Calculation of Demurrage

Calculation of Demurrage

In the calculation of demurrage amount payable to shipowner, demurrage rate is multiplied by the number of days or part of day in excess of the agreed laytime. For example:

  • Total Laytime Allowed 11 days
  • Demurrage Rate $60,000 per day pro rata (PDPR)
  • Ship exceeded laytime allowed for loading and discharging by 4 days 6 hours 30 mins
  • Demurrage Payable =4d 6h 30m x $60,000 per day =4.27083 days x $60,000 = $256,250

In order to arrive at the number of days on demurrage, a calculation of the time in port must be made making reference to the time allowed (laytime) and whether time is counting or whether it is an exception and does not count. Demurrage calculation is similar to using a stopwatch in that the clock will continue to run until there is a qualifying exception and the time will stop. Therefore, in any charter-party it is important to know exactly when the agreed laytime has expired as the ship, from that point, ship will be on demurrage.

‘Once on Demurrage, Always on Demurrage’ phrase is sometimes overused and often misleading. It is crucial to note that the rules for the stopwatch change when a ship is on demurrage and careful attention must be paid to the detail of the specific charter-party when this happens.

General rule is that express exceptions to laytime do not apply to demurrage unless there is clear wording in the charter-party to that effect. Theoretically, the clock does not stop running once the ship has gone on demurrage,

For example, Asbatankvoy – Clause 7 last sentence reads as follows: Time consumed by the ship in moving from loading or discharge port anchorage to her loading or discharge berth, discharging ballast water or slops, will not count as used lay time. If the ship was moving from the anchorage to the berth and the laytime at that time had not been used up then time will not run during the period of moving to the berth. On the other hand, if lay time had expired and the ship was on demurrage then time would continue to run for such an event and the owner is entitled to demurrage for this time.

Great care must be taken over the wording of the charter-party for events which interrupt laytime to apply to demurrage.

Demurrage would not run where there is a fault on the part of the shipowner. For example, a ship breakdown, as shipowner should not be able to profit (paid for demurrage) for his own breach of contract. General exceptions clauses will not apply to demurrage unless the wording specifically supports this. Time on demurrage ends at the same time as laytime would have done, such as when completion of cargo operations in dry bulk market or when disconnection of cargo hoses in the tanker market.

When is Demurrage Payable?

Gencon Charterpary (GENCON 94) Clause 7 states ‘Demurrage shall fall due day by day and shall be payable upon receipt of the owners’ invoice.’ In this case an owner is entitled to submit an invoice every day for as long as the vessel is on demurrage. Clearly where there are long delays and large amounts of demurrage incurred the owner may want to do so to ensure that the charterer becomes liable immediately.

In practice a claim is submitted at the end of the voyage and, after a period of negotiating the details and amount, agreement is reached and one payment made for the entire claim. Absent the Gencon wording, it is generally accepted that demurrage is payable day by day. However some charterparties will include express terms about the timing of payment which will need to be examined on a case-by-case basis.

 

What is Demurrage?

Demurrage refers to the liquidated damages payable by the charterers to the shipowner for failing to complete the loading or discharging of the ship within the agreed laytime period.

Demurrage is not payable when the charter party expressly provides that certain periods of time lost, such as breakdown or inefficiency of the ship, shall not count for demurrage, However, the general rule is “once on demurrage, always on demurrage” i.e., if a ship is on demurrage, no laytime exceptions such as Sundays and holidays can be deducted from the computation of demurrage.

Demurrage, unlike laytime, is a continuing period, and once laytime has expired and the vessel has come on demurrage, the period runs without interruption until the charterer has finally completed her. This principle of law is epitomised in the expression “once on demurrage, always on demurrage”.

The only exception to this very strict rule is that if the parties have agreed that periods excepted from laytime should also be excepted from the demurrage period then, of course, according to the basic rule of freedom of contract, the parties’ intentions will be respected.

Unliquidated damages are those not agreed as between the parties when entering into the contract and to arise on the occasion of specified breaches) are assessed under the rules laid down in Hadley & Baxendale (1854). These are, that the plaintiff is entitled to: Damages for that loss which was an obvious consequence of the breach i.e. that loss which must have been in the contemplation of the reasonable person entering into this contract and general damage and, any special loss of which the defendant was made aware by the plaintiff when entering into the contract.

In order to see clearly a situation where demurrage would not be appropriate and damages for detention more correct is exemplified in Nolisement (Owners) v Bunge y Born (1917).  In this case the vessel had completed loading some 19 days before the expiration of the laydays but the charterers held the ship for a further three days before presenting bills of lading to the master because they were unable to decide on the port of discharge. It was held that, rather than simply reducing the amount of despatch money, the charterers should pay damages for detention for two days. One day being considered a reasonable time to wait for presentation of bills of lading.

Demurrage Rate

Demurrage is the name given to the damages payable by the Charterer to the Shipowner for the Charterer’s Breach of Charterparty in delaying the ship beyond the agreed laytime. Demurrage is Liquidated Damages that means the rate per day is fixed at the time the charterparty is agreed. Furthermore, Shipowners (Disponent Owners) and Charterters know in advance their respective liabilities/earnings in the event of a delay. This is distinct from Damages at Large which would require a Shipowner to prove his losses. For demurrage, the Shipowner only has to prove that the delay falls within the terms of demurrage for the relevant charterparty. The Demurrage Rate agreed is much like the Freight Rate, Demurrage Rate will be a reflection of the running costs of the ship and the market conditions. Usually, the Demurrage Rate is agreed in the charterparty as a Daily Rate. For part of a day, the rate is pro rated as.

 

Once on Demurrage, Always on Demurrage

If a charterer detains the vessel beyond the agreed lay days, then the charterer is in breach of contract.

The majority of charter-parties include a clause providing that he may retain the vessel for additional days in order to complete the loading or discharging operation on payment of a fixed daily amount, known as demurrage.

In the late nineteenth century this additional period was judicially referred to as lay days that have to be paid for. This is a misleading description since it conceals the fact that, in reality, the charterer is in breach of contract even though he is entitled, on payment of the agreed rate, ‘to detain the ship for the purpose of enabling him, if possible, to perform his broken contract and so mitigate any further damage’.

Nevertheless, it is an anomalous position since, despite the breach, the shipowner is unable to rescind the contract and withdraw his ship during the demurrage period unless the failure of the charterer to load amounts to a repudiation of the contract on his part, or the delay is so substantial as to frustrate the object of the charter-party. This principle applies whether the charter stipulates for a fixed number of days on demurrage or no time limit is expressed as, e.g., ‘eight days for loading, after which demurrage at £2,000 per diem’. At common law a demurrage clause is purely a creation of contract and is in the nature of a provision for agreed damages for detention of the vessel beyond the agreed lay days. The stipulated sum is recoverable by the shipowner irrespective of proof of damage, and represents the maximum amount recoverable for loss resulting from the detention.

Demurrage will thus cover losses of freight arising under subsequent charter-parties affected by the delay, or from the consequent reduction in the number of voyages possible under a consecutive voyage charter-party. On the other hand, it will not extend to limit claims for losses arising from causes other than detention as, for example, from failure to load a full cargo.

As with any other provision for liquidated damages, a demurrage clause may be struck down by the courts as a penalty if the rate is fixed so high as to be extravagant and unconscionable in comparison with the greatest possible loss that could flow from the breach. In such circumstances the courts would consider the shipowner adequately compensated by being allowed to recover his actual loss. A similar principle would not appear to be applicable in reverse in cases where the rate is fixed at an unreasonably low level. In such an event the shipowner is unable to recover his actual loss but is limited to the specified demurrage rate even though the delay has been deliberately caused by the charterer for his own benefit. Such a situation may be open to abuse at times when costs and freight rates are rising and the shipowner may be left without an effective remedy should excessive delay result in him losing a subsequent charter.

The actual rate of demurrage will be stated in the charter-party and will normally be fixed at a figure in line with current freight rates at the time of the conclusion of the charter. As such fixtures are often made well in advance, the figure may bear little resemblance to prevailing freight rates by the time demurrage becomes payable.

Liability for the payment of demurrage accrues immediately on the expiration of the lay days and runs continuously through Sundays, holidays and other periods normally excluded from laytime, e.g. bad weather working days.

The rule is once on demurrage, always on demurrage. For a similar reason, laytime exceptions are held not to be applicable to a demurrage period unless expressly worded to that effect. Thus in a case in which the House of Lords had refused to allow a charterer to invoke a strike exception after laytime had expired, Lord Reid justified the decision on the grounds that ‘the shipowner might well say: true, your breach of contract in detaining my ship after the end of laytime did not cause the strike, but if you had fulfilled your contract the strike would have caused no loss because my ship would have been on the high seas before it began: so it is more reasonable that you should bear the loss than that I should’.

Nevertheless, the once on demurrage rule may still apply even though the event covered by the exception occurs before the expiry of laytime. An exception can be expressly worded so as to cover the demurrage period as, for example, where it was provided that demurrage was to be paid ‘at 12s 6d per hour unless detention arises from a lock-out, strikes etc.’ Similarly, demurrage will not accrue during a period where delay was due to the fault of the shipowner or resulted from action taken by the shipowner for his own convenience. It will, however, accrue where the delay is accidental and not due to the fault of either shipowner or charterer. Even where the delay results from a breach of contract by the shipowner, demurrage may still be payable if the length of such delay is beyond the reasonable contemplation of the parties as a possible consequence of the breach.

Demurrage as Liquidated Damages

It should be remembered that since demurrage represents the amounts which the Shipowners (Disponent Owners) and Charterers have agreed are payable by the Charterer to the Shipowner to recompense it for any losses which it has suffered as a result of the detention of the ship beyond laytime, it follows that the Shipowner may not be able to recover other losses which it has suffered as a result. These Liquidated Damages (Demurrage) represent all the damages which can be recovered by the Shipowner where the laytime is exceeded. Therefore, the Shipowner (Disponent Owner) may not be able to recover extra bunkers or port costs incurred by it as a result of the delay or even the loss of a valuable next cargo (fixture) which is cancelled as a result of the delay.

To recover other losses, the Shipowner must show that the charterer is also in breach of another provision of the charterparty. For example, in a case called Reider v Arcos (1926) Case, the Shipowner proved that, as a result of the charterer’s delay, the ship could not leave port with a full cargo because the depth of water over the bar had dropped. The charterer therefore loaded less cargo than it would have loaded if there had been no delay and the owner recovered deadfreight for the Charterer’s breach on top of demurrage.

 

Ship Detention

Laytime is at the free disposal of the charterer since he is regarded as having paid for it in the freight. He is entitled to use it in the way which suits him best and, provided that the agreed period is not exceeded, the shipowner is not entitled to complain that the cargo could have been loaded in a shorter time. ‘The method of loading  and discharging the ship is entirely a matter for the charterers to decide. Nor is it of any consequence to the owners whether the loading or discharge proceed very slowly on some days and exceptionally fast on others or at an even pace.

All that matters to the owners is the actual time occupied by those operations.’ The most striking example of this principle in operation is to be found in the case of Margaronis Navigation Agency v Peabody where a vessel had been chartered  to load a full and complete cargo of maize at an average rate of 1,000 tons per weather working day of 24 hours, Sundays and holidays excepted. The charterers were required by the master to provide a cargo of 12,600 tons and when, by 5 p.m. on Friday, 27 December, all but 11 tons of this amount had been loaded, they instructed the stevedores to stop work as they were anxious for business reasons to obtain January bills of lading. Loading  was resumed at 8 a.m. on Tuesday, 2 January, the next working day in the port, and was completed in 40 minutes, after which the vessel sailed. Although the operation had been completed within the agreed lay-time, the shipowners nevertheless claimed damages for detention on the  ground that the charterers had wrongfully detained the vessel for their own purposes after a full cargo had been loaded. While admitting that the charterer’s obligation ‘was to load a full and complete cargo subject to the de minimis rule’.

The Court of Appeal nevertheless upheld the decision of the arbitrator that, in  view  of  the accuracy of the loading equipment being used, a shortage of approximately 12 tons (i.e. less than 0.01 per cent) was not a commercially insignificant amount and so the charterers were entitled to detain the vessel until the balance of the agreed cargo was loaded.

In contrast, once the loading operation has been completed, the charterer has no right to detain the vessel further, even though the laytime has not expired.

In Nolisement (Owners) v Bunge y Born the loading was completed some 19 days before the expiration of the lay days, but the charterers delayed a further three days before presenting bills of lading to the master since they were unable to decide on the port of discharge. They were held liable for damages for two days’ detention. It would seem a little inconsistent for the charterer to be penalized for detaining the vessel after the completion of loading if he could retain complete freedom of action by withholding a minimal amount of cargo.

Finally, it must be noted that the loading stage is not complete until the cargo is aboard the vessel and also stowed. Although stowage of the cargo is normally the responsibility of the shipowner and the cost is usually borne by him, it is nevertheless regarded as part of the loading operation and the charterer is under an obligation to bring the cargo alongside the vessel in sufficient time to enable the shipowner to complete the stowage within the lay days. With the completion of the loading operation, the end of the second stage of the voyage charter-party is reached and the risk of subsequent delay due to accidental hindrances and obstructions reverts to the shipowner.

Consequently, if after the cargo has been stowed the vessel is prevented from embarking on the carrying voyage by reason of ice or bad weather, the cost of the delay must be borne by the shipowner.

 

Damages for Ship Detention

When there is no provision in the charterparty for the payment of demurrage, a charterer will be liable for damages for detention for all the time he detains the vessel after the expiration of the lay days. In this situation damages are at large and will be assessed by the court in relation to the actual loss suffered by the shipowner, and in accordance with the normal principles governing remoteness of damage in contract.

Damages for detention is also the appropriate remedy where a charter-party stipulates a fixed number of days for the payment of demurrage, and those days have expired. In the latter case, however, the court will normally assess the damages at a figure corresponding to the agreed demurrage rate, though it is open to either party to prove that such a rate does not represent the actual loss suffered by the shipowner.

A shipowner is not allowed to withdraw his vessel during any period for which the payment of demurrage has been agreed, unless the delay is such as to frustrate the object of the charter-party. On the other hand, once the specified demurrage period has expired he is no longer obliged to remain in port to complete the loading operation and to be restricted to a claim for damages for detention.

If part of the cargo has been loaded, he may sail and claim compensation in the form of dead freight, or, if the charterer has failed to ship any cargo, he may rescind the charter and sue for damages at large. If, however, the delay occurs at the discharging port, he has little option except to complete the unloading operation and claim damages for detention.