The work involved in processing a demurrage claim is extensive. Analysts sift through an overwhelming volume of documents, often from multiple sources with varying degrees of reliability. Bills of lading, charter party agreements, notices of readiness, and port logs are just a few of the documents that need to be reconciled to create a comprehensive timeline of events. It is an intricate, multifaceted process complete with a myriad of obligations, historical events, and conflicting information to sift through to establish an iron-clad case for liability and compensation.
It is the analyst’s role to cut through this noise, piece together a narrative from incomplete or disputed information, and produce a clear, evidence-backed account of the voyage. And this is extremely critical, as demurrage can represent 10-15% of the total freight costs of a single trade.
In this article, we will cover the steps that compose the process of managing a demurrage claim, covering the steps a demurrage or chartering analyst takes to:
- Understand the contractual commercial terms (i.e., Incoterms).
- Monitor and assess the voyage’s operational details.
- Gather relevant documentation.
- Calculate/validate the claim.
- Settle the payment.
- Resolve potential disputes.
Let’s explore each of these steps in detail.
Process & Interpret the Claim
The most common demurrage claim situation that an analyst faces is where a charterer receives one (or more) claims from a carrier involving demurrage. The charterer’s analyst’s job is to determine if the claim is valid, if the calculations were correct, and if they must pay the received invoice.
Multiple voyage documents will come from many different stakeholders, such as traders, agents, shipping teams, port representatives, and more. Although this step appears simple and straightforward, demurrage and chartering analysts spend most of their time unpacking the information at this point.
Scrolling through long email threads and deciphering information contained deep in poorly scanned documents is a common task faced by demurrage analysts.
Charter Party Contract
The key document of a voyage is the freight contract, commonly known as the Charter Party. The Charter Party is the legal contract between the shipowner and the charterer that outlines the terms and conditions of the charter.
While a detailed contract analysis is primordial, charter party contracts are generally reused repeatedly without a thorough review or update.
This recycling of contracts stems from the sheer volume of agreements involved in the shipping industry and the hesitance – even resistance – to engage with new, unfamiliar contract terms. In a fast-paced environment where time is money, creating an entirely new contract is often not feasible.
From the innumerable clauses in the charter party, the key information to be identified is the Commercial Terms:
- Laydays (The earliest date the vessel can arrive at the port to begin loading/unloading cargo)
- Loading/Unloading ranges / ports / places (where the ship will load or unload its cargo)
- Discharge ranges / ports / ranges (As a general rule, most charterers don’t know where the ship will go after loading (or unloading), so a ship gets booked while heading to a general location, and the specific port is settled at a later time)
- Cargo quantities and ship carrying capacity
- Freight rates
- Total laytime (the agreed-upon time allowed for loading / discharging)
- Demurrage rate (per day or per hour) once layday (or laytime) has been exceeded
- Specific contract clauses such as:.
- Laytime / demurrage – for example, when it commences, when it resumes, the duration, payment specific terms, etc.
- For tankers – Specific clauses such as those related to tank cleanliness and cargo operations, etc.
Other documents that can be collected during this phase can involve:
- Letters of protest – A letter of protest is a written communication that records any discrepancies on the part of one party, concerning any operational matter that happened during a voyage.
- Inspector and Surveyor Reports – Registering the quantities, cleanliness and sampling results made at berth. This involves surveying and sampling bunker tanks and non-cargo spaces on board a vessel by an independent authority.
- Bills of Lading, the document that acknowledges receipt of cargo for shipment, detailing the type, quantity, and destination of the goods being transported.
- Time & Pumping logs (for tankers) document the details of the cargo discharge or loading process, including the start and stop times, pumping rates, cargo volumes, and any interruptions or issues during the operation.
The Efficiency Bottleneck
The step of collecting, processing and filing documents in preparation for the claim calculation process requires considerable effort. Many documents are still created using a clipboard, pen, and paper, manually transposed into PDF form, and then shared via email.
This inefficiency is distinctly illustrated when tracing the journey of an SoF from the ship to the operations table, as seen in the following diagram. The result is over three hours of work in the shipping value chain for a single demurrage claim:
Understanding Contract Clauses
Despite the fatigue that occurs from repeated use of the same contractual documents, it is primordial to thoroughly understand the clauses contained in a Charter Party contract.
Many clauses define the rights and liabilities of each party for virtually every possible situation – strikes, war, piracy, weather, fuel, etc. – and set the accountability for all that may occur during a port call.
These clauses have a significant impact on the value of demurrage, which can negatively affect a voyage’s profitability. A badly written contract can greatly increase the demurrage amount, either for the charterer or the owner, depending on which clauses were used and how they are formulated.
Understanding the clauses that mention demurrage (or laytime) in a charter party contract becomes a valuable tool to improve predictability and reduce risks. Creating contracts with this in mind can be equitable to both parties and minimize the risk of disputes.
Some of the key clauses that refer to demurrage in a contract are:
- Laytime / Demurrage
This clause will inform how much time is available to load or discharge cargo and when demurrage shall start.
Laytime or time on demurrage, as herein provided, shall commence or resume upon the expiration of six (6) hours after receipt by Charterer or its representative of a valid Notice of Readiness or upon Vessel’s Arrival in Berth, whichever occurs first. Laytime shall not commence before 0600 hours local time on the Commencing Date specified in Part I (B) unless Charterer shall otherwise agree, in which case laytime shall commence upon commencement of loading.
- Half Rate Demurrage:
Normally explains when demurrage will be deducted due to delays, and specifies which delays are liable.
If Vessel has been delayed in berthing, loading and/or discharging due to weather and/or sea conditions; fire; explosion; (…) or equipment in or about the facilities of Charterer, supplier, shipper or consignee of the cargo be the Delay prior to or after the expiration of laytime, the laytime used or, if the Vessel is on demurrage, time on demurrage equal to the period or periods of Delay as just described shall be reduced by half. |
- Duration
Specifications for the laytime clause.
The laytime specified shall be allowed free of expense to Charterer for the purpose of loading and discharging cargo and all other Charterer’s purposes. Laytime or, if Vessel is on demurrage, time on demurrage, shall continue until the final termination of the loading or discharging operation. |
- Shifting
Detailing if the charterer can shift the vessel within any loading or discharging places at port.
| Charterer shall have the right to shift Vessel within any port of loading and/or discharging from one loading or discharging place back to the same or to another such place once or more often. In the event that Charterer exercises this right, Charterer shall pay all additional expenses properly incurred. |
- Sampling
Detailing what happens when there is sampling going on and who’s responsible for this time.
| Charterer’s representative(s) shall have the right to survey and take samples of all Vessel’s bunker tanks and non-cargo spaces. Refusal by Master to permit such bunker surveying and sampling shall give Charterer or terminal operator the right to order Vessel off berth. |
- For tankers – Pumping
Detailing what happens during the time hoses are pumping cargo.
| Owner warrants that Vessel shall arrive at the loading place(s) with cargo tanks properly inerted and that such tanks shall remain inerted throughout the loading of the cargo, the voyage and the subsequent discharging of the cargo. |
Charter Party Clause Case Study
The following is an analysis involving several real-world port calls, and applying two different sets of charter parties to each call. This allowed us to compare the potential costs of demurrage under different contractual arrangements.
What we discovered is that, depending on how it’s formulated, a charter party can add up from 50 to 60% on the demurrage claim value for either the charterer or the shipowner, only by applying the right clauses.
The conclusion is that not fully understanding the implications of the charter party clauses on demurrage can easily represent several million dollars per year in lost revenue.
Find out more about this study here.
