Demurrage and Incoterms

Demurrage is a cost paid to a shipping line when the owner of cargo is not able to take full delivery of the cargo within the stipulated time. In other words, the owner has to pay these penalty fees when the demurrage free days are exceeded. Demurrage free days can also be referred to as laytime. This can apply to all types of cargo, such as containerized cargo, loose cargo and charter party arrangements.

Sometimes demurrage costs is confused with detention costs, because demurrage can occur due to the container being detained. It is a matter of industry practice if these terms can be used interchangeably. However, to be specific the cost arising from detention are detention charges of which demurrage is a component.

As we have discussed, demurrage can sometimes include detention charges (or vice versa depending on the terminology used in the billing documents). However, detention charges can also include the fees associated with failing to return a container to a shipping line in time.

It is important to indicate in the sales contract, who will bear costs for demurrage and detention. Traders should not depend on the default definition in the Incoterms. This is because different entities can have different interpretations of a situation. For example, under DPU terms the shipment may have been delayed at the port due to the importer not providing the seller with necessary documentation in time. However, the importer may argue that the requested documents were in fact not needed, and that the delay was unnecessary. Since Customs and port procedures in many countries are not always standard, both parties may actually be right (i.e the documents may not be necessary, but an over zealous Customs may have insisted for them and the seller may not have been capable enough to negotiate a resolution). – who will end up bearing the costs of demurrage and detention in such a case?

When do Detention and Demurrage charges can arise?

These costs can occur in many situations. Here are a few of them:

  1. Importer fails to ensure pick up of arriving cargo is done on time
  2. Importer fails to prepare import licenses prior to arrival of import cargo
  3. Importer fails to prepare the correct paperwork for import clearance
  4. The shipment gets red-laned for inspections and lapses are found
  5. The importer does not have the necessary equipment to unload cargo from a container or truck
  6. The importer does not have the space to receive the incoming shipment

When engaging a forwarder it is best to clarify these charges upfront, and explicitly state in writing when and under what conditions you will be held liable for these charges. To prevent misunderstandings arising from different industry practices in different countries, it is highly advisable to define these terms in your contracts.

A final note

Demurrage and detention costs are part and parcel of every supply chain and logistics model. This is because shipping lines depend on their assets to be returned in a timely manner in order to meet their commitments to all customers. These charges act as a strong incentive to encourage traders to meet equipment turn around and return times. The average costs for detention and demurrage can run between 50 USD to 300 USD per day. Hence, it is important to plan ahead for shipments, have suitable backup plans in place and understand importation requirements thoroughly so that you don’t end up paying these charges simply because you were not prepared to clear the cargo for import or export.

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