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Demurrage (Shipping and Currency) Explained

Demurrage Definition

Demurrage is the charges paid by the charter to the vessel owner when there is a delay in the operation of loading or unloading the vessel. It is a penalty, charged for the delay or any other violation of the agreement signed between the two parties.

The term demurrage is also used in currency trading. It refers to the charges payable for owning or holding currency or currency-related commodities over a specific period of time. It is the carrying cost of money and important for economic growth and currency circulation.

A Little More on What is Demurrage

Shipping

A vessel owner makes money by transporting goods for individuals chartering the vessel. If the vessel is unduly occupied, then the vessel owner requires compensation for the lost ability to earn additional revenue. As such, the parties may include clauses in the contract addressing demurrage.

Currency and Commodity Trading

In the context of currency trading, demurrage is used to incentivize continued trading of the currency.

When it is paper currency, the demurrage can be charged as taxes, payable periodically. Stamp tax on currency holding is one such tax. In the case of commodity money, such as gold, the demurrage is the cost of storing the gold. The charges are usually calculated on the basis of the value of the stored commodity and the time period for which it is being stored. Per hour to per annum, the rate may vary.

Circulation of currencies and commodities is important for the growth of an economy. If someone holds a large sum of currency for a long period of time without circulating it in the market, the economy is affected adversely. Currency being held loses its velocity and cannot have a multiplier effect in the economy. The demurrage was introduced to discourage people from hoarding cash and commodity money.

Say, for example, John Brown is a businessman who has stored a large amount of gold and silver in the form of bars. He keeps these golds and silver with a third-party company and the company is responsible for the safety and security of those. John needs to pay a charge for the service to the company. A demurrage is also associated with this. He needs to pay a charge periodically for holding the gold and silver. Along with the storage and security, he also needs to pay the demurrage fee. The amount depends on the size and value of the commodity. He may consciously choose to pay the fee if holding the gold and silver is a good investment for him considering the high and ever-increasing value of the precious metals.

References for Demurrage

Academic Research for Demurrage

  • ·       Competing Periods in Determining Laches in Demurrage Disputes, Byrne, W. P. (2005). Transp. LJ33, 135. This paper examines the various statutes of limitations under which the owner of ship can be compensated for the delay in the loading and/or unloading of his vessel beyond the normal allotted time.
  • ·       Laytime and demurrage clauses in contracts of sale-links and connections, Debattista, C. (2003). LLOYDS MARITIME AND COMMERCIAL LAW QUARTERLY, 508-524. Laytime and demurrage clauses are an essential part of any contractual agreement arising from maritime shipping, and this paper seeks to address two questions regarding the laytime and demurrage (L&D) clauses. First, what is the financial link between laytime and demurrage clauses? Second, what is the legal connