Support and Advice - BIMCO Bulletin

Support and Advice

SUPPORT AND ADVICE | LAYTIME EXCEPTIONS November 2018 & Support advice Support and Advice guides BIMCO members on contractual issues and disputes. The team answers more than 3,000 questions every year related to commercial and contractual topics, including company information. It also assists in collecting several million dollars per year through the BIMCO intervention service at no extra cost to our members. In every issue, Support and Advice shares some of the advice it frequently gives to BIMCO members. Use tabs to navigate to pages Demurrage despatch Detention In the previous issue of the BIMCO Bulletin, Support and Advice shared some short answers to a few of the frequent questions we receive regularly related to laytime exceptions. Once the (fixed) laytime has run out, most charter parties provide for a solution where demurrage must be paid by the charterers. In this issue, we will highlight relevant issues to keep in mind with regards to demurrage and related matters: Demurrage forms an integrated part of the laytime provisions in voyage charter parties operating with fixed laytime. Just as voyage freight, the amount of demurrage negotiated reflects the current market conditions and not necessarily the daily cost of the vessel. This means that it is just as important to negotiate the applicable demurrage rate as skilfully as it is to negotiate the rate of freight. Demurrage constitutes the compensation to which the owners are entitled, if the charterers fail to load or discharge the ship within laytime allowed. However, different jurisdictions construe demurrage differently. Once on demurrage always on demurrage In English law, it is considered a technical breach if the charterers do not manage to load or discharge the vessel within the laytime allowed. The penalty is demurrage, referred to as liquidated damages, payable for the detention of the ship beyond laytime allowed. In view of the breach element, exceptions to laytime do not apply when the ship is on demurrage because a party in breach cannot take advantage of its own breach. This is probably the background for the almost universally acknowledged maxim once on demurrage always on demurrage. Since laytime exceptions do not stop the running of demurrage, it requires expressly agreed exceptions to demurrage to do so. This is also the case if all laytime is used up at the loading port. In such a case, the charterers will not be entitled to notice of readiness, nor to notice time at discharge port(s). Scandinavian law differs slightly in that there appears to be no breach aspect per se, but rather the view that demurrage is a contractual agreement determining the owners right to compensation for the ships prolonged stay in port. The view is, therefore, that since there is no breach on the part of the charterers, they will be entitled to notice of readiness as well as notice time even if there is no laytime left. Similar approaches seem to be preferred by German, Dutch and Italian maritime codes.1 ________________________________ 1 Hugo Tiberg, The law of demurrage, third edition, 1979, chapter XI BIMCO Relevant links (formembers ): Demurrage Once on demurrage always on demurrage Demurrage and exception clauses Payment of demurrage A problem which often occurs is when demurrage is to be paid. In fact, there are not many voyage charter parties that contain provisions governing this issue. If there are, they are often rider clauses, which provide that demurrage, if any, is to be paid together with balance freight at some point in time after completion of discharge. It is important to keep in mind that payment of demurrage is closely connected with the owners lien right and that the lien right is retained so long as the owners are in possession of the cargo. Once the cargo is no longer in the owners custody, their lien right disappears. There have been numerous examples of owners being unable to collect the demurrage because they had nothing to bargain with; the cargo had been discharged and there was, therefore, no cargo on which to place a lien. BIMCO has sought to address this issue in clause 7 of GENCON 1994, which provides that demurrage must be paid on receipt of the owners invoice. Relevant links ( for BIMCO members ): lien and cesser clauses In the next Bulletin: Freight... Connect with BIMCO Facebook Twitter Linkedin YouTube Having said demurrage, one must also consider the topic of despatch at least when it comes to dry cargo. Besides having agreed to a demurrage rate for time used in excess of laytime allowed, it is common in dry-bulk chartering that parties agree to compensate charterers if less time has been used than what the parties have agreed in the charter party. Usually, the despatch rate is half of the demurrage rate, but, of course, parties may agree to another formula. However, what is important to understand and express correctly is how the amount of despatch will be calculated. There might be a big difference in the calculated saving depending on the terms used in the contract. Frequently, the despatch is calculated on laytime saved, which provides for a relatively straightforward calculation once the used time is clear. If five days are allowed and the charterers only use three to load the ship, the saved laytime will be two days. If the parties agree, however, that despatch is payable on all time saved, the calculation may be very different. In such a case, it will be based on the time the ship could have been required to stay in the port before the laytime had run out. Consequently, laytime exceptions, for example during weekend periods, will add to the actual period for which the owners must pay despatch to the charterers. This can be costly and, in an extreme case, the laytime may not even have started when cargo operation is complete and as such the despatch period may involve the whole laytime allowed. This is bad enough when despatch has been agreed on the basis of laytime saved, but becomes even worse if it includes the excepted periods until the ship could have expected to finish had the allowed time been used in its whole. Relevant links ( for BIMCO members ): despatch Despatch on all time saved When the charterers are unable to load or discharge the ship within the agreed fixed laytime, it is in principle wrongfully detained and the contractual remedy is demurrage, which constitutes liquidated damages. There is, however, another form of wrongful detention, which is when the ship is detained for reasons within the charterers sphere of responsibility in situations where neither laytime nor demurrage is running. Typical situations of such wrongful detention are when it takes beyond reasonable time to bring on board cargo documents after completion of loading, or if there is a cargo documentation issue with the local authorities preventing the ship from sailing after completion of discharge. In English law, running of laytime or demurrage as the case may be ceases to run on completion of loading or discharge. The remedy at owners disposal, if the ship is prevented from leaving the port after completion of loading or discharge, is to claim damages for detention. Since damages for detention fall outside the contractual terms, it constitutes unliquidated damages in other words, the purpose of damages for detention is to place the owners in the same financial position in which they would be had the charterers not prevented the ship from sailing. Unlike demurrage, damages for detention are not negotiable and will, therefore, not need to be confined to the agreed rate of demurrage, if that is much lower than the vessels running costs. In the Demurrage article, it is mentioned that demurrage is a contractual agreement in Scandinavian and German law. Detention may, therefore, be much more difficult to claim in these law systems since there is no element of breach, and demurrage is thus likely to run until the ship is allowed to leave the port. As mentioned in the introduction, these comments relate to contracts operating with fixed laytime. However, detention can be, and indeed is, also used as a contractual remedy in other contracts, typically when undefined laytime has been agreed, such as customary quick despatch (CQD) and custom of (the) port (COP). If parties have made an agreement to this effect, detention basically serves the same purpose as demurrage. Generally, it is difficult for the owners to establish laytime allowed when undefined laytime has been agreed. This carries difficulties in establishing when laytime allowed has expired and thus to formulate a detention claim. This may be the reason why clauses have emerged outlining situations in which the charterers will be liable for detention. This could, for example, be if the cargo is not ready, or if lack of cargo documents prevents loading or discharging, etc. It should be kept in mind that this type of detention constitutes a contractual agreement similar to demurrage and the agreed amount will therefore prevail. Such provisions are likely to be construed narrowly. BIMCO Relevant links (formembers ): waiting time after loading and discharging waiting for cargo documents after completion of loading Customary quick despatch