Demurrage, repudiation and good faith


Published: 8 April 2015

Members, particularly in the container trade, will be aware of the significant problems that can follow an abandonment of the cargo, in particular with respect to accruing demurrage and the desire to dispose of the contents and retrieve the box. A recent English decision provides guidance on demurrage claim situations.

Container operations (Source: Andrew Moore & Associates)

Demurrage and containers

It is a common feature of the shipment of containers, that they are "given" to a shipper / cargo interest for a certain period of time, and that should boxes not be returned in that time then demurrage or detention may be charged (these words can sometimes have specific meaning given by express contract terms or be used interchangeably to mean a set rate of money to compensate for the late return of the box).

Another feature, also common (unfortunately) is that boxes and cargo are not picked up by receivers in their ports of discharge. There are many reasons for this, but they tend to either be economic or legal. If cargo prices drop, a receiver may seek to avoid having to pick up and pay for the cargo. It could also be that the cargo may contain contraband or be illegal in its own right (such as the dumping of waste). At times there seems to be no clear reason for the failure to take delivery.

Demurrage / detention rates are intended to provide compensation for the unplanned and non-contractual over use of the "time" of the box.

The Association is aware of more than a few cases where these charges have amounted to very large sums of money, potentially running in to hundreds of thousands of US Dollars.

A recent decision in London has analysed a situation as to "how long" such demurrage can run for, particularly when there is no end in sight as to the particular situation which has led a box or boxes to be "stuck" in a port or in the custody of customs. The Association is grateful to Messrs. Hill Dickinson for their note and analysis on this recent decision. It is reproduced alongside this advisory with their kind permission.

Contractual and physical risk management of boxes

Carriers and operators in the container industry are well aware of the risk of a possible abandonment of a box / non-receipt by its designed receiver. That is why the terms of carriage typically include clauses (be they called demurrage, detention or otherwise) which seek to pre-agree the charge rate for the overuse of the boxes' time.

Helpful are also clauses which assist in dealing with a situation where, despite the passage of sometime, the receiver still does not take delivery and a decision needs to be made on a possible disposal of the contents of the box and its retrieval.

There can be situations, however, where an otherwise planned and contracted disposal and retrieval are not legally or practically possible. In such situations there is then the risk, as was played out in the case discussed in the Hill Dickinson note, that there is an open-ended liability between two parties for these further charges. This liability may then start to accumulate to dramatically uneconomic levels, at which stage it becomes difficult to resolve the issue practically and both sides may decide that "too much is at stake" and the potential "all or nothing" solution of litigation is implemented.

To seek to manage these risks effectively requires trade participants to do the following:

  1. ensure that clear contractual clauses are included in charters and bills of lading that address these possible scenarios
  2. develop a clear understanding of how these clauses may play out if a scenario becomes real
  3. plan for the contingency of what practical, formal and legal steps would need to be taken if a box is abandoned or otherwise "stuck"
  4. monitor the post discharge life of a box and take steps for early follow up / intervention if a problem is in development
  5. seek to communicate with contractual and other counterparties early if a problem box is identified
  6. work out practical solutions that seek to mitigate losses and resolve the issue at the earliest

With good contracting, planning and operational follow up it will be possible to manage many of the risks that may arise if a box is not taken up by the receivers or otherwise is stuck in the system. While not every situation can be resolved, and some may take time to resolve, it is likely that an early grappling with the issue and a pro-active "solution orientated" approach as well as clear and frank communication with counterparties will help to mitigate against some of the worst of the possible consequences.

Further reading

The Association has previously advised on issues with respect to both demurrage / detention for containers as well as issues with respect to abandoned cargo.

For vessel specific enquiries, members are asked to contact their usual Skuld business unit.

The Association is grateful to Messrs. Hill Dickinson for contributing to this update.