Impact of Laytime and Demurrage clauses

Laytime disputes and demurrage claims under charterparties are the stable diet of shipping and maritime lawyers globally.

The payments and receipts of money as demurrage, or post fixture claims being recognized well both by tanker owners and charterers not only as devices encouraging efficient usage of time in loading and discharging operations but also as hedges against fluctuating freight markets.

The Maritime law reports and the literature are replete with decisions and guidance on the application and construction of the Laytime and Demurrage (L&D) clauses in charterparties.

These have attracted much attention and analysis in their original base contracts, ie charterparties. They also exist in International Sales Contracts where two issues are raised.

1.   First, what is the link between an L&D clause in a sales contract and its relevant charterparty.

2.   Second, when the interpretation of the clauses is applied, are we guided by charterparties or court decisions?

A new approach is been taken towards the drafting of such clauses separately in the contracts, keeping the verbiage, precise and accurate. Charterparties are concluded in most cases in order to perform obligations under sale contracts and charterers find themselves liable under charterparties for delays caused by their counterparties under their sales contracts.

This brings us to the two points of discussion, both of which related to the link between L&D clauses in sales contracts and charterparties.

Tanker owners have a vested interested in ensuring that their voyage charterer do not delay their asset - the tanker. Time delays caused have a direct impact of prolonging the duration of the voyage beyond the profit margins allowed by the tanker owner in settling of the final freight. Tanker owners enforce this interest by stipulating for L&D in the agreed charterparty.

Where the charterer is also a CIF or CFR seller of the commodity, demurrage might be paid on account of a delay caused by the buyer during the discharge operation. This is co-relation of capital cash flow in the oil trading market. The reverse my occur where the charterer is the FOB buyer.

The very purpose of the L&D clause in the sales contract is the ability to pass on to the counterparty, the cost of demurrage paid to the shipowner by the charterer, which has been in the first place, caused by the counter party.

Financial link

The financial link between the two clauses,

1.     is the L&D clause in the sales contract intended simply to indemnify the party to the sales contract against losses suffered under the counterpart clause in the charter party or,

2.     does the clause in the sales contract stand quite independently of the liability under the charterparty?

What is the legal link between these clauses: when applying and construing the L&D clause in a sales contract, do we need to transplant in the sales contract all the law surrounding similar clauses created in the context of charterparties?

The L&D clause in a sales contract stands free and independent from their counterparties’ charterparty. L&D clauses in sales contracts should be construed and applied as clauses in sales contracts, not as adjuncts to charterparties. Their interpretation should therefore be colored not by direction of the charterparties but by their relationship to the contractual duties of being an FOB or a CIF buyer or seller.

Of specific interest here is the start of laytime. A valid Notice of Readiness (NOR) may not necessarily be the same of what the charterers have been charged by the tanker owners, compared to what can be onward charged to the counterparty.

The commencement of laytime in the charterparty or a valid NOR may depend on various factors, which the charterers can use to accept as a valid NOR.

A valid NOR from tanker owners to charterers may not necessarily be the same valid NOR from charterers to their buyers.

Also worth a mention is the commencement of laytime is relevant at the first discharge port but not at the second and third port, where the laytime is to start at arrival immediately at arrival at the port.

FOB loading duties

While we are aware that the CIF buyer is under no obligation to discharge the cargo, it is impossible to suggest that an FOB seller is under no implied obligations to lead – and, if the FOB seller is obliged to

load, he must be under the obligation to do so within a specific time.

It is of the essence in the FOB sales contract that the seller performs his obligation to deliver by loading the goods free on board. The obligation is also of the essence in the sense that the seller must deliver the goods within the shipment period stipulated in the sales contract subject to of course the buyer making the arrangements for the engagement of shipping space allowing the seller to ship within the shipping period where the sales contract leave such arrangements to the buyer.

However, to say that the FOB seller is under an implied duty to place the cargo free on board the vessel within the period stipulated in the sales contract does not mean so necessarily that the FOB seller is bound to load within the stipulated time to avoid the buyer’s potential liability to the tanker owner for demurrage.

Laytime starts

Where the charterparty names a port as the terminal for loading or discharging operation, then subject to any term in the charterparty stipulating for the giving of an NOR, laytime starts as soon as the vessel reaches the named terminal. i.e. once the tanker has ‘arrived’ at the port. The precise ambit of the port consequently becomes an issue between owner and charterer i.e. any time spent idle between ‘arrival’ and berthing for the benefit of the charterers eats into the laytime agreed in the charterparty and brings closer the moment at which the owner starts earning demurrage.

It is interesting to identify who bears the risk of congestion between the arrival and berthing of the vessel.

Who bears this risk?

Is it between tanker owner and charterer or between buyer and seller in the sales contract?

To undertake a liability for demurrage while the vessel is in port but waiting for berth would be an open-ended commitment in a contract for the purchase of what must probably be a part cargo. In fixing the start of laytime in a sales contract, overriding regard should be had to the nature of the sales contract rather than to the charter party origins of laytime.

Valid NOR

In the case where there is ambiguity towards start of laytime, this runs from the moment the seller places the cargo at the disposal of the buyer. Even when the contract provides for an NOR to be provided, laytime still runs from the moment when a valid NOR has been provided, such that the risk of congestion remains with the CIF seller or charterer.

In conclusion, although the points of reference discussed above are all interlinked and related, the ultimate interest is the ability to dissect and clarify the risk to which any particular party is exposed because all of this translates into a dollar value which makes the L&D industry worth billions of dollars annually.

Traders and execution officers responsible for carrying out the trade deal are to be familiar with the interstices of the law of L&D in the charterparty, as it has been evolving and developing in the commercial courts and beyond.