What is Dead Freight?

What is Dead Freight?

If the charterer cannot provide this quantity on Charter Party, the charterer will be expected to compensate the Shipowner for the loss of revenue resulting from the lack of cargo. This money is known as Dead Freight.

Dead Freight is calculated in such a way as to ensure that the Shipowner is in the same position as he would have been if a full cargo had been loaded.

When the charterer is not certain whether there will be enough cargo to fill the ship, the Freight may be paid as a Lump Sum, which means that the charterer can load as much or as little cargo as he wants. In this case, there is no contractual obligation to provide a full cargo, so the question of Dead Freight will not arise.

—

What is Dead Freight in Shipping?

Dead freight is a term used in the shipping industry to describe the situation where a charterer has reserved a specific amount of cargo space on a ship but fails to utilize the full capacity. In other words, the charterer is unable to supply the agreed-upon quantity of cargo for transportation during the loading process.

When dead freight occurs, the charterer is typically required to pay a penalty or compensation to the shipowner or disponent shipowner for the unused cargo space. This is because the shipowner has incurred costs for making the reserved space available, and the unutilized space represents a loss of potential income from other cargo that could have been carried instead.

The terms and conditions related to dead freight, including the method of calculating the compensation and any applicable penalties, are usually outlined in the charter party agreement between the shipowner (or disponent shipowner) and the charterer. It is essential for both parties to be aware of these terms to avoid misunderstandings and potential disputes related to dead freight situations.

 

How do you calculate Dead Freight?

Dead freight is calculated based on the difference between the agreed-upon cargo capacity in the charter party agreement and the actual amount of cargo loaded onto the ship. The calculation typically involves the following steps:

  1. Determine the agreed-upon cargo capacity: Refer to the charter party agreement to find the contracted cargo capacity. This is the amount of cargo that the charterer has agreed to load onto the ship.
  2. Determine the actual amount of cargo loaded: After the loading process is completed, calculate the actual amount of cargo loaded onto the ship.
  3. Calculate the difference: Subtract the actual amount of cargo loaded from the agreed-upon cargo capacity. This difference represents the unutilized cargo space for which dead freight must be calculated.
  4. Determine the freight rate: Refer to the charter party agreement to find the agreed-upon freight rate. This rate can be expressed per ton, per unit, or as a lump sum, depending on the terms of the agreement.
  5. Calculate the dead freight: Multiply the difference in cargo capacity (from Step 3) by the freight rate (from Step 4). The result is the amount of dead freight owed by the charterer to the shipowner or disponent shipowner as compensation for the unused cargo space.

It is important to note that the specific terms and conditions related to dead freight calculations may vary depending on the charter party agreement. Both parties should carefully review the agreement to ensure they understand and adhere to the applicable provisions for calculating dead freight.

 

Who pays Dead Freight?

In the shipping industry, dead freight is paid by the charterer. When a charterer reserves a specific amount of cargo space on a ship but fails to utilize the full capacity, they are required to compensate the shipowner or disponent shipowner for the unused cargo space. This compensation is known as dead freight.

The obligation to pay dead freight arises because the shipowner has incurred costs for making the reserved space available, and the unutilized space represents a loss of potential income from other cargo that could have been carried instead.

The terms and conditions related to dead freight, including the method of calculating the compensation and any applicable penalties, are usually outlined in the charter party agreement between the shipowner (or disponent shipowner) and the charterer. It is essential for both parties to be aware of these terms to avoid misunderstandings and potential disputes related to dead freight situations.

 

What are the Dead Freight Charter Party Clauses?

Dead freight clauses in a charter party agreement are provisions that specifically address the situation where a charterer fails to utilize the full cargo capacity reserved on a ship. These clauses outline the rights and obligations of the parties involved, as well as the method for calculating and paying dead freight. Although the exact wording and content of dead freight clauses can vary depending on the charter party agreement, they typically include the following elements:

  1. Definition of dead freight: The clause should clearly define what constitutes dead freight, usually referring to the unutilized cargo space when the charterer fails to load the agreed-upon cargo capacity.
  2. Calculation method: The clause should specify the method for calculating dead freight, which usually involves determining the difference between the agreed-upon cargo capacity and the actual amount of cargo loaded, and then multiplying this difference by the freight rate.
  3. Freight rate: The freight rate, which may be expressed per ton, per unit, or as a lump sum, should be specified in the charter party agreement. This rate is used in calculating the dead freight owed by the charterer.
  4. Payment terms: The clause should outline the terms and conditions for the payment of dead freight, including the due date, currency, and method of payment.
  5. Notification requirements: The clause may specify any requirements for notifying the relevant parties of a dead freight situation, such as deadlines for informing the shipowner or disponent shipowner of any changes to the cargo quantity.
  6. Liability and indemnity: The clause may also address the liability of the charterer for any additional costs or damages incurred by the shipowner or disponent shipowner due to the dead freight situation, as well as any indemnity provisions related to dead freight claims.

It is essential for both the shipowner (or disponent shipowner) and the charterer to carefully review the dead freight clauses in their charter party agreement to ensure they understand and adhere to the applicable provisions. This will help avoid potential disputes and misunderstandings related to dead freight situations.

 

Shipowners Right to Deadfreight

The shipowner’s right to dead freight refers to their entitlement to compensation when the charterer fails to utilize the full cargo capacity reserved on a ship as agreed upon in the charter party agreement. This right is based on the understanding that the shipowner incurs costs for making the reserved space available, and the unutilized space represents a loss of potential income from other cargo that could have been carried instead.

The shipowner’s right to dead freight is typically established and protected by the inclusion of specific dead freight clauses in the charter party agreement. These clauses should clearly define the circumstances under which dead freight arises, the method for calculating the compensation, and the terms and conditions for payment.

To enforce their right to dead freight, shipowners (or disponent shipowners) should:

  1. Clearly outline the dead freight provisions in the charter party agreement: Ensure that the dead freight clauses are well-defined and included in the charter party agreement, specifying the calculation method, payment terms, and any other relevant conditions.
  2. Monitor cargo loading: Keep a close eye on the cargo loading process to identify any discrepancies between the agreed-upon cargo capacity and the actual amount of cargo loaded.
  3. Document the dead freight situation: Maintain accurate records of the cargo loading and unloading process, including any evidence of the unutilized cargo space, to support dead freight claims.
  4. Notify the charterer: Inform the charterer of the dead freight situation as soon as it is identified, in accordance with any notification requirements specified in the charter party agreement.
  5. Enforce payment: Pursue the payment of dead freight from the charterer according to the terms and conditions outlined in the charter party agreement.

By incorporating dead freight clauses in the charter party agreement and taking appropriate steps to enforce their right to dead freight, shipowners can protect their interests and ensure they are fairly compensated for any unutilized cargo space.

 

Dead Freight Calculation Example

In this example, we will use a per-ton freight rate.

Assumptions:

  1. Agreed-upon cargo capacity in the charter party agreement: 100,000 metric tons
  2. Actual amount of cargo loaded onto the ship: 95,000 metric tons
  3. Freight rate: $30 per metric ton

Steps to calculate dead freight:

  1. Determine the agreed-upon cargo capacity: 100,000 metric tons
  2. Determine the actual amount of cargo loaded: 95,000 metric tons
  3. Calculate the difference in cargo capacity: Agreed-upon cargo capacity – Actual cargo loaded = 100,000 – 95,000 = 5,000 metric tons
  4. Determine the freight rate: $30 per metric ton
  5. Calculate the dead freight: Difference in cargo capacity × Freight rate = 5,000 metric tons × $30 = $150,000

In this example, the dead freight owed by the charterer to the shipowner (or disponent shipowner) for the unused cargo space is $150,000. Keep in mind that this is a simplified example, and the specific terms and conditions of the charter party agreement may affect the calculation of dead freight in real-world scenarios.

 

If charterers fail to provide the agreed quantity of cargo to shipowners, shipowners typically be entitled to compensation for their loss of earnings which is known as deadfreight.

Deadfreight Example:

60,000 mtons 10% MOLOO (More or Less in Owners Option), the captain (master) will calculate the loadable quantity with reference to any draft restrictions at the intended ports, rivers and berths to be used, the ship’s cubic capacity and stowage factor (SF) of the cargo. Within the above cargo description, the captain (master) may call for any quantity between 54,000 mtons and 66,000 mtons. Suppose the captain (master) called for 65,000 mtons, but charterers could supplied only 60,000 mtons. Charterer will pay compensation to shipowners on 5,000 mtons shortfall which is known as deadfreight.