An Introduction to Demurrage and Demurrage Charges in Bulk Carrier Charter Contracts for International Trade

01 Demurrage

As interpreted under the Voyage Charterparty Laytime Interpretation Rules 1993, demurrage refers to "an agreed amount payable to the owner in respect of delay to the vessel once the laytime has expired, for which the owner is not responsible. Demurrage shall not be subject to exceptions to laytime." If the actual loading/unloading time used by the charterer exceeds the time allowed under the contract, the excess time is "demurrage time," and the vessel entering this state is referred to as a "vessel on demurrage." For this, the charterer must pay the shipowner "demurrage" to compensate for the losses suffered due to the vessel's delay.

Demurrage can be further categorized into:

01 Specified Demurrage Period

A specified demurrage period is an agreed-upon limited time for vessel demurrage stipulated in the contract. If the vessel is on demurrage within this specified period, the charterer pays the shipowner demurrage at the rate specified in the contract. However, if the loading/unloading is still not completed upon the expiry of the "specified demurrage period," or if the vessel remains in port due to the charterer's fault, the vessel is termed a "vessel under detention." For this, the shipowner can claim "damages for detention" from the charterer. The basis for calculating damages for detention is generally not explicitly defined in the contract but is calculated based on the fact of the delay and the prevailing freight market levels.

02 Unspecified Demurrage Period

An unspecified demurrage period occurs when the contract does not specify the duration of demurrage but only establishes the demurrage rate. In principle, the demurrage time can be unlimited, and the issue of damages for detention does not arise; the shipowner can only demand payment of demurrage from the charterer at the rate determined in the contract.

However, even if the contract does not explicitly specify a demurrage period, if the relevant laws of the country where the contracting parties are located, or the Maritime Code, or the law applicable at the arbitration venue specified in the contract's arbitration clause, have specific provisions regarding the vessel's demurrage period, the shipowner may similarly claim damages for detention from the charterer.

Demurrage equals the product of demurrage time and the agreed demurrage rate.

Demurrage time is determined by comparing the time actually used for loading/unloading operations with the laytime allowed by the contract. Whether Sundays, holidays, and even times when work stopped due to weather or other reasons during the demurrage period also count as demurrage time is often contentious. To avoid disputes, charter parties often use specific terms with clear meanings to indicate the calculation of demurrage time, such as: "demurrage runs continuously" and "demurrage runs non-continuously" or "per like day".

If the contract does not explicitly agree on which term to use for calculating demurrage time, it is usually interpreted that demurrage time runs continuously according to common law. Based on the definition of demurrage in the Voyage Charterparty Laytime Interpretation Rules 1993, the term "demurrage" itself implies that demurrage time runs continuously. Therefore, there is no need to include the term "demurrage runs continuously" in the contract. However, if the contracting parties agree that "demurrage runs non-continuously," this must be explicitly stated in the contract; otherwise, it will be calculated continuously based on the principle "once on demurrage, always on demurrage."

Firstly, demurrage applies only to delays during the loading/unloading process and cannot be applied to other time losses caused by the charterer. Secondly, demurrage is not consideration or cause under contract law; it does not mean that the charterer has the right to delay the ship's schedule simply by paying demurrage. It is merely a form of liquidated damages.

When discussing demurrage, it is essential to distinguish it from a closely related concept: damages for detention (also known as detention damages, super-demurrage, etc.). This refers to an amount payable by the charterer to the shipowner for the detention of the vessel in port.

Damages for detention differ from demurrage. Demurrage is often closely related to laytime and is a form of liquidated damages. That is, if the charterer fails to complete loading/unloading operations within the laytime stipulated in the contract, regardless of whether the shipowner has actual losses or whether the actual loss amount exceeds the agreed demurrage, the charterer must compensate according to the amount stipulated in the contract.

Damages for detention are not agreed upon in advance by the parties, or cannot be fully foreseen. They arise from losses due to vessel delay caused by the charterer's fault, or reasons other than the charterer's fault, and should be compensated based on the actual loss of the vessel. Detention could arise from delays caused by the charterer's failure to nominate the discharge port promptly, or delays due to the charterer's failure to provide cargo promptly. Generally, it is unrelated to loading/unloading operations. Therefore, damages for detention are a form of compensatory liquidated damages. This includes operating costs such as fuel and port dues incurred due to the delay, and the potential lost profits the shipowner might have missed due to the detention.

Possible scenarios giving rise to damages for detention include:

(1) When the laytime stipulated in the contract expires, and loading/unloading is not completed. If the contract does not specify a demurrage rate and no agreement is reached afterwards, the loss during the detention period is calculated based on actual loss.
(2) When the contract specifies a demurrage period. For example, if Clause 7 of the contract clearly states the demurrage time is 10 running days. If loading/unloading is still not completed after these 10 running days, the period enters into damages for detention.
(3) Detention arising under terms like CQD. Terms like CQD (Customary Quick Despatch) and "as fast as the vessel can receive/deliver" do not stipulate fixed laytime. Once reasonable loading/unloading time is exceeded, the calculation of damages for detention begins. Therefore, under such terms, there is no calculation of demurrage or dispatch money.
(4) Detention due to the charterer's failure to provide cargo on time. In practice, if the charterer has not prepared the goods, or completed necessary documentation, or due to trade disputes, etc., the vessel cannot berth and load/discharge upon arrival. If laytime has not yet commenced, the resulting loss constitutes damages for detention, not demurrage.
(5) Other situations causing damages for detention. These include delays due to refusal to deliver goods without the original bill of lading, delays due to the charterer's failure to declare the port promptly, or delays due to the charterer breaching the draft warranty, forcing the vessel to wait for high tide or lighten outside the port, resulting in delay.

02 Dispatch Money

Dispatch money equals the product of dispatch time and the agreed dispatch rate.

If the actual loading/unloading time used by the charterer is less than the time allowed under the contract, the saved time is the "dispatch time." For this, the charterer has the right to claim dispatch money from the shipowner. According to international shipping practice, the dispatch rate is usually half of the demurrage rate ("dispatch half demurrage," DHD), unless otherwise specified in the contract.

Regarding the calculation of dispatch time, a common issue of dispute between the shipowner and charterer is whether Sundays, holidays, and stoppages due to bad weather should be deducted from the saved time. To prevent disputes, charter parties also often use specific terms with clear meanings to indicate the calculation of dispatch time. These are "all time saved" and "all working time saved."

When the contract does not explicitly specify which term to use for calculating dispatch time, it is usually interpreted as "all working time saved," as this calculation method is considered more reasonable and is more commonly used in practice.