In this first post of a series about Demurrage, we’ll cover the basics of demurrage and laytime, the relationship between charter parties and demurrage claims, and how statement of facts can be detrimental to the demurrage negotiation process.
Demurrage represents a significant cost in most bulk shipping operations. Defined as a charge that is levied on a vessel or cargo when it stays longer than the allotted time at a port or terminal, Demurrage is a penalty that is imposed on the charterer for overstaying its allotted time. This fee is negotiated and agreed upon in the charter party agreement, between the charterer and the ship owner.
In the bulk shipping industry, demurrage charges are a common occurrence due to the nature of the business. Bulk carriers are used to transport large quantities of dry cargo, such as coal, iron ore, and grains, and often have to wait for loading or unloading at ports or terminals, due to various reasons – climate conditions like heavy rain and congestion are common examples. This waiting time can lead to financial charges, as the vessel is not moving and is not generating revenue for the ship owner. The charge is levied by the shipowner on the cargo owner. Just like when you order an Uber and you make the Uber wait because you are not ready!
In times of supply chain disruptions, problems with demurrage can be accentuated. As an example, at Voyager we’ve recently seen dry bulk demurrage rates soar to as high as US$70,000 per day in shipments from Russia – of course, due to the disruptions caused by the war. Similarly, LNG ships are testing the limits of multiple hundreds of thousands of dollars per day.
Commodities traders, producers, and manufacturers have full departments specialized on the topic and highly trained personnel to deal with the myriad of situations that need to be analyzed individually. From reading Statements of Facts (SOFs) to understand the events during a port call, to connecting each of those events to charter party clauses and negotiating with carriers to settle demurrage claims… It can get really complicated and often requires arbitration to settle a claim.
In this article, we’ll cover the fundamentals of demurrage and review how technology can be used to streamline processes, capture valuable data, and how to use this data to drive efficiency and direct cost savings.
What is Laytime?
Owning and operating ships as a logistics service is an extremely asset-heavy business. The investments of hundreds of millions of dollars on a ship are exposed to the volatility of future freight rates, driven by the global demand for each commodity the ship can carry. Therefore, carriers must carefully plan their fleet’s positioning to capture the best market opportunities. Their return on investment is based on how efficiently their availability (time) is used. Taking into consideration their relatively slow speed, long loading and discharge duration, and need to optimize for cargo positioning globally, every hour counts.
When a charterer takes longer than expected to load or discharge the cargo to or from a ship, the carrier is missing out on opportunities to provide other services. This is the fundamental reason for the demurrage charges forming an important part of the Charter Party, the legal contract between the shipowner and charterer that outlines the terms and conditions of the charter.
A charterer may know the load/discharge rates with which their equipment at the port can operate (tons per hour or per day, for example), which makes it easy to calculate how long it takes to perform that operation. The shipowner also knows the speed of the vessel, laden or ballast, and can calculate the duration of a journey to estimate when they’ll be at a given port and use charterers’ information to estimate the length of their stay. But that’s all assuming no external interference will ever impact their operations.
When carriers provide a quote for a spot voyage or even a COA, they take into consideration the volumes (tons) for load and discharge, port distances, current vessel position, and historical port operations data, among many other variables. Carriers and charterers use these data points to estimate the necessary duration at the port and, therefore, agree on the length that the vessel will be available to the charterer. This duration at the port is called Laytime.
Laytime should not be confused with Laycan, which is the window in which the vessel must arrive at the loading port and tender Notice of Readiness (NOR) without risk of being canceled by the Charterer. Following that, and most commonly also triggered by the NOR, Laytime is defined as the period (in days or hours) that the charterer has available to complete load or discharge operations of a specific cargo quantity.
In a conflicting interest with carriers, who would want to spend the least amount of time at port, charterers (or cargo owners) would benefit from a lengthier stay, allowing for smooth cargo operations and having enough time to handle supply chain disruptions from in-land operations or other external factors. But having a strict window to operate, charterers need to carefully plan the voyage and ensure that the vessel is loaded and unloaded within the agreed-upon timeframe. There are however exceptions to this when, for example, the shipowner can earn more money on demurrage than conducting a voyage. Vice-versa, there are times when a Charterer may prefer to incur demurrage and have a ship wait.
The marine supply chain processes and workflows require multi-stakeholder collaboration, adding more complexity and potential failures in the chain, which expose charterers to the risk of exceeding Laytime. Assuming that the general position is that all parties want to minimize demurrage and ensure a smooth turnaround, Charterers must carefully plan the cargo operation which requires coordination with the shipowner, agents, surveyors, terminals, brokers, pilots, receivers, and authorities.
