Demurrage

If a charterer detains the vessel beyond the agreed lay days, then he is in breach of contract. The majority of charterparties, however, 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 charterparty. 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 charterparties affected by the delay, or from the consequent reduction in the number of voyages possible under a consecutive voyage charterparty. 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 applic- able 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.174 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 charterparty 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 [ship]owner 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. Of course, 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 him 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, demur- rage 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.