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Demurrage

D
Typography

Demurrage (a). In every contract, each party to the contract has certain agreed obligations. In a voyage charter one of the charterer's obligations is to load and/or discharge the vessel in an agreed period of time, the "laytime", without any payment additional to the agreed freight.

Therefore the charterer does not pay for the value of the vessel's time during the loading and/or discharging within the permitted laytime. If the cargo operations occupy a longer period of time the shipowner can face financial losses. "By way of agreed compensation for these losses, the charterer usually contracts to make further payments, called demurrage, at a daily rate in respect of detention beyond the laytime." (Naviko v. Vrontados, 1968.)


When the payment for compensation is agreed in the charterparty, at a specified rate, this is known as "liquidated damages". If no rate of payment is agreed or if the detention of the vessel is longer than an agreed period of delay or if the detention is caused for reasons unrelated to cargo operations, (that is; outside periods not normally counted as "laytime"), the compensation to the shipowner is called "damages for detention" and comprises "unliquidated damages".

While demurrage is usually payable for a breach of the obligation to load and/or discharge the vessel within the agreed laytime, other delays may also cause similar compensation to become payable. Such compensation is also called "demurrage". For example, if the vessel arrives at the agreed destination, the Notice of Readiness is correctly given and is valid, the laytime will commence after the agreed notice period even though cargo operations have not commenced. When the laytime expires, demurrage becomes payable. This is the common use of the term.

However, if the vessel arrives and cannot reach its agreed destination, for example, a berth in a berth charter, the "Laytime clause" may state, as does cl. 6(c) of the GENCON voyage charterparty, that "Time lost in waiting for berth to count as loading or discharging time, as the case may be". Therefore, if the berth destination cannot be reached, outside the owner's control, time may be lost even though "laytime" has not yet commenced: If time is so lost, demurrage may become payable.

Therefore "demurrage" has a technical meaning related to the loss of time if laytime for loading and/or discharging is exceeded but can also have a wider meaning. In the wider sense, it “ . . . is sometimes extended to cover delays other than delay in the physical processes of loading and discharging" (Islamic Republic of Iran v. Royal Bank of Scotland, 1987). In that case, the vessel was fixed to Bandar Khomeini in Iran during the Iran-Iraq war. The vessel waited for nearly four months off a port six hundred miles away from the destination before being able to discharge the cargo. When the vessel was on its voyage to the discharging port, the charterers ordered it to wait. Two months later the vessel was ordered to join a convoy to the discharging port. The crew refused to do so. The charterers agreed that most of the initial delay was time lost and demurrage was payable but after the orders to join the convoy were given there was no longer any "time lost waiting for berth". If this was correct, the owner's claim for demurrage would cease from the date of orders until the vessel reached the berth destination.

However, a general principle exists that "once on demurrage, always on demurrage" applies to voyage charter. This will be briefly discussed below but the main reason is that once the agreed time at which the vessel is at charterer's disposal has expired, the charterer is in breach of his "warranty" of laytime in the contract and is no longer entitled to any rights under the charterparty.

In another, more recent case, also related to the Iran-Iraq war, The Forum Craftsman, 1990, arrived at the destination port and gave a Notice of Readiness. The port was congested and the vessel had to remain at anchor awaiting a berth. The vessel berthed 52 days after arrival but four days later had to obey Iranian Government instructions and return to the anchorage because it was discovered that the cargo of sugar was wet and contaminated by seawater. It was alleged that the vessel was not "seaworthy". The vessel remained at the anchorage for a further 79 days.

The charterers agreed that the vessel was already on demurrage before the shifting from the berth to the anchorage but argued that because of the owners' breach of the contractual obligation of seaworthiness, the owners could not claim demurrage for the time lost from the time of shifting.

When the dispute was referred to the arbitrators they held that a delay of a week because of the damage to cargo and investigation of the damage was reasonable and allowed the charterers to reduce the claim for the 79 days' demurrage by this amount.

The arbitrators also held that the charterers' alternative reliance on cl. 28 of the Sugar Charterparty 1969 failed. This clause states:
"Strikes or lockouts of men, or any accidents or stoppages . . . or any other force majeure causes including Government interferences, occurring beyond the control of the shippers or consignees, which may prevent or delay the loading and discharging of the vessel, always excepted."

The arbitrators decided that because of the principle of "once on demurrage always on demurrage" the above clause could not assist the charterers to reject a claim for further demurrage for any cause.
On appeal to the court, the arbitrators' findings were confirmed.
The rate of demurrage is usually specified in the charterparty, on a daily basis, or for a proportional part of a day ("pro rata"). It may also be provided in the charterparty that time on demurrage is for a specified period.

An, example of a clause that limits the time lost is found in the GENCON charterparty:

"Ten running days on demurrage at the rate stated in Box 18 per day or pro rata for any part of a day, payable day by day, to be allowed Merchants altogether at ports of loading and discharging."

This indicates that "merchants", that is, the users of the ship, can keep the vessel longer than the agreed laytime for loading and/or discharging on the agreed rates of demurrage. After that period of 10 days, the ship may continue to be on demurrage or the owner may claim for damages for detention.
(The reference to "Box 18" is to the box in the 1976 revision of the charterparty which has a "Box layout" containing the main terms in Part I (Page 1) of the document and the text of the details of the clauses in Part II)

This clause is not really in the charterer's favour because the time lost after the fixed period on demurrage may have to be compensated at uncertain, "unliquidated" rates and because it does not provide for despatch payable by the shipowner to the charterer. Therefore, charterers may insist on a rider clause and delete the GENCON demurrage clause during negotiations. Such a clause could be as follows:

"Demurrage to be paid at the rate of USD per day/pro rata for all working time lost: Despatch money to be paid at half the rate of demurrage for all working time saved. Demurrage/despatch, if any, to be settled directly between Owners and Charterers."

If the charterparty clause refers to a fixed period on demurrage, this would be the maximum period at the agreed rate of demurrage. If the ship was delayed beyond the laytime for less than the contracted period of days on demurrage, the rate of demurrage would be that agreed in the charterparty. If, however, the ship was detained for a longer period than the fixed number of days on demurrage, the owner would be entitled to damages for detention. The amount could be the same as at the rate of demurrage or the owner could claim for a higher amount if he faced serious losses because the ship's next fixture is postponed or cancelled. Another possible way of assessing damages for detention can be at the owner's costs of overheads and ship's running costs per day.

For oil tankers the rate of demurrage may be referred to Worldscale rates. The rate of demurrage may also be reduced by some agreed percentage in certain circumstances. For example, the demurrage clause in TANKERVOY 87 states:

"Charterers shall pay demurrage as specified in Part I (L) for all time by which loading and discharging and other time used on Charterer's purposes . . . exceeds the laytime as specified . . . If however, any demurrage is incurred due to any of the events set out below the rate of such demurrage shall be reduced by half
(a) bad weather or sea conditions;
(b) the effects of fire or explosion, or breakdown of machinery at shore installation not caused by negligence on the pan of Charterers: . . ;
(c) act of God; act of war; act of public enemies; . ."

Section L in Part I of the Charterparty gives the rates as "The demurrage rate per day or pro rata shall be:(i)...percent of Worldscale based on.… or (ii) ... US Dollars". Another example of demurrage rates being halved is found in "Strike clauses". In the GENCON charterparty the "General Strike clause" states:

"If there is a strike or lock-out affecting the discharge of the cargo on or after vessel's arrival at or off the port of discharge and same has not been settled within 48 hours, Receivers shall have the option of keeping vessel waiting until such strike ox lock-out is at an end against paying half demurrage after expiration of the time provided for discharging . . ."

The GENCON strike clause and "half demurrage" were considered in The Saturnia, 1984, where the English court held that the half-demurrage provision in the clause applied only if a strike took place before expiry of laytime. The clause clearly contemplates the existence of a strike during the laytime. The wording of some clauses dealing with circumstances when half demurrage will become payable may lead owners to consider that such protection should be given to the charterer only when the vessel is on demurrage. This is the opposite of the position under the GENCON strike clause and the decision in The Saturnia. For example, in the ASBATANKVOY charterparty the demurrage clause provides: ... If, however, demurrage shall be incurred at ports ... by a strike, lockout, . . . the rate of demurrage shall be reduced one-half."

Charterers may argue that the half demurrage provisions apply to any delay caused by the specified events, if the delay is during the laytime or when the laytime has expired. The owners may argue that the protection applies only after the vessel comes on to demurrage time, that is, after laytime has expired. In the owners' case, if a strike takes place during laytime and ends before laytime expires, any demurrage caused by the consequential delay must be at full rates.

It is more likely that the charterers' argument will succeed because the clause does not clearly restrict when half demurrage, is payable.
The charterparty may also contain a clause dealing with the mechanism for claiming demurrage. For example, TANKERVOY states:

"Any claim for demurrage shall be delivered with supporting documents not later after the completion of discharge than the number of days specified . . . Owners shall give the promptest notice of any such claim that is reasonably possible. If Owners fail to submit any such claim within the time limit aforesaid Charterers shall be discharged from all liability in respect thereof."

Demurrage (b).The Charterparty Laytime Definitions 1980 specify that:

"DEMURRAGE" - means the money payable to the owner for delay far which the owner is not responsible in loading and/or discharging after the laytime has expired."

It can be seen that "demurrage" is a word that is correctly used to describe the money compensation. It can also refer to the nature of the actual delay although it is probably better to use the phrase "time lost" to refer to the actual delay and retain "demurrage" to mean money. Because the rate of demurrage is usually agreed in the charterparty, demurrage is considered to be "liquidated damages", that is, compensation agreed in advance.

For dry cargo voyage charters the rate of demurrage is specified in the charterparty. For oil tankers, the rate of demurrage could be specified in the charterparty or the demurrage rates used from a table contained in the "Worldscale" publication, which is amended every six months. These rates depend on the size of the tanker.

When oil tankers are chartered under the "Worldsca1e" freight rate system the laytime allowed for loading and discharging is 72 hours, subject to any qualifications in the applicable charterparty. If this laytime is exceeded demurrage is payable according to the scale of rates in the table.

The provision in a dry cargo voyage charterparty for demurrage can vary from a clause, which has indeterminate erect to one that is limited to a stipulated period of time lost. As an example of the former, a STEMMOR charterparty (1983) (Adapted from another standard-form charterparty, "C.(Ore) 7") signed in March 1988, stated:

"Demurrage (if any) at the rate of USD per running day or pro rata for part of a day to be paid to Owners. Owners to pay Charterers, despatch money at half demurrage rate for all working time saved both ends. Demurrage/despatch to be settled after completion of the voyage and receipt of loading and/or discharging documents."

The rate of demurrage for pan of a day may vary, depending on the term used to describe part of a day. If, as is usual, the clause states “ . . .pro rata . . ." the calculation of demurrage for, say six hours, would be 0.25 of the daily rate.

Sometimes, to the owner's advantage, a clause may state that the rate is “ . . . per day and part thereof . ..". In this situation six hours' demurrage would be the same as one day's demurrage.
It may be stipulated in the charterparty that demurrage, if any, is to be paid at specified intervals, before the ship sails or before bills of lading are released to the shipper. A charterparty may also state that demurrage is to be paid "before breaking bulk" at the discharge port. Clauses such as these protect the owner's interests so that he can obtain his compensation without going through a lengthy procedure of making a claim and possibly bringing a legal action against the charterers.

The phrase "on demurrage" is also explained in the Charterparty Laytime Definitions 1980: "ON DEMURRAGE-means that the laytime has expired. Unless the charterparty expressly provides to the contrary the rime on demurrage will not be subject to the laytime exceptions." Therefore, the expression "Once on demurrage always on demurrage" is sometimes used. This would seem to indicate that once the charterer begins to exceed the agreed laytime, he is in breach of the contract and cannot take advantage of the laytime exceptions, which are in his favour. However, the continuous running of time on demurrage can be qualified by express words in the charterparty or by custom of the trade. For example, if the ship is on reversible laytime (that is, where the charterer is using the option of adding together the laytime for loading and discharge) and at the loading port is already on demurrage, its voyage time between the load port and the discharge port will not count as time on demurrage. Demurrage will resume on arrival at the discharge port. Time between the giving of Notice of Readiness and the commencement of discharge will not be excepted from time on demurrage as it may have done in normal circumstances because the laytime had already begun (and expired) at the load port.

Express words in the charterparty can also reduce time on demurrage. For example, one form of exceptions clause, the Strike clause, may prevent demurrage time (in addition to laytime) from counting if there are delays caused by strikes and other similar circumstances.

If demurrage has been incurred at the part of loading, hit has not been paid by the charterers, it is important to insert the amount in question in the bills of lading, in order to recover the demurrage from consignees before delivery of the cargo and to avoid disputes. Sometimes, "clean" bills of lading are required by charterers, in which case a solution may be that the master, before signing the bills of lading, obtains a letter of guarantee from the charterers, countersigned by a bank, for payment of the outstanding demurrage. No hard and fast rule can be applied, but the solvency of the charterers or shippers may have a bearing thereon.

 

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