Claim for Demurrage as Liquidated Damages Not a Debt Until Liability Is Fixed by Arbitration; Interim Attachment Denied by Andhra Pradesh High Court
Sanchayita Lahkar
The High Court of Andhra Pradesh, Single Bench of Justice Challa Gunarajan declined to grant interim relief for attachment of goods and security under Section 9 of the Arbitration and Conciliation Act, 1996, in a dispute involving a Hong Kong-based shipping company and an Indian exporter over demurrage claims for delayed discharge of cargo. The Court held that liquidated damages claimed as demurrage could not be treated as a debt until the arbitral tribunal determined the liability. Consequently, it vacated the earlier attachment order and directed the return of the security deposit, finding no evidence that the respondent intended to dispose of its assets.
Zion Shipping Ltd., having its registered office in Hong Kong, filed an application under Section 9 of the Arbitration and Conciliation Act, 1996, seeking interim protection in respect of cargo owned by Sarala Foods Pvt. Ltd. and its co-respondents. The petitioner chartered the vessel MV Han Thar under a fixture note dated March 12, 2021, for the carriage of 9,000 metric tonnes of rice from Kakinada Port, India, to Ho Chi Minh City, Vietnam. The fixture note specified laytime, demurrage at USD 7,500 per day, and arbitration at Singapore in case of disputes.
According to the petitioner, discharge of cargo commenced on May 29, 2021, and was completed on June 12, 2021, exceeding the permissible laytime. Zion Shipping raised an invoice dated June 23, 2021, for USD 128,409.74 towards demurrage, and later issued a legal notice dated August 6, 2021, demanding payment, which allegedly went unanswered. The petitioner claimed a cumulative amount of USD 296,326.74, including interest and costs.
In April 2024, Zion Shipping approached the High Court seeking attachment or sale of 1600 metric tonnes of rice being loaded on the vessel MV Bulk Manara at Kakinada Port to secure the claimed amount. On April 23, 2024, the Court passed an ex parte conditional order attaching the cargo, which would stand vacated if the respondents furnished security within 24 hours. Sarala Foods complied by depositing the equivalent amount, leading to the release of the attachment.
Sarala Foods later challenged the interim attachment before the appellate court which on February 18, 2025, granted liberty to seek vacation of the ex parte order before the Single Judge. Consequently, the respondents filed I.A. No.1 of 2025 under Order 39 Rule 4 of the CPC to vacate the interim order and I.A. No.2 of 2025 for return of the deposited amount.
The petitioner opposed the applications, asserting that the respondents had failed to dispute the liability for demurrage since 2021 and that the fixture note constituted a valid contractual basis for the claim. It was contended that the respondents’ conduct in not replying to notices or disputing liability established a prima facie debt, justifying the order of attachment to secure the claim.
The respondents contended that the claim for demurrage amounted to liquidated damages, which could not be treated as an existing debt until adjudicated by an arbitral tribunal. They argued that Zion Shipping had not issued notices of readiness and advance notices as required under clauses 16 and 21 of the fixture note, thereby invalidating the demurrage claim. They further argued that the petitioner had neither acted promptly nor produced any material suggesting that the respondents were attempting to dispose of assets to defeat an award.
The Court observed that “it is an admitted position that claim is for demurrages which are in the nature of liquidated damages, even as admitted by petitioner, until and unless such liquidated damages are proved, established and adjudicated, there exists no debt.” Referring to Union of India v. Raman Iron Foundry (1974) 2 SCC 231, the Court noted that a claim for liquidated damages remains merely an actionable right until determination of liability by a competent forum.
The Court stated that “since the claim is in the nature of liquidated damages, it is the contention of counsel for respondents that unless the same is determined and damages are assessed, there cannot be any debt in existence.” Justice Gunarajan held that while a prima facie case may exist, the petitioner must also establish imminent risk of disposal or concealment of assets by the respondent to justify attachment.
Citing the Supreme Court’s decision in Raman Tech. & Process Engg. Co. v. Solanki Traders (2008) 2 SCC 302, the Court reiterated that “the power under Order 38 Rule 5 CPC is a drastic and extraordinary power. Such power should not be exercised mechanically or merely for the asking. It should be used sparingly and strictly in accordance with the Rule.” It further noted that mere existence of a valid claim does not entitle a party to convert an unsecured debt into a secured one.
Justice Gunarajan also cited Essar House Pvt. Ltd. v. Arcelor Mittal Nippon Steel India Ltd. (2022 SCC OnLine SC 1219) to observe that courts considering Section 9 applications must assess “whether the applicant for interim measure has a good prima facie case, whether the balance of convenience is in favour of interim relief, and whether the applicant has approached the court with reasonable expedition.” The Court, however, held that Zion Shipping failed to demonstrate reasonable expedition, noting its three-year delay between the initial claim in 2021 and the filing of the present petition in 2024.
The Court recorded: “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.” The Court further found that the pleadings contained only “general and vague statements” alleging possible disposal of assets without any supporting material. The Court stated, “except for making a vague and bald statement, no cogent material has been placed on record to even remotely suggest 1st respondent is disposing of its properties to frustrate the award.”
Observing that the cargo sought to be attached constituted stock-in-trade and not substantive assets, the Court found no justification for the continuation of the attachment or retention of the deposited security amount. The Court concluded that the conditions required under Order 38 Rule 5 of the CPC were not met, and that the petitioner’s delayed action and absence of concrete evidence defeated its plea for interim protection.
The Court held that “the interim order dated 23.04.2024 stands vacated and the application accordingly dismissed.” Further, the Court directed the Registry “to forthwith return the security amount of USD 296,326.74 deposited by 1st respondent.” No costs were awarded.
“As a sequel, interlocutory applications pending consideration, if any, shall stand closed.”
Advocates Representing the Parties
For the Petitioner: Sai Sanjay Suraneni
For the Respondents: Moguluru Iswarya
Case Title: Zion Shipping Ltd. v. Sarala Foods Pvt. Ltd. & Ors.
Neutral Citation: APHC010193672024
Case Number: International Commercial Arbitration Original Application No. 5 of 2024
Bench: Justice Challa Gunaranjan
