If your business is involved in container shipping, it’s likely that you have heard of “demurrage” and “detention” charges. This article explains the basics of the two terms, recent observations by the Australian Competition and Consumer Commission, as well as tips on mitigating your exposure to fees, for both new and existing businesses in container shipping.
The party responsible for unloading the shipment (typically, the importer), will have a set period of “free time” (commonly referred to as “laytime”) to take delivery of the container. If the importer fails to take delivery by the last free day, this will then trigger demurrage fees. Generally, the importer will have anywhere between 5 and 20 of laytime to collect the container. Demurrage is charged from the day after the last free day, until the cargo is either loaded onto transport or it has departed (depending on your contract). Demurrage is a form of liquidated damages to compensate the shipowner or owner of the container yard for holding the container beyond the allotted laytime period. That said, demurrage may be the only loss or damage claimed by the shipowner or container yard, depending on the breaches and heads of loss set out in your contract.
By contrast, shipping line contracts may also have a separate line item for detention charges, where the importer must collect the container, unload the cargo and return the empty container to the port terminal, for that container to repeat the logistics cycle. If the consignee fails to return the empty container within the laytime period, detention charges (or “ongoing container hire fees”) start to amount. In Australia, demurrage and detention is commonly a combined term that allows only one laytime period for a container’s time inside and outside of the terminal.
In December 2022, The Australian Competition and Consumer Commission published a report of its findings following a directive by the Australian Government to monitor prices, costs and profits of container stevedores at international container ports in Adelaide, Brisbane, Fremantle, Melbourne and Sydney (ACCC Report). The ACCC Report cites reasons for recent increases to demurrage and detention charges in Australia, such as: supply chain disruptions; container yard congestion due to COVID-19; and labour shortages (among other reasons). A key finding of the Report is that cargo owners in Australia need more protection against unreasonable detention fee practices, and this sentiment has been echoed by cargo owners throughout Australia.
Incoterms and Sale of Goods Contracts
A sale of goods contract between a seller and a buyer will bring about the need for a form of delivery. That contract will typically stipulate a three-letter abbreviation which dictates agreed rules for the delivery of the goods, known as “Incoterms” (International Commercial Terms) which are published by the International Chamber of Commerce. It is crucial that you understand the different Incoterms, and the version that applies; whether it be Incoterms 2010 or Incoterms 2020.
A sale of goods contract can be utilised to pass through liability for shipping line charges from one party to the county party. It is important that contract terms are clear and fair, as carefully drafted terms can deflect liability for shipping line charges.
Demurrage and detention charges can add up quickly and amount to a significant expense. This highlights the importance of having clear contract terms, both in the contract between the seller and the buyer, as well as the contract between the consignee and the shipowner or container yard owner.
Here are a few brief tips to keep in mind to mitigate demurrage and detention charges:
- Be proactive and organised;
- Use technology to your advantage – an efficient freight management system can help you tick item 1; and
- Seek advice from a broker or freight forwarder or a customs agent;
- Carefully consider the terms of the sale of goods contract, with a focus on:
- The effect of the Incoterm (where applicable).
- Risk allocation between the buyer and seller for charges payable to the owner of the shipping line or container yard.
- Limitations on liability.
If you would like assistance with drafting or negotiating a contract concerning demurrage or detention charges or Incoterms, please contact one of our expert commercial lawyers at Taurus Legal Management on (03) 9481 2000 or firstname.lastname@example.org.