Demurrage in Commercial Law: Understanding the Legal and Commercial Implications

Theo Kwong, 12 February 2025.

Demurrage, having its firm origins in shipping and maritime law, is the fee charged when cargo remains loaded or unloaded beyond the agreed time limit specified in a bill of lading or charter party. Though it might appear to be a specialised field of commercial law, demurrage has significant effects on international commerce, ranging from supply chains and contract terms to the economic bottom line for shipping firms, charterers, and cargo owners. This article examines the legal regime that governs demurrage, its practical implications, and new trends within this field of commercial law.

The Legal Framework Regulating Demurrage

Definition and Origin

Demurrage comes from the French word 'demurrer,' which means to stay or tarry. In law, it refers to the payment to the shipowner for delaying the vessel beyond the laytime, the contractually agreed—upon time for loading and unloading cargo.

Demurrage clauses are generally included in charter party contracts and, on a lesser scale, bills of lading. The agreements stipulate the terms of laytime, the demurrage rates to be paid, and the specific circumstances under which demurrage is payable. The primary charter parties are:

• Voyage Charter Party: The shipowner commits to transporting cargo from named ports. If the agreed laytime for loading or discharge is surpassed, demurrage is payable;

• Time Charter Party: The ship is chartered by the charterer for a specific period. Demurrage is less common here, but similar concepts like detention charges may apply; or

• Laytime Calculation: Laytime is calculated based on the contract terms agreed upon. It can be:

  • Per Running Hours/Days: Continuous counting of time, including holidays and weekends.

  • Working Days/Weather Working Days: Holidays or days with bad weather are not counted.

If cargo operations exceed the permitted laytime, demurrage charges will accrue.

Legal Principles Applicable to Demurrage

Strict Liability Demurrage is typically characterized as a form of liquidated damages, in that it is payable independently of fault. This approach was reaffirmed in The Bonde, in which it was held that demurrage is payable even if the delay was beyond the charterer's control unless expressly stipulated to the contrary in the contract.

Although demurrage is strict, there are some defences available: Natural disasters, war, or governmental interventions might excuse parties from liability if they are included in the contract. Where unforeseen events fundamentally alter the object of the contract, demurrage would not be enforceable.

Notice of Readiness (NOR)

For demurrage to be incurred, the shipowner must issue a valid Notice of Readiness, that the ship is ready to load or discharge. The validity and timing of NOR can be contentious, particularly where the ship is not at the contracted berth or in the event of documentation discrepancy.

Commercial Implications of Demurrage

Demurrage charges can be significant, having a great impact on the financial success of a maritime voyage. For cargo owners and charterers, unexpected demurrage can reduce profit margins and strain commercial relationships. For shipowners, however, demurrage is a vital source of revenue that compensates for operational delays.

To prevent demurrage risks, parties usually insert detailed laytime and demurrage clauses, negotiate buffer periods, and employ port agents to help smooth cargo operations. Effective communication and coordination between the stakeholders are key to minimizing delays.

The shipping industry has seen a rise in demurrage disputes, partly due to congested ports, regulatory interventions, and intercontinental supply chain disruptions. The COVID-19 pandemic, for instance, brought about record delays and a surge in demurrage claims, identifying the need for flexible and reactive contract terms.

Case Law and Jurisprudence

The Johanna Oldendorff case established basic principles regarding the validity of NOR and from which time laytime starts. The House of Lords decided that the ship must be at the complete disposal of the charterer before a valid NOR is given and this has influenced subsequent interpretations of readiness.

Dimitris Lemos considered the potential for port congestion delay to trigger demurrage obligations. The court ruling was that demurrage was payable unless congestion was excluded by the charter party, thus demonstrating the inelastic nature of demurrage liability.

In the case of Bonde, it was reaffirmed that demurrage is payable even if the delay is beyond the charterer's control, thus again demonstrating the interpretation of demurrage as liquidated damages.

Recent Developments and Challenges

As stricter environmental regulations, such as the IMO 2020 sulphur cap, come into force, delays due to compliance measures have given rise to debate on the applicability of demurrage. Contracts now increasingly include provisions for environmental compliance-related delays.

The digitalization of shipping documents using blockchain technology is aimed at minimizing administrative delays and demurrage disputes. The application of smart contracts has the potential to automate demurrage invoicing and laytime calculation, making the process more transparent and efficient.

Recent supply chain disruptions, including the closure of the Suez Canal and pandemic-induced port closures, have put demurrage under the spotlight. The incidents underscore the importance of force majeure provisions and flexible contractual provisions to ride out unforeseen delays.

Conclusion

Demurrage is a vital element of commercial law that balances the interests of shipowners, charterers, and cargo owners in the intricate universe of maritime business. Its legal framework, economic impact, and contemporary developments are essential knowledge for participants operating in the global shipping market. As the business continues to develop in response to technological advancements and policy shifts, demurrage will undoubtedly continue to play its fundamental role in influencing contractual agreements and financial results in the global trading arena.

References

• The Johanna Oldendorff [1974] AC 479

• The Bonde [1991] 1 Lloyd’s Rep 136

• The Dimitris Lemos [2002] 2 Lloyd’s Rep 182

• Herring, J. "Commercial Law: Text, Cases, and Materials."

• International Maritime Organization (IMO) Regulations

• Law Commission Reports on Commercial Law (2006)