In order to understand the concept of demurrage, it’s a must that we understand its background and the rationale that works behind it. The parties involved in shipping need to abide by strict rules and failure to do so invites strict penalties.
Demurrage is one such penalty. It arises when either of the parties in a charter agreement fails to abide by the rules agreed upon. To be more precise, the charge that needs to be paid to a chartered ship’s owner on occasions of failure in loading or discharging the ship within the stipulated time that was agreed upon.
When a ship is chartered there’s generally a period not longer than three days within which delivery has to be taken and the receipt furnished by the warehouse.
The system involved is to levy a penalty on a consignor, consignee, or any other party considered to be responsible for any delay in the loading or loading of any shipping vessel. Any undue detainment of usually more than 48 hours (that is of 2 days) of the transportation equipment may also cause delays. This is referred to as a detention charge.
In short, let’s assume, the seller has to send goods from his warehouse and hired a trucking company. The seller and the shipper signed an agreement where the shipper is agreed to pay the penalty charges if the goods won’t be pick up within a specified time. And this is called Demurrage.
What are Demurrage Charges?
To put things simply, demurrage charges are actually penalty charges. These charges are applied after the free time allotted to load or unload the vessel has expired. It’s applicable to all vessels irrespective of them being in the port, container yard, or feeder terminal.
To understand how demurrage charges apply, it’s important to know when the allotted free time has started. Depending on the port the vessel is sailing to, it may either be prior to or at a stipulated time of the day.
We cite a simple example. Let’s suppose that a customer has imported furniture in 10 x 40’ containers which have their unloading delayed due to correct documents not being made available on time.
Now let’s assume that the demurrage charge of the shipping line stands at 130/40’/day for the first 15 days after the free days allotted have expired.
Supposing that the containers are made to stand for 9 days after the free days have expired, a demurrage charge of US$ 130 x 15 x 9 = US$ 17,550 will be levied just due to delays in the documentation.
Also learn, what is LCL.
What Makes Demurrage Important?
The very foundation of the shipping market stands on vessel chartering. It’s the time when the vessel is in the possession of the charterer after the laytime, i.e., the time allowed to load or unload cargo. The charterer has to pay penalty or demurrage charges once this laytime has expired.
Demurrage charges are important to make sure that every port has enough space to store cargo when a vessel docks there. Such charges ensure that the onus is on the charterers to have the vessels loaded or unloaded on time. The prospect of any failure to do so inviting a stiff penalty ensures that they remain on their toes and have the vessel loaded or unloaded on time. This ensures optimum use of storage space in a port and keeps the cargo rolling.
The Difference between Demurrage Charges and Port Storage Charges
As already mentioned in the article, all ports allow a period of say 3 to 7 days to let import customers have the import requirements processed and unload or load the containers in a terminal. However, documentary, contractual or financial issues or customs obligations may delay the process. Both demurrage charges and port charges kick in during such scenarios.
There’s a great deal of confusion around how the two differ. Here’s a very simple explanation. When the charterer uses the equipment and not the storage space after the expiry of the free time, demurrage charges apply. On the other hand, port storage charges are applied to the use of storage space at the terminals, rail depots, and warehouses after the free time allowed has expired.
This article sheds light on the most important charge that a charterer has to bear on failure to empty containers on time, namely demurrage charges. It is a thorough explanation of the various aspects involved in the charging of demurrage. The article also answers the question that has vexed shippers for long- the exact difference between demurrage and port storage charges.