90% of global cargo transportation is carried out by sea.
One nuance of such transportation, which is often given little attention while contracts are drafted, is the imposition of liquidated damages (demurrage) in the event of delays during loading or discharge of a vessel at a seaport.
Particular attention should be paid to this by charterers (for example, sellers under CIF terms), as they may face substantial losses if this issue is not properly addressed.
What is demurrage?
Demurrage is a fee for the detention of a vessel beyond the time allocated under the charter for loading and discharging operations (laytime), which the charterer pays to the shipowner.
However, if the delay is caused by a counterparty under the sales contract, the obligation to pay demurrage may be transferred to that party. Nevertheless, for this to happen, it is necessary to properly align the terms of the sale contract and the charterparty.
In practice, laytime is often determined based on a contractual daily loading rate (for example, 1,000 MT per day). In such a case, if 10,000 MT of cargo is to be loaded onto the vessel, the laytime will last 10 days, after which demurrage will start to accrue.
The two main issues that are relevant for the charterer are as follows:
- When does laytime start to count?
- Who is responsible for paying demurrage if it arises?
Has laytime commenced?
In most cases, the moment when laytime starts to count is determined by the charterparty. Frequently, the trigger is the issuance of a Notice of Readiness (NOR) – confirmation that the vessel is ready to commence loading or discharging operations.
The NOR must be issued in accordance with the terms of the charterparty, usually only after the vessel has arrived in the immediate vicinity of the port.
In this context, it is important not to confuse the NOR with the NOA (Notice of Arrival), which in some cases may be issued to confirm that the vessel has been delivered to the contractual place in due time. However, the issuance of such an NOA does not confirm that the vessel is actually ready to commence loading and discharging operations.
The use of an NOA is particularly significant now, during the period of operation of the Ukrainian grain corridor. This is due to the fact that, because of long queues in the Danube ports, it is often impossible to accurately predict when a vessel will be able to berth. Under such circumstances, charterers issue an NOA outside the port limits (for example, at Sulina) in order to avoid claims for late delivery of the vessel.
However, unless the charterparty provides otherwise, it is the issuance of the NOR, not the NOA, that triggers the commencement of laytime.
For our clients, it is crucial that the moment of NOR issuance is defined consistently in both the charterparty and the sales contract.
Otherwise, a situation may arise where, for example, demurrage is incurred under the charterparty, but the counterparty under the sales contract refuses to acknowledge it.
This is precisely what happened in a recent case, where our client (a CIF buyer) was able to establish their right not to pay demurrage incurred under the charterparty, as the sales contract provided for a different moment for the issuance of the NOR.
Due to the fact that, under the sales contract, the NOR was to be issued later, the vessel managed to complete loading within the contractually agreed time.
To reimburse or not to reimburse? Who actually pays demurrage?
As a general rule, demurrage is paid by the charterer to the shipowner.
For the shipowner, it does not matter which party is at fault for the demurrage – the responsibility always lies with the charterer (except in cases of force majeure as provided for in the charterparty).
However, this does not deprive the charterer of the right to seek compensation for demurrage from third parties who may have caused the delay.
Most commonly, demurrage arises in the following situations:
- Lack of a free berth
- Absence of cargo ready for loading
- Delays in carrying out loading and discharging operations
If these situations arise through no fault of the charterer, the charterer has the right to claim compensation for demurrage from the counterparty who breached the obligation to provide a berth, cargo, or perform transshipment in due time.
In such cases, the typical scheme is as follows: the charterer pays demurrage to the shipowner at their own expense, and then recovers compensation from their counterparty.
However, as noted in the previous section, demurrage can be claimed from the counterparty only if it is calculated in accordance with the sales contract.
It is best for the charterer if the sales contract expressly provides that the counterparty is obliged to fully reimburse demurrage incurred under the charterparty.
If the sales contract and the charterparty set out different terms for the accrual or triggering of demurrage, the counterparty will always have the opportunity to at least challenge the amount, or in the worst-case scenario, to reject the demurrage claim altogether.
Recommendations:
In order to best protect themselves from the risk of demurrage, charterers should take a careful approach to the drafting of both charterparties and sales contracts, namely:
- Clearly stipulate in both the charterparty and the sales contract the moment of NOR issuance and the commencement of laytime (the calculation method must be consistent in both documents);
- Specify that the NOA may be used as confirmation of the timely delivery of the vessel, but shall not serve as the date from which laytime commences;
- Provide in the sales contract that the counterparty (i.e. seller down the chain) is obliged to pay any demurrage incurred in accordance with the terms of the charterparty.
