What is demurrage and what are the best practices to avoid it?

Do you know the meaning of “demurrage” and what it implies? Professionals of logistics and ocean transport departments have probably heard about this term, already, as this is a very important subject in shipping. Considering that demurrage might incur in financial losses, all efforts must be made to avoid it.

Therefore, we have prepared this article to help you understand the concept of demurrage, and provide you with some recommendations to prevent your company from these charges. We hope you enjoy it!

What is demurrage and how does it work?

In order to discuss this subject with the technical groundings it requires, we invited Roberto Brandão, from Tap Consultoria — a company specialized in training professionals of shipping industry – to talk about demurrage and its implications. According to Brandão, it is opportune to clarify some usual confusions about this term: “in full container segment, demurrage is a tax that the lines charge importers when they exceed the free time given to pick up the loaded container at the import storage yard, unstuff it, and return the empty unit to owners’ depot.”

“However, in chartering, demurrage is a penalty paid by the charterers when they exceed the laytime allowed, i.e., the maximum time stipulated in the contract to for them to perform loading and discharge operations according. This allowed time is previously agreed during the transport negotiations, and varies according to the volume and the type of cargo, port, type of negotiation, and so on”, explains the specialist.

In short, we can say that it is not a fixed tax, such as a tariff, but a negotiable value. Therefore, if charterers exceed the laytime, they must pay a penalty, which is the demurrage. And it is applied pro-ra — days, hours, and minutes — according to the extra time used.

“We also have the dispatch”, points out Brandão, “which is negotiated simultaneously with the demurrage. Instead of a penalty, however, it is a reward paid to the charterer for any eventual time saved, if they manage to complete before laytime expiry. The dispatch rate is negotiated case by case, as well, and it may be the same amount as the demurrage. It may be also be agreed a free demurrage clause, i.e., no compensation is paid even if the charterer completes operations before the laytime expires. But, nowadays, the common practice in the market is to agree ‘half dispatch’, which means 50% of the demurrage value.”

What are the main causes of demurrage charges?

The most usual causes are:

• Time lost at roads awaiting berth;
• Lack of cargo alongside for loading;
• Lack of transport alongside for receiving or delivering cargo for loading;
• Shore cranes breakdown;
• Lack of cargo clearances;

Besides the above causes, there are further situations which may cause demurrage. According to Brandão, “It may happen that, for example, for one reason or another someone fails to order gangs, which spoils the whole operations plan, once this will obviously result in delays that, in the end, will increase ship’s turnaround time in port”.

“There may be several different causes, but something that usually happens is the charterers to be in an unfavorable position to impose better conditions during negotiations, and end up being forced to undertake tight loading or discharging rates. In this case, the risk of demurrage increases. It is the price to pay for a bad negotiation”, explains the consultant.

How to calculate demurrage? Check out an example!

It is important to mention that the value of demurrage is stipulated in the contract, also called charter party, in a specific clause, so that it is usually easy to identify the demurrage rate in the charter party.

However, more importantly, it is necessary to identify first of all in the charter party the clauses referring to the laytime, since these are the clauses that indicate the conditions agreed and, based on them, you will be able to do an exact laytime calculation and verify whether vessel incurred in demurrage or not. It is also extremely important to consider the clauses that stipulate the laytime exceptions.

“The most usual and clear exceptions listed in the contract are rain stoppages, ship´s cranes breakdown — when the charter party specifies that they will be used —, weekends, if the exclusion of Sundays and holidays has been agreed, the laytime commencement rules, etc. In other words, there may be many others, and all depends on what has been negotiated”, explains Brandão.

In short, summarizes the specialist, it is essential to identify clearly in the charter party the obligations on account of owners and the ones pertaining to the charterers. Having these obligations in mind, you must find the response for the following questions: Who failed? Who was accountable for the task that failed? And what happens to the party responsible for it? Can we discount the time lost from the laytime? If the shipowners failed in any of their obligations, you should automatically check if it is the case of discounting the time lost from laytime”.

According to Brandão, “to elaborate the laytime calculation, you should have in hands the Statement of Facts, which is a kind of log usually issued by the port operator, but also by the agent in some ports. It is a document signed by the captain, confirming all the events of the operations, or including his own remarks, if he feels it necessary. All the facts occurred during the operations are reported in the Statement of Facts, from the arrival of the ship at roads to her departure, and that is the document you base to ascertain the laytime used and verify if it resulted in demurrage”.

“Finally, in order to demonstrate the laytime calculations and if clients have to pay demurrage or not, you can use the Layday Statement, a form in which the periods that count as laytime (or he exceptions) are listed in columns. Once all periods are inserted, you sum the “total time used” column and compare with the laytime allowed to stablish if it was exceeded. All the time used above the laytime is considered as demurrage, which is expressed in days, hours, and minutes. The time saved, if any, is dispatch, if so agreed”, concludes the specialist.

What are the best practices to avoid demurrage?

Relying on the services of a shipping agent is one of the most efficient practices to avoid demurrage. Regardless of the position, these professionals may be of great assistance.

When working in coordination with the charterers, agents can, for example, follow up the loading and discharge, and monitor the operator’s performance to ensure that they are indeed committed to completing operations without incurring in demurrage charges. Agents can also represent the interests of shipowners, if employed by them, making sure that all facts of owners’ interest are properly reflected in the Statement of Facts.

Sometimes, the stoppages and other information are not very clearly mentioned in the statement, or may not have been inserted al tall, by negligence, or even bad faith. Therefore, it is essential to ensure that all relevant facts have been duly reported in the statement, so that clients can analyze and question them, if necessary, or may be able to use them in their favor.

After all, it was not so complicated to understand the meaning of demurrage and procedures involved, right?

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