Introduction

The possibility of incurring demurrage is unpredictable even though shipowners know that certain ports are prone to delays probably due to congestion or inadequate port infrastructure and equipment required to discharge cargo quickly.

In this article we are going to explore ways of improving demurrage recovery rates as for every successful recovery, a shipowner probably has tens of unsuccessful ones.

The terms of the Charterparty

The starting point for every demurrage claim is usually the charterparty between the parties.

The GENCON 1994 Charterparty has the following clause:

7. Demurrage

Demurrage at the loading and discharging port is payable by the Charterers at the rate stated in Box 20 in the manner stated in Box 20 per day or pro rata for any part of a day. Demurrage shall fall due day by day and shall be payable upon receipt of the Owners’ invoice. In the event the demurrage is not paid in accordance with the above, the Owners shall give the Charterers 96 running hours written notice to rectify the failure. If the demurrage is not paid at the expiration of this time limit and if the vessel is in or at the loading port, the Owners are entitled at any time to terminate the Charter Party and claim damages for any losses caused thereby.

The GENCON form sets out clearly that demurrage shall fall due day by day and shall be payable upon receipt of the owners’ invoice. It is important to note that the only remedy provided for in the said clause, which is the termination of the charterparty, only applies if the vessel is still at the loading port. There are no prescribed remedies for the failure of the charterers to pay demurrage at the discharge port.

The lien terms in Clause 8 may be able to provide some assistance in relation to remedies available to the Shipowners in connection with unpaid demurrage.

8. Lien Clause

The Owners shall have a lien on the cargo and on all sub-freights payable in respect of the cargo, for freight, deadfreight, demurrage, claims for damages and for all other amounts due under this Charter Party including costs of recovering same.

Exercising the lien on the cargo

After laytime at the discharging port has expired, the time for demurrage will start to run. At this time, probably some of the cargo has been discharged and there are some quantities of cargo still onboard. Going by the lien clause in the GENCON form, the shipowner can have a lien on the cargo that is still onboard.

The shipowner will then be required to take possession of the cargo either leaving it onboard, which is usually not the preferred method as it encumbers the vessel, or landing it to the order of the shipowner. However, many ports prohibit such lien activities as the ports are usually controlled by government agencies who will always promote the quick movement of goods out of the port for consumption or use instead of holding onto cargo which will occupy much-needed storage space for the quick turnaround of vessels at berth.

Contractual rights available to the shipowner

If taking possession of the remaining cargo onboard is not an option available to the shipowner, the shipowner will only have a contractual right against the charterers. There is always a contractual right to claim demurrage against the charterers. However, if the charterers are not financially sound, the shipowners will then look to the terms of the bills of lading to see if the receivers or consignees of the cargo can be asked to pay demurrage. Very often, the creditworthiness of the receivers or consignees is not known to the shipowners when the charterparty is executed. Therefore, the shipowner will not be able to ascertain the creditworthiness of the receivers or the consignees at the time of entering the charterparty.

All is well and good if the terms of the charterparty set out clearly that the demurrage shall fall due day by day and become payable when the invoice is issued by the shipowner. However, as is usually the case, shipowner tend to give credit periods for the payment of freight. If additional days are given for the payment of demurrage invoices, the vessel would have left the discharge port when the demurrage invoice becomes due. The shipowner’s best weapon against non-payment which is the right to exercise a lien on the remaining cargo onboard would have been lost in these circumstances as the due date for payment of the demurrage invoice falls after the vessel has left the discharge port. Here again, the shipowner is left with a contractual right to enforce the demurrage claims.

Preventive steps

If the shipowner will eventually rely on contractual rights as opposed to the more superior proprietary right when a lien on the cargo remaining onboard is exercised, the shipowner will have to take steps prior to entering the charterparty to ensure recovery of demurrage that may be incurred at the discharge port.

For a start, the charterparty should not allow any grace period for the payment of demurrage especially for demurrage incurred at the discharge port. More importantly, demurrage should be payable immediately when it falls due “day by day” similar to the terms in clause 7 of GENCON.

The more important step is for the shipowner to carry out financial due diligence on the charterer and if possible, on the receivers and the consignee. With this information on hand, the shipowner can then assess the possibility of the charterers being liable for demurrage and the steps to take in order to successfully recover demurrage.

The best option would be to ensure that a financially sound charterer is always liable to pay demurrage without being able to rely on any cesser clause or other clauses excluding the charterer from paying demurrage that is incurred at the discharge port. In some instances, corporate guarantees or personal guarantees may be demanded by the shipowner to ensure that all payments are received by the shipowner as per the terms of the charterparty.

Additionally, the shipowner should also ensure that a favourable law and jurisdiction clause is chosen so that demurrage claims can be pursued successfully in a jurisdiction where the charterer has assets or where successful awards or judgments from that jurisdiction can be enforced in another jurisdiction where the charterer has assets.  

For more information relating to this article, kindly contact Partner, Captain Mathiew Christophe Rajoo.

Disclaimer: This information is provided for general information and does not constitute legal or other professional advice. Specific advice should always be sought in relation to any legal issue.