present petition nearly after three years, therefore, as observed by Hon'ble Apex Court, if the applicant has not applied for relief with reasonable expedition, the relief of order of attachment should not be granted in a routine and mechanical way merely for asking. Had the petitioner been diligent and serious about asserting the claim, nothing prevented or stopped it from initiating appropriate legal proceedings at the earliest point of time rather than choosing to wait for such a long period. This conduct even raises serious doubts about the bonafides of petitioner in making eleventh hour attempt of securing attachment even without initiating any legal steps for recovery.” The Court therefore dismissed an application filed by Zion Shipping Ltd seeking attachment and security for USD 296,326.74 holding that the petitioner failed to establish the prima facie case and risk of assets dissipation as per principles laid down under Order 38 Rule 5 of the Civil Procedure Code (CPC). Background: The Petitioner (Zion Shipping Ltd) entered into a charter party agreement with Sarala Foods Pvt. Ltd for transporting 9,000–9,500 MT of rice from Kakinada City in India to Ho Chi Minh City in Vietnam on the Vessel. There was a clause in the agreement which provided for demurrage at USD 7,500 per day for delay beyond the stipulated time period. After unloading of the rice, the respondents claimed the demurrage charges. When the respondent failed to pay the alleged amount, the petitioner invoked the arbitration in Singapore and sought reliefs under section 9 of the Arbitration Act for attachment of 1,600 MT of rice loaded at Kakinada Seaport on another vessel (MV Bulk Manara). The reliefs were granted. The respondent, therefore had filed an application under Order 39 Rule 4 of the CPC seeking to vacate the ex parte interim order dated 23.04.2024 ordering attachment of Cargo and I.A. No.2 of 2025 seeking direction to the Registry to return the security amount as deposited respectively. Contentions: The petitioner submitted that the demurrage clause constituted a liquidated damages therefore liability for the fixed amount arose the moment there was delay. The respondents did not dispute the invoice nor denied delay which implied the acceptance of liability. The court's intervention was necessary to secure the subject matter of the arbitration and prevent frustration of the award. Strict proofs are not required under Order 38 Rule 5 of the CPC if a strong prima facie case existed. Reliance was placed on Essar House Pvt. Ltd. v. Arcelor Mittal Nippon Steel India Ltd. (2022) and TUF Metallurgical Pvt. Ltd. v. BST (HK) Ltd. (2025) Per contra, the Respondents submitted that the claim for demurrage was in the nature of liquidated damages and did not constitute a debt until adjudicated. There was no material to indicate that the respondent was going to dissipate the assets to defeat the award. Reliance was placed on Union of India v. Raman Iron Foundry (1974). Findings: The Court while examining the interplay between section 9 of the Arbitration and Order 38 Rule 5 of the CPC and observed that interim protection cannot be granted mechanically and must satisfy the preconditions. Citing Raman Iron Foundry, the court rejected the contention that a claim for demurrage constituted a liquidated damages by holding that “A claim for damages, whether liquidated or unliquidated, does not become a debt until the liability is adjudicated and damages assessed. Until then, there exists no pecuniary obligation or actionable claim.” The court observed that although the demurrage was contractually fixed but whether the delay was attributable to the respondent was disputed and remained to be adjudicated by the Arbitral Tribunal. The court further noted that although the petitioner had established a prima facie case based fixture note and undisputed voyage but it had failed to show that the balance of convenience was in its favor as there was an inordinate delay. It held that “the petition is silent about what steps have been initiated from July, 2021 till institution of present petition for initiating legal steps. Therefore, this absolute silence for such a long period makes this Court to conclude that balance of convenience clearly does not lie in favour of petitioner.” On evidence of assets dissipation, the court held that “mere bald allegations that the respondent 'may fritter away assets' are insufficient. The petitioner must at least place some material...

Claim For Demurrage As Liquidated Damages Does Not Constitute Debt Until Liability Is Determined: Andhra Pradesh High Court

Mohd Malik Chauhan

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