Demurrage is a term that is used in the specific branch of the law that deals with the sea, or “maritime law.” Demurrage refers to the damages that are payable to the owner of a ship, to make up for lost time when his ship is not returned to service on the date it was supposed to be. Demurrage is a separate freight charge, and it is paid when there is an “unreasonable” delay in the loading or unloading of cargo. To explore this concept, consider the following demurrage definition.
Definition of Demurrage
- The keeping of a ship in port for loading or unloading, beyond the time agreed upon.
- Damages due after having caused an unreasonable delay in loading or unloading cargo.
1635-1645 Old French demourage
What is Demurrage
In the shipping business, time is money. Freighters keep to a tight schedule in order to be able to pick up, transport, and deliver as many cargo loads as possible. In order to create such a schedule, it is necessary to specify how much time is to be allowed for loading and unloading the cargo. The days on which loads and unloads take place are called “lay days.”
As an example of demurrage, consider a shipper that specifies it will need two lay days for loading its cargo onto the ship, but finds that something is missing, and needs another full day to get the entire cargo loaded. This would make the freighter late on its schedule, potentially costing it money on its other contracts. To discourage shippers from underestimating these times, and to ensure the freighter is paid for that time, demurrage charges may be added to the freight bill.
Demurrage is the term for the damages that are paid to a ship owner, the “freighter,” when the ship is released late, due to “unreasonable” delays in the loading or unloading of cargo. Another example of demurrage charges might occur if there are unreasonable delays as a result of overly lengthy sailing time. Times are considered to be unreasonable if they exceed the terms that were agreed upon when the charter contract was drafted.
Demurrage does not, however, have to be paid if a delay was unavoidable. For example, demurrage would not be charged should the ship be delayed due to a natural disaster, such as a hurricane or blizzard, which halts transportation. Also, problems originating with the freighter cannot be charged to the shipper.
Demurrage vs. Detention
Demurrage and detention charges may be considered one and the same, but they are actually different. Demurrage charges apply to the storage of containers while under the ship charterer’s care. This includes shipments that are being held in a port, container yard, or rail terminal. Demurrage charges apply once the shipment is held past the designated times that were agreed upon in the charter contract.
People often charter ships and keep them for however long they had agreed to do so in the related agreement. However, when they fail to give the ship back on time, the time period during which they still have the ship after they should have given it back is called demurrage. Commonly, demurrage is the term used to describe the penalty that is charged to the charterer for keeping the ship longer than previously agreed.
Now, the term “demurrage” is used to describe any delay that occurs when the ship’s cargo is being unloaded. For example, demurrage fees are charged when the consignee – the person who is responsible for picking up the shipment – is late to pick up a shipment. Essentially, the consignee is paying the charterer for the extra time that the charterer is responsible for protecting the shipment and keeping it safe.
Once a container has been picked up by the consignee, the consignee then has to return the emptied container that carried the cargo back to the ship. The consignee agrees to a certain amount of time in which to return the container before he receives the shipment. If he exceeds this agreed-to time, then he is charged with detention fees. Detention fees are to compensate the shipping company for the delays the consignee has caused by not returning the containers on time.
Detention charges differ from demurrage charges, in that detention charges apply to shipments that are in the customer’s care. Holding locations for these shipments can be the same as those used by the ship charterer, including ports, container yards, and rail terminals. There are two different kinds of detention charges:
- Merchant Haulage – Merchant haulage detention charges are applied when customers do their own trucking. The customers then have to return the container that transported the shipment back to the charterer within the window of time specified in the contract. If they do not, then detention charges may apply.
- Carrier Haulage – These charges are also referred to as “Drop & Collect” charges. These types of shipments are left on the customer’s premises while being loaded or unloaded. The charterer then sends a separate vehicle on a different day to take the containers back. If the containers are not ready on time, then carrier haulage-related charges may apply.
In simpler terms, while demurrage is a charge that applies before a shipment can even be unloaded and unpacked, detention is a penalty that applies once the shipment has been unloaded and unpacked. In either case, someone is experiencing a delay, and multiple people may be incurring a significant loss of both time and money as a result.
Demurrage Example on the West Coast
Back in 2015, the labor contract that existed between the International Longshore and Warehouse Union and the Pacific Maritime Association expired. The two sides were unable to compromise on a new agreement and, as a result, about 20,000 longshoremen were forced to work during the winter of 2015 without an official labor contract in place to protect them.
As one might expect, the longshoremen allegedly failed to work as hard as they were working previously while under contract. As a result, the maritime association chose to suspend the workers’ hours so as to avoid paying them the “higher rates” they were enjoying while producing only half the work.
However, even a small delay – less than a week, for instance – can, and did, cause ripples throughout the entire United States. Customers do not like to be told that they cannot be given a date as to when to expect their overseas shipments. In this case, night and evening shifts were altogether eliminated, and dozens of cargo ships remained anchored.
Shipping companies began charging fees of up to $1,000 for any of their containers that were stranded aboard these anchored ships so that they could recoup the losses of their failed deliveries. These costs were passed down through the supply chain and eventually became the customers’ responsibility.
When there are multiple containers ready to be unloaded, and multiples companies waiting on the products that are in those containers, a lot of people are going to be angry. U.S. companies spent a fortune on detention fees that the container lines were forced to charge on those containers.
In this case, because Honda Motor Co. was unable to receive the parts they needed that were tied up in the strike, they had to actually trim the production of their vehicles. This resulted in a huge loss of profit, and this is only one company that was affected by this situation. It therefore stands to reason that demurrage and detention fees would be charged as a result of this severe delays. Not to mention the produce that sat rotting in other containers and that ultimately had to be thrown out, costing several people millions of dollars in wasted product and lost sales.
It is understandable then why people may want to file a lawsuit in this case in order to be compensated for their damages. That is just what one company did. Elkay Plastics Company Inc., a company that imports plastic bags, slapped port terminal operators and equipment providers in Los Angeles with a class action lawsuit. Their complaint was that the companies broke the law and charged unlawful fees in connection with the slowdown.
The slowdown not only affected domestic imports, but it unsurprisingly threw a wrench in the operations of international imports as well. For one thing, the West Coast handles about 70 percent of the United States’ imports that come in from Asia. The product is then distributed throughout the rest of the country via truck or train.
In 2016, one year after a resolution to the slowdown was announced, economists began tallying up just how badly the dispute affected the American economy. All in, analysts calculated that the state of Washington alone lost a grand total of $770 million in the fray. This number tallies up all of the late shipments and the costs associated with them – specifically, warehousing fees and fees for trucks that were simply left idling with product on board.
Related Legal Terms and Issues
- Charter – The reservation of a boat for someone’s private use.