In a voyage charterparty the shipowner undertakes the transportation of goods to the port(s) specified in the charterparty. In exchange, he will be paid freight which includes costs (fuel, crew, and profit). An agreed time, called laytime, will be provided for the loading and discharging of cargo, but if the operations exceed the permitted laytime, the shipowner will be compensated by demurrage at the rate agreed in the charterparty.
The calculation of laytime is subject to the contractual agreement of the parties. Certain periods are usually excepted by agreement from the calculation of laytime, for instance, Sunday and Public Holidays or periods of bad weather. The time of its commencement is usually provided in the agreement, and it follows a reasonable interval from the tendering of the notice of readiness by the master that the ship is ready to load or discharge.
The Voylayrules 1993[1] define demurrage as follows:
“DEMURRAGE” shall mean an agreed amount payable to the Owner in respect of delay to the vessel beyond the laytime for which the Owner is not responsible. Demurrage shall not be subject to laytime exceptions”. [Emphasis added]
Although strictly speaking demurrage is the money paid for the excess of laytime, it is frequently used to describe the period during which the agreed sum is payable.
A charterparty may provide for the length of duration for demurrage or, more commonly, only a demurrage rate and leave the period unspecified. In the latter case demurrage will run until the contract becomes frustrated or repudiated with any further delay thereafter giving rise to a claim for detention. Under English law, if the charterers do not manage to load or discharge the vessel within the laytime allowed, this is considered a technical breach. In view of the breach element[2], exceptions to laytime do not apply when the ship is on demurrage because a party in breach cannot take advantage of its own breach. This is the basis for the maxim in English maritime law “Once on demurrage, always on demurrage”.
Since laytime exceptions do not stop the running of demurrage, it requires expressly agreed exceptions to demurrage to do so. Not surprisingly, BIMCO advises in this context the following:
“It is just as important to negotiate the applicable demurrage rate as skillfully as it is to negotiate the rate of freight”.
Under Spanish law, the relevant provisions regarding demurrage are contained in the 14/2014 Maritime Navigation Act. The following are the most important ones:
Article 241. Commencement of Demurrage and its amount.
1. Once the laytime has ended, without having concluded the loading or unloading operations, the delay time shall automatically begin to be counted.
2. The charterer shall pay the amount set in the contract for the delay time arising. If its amount has not been agreed, a sum shall be paid equal to that which may have been set according to the business practice for ships of similar characteristics, with similar cargo and voyage.
Article 242. Duration and calculation of the Demurrage term.
The duration of the delay term shall be set in the charter party and, failing that, shall last as many days as the working ones in the laytime. Calculation of the delay shall be by consecutive hours and days, being suspended only when it is impossible to load or unload due to causes arising from the operation of the ship. [Emphasis added]
Article 243. Subsequent detention of the ship.
Once the Demurrage period has expired without the loading or unloading having concluded, the carrier may demand compensation for the losses caused due to subsequent detention of the ship without this being subject to the contractual or legal amount set for Demurrage. Notwithstanding this, the carrier may also set sail with the goods loaded up to that moment, or unload them on his account in the most adequate manner, depending on whether the expiry of the delay period took place in the port of loading or unloading. In the first case, it may claim the freight on the relevant empty carriage; in the second, the expenses arising from unloading not due to the carrier pursuant to the contract.
We have seen that under English law demurrage, as a standard provision in a voyage charterparty, reflects the compensation for the owners´ loss of the use of the vessel as a freight-earning instrument arising from the charterer´s liability for delay in loading and discharging, without exceptions. However, under Spanish law the legal nature of demurrage is less clear. There are two opposing positions: either demurrage is defined as damages for breach of the laytime/demurrage provision in the charterparty (as under English law), or it is regarded as a supplement to the freight, based on the greater immobilization of the vessel.
The latter opinion is the prevalent among scholars. In particular, in I. ARROYO MARTINEZ, "Curso de Derecho Marítimo" (Shipping Law Course), p. 567 (Third Edition), the author cites a Supreme Court ruling of 28.02.1984 where demurrage is assimilated to freight. Along the same lines, Article 245 of the aforementioned Act 14/2014, on Maritime Navigation, states that “The rules on payment, lien and time-bar of the freight shall be applicable to demurrage”, which seems to reinforce the idea that there should be a relation of proportionality between freight and demurrage.
The assimilation between demurrage and freight under Spanish law would allow a less stringent interpretation of the demurrage provision, moving away from the idea of breach, and serving as a limit to the carrier´s practice of claiming exorbitant demurrage charges – well beyond the freight agreed for the voyage – in order to generate an unending stream of free income without exceptions.
This is not just an academic discussion. The practical importance of determining the legal nature of demurrage is self-evident. It may allow shippers to enjoy legal mechanisms to avoid the increasing charges imposed by carriers where the delay is due to a force majeure event such as the Covid-19 pandemic, for which shippers are not responsible. There must be limits and exceptions to demurrage charges in these cases to avert illicit enrichment on the part of shipping companies in a captive market.
Indeed, the Covid-19 pandemic, still raging in China at present, has led to a drastic inflation in demurrage charges. This is the source of many conflicts between shipping companies and their customers. A case in point is container demurrage tariffs.
Containers are either owned or leased by shipping lines that provide them to their customers (shippers or merchants) for the safe and fast door-to-door transport of their goods. Once discharged from the vessel and offloaded, the empty container has to be returned to the port from where it has been picked up or to the empty container depot (to be collected by another ship, as the previous one has already left the port).
Because the cost for using the container during the door-to-door transport is included in the freight, it is essential for shipping lines to turn around their containers as fast as possible. As a result, and with the objective to encourage merchants to move or return their containers swiftly, shipping lines penalize merchants who exceed the free time by charging increasing container demurrage tariffs (where the merchant has not always been previously informed about these tariffs).
The delay in returning or picking up containers cannot be always attributed to the merchant, but to terminal congestions or other reasons that are beyond the control of the merchant, as is the case of the Covid-19 pandemic.
In this context, the increase in tariffs for container demurrage by shipping lines may be an attempt to maximize profits, that is to say, to develop revenue streams that are not necessarily derived from the loss of freight.
A way to tackle this problem is through an equitable apportionment of risks between shipper and carrier, as none of them are responsible for the disruption caused by the Covid-19 pandemic, keeping also in mind the relation of proportionality which must exist between demurrage and freight to avoid illicit enrichment on the part of the carrier. It would be entirely unreasonable to maintain indefinitely high container demurrage charges for delays caused by a force majeure event.
To work towards a fair apportionment of the risks inherent to a force majeure event, Spanish case law has developed the so-called rebus sic stantibus doctrine. On the basis of such doctrine, over the past two years the Spanish courts have granted interim relief and even a significant reduction of hire – usually half of it – to tenants in business lease agreements because of the change of circumstances caused by the Covid-19 outbreak on such contracts.
The rebus sic stantibus doctrine requires the affected party to prove an extraordinary change in the circumstances at the time of performance of the agreement, which was unforeseeable by the parties when they entered into the agreement, and which results in an excessive disproportion, beyond any calculation, between the parties’ rights and obligations that frustrates the purpose of the agreement. Such a change must be caused by an event beyond the control or action of the parties and must be assessed within the specific economic and business context where it occurs (and not in a merely theoretical or abstract sense).
This is a doctrine developed by court jurisprudence (case law) and not expressly regulated under Spanish law. Its application has become widespread in Spain during these two pandemic years, being used in the context of financing agreements as well, to share the risks of force majeure events.
Its traditional context is long-term hire contracts and, therefore, it is arguable whether the rebus sic stantibus doctrine could be applied to voyage charterparties (provided that they are subject to Spanish law). As far as we know, this legal approach has not been taken before the Spanish courts yet to tackle the problem of abusive container demurrage charges during pandemic times. However, it appears to be a legal mechanism worth being raised in demurrage disputes linked to the Covid-19 pandemic.
Juan Montenegro
Lawyer
PEREZ ALBORS & CO
[1] VOYAGE CHARTER PARTY LAYTIME INTERPRETATION RULES 1993 issued jointly by BIMCO, CMI, FONASBA and INTERCARGO.
[2] The UK Court of Appeal ruling in The Eternal Bliss (November 2021) reinforces the idea of demurrage as damages for breach of contract. The Court held that demurrage liquidates the whole of the damages arising from a charterer´s breach in failing to complete cargo operations within the laytime “and not merely some of them”. Accordingly, if a shipowner seeks to recover damages in addition to demurrage arising from delay (such as a cargo claim, as in this particular case), it must prove a breach of a separate obligation.
