If you are new in the shipping world, then you may find yourself struggling to figure out what Demurrage is. If you are not new in the shipping world, then you should not be here wasting your time reading this post. Shoo! Come on now, go away!
Where were we? Ah, right. Demurrage. Before looking at what Demurrage actually is, let us take things from the start.
In the vast majority of the cases, a commercial vessel will be let under one of the two main types of Charters, namely either on:
- A Time Charter, or on
- A Voyage Charter;
When the vessel is let on a Time Charter, then the Ship Owners is getting compensated for the period the vessel is under the Charterers’ employment by daily hire. This makes sense, right?
When, however, the vessel is chartered on a Voyage Charter basis then the vessel is essentially fixed to go from place A to place B (there may be other ports in between but let’s keep things simple for now, shall we?). The Charterer, in turn, is paying the Ship Owner freight (rather than hire) which compensates the Ship Owner for the the time the vessel will spend in performing the agreed voyage plus some further time allowed for loading and discharging respectively (which shall be provided for in the Charter and is known as laytime).
It is not, however, unusual for a vessel to exceed the allowed laytime under the Charter. If this is the case, then, depending on the terms of the Charter, Demurrage is likely to be incurred. Demurrage normally takes the form of a daily rate which will apply for every day used for loading or discharging in excess of the laytime.
Demurrage clauses essentially constitute liquidated damages clauses and they should represent a genuine pre-estimate of the losses the Ship Owner will suffer as a result of the Charterers’ breach to exceed the contractually agreed laytime.