When the vessel arrives at a port, there are many other operations taking place, with multiple ships requesting permission to enter a terminal or berth. Furthermore, each vessel may be operating for more than one charterer and each one of them could potentially cause a delay to the cargo operations of one ship, ultimately triggering a domino effect of delays.
So who is responsible when delays happen? Which events are at the liability of each party involved in cargo operations? When does laytime commence and when does it end?
Charter Parties and Demurrage Claims
Charter parties (CPs) are the maritime contracts governing the relationship between charterers and carriers (shipowners) for the hire of a ship. Amongst the myriad of clauses defining the rights and liabilities of each party for pretty much every possible situation – strikes, war, piracy, weather, fuel, etc – these documents set the accountability for all that may occur during a port call. They define who’s responsible in case of delays, either by bad weather, broken cranes, bunkering (fueling), or even waits due to port queues.
The conflicting interests here are that charterers need to make sure that they’ll have enough time to load their cargo accounting for any unexpected events that may arise, while carriers need to ensure that minimum time is spent at the port and that the ship has spent its time actually sailing to get the next cargo.
To balance these interests, the parties negotiate to define Laytime, which is the time allowed to charterers to use the ship for loading and discharge operations (depending on the INCOTERM used). Based on the Request for Quote (RFQ) information from the Charterer, the shipowner estimates how long their ship will be used in that specific operation. Based on this assessment, the shipowner will quote a freight rate for the voyage, ultimately coming to an agreement (or the “fixture” of the ship).
The C/P will define clauses for Laytime such as:
- At which event Laytime starts counting (“Laytime commencement”): most commonly, at Notice of Readiness Tendered (by the ship captain to the port), Pilot on Board, Arrived at Berth;
- When Laytime ends (Cessation): hoses off (wet cargo), pumping ended, crane operations finished;
- Allowed deductions or interruptions of Laytime: broken cranes, strikes, weather;
According to Charter Party Disputes, Owners and Charterers also have conflicting interests in relation to contractual terms governing the timing of the vessel’s arrival. For example, a delayed arrival may be in the Charterers’ interests when no cargo is available, or the port is congested. On the other hand, the Owners may order the ship to increase its speed to arrive earlier and within the agreed dates & hours stipulated in the ‘NOR clause’ or ‘laytime clause’, enabling the ‘laytime clock’ to start ticking. Notably, the Owners will consider the port costs, fuel costs, paid hire, fuel prices, and other related expenses or factors affecting the commencement of Laytime before deciding to vary the ship’s speed.
Who is responsible for delays caused by bad weather, broken cranes, or strikes, for example? All of these responsibilities and liabilities are assigned to each party – charterer or carrier – in the charter party. And this is where things can get very complicated. Connecting each event from the SOF to contract clauses can be extremely cumbersome and time-consuming.
The importance of the SOFs to Demurrage
Port operations often become extremely complicated, with a myriad of potential events occurring due to weather, equipment, personnel, and other supply chain disruptions. For dry bulk cargoes, for example, a simple rain can stop load or discharge operations for a long time.
Statements of Facts, or SOFs, are documents used to provide detailed information about all the events that occur during a port call. For example, a SOF includes information about the vessel’s arrival (“Notice of Readiness Tendered”, or “NOR Tendered”) and departure times, the amount of cargo loaded or discharged, and any delays that occurred during the cargo operations. The SOFs are essentially a log of events prepared by port agents, surveyors, terminals, or even the shipowner.
For the non-containerized sector of the shipping industry, 99% of these documents are still created manually, scanned, and sent by email to all relevant stakeholders. On average, a Statement of Facts contains over 40 events – and some can contain more than 300.
Statements of facts can vary widely between dry bulk, wet bulk, and break-bulk. In 2020, due to the measures to contain the spread of COVID-19, ships had to spend more time in ports that were operating more slowly. The greatest delays were for dry break bulk carriers for which cargo operations tend to be less automated and more labor-intensive, which makes SOFs for dry cargoes much more complex and therefore liable to having processing errors.
Average number of SOF events by cargo type
Statements of Facts alone would simply provide a log of port call events. These events gain meaning depending on what has been agreed upon in the charter party. Laytime and Demurrage specialists not only need to deeply understand the events but also use their expertise to evaluate how each event is connected to charter party clauses and revise claims accordingly. For many reasons, even if by a mistake on the carrier’s part, a charterer may receive a demurrage claim when they’re not liable for a certain delay at the port, which will be countered by the demurrage specialists.
These specialists will need to understand the events that caused delays in laytime, which according to Prokopios Krikris, the author of Charter Party Disputes, may include:
- bad weather;
- shipping accidents;
- delays en route at intermediate ports to lift bunkers or receive spare parts or conduct crew changes;
- technical or mechanical issues affecting the vessel’s performance (engine damages or defects, hull fouling, etc.);
- delays in following a convoy (Canal transit etc.);
- pre-inspections conducted at adjacent ports or other operational issues en route (inspection by authorities);
- delays due to local regulations (pilotage in & out restricted areas-straits, navigation subject to weather conditions, deviation due to ballast exchange at open sea);
- delays occurred at intermediate voyages performed (i.e. before the present charter);
- a divergence that added extra time on the voyage or some unforeseen events (e.g.: Ever Given grounding at Suez), etc.
Even if a ship arrives punctually, laytime disputes may arise for many other reasons, e.g. invalid NOR as the pre-conditions to tender NOR were not fulfilled (delayed attendance of the surveyor to conduct holds inspection, or NOR not tendered at the agreed place), lack of information on the berthing schedule/congestion, or prevailing weather conditions (swell, ice, fog) at the port obstructing the vessel’s berthing or arrival at a position to tender NOR, etc.
The charter party may also contain additional provisions qualifying whether the vessel is deemed to be an “arrived ship” in certain circumstances, for example:
- WIPON (Whether In Port Or Not)
- WIBON (Whether In Berth Or Not)
- WICCON (Whether Customs Cleared Or Not)
- WIFPON (Whether In Free Pratique Or Not)
If, for example, a vessel is unable to enter a port due to congestion and is to wait her turn in a “normal waiting place”, the NOR may be tendered only when the vessel enters the port. However, if the charter party contains a WIPON clause, the NOR may be tendered from the “normal waiting place”.
Laytime Calculations and Demurrage Estimates
With the events captured from SOFs, demurrage analysts and managers are able to calculate how much of the allowed Laytime was actually used during the port call, and, in the cases where multiple charterers have cargo on a ship, what factor of that laytime was alloted to their companies.
Laytime calculation is required for determining whether on completion of loading or discharge operations despatch is payable to the charterers or demurrage is due to the owners. Laytime calculation is recorded on a laytime statement.
The general steps for a laytime calculation would include:
- Understanding of relevant clauses in the charterparty.
- Obtain SOF from the vessel’s agent.
- Determine the duration of laytime allowed.
- Ascertain time of commencement of laytime.
- Allow for interruptions to laytime as per the charterparty.
- Ascertain time of expiry of laytime.
- Calculate despatch or demurrage payable.
Even with all documents and information at hand – charterparty and Statement of Facts -, laytime disputes may arise. For example, if a ship arrives punctually, laytime disputes may still arise for many other reasons, such as:
- invalid NOR as the pre-conditions to tender NOR were not fulfilled (delayed attendance of the surveyor to conduct holds inspection or NOR not tendered at the agreed place);
- lack of information on the berthing schedule/congestion; or
- prevailing weather conditions (swell, ice, fog) at the port obstructing the vessel’s berthing or arrival at a position to tender NOR, etc.
There are also ways to mitigate demurrage charges, such as negotiating with the ship owner or terminal operator to extend the free time or to waive the charges in certain circumstances. It is also possible to purchase demurrage insurance, which can cover the cost of demurrage charges in the event of unexpected delays.
When the carrier has identified that the charterer exceeded the allowed Laytime as per the charter party, they will issue a “Demurrage Claim” and an invoice to the charterer. The following documents are generally required to claim demurrage: Invoice, Timesheet, NOR, Statements of Facts.
The charterparty or contract may set out additional documents. English law provides for a 6-year limitation period for demurrage claims. However, the riders to the charterparty usually shorten this period up to a maximum of 60 days, as the following example of a clause:
If the deadline is missed by even one day, the claim will be time barred. The claim will also likely fail if any of the documents required by the charter to be presented to claim demurrage are not provided in support of the claim in time.
If the demurrage is not paid voluntarily, then the claim may be referred to an appropriate arbitral forum in accordance with the arbitration clause of the charterparty or commercial contract. In our previous articles, we explain the recovery procedure under LMAA, GAFTA and FOSFA rules.
Stay tuned for our next posts of the Demurrage series, as we’ll deep dive into some of Voyager customers’ use cases and how they’ve been able to optimize and streamline their demurrage claims & negotiation process.