BIMCO Training

OVERVIEW OF DEMURRAGE AND DESPATCH

RICHARD WILLIAMS

The information and opinions which this paper contains are not intended to be a comprehensive
study, nor to provide legal advice and should not be treated as a substitute for specific advice
concerning individual situations.

1. INTRODUCTION

By payment of freight the charterers are given the right to detain the ship without further payment for
the duration of the laytime. Therefore, it follows that once the agreed duration of laytime has expired
the Charterers are in breach of contract since they have detained the vessel longer than the time
contractually allowed to them under the charter party. However, if the loading or discharge is
completed within the laytime, the shipowner has received a benefit in that the charterers have not
obtained full value for the freight which they have paid.

In general terms the mere fact that someone has received a benefit does not necessarily entitle that
person to claim a rebate from his contractual partner unless the terms of the contract expressly entitle
him to claim such a rebate. Despatch is the contractual method which entitles the charterer to obtain
such a rebate.

On the other hand, if the charterers have taken longer than the laytime to load or discharge the cargo,
the shipowner is entitled at law to claim damages for any losses which he has suffered as a result of
the Charterers’ breach of contract even if there is no express clause to such effect in the contract.
However, the usual rule at law is that a shipowner is obliged to prove his losses when calculating
damages. In the case of delay the quantum of damages is normally the daily amount which the
shipowner has lost as a result of the delay and which he could reasonably expect to have achieved on
the open market for a vessel of this type but for the delay i.e. the cost of a lost opportunity. This rule
can cause problems to the shipowner as it is sometimes difficult to prove quickly and easily that he has
lost an opportunity to obtain alternative employment for his ship and even if he manages to do so, it is
notoriously difficult to establish with precision exactly what the market rate would have been for his
ship at the relevant time. Furthermore, and in any event, the process of establishing the claim is time-
consuming and costly to the detriment of the shipowners’ cash-flow.

Due to such difficulties it is customary for the parties to agree the amount of damages which will be
payable in the event of a failure to load within the laytime. This form of agreed (often referred to as
liquidated) damages is called demurrage. Parties can thereby avoid the inconveniences of the usual
damages rules by agreeing in advance that an agreed amount will be payable for delays beyond the
laytime without proof of loss. It also enables payment of an agreed amount to be made quickly once
the calculation of the delay period has been established.

The “package” of rights and obligations has been described as follows:

“A liability for demurrage is a liability for liquidated damages for breach of contract. The breach of
contract is the failure to discharge (or load) within the permitted laytime. The obligation has two
different aspects: the first is the obligation to discharge and the second is to do so within the
limited time. There is no breach before that limited time has expired. Once the limited time has
been exceeded there is a continuing breach for which the liability in liquidated damages (that is
to say demurrage) continues to accrue minute by minute as the failure to complete discharge
continues1.”

1 “Forum Craftsman” (1991) 1 Ll. Rep. 81

© BIMCO Overview of Demurrage and Despatch 1

 BIMCO Training

2. DESPATCH

Despatch is a feature of dry cargo charters. Tanker charters have despatch provisions only very rarely,
if ever.

Despatch is defined in Rule 31 of the BIMCO Laytime Definitions for Charter Parties 2013 as follows:

“Despatch Money” or “Despatch” shall mean an agreed amount payable by the owner if the
vessel completes loading or discharging before the laytime has expired.”

In most cases despatch is quantified as 50% of the demurrage rate. For example, clause 10 of Amwelsh
1993 provides that:

“Demurrage, if incurred, at loading and/or discharging port(s) shall be paid by the Charterers to
the Owners at the rate of….per day, or pro-rata for part of a day. Despatch money shall be paid
by the Owners to the Charterers at half the demurrage rate for all laytime saved.”

The charter party may provide that despatch is payable on “all time saved” or on “all laytime (or
working) saved”. The distinction is material.

“Despatch on all time saved” means that despatch money shall be payable for the time from the
completion of loading or discharging to the expiry of the laytime including periods excepted from the
laytime. However, “despatch on all laytime (or working) saved” means that despatch money shall be
payable for the time from the completion of loading or discharging to the expiry of the laytime
excluding any periods excepted from the laytime.

(For examples of the difference see the powerpoint slides which accompany this paper)

It should be understood that even if a ship is delayed by congestion or other matters attributable to
the charterers the owners may nevertheless be liable for despatch (if the charter provides for
despatch) if the owners do not do what is contractually required to commence the running of laytime.
The rationale for this is that if laytime is not validly commenced, it does not run, and if it does not run,
then despatch is payable for the time saved. In the case of the “Mexico I2” the master wrongly gave
NOR before the ship was ready to discharge the cargo and did not give a subsequent valid NOR when
the ship became ready. The ship had to wait for a considerable period of time before she was allowed
to berth due to reasons for which the charterers were responsible and at the end of the discharge the
shipowners claimed demurrage. The Court of Appeal held that since the giving of a valid NOR was a
contractually agreed pre-requisite to the commencement of laytime, laytime had never commenced to
run (at least before the discharge actually commenced3). Accordingly, if laytime had not commenced
to run, despatch was logically payable to the charterer since he had completed discharge before the
expiry of the agreed laytime.

This case is an example of the principle that, unless there is good reason to the contrary, the law will
hold contractual parties to their contract even if this results in hardship. This is particularly true in the
case of disputes as to laytime and demurrage.

2 [1990] 1 Lloyd’s Reports 507

3 In the “Happy Day” (2002) 1 Ll. Rep. 48, the Court of Appeal concluded in similar circumstances, that the NOR was to be treated
as valid when the charterers actually began to discharge the cargo.

© BIMCO Overview of Demurrage and Despatch 2

 BIMCO Training

DEMURRAGE

3.1 Quantum of demurrage

Traditionally, the demurrage rate was an accurate guesstimate of the amount which would be lost
to the particular vessel as a result of the delay. However, the more modern trend in some trades is
to make the demurrage rate the subject of negotiation in the same way as the freight. Accordingly,
it may bear little relationship to the actual state of the market.

3.2 The effect of agreed (“liquidated”) damages

It should be appreciated that since demurrage represents the amounts which the parties have agreed
to be payable by the Charterers to the Owners to recompense them for any losses which they have
suffered as a result of the detention of the vessel beyond the laydays, it further follows that the
shipowners may not be entitled to recover other losses which they have suffered as a result unless the
charter party provides expressly that such other losses are also recoverable 4. The liquidated damages
[demurrage] represent all the damages which can be recovered by the shipowners for such breach.
Therefore, for example, the shipowners may not be able to recover extra bunkers or port costs
incurred by them as a result of the delay or even the loss of a valuable ‘next’ fixture which has been
cancelled as a result of the delay.

To recover such other losses the shipowners must be able to show that the Charterers are also in
breach of other provisions of the charter. For example in Reidar v. Arcos5, the Owners proved that, as a
result of the delay, the vessel could not leave the port with the full contemplated cargo as the depth of
water over the bar had dropped. The Charterers consequently loaded less cargo than they would have
loaded had there been no delay and the shipowner recovered deadfreight in addition to demurrage as
a result of the breach by charterers of the completely separate obligation to load a minimum quantity
of cargo.

In view of the inconvenience of this principle of law, it is becoming more common to see charter party
clauses which expressly allow the shipowner to claim other losses in addition to demurrage. For
example:

“Should it be necessary to steam whilst at the anchorage area then time and additional bunkers
consumed in this respect to be for charterers’ account.”

3.3 When is demurrage payable?

Since demurrage is a form of agreed damages it follows that the charterer is liable as soon as he is
in breach. It further follows that unless the charter provides otherwise demurrage is incurred day
by day. However, it has been debated in the past whether demurrage is also payable day by day.
The generally accepted view is that it is payable day by day and that, theoretically, the charterers
would be able to commence legal proceedings each day for the recovery of the demurrage which
had been incurred on the prior day. However, it is unlikely in practise that a shipowner would wish
to proceed in this manner as it is normally more economic to commence one set of proceedings to
recover the total demurrage which has been incurred.

However, the question of when demurrage is payable is important when considering whether the

4 Suisse Atlantique v. Rotterdamsche. [1967] l AC.361

5 [1927] l KB 352

© BIMCO Overview of Demurrage and Despatch 3

 BIMCO Training

shipowner has the right to exercise a lien on the cargo for demurrage since a lien can only be
exercised for an amount which is due and payable at the time that the lien is being exercised.
Unless the contract states otherwise there is no right to lien the cargo for future debts. Therefore,
whilst an owner can exercise a lien over the cargo (if the charter allows such a lien) in respect of
demurrage which has been incurred before the date of the exercise of the lien, he cannot do so in
respect of demurrage which has either not yet been incurred or is not yet payable 6. It is common
therefore for charterers to wish to amend the traditional rule and to specify that demurrage will be
paid only after the shipowner has submitted a detailed laytime calculation with supporting
documents after the completion of discharge. The following clause is a typical example:

“Demurrage, if any, shall be payable by the charterers against owners’ invoice supported by
notices and statements of facts from loading and discharging ports duly signed by
shippers/receivers respectively.”

To counter such difficulties shipowners prefer to include clauses which emphasis that demurrage is
payable day by day as it is incurred. A classic example is clause 7 of Gencon 1976:

“… demurrage at the rate stated in Box 18 per day or pro rata for any part of a day, payable
day by day, to be allowed merchants at ports of loading and discharging.”

© Copyright Richard Williams, 2015. All rights reserved.

No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including
photocopying, scanning, recording or by any information storage or retrieval system, without the prior written permission of the
author.

6 “Boral Gas” (1988) 1 Ll. Rep. 342

© BIMCO Overview of Demurrage and Despatch 4