Demurrage Claim Is Not a Debt Until Liability Is Adjudicated: Andhra Pradesh High Court

“Liquidated damages, however quantified in a contract, do not crystallize into a debt until the liability is judicially determined” – In a significant decision shaping the contours of international commercial arbitration law, the Andhra Pradesh High Court refusing to grant interim attachment of cargo under Section 9 of the Arbitration and Conciliation Act, 1996.

Justice Challa Gunaranjan, presiding over the matter in the Court’s International Commercial Arbitration Original Jurisdiction, held that a claim for demurrage under a charter party agreement “being in the nature of liquidated damages, does not create any debt or pecuniary liability until the same is adjudicated by a competent tribunal.”

The Court thus vacated its earlier order of attachment over 1600 MT of rice loaded on the vessel MV Bulk Manara, directing that the security deposit of USD 296,326.74 furnished by the first respondent be returned.

The decision is a powerful reaffirmation that interim protection cannot be misused to secure unadjudicated commercial claims, especially when there is inordinate delay and no material to show intent to defeat the potential arbitral award.

“Liquidated Damages Do Not Mature Into Debt Until Determined by Tribunal”

Justice Gunaranjan drew extensively from the Supreme Court’s seminal ruling in Union of India v. Raman Iron Foundry (1974) 2 SCC 231, observing that “even liquidated damages are but an agreed measure of compensation, not a present debt.”

The Court remarked: “A claim for damages for breach of contract, whether liquidated or unliquidated, does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a competent authority.”

Applying this principle to the maritime demurrage clause, the Court clarified that while demurrage rates may be predetermined, the liability itself is contingent upon proof of breach. Hence, until the arbitral tribunal determines whether the delay in discharge was attributable to the charterer, no enforceable debt arises.

In the words of the Court: “The petitioner’s claim, being in the nature of liquidated damages, cannot translate into a pecuniary liability until the adjudication of the underlying breach. The assertion of demurrage, therefore, remains a contingent claim.”

“Section 9 Relief Requires More Than Mere Apprehension”

The Court went on to delineate the scope of Section 9(1)(ii)(b) of the Arbitration and Conciliation Act, which permits a party to seek interim protection to “secure the amount in dispute.” However, Justice Gunaranjan cautioned that the power must be exercised sparingly, guided by the principles enshrined in Order 38 Rule 5 of the Code of Civil Procedure, 1908.

In a cautionary tone, the judgment stated:

“The power of attachment before judgment is a drastic and extraordinary one. Its purpose is not to convert an unsecured claim into a secured debt, nor to arm-twist a party into settlement.”

The Court referred to Sanghi Industries Ltd. v. Ravin Cables Ltd. (2023 SCC OnLine SC 1321) and Essar House Pvt. Ltd. v. Arcelor Mittal Nippon Steel India Ltd. (2022) 8 SCC 876, reiterating that for such interim relief, the applicant must demonstrate a strong prima facie case, balance of convenience, reasonable expedition, and credible material showing intent to dispose of assets to defeat an award.

Justice Gunaranjan found that none of these preconditions were satisfied in the present case:

“Except for vague and bald statements that the first respondent may encumber or sell its goods, no material has been produced to show any intent to defeat execution of a possible award. Mere apprehension cannot justify an extraordinary relief.”

“Delay of Three Years Fatal to Claim of Urgency”

One of the decisive factors that weighed against the petitioner was its unexplained inaction for nearly three years between the original invoice in June 2021 and the initiation of the Section 9 petition in April 2024.

Justice Gunaranjan emphasized that the element of reasonable expedition is crucial to invoking equitable relief:

“The petitioner, having raised a demand in July 2021, remained silent until 2024 without initiating arbitration or any legal proceeding. Such silence defeats the very plea of urgency under Section 9.”

The Court noted that the petitioner sought attachment only when the respondents were exporting a fresh rice consignment, suggesting an attempt to “use interim relief as a bargaining tool rather than a measure of genuine necessity.”

“Attachment of Stock-in-Trade Is Not a Substitute for Proof of Risk”

The Court also disapproved of the attempt to seek attachment of rice cargo, which was the respondents’ stock-in-trade, observing that ordinary commercial goods cannot be seized to secure a speculative claim.

Justice Gunaranjan observed:

“The cargo sought to be attached is merely stock-in-trade and does not constitute a substantive asset. The petitioner cannot seek to immobilize business operations on the basis of conjecture.”

Reiterating the principle laid down in Raman Tech. & Process Engg. Co. v. Solanki Traders, the Court added:

“Attachment before judgment cannot be granted merely for the asking or to secure a doubtful claim. The Court must guard against its misuse as a coercive commercial strategy.”

Section 9 Petition Dismissed, Attachment Vacated

Concluding the 55-page order, Justice Gunaranjan held that the petitioner failed to demonstrate the legal and factual preconditions necessary for the grant of interim protection.

The Court ruled:

“The parameters circumscribed under Order 38 Rule 5 CPC are not made out. The claim for demurrage remains unadjudicated and the petitioner’s delay of nearly three years is unexplained. Interim protection cannot be granted merely to secure a disputed and contingent claim.”

Accordingly, the interim attachment order dated 23.04.2024 stood vacated, and the Registry was directed to return the security amount of USD 296,326.74 deposited by the first respondent. No order as to costs was made.

“The judgment reinforces that arbitration courts are not debt recovery tribunals; they protect genuine interests, not speculative claims.”

The decision in Zion Shipping Ltd. v. Sarala Foods Pvt. Ltd. stands as a robust precedent affirming that commercial arbitration remedies must align with equitable discipline, ensuring that Section 9 jurisdiction remains a shield of justice, not a sword of coercion.

Date of Decision: 13 October 2025