Demurrage Charges - What is Demurrage For Shipowner & Importer

In any project involving dependent activities, delays in the process can lead to additional costs. When it comes to the shipping market, time is money. To address this, let us briefly understand the journey of importing or exporting cargo by sea shipping. Whenever a cargo is imported or exported, a charter agreement is formed between the shipowner and the charterer to make sure that its loading and unloading is done in the stipulated time frame. The cargo is in the form of shipping containers and is carried by ship to the designated port. The containers are received by the customs department and are stored in the yard without any charges for a certain time, referred to as free time.

Laytime varies as per the shipping lines. A custom duty has to be paid to release the containers, and then they are taken to the warehouse where the goods are unloaded/loaded. The empty or loaded containers are returned to the ship abiding by the timeline mentioned in the charter agreement, and the shipping process is completed.

However, in real-time, due to any undesirable events or challenges, handling cargo can exceed the timelines and invite demurrage and detention.

What is the meaning of demurrage?

When a consignment reaches the port, there is a fixed timeframe for the importer or the shipowner to load or unload the containers known as laytime. If they fail to load or unload the consignment in the given laytime the importer or the shipowner or whosoever is responsible for discharging the ship has to bear a charge which is called Demurrage.

The term Demurrage has its roots in the Old French word ‘demeurage’ or ‘demeurer,’ which means to linger, tarry.

Demurrage – Charges

Demurrage charges for importer

Demurrage charges apply to an importer when he fails to take the delivery of the containers within the stipulated number of free days allowed (decided by the Port Authority). Demurrage charges are usually calculated on a per-day basis. This charge will keep on accruing until the delivery of the containers is taken, and sometimes they overtake the actual value of goods imported, leaving the importer no choice but to abandon the shipment.

Charges - Paid by the Importer

Demurrage charges for shipowner

Demurrage charges apply to a shipowner when he fails to load or unload the containers within the stipulated number of free days allowed (decided by the Port Authority). Demurrage charges are usually calculated on a per-day basis. This charge will keep on accruing until the loading or unloading is not completed within the free time frame.

Charges - Paid by the Ship Owner

How are demurrage charges calculated?

In the calculation of Demurrage charges to the shipowner/port authority, the demurrage rate is multiplied by the number of days/part days over the agreed free days.

Demurrage Payable = DR * DE * n

Example of calculation of demurrage charges

Total free days allowed: 7 days Number of containers (n): 5 Demurrage Rate (DR): US$ 20,000 per day pro-rata (PDPR) Days exceeded (DE): 6 days 8 hours 30 minutes Demurrage Payable = US$ 20,000 × 6 days 8 hours 30 minutes × 5 = US$ 20,000 × {6 + (8÷24) + (30÷1440)} × 5 = US$ 20,000 × 6.3542 × 5 = US$ 635,420

From the calculation, it is evident that Demurrage Charges are directly proportional to the Days Exceeded and the Demurrage Rate. Hence, the port or the shipping carrier should be over-cautious in calculating the Demurrage days.

Also, both the importer and the shipping carrier should judiciously read the Charter Contract to chalk out all the grey areas. It is important to note that Demurrage to the charterer would not run if the fault is on the part of the shipping carrier (for example - ship breakdown).

Why is Demurrage levied?

Many importers or freight forwarders have asked this question because of the high per diem charges which may feel unjust and unreasonable. These charges are levied by the shipping lines or port authorities to ensure efficient and quick turnaround of containers leading to better use of storage and container space. Demurrage and Detention are levied because of two main reasons: Importers use the containers provided by the Shipping Lines and hence need to be compensated. Acting as an incentive to the importer to quickly return the empty container and have a good turnaround time.

Other things to note about demurrage charges

Demurrage charged on the shipment may vary on the type of container being used, i.e., dry container, refrigerated container, a chassis, or any other equipment that the shipping line owns or leases.For conventional shipping lines/port authorities, the number of free days allowed ranges somewhere between three to seven, after which Demurrage is levied. Demurrage charges are different for all countries and are also dependent on the Shipping Line/Carrier. To complicate matters further, fees are applied on a per container as well as on a per-day basis after a designated free time.

Demurrage and Detention - know the difference

What is Detention?

Post the release of consignment, from the yard and taken to the warehouse. Unloading has to be processed by the time frame. Keeping the container at the warehouse and exceeding the decided time limit will incur Detention. This penalty is paid to the owner of the container by the importer as compensation since the container could have been used for another shipping consignment.

Difference between demurrage and detention

Demurrage occurs for loaded containers that are not released from the yard while Detention occurs for the containers that are not returned to the owner. Another difference to note is, demurrage can occur for both shipowners and the importers, while Detention occurs for the importer.

Tips to avoid Demurrage

Read the charter agreement carefully
Identify special requirements for the cargo import, which may be held by customs or port authorities
In case of special permissions, negotiate with the Port Authority for an increase in the number of free days
Use the expertise of a freight forwarder. The forwarding agent can work towards minimizing it.
Pre-clear the cargo for the customs or have the proper documents ready to reduce Demurrage and Storage charges. These charges are mentioned in the quotation, if not ask for them.
Communicate proactively with the broker, carrier, driver, shipper, and port authorities
If the shipment is under Letter of Credit, make sure that you start communicating with the banks for timely document release
Consider Express Release if the shipment is not under a Letter of Credit and does not require an Original Bill of Lading, to avoid any delays
Secure a Telex Release with the shipper if they insist on an Original Bill of Lading to safeguard their payment
Share cargo and shipment delivery documents with all the involved parties for a smooth loading/unloading process

FAQs on Demurrage

1. Who is responsible for demurrage charges?

In the case where goods are being imported, a Demurrage fee is charged by the port authority to the importer. For exports, when the loaded containers are not transported within the given laytime, a Demurrage fee is charged by the port authority to the shipping line.

2. What are laytime and demurrage?

Laytime and Demurrage are probably the most important terms in a Charter Party and can have significant financial implications. Laytime - It is the free time allowed by the Port Authorities to the importer/exporter to load or unload the container from the shipping yard. Demurrage - The penalty charged for exceeding the free days allowed for storage of loaded containers at the yard is called Demurrage.

3. Can demurrage be capitalized?

No. As per AS 10, the cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for the intended use. Demurrage charges are due to delayed cargo clearing. This is the charge which is incurred to bring the asset to its working condition for the intended use. It is a finance charge and should be expensed off immediately. No part of such charges should be capitalized. Contact your CA for more details.

4. Is the demurrage part of inventory cost?

All costs incurred in bringing inventory to the present location and condition should be included in Inventory Cost as per AS-2. If the demurrage cost is necessary for bringing the inventory to its present location, then it can be included in the inventory cost. Contact your CA for more details.

5. How do you negotiate demurrage charges?

To negotiate Demurrage charges, the charterer must be sure of the type of cargo being imported/exported. If the cargo being imported/exported will require some special custom permission, the charterer should make sure that they have the documents and permissions in place. If not, they can negotiate for additional laytime with the port authority citing special cargo needs.

6. Is demurrage the same as despatch?

No, Demurrage is the penalty levied on the charterer in the cargo discharging operations from the shipyard after the laytime has been exceeded. Whereas, Despatch is an incentive clause included in the Charter Party by the Port Authority/ship line whereby if the charterer completes the cargo loading and discharging in a shorter period than agreed, then they may be entitled to Despatch Money. Usually, the Despatch rate is half of the Demurrage rate.

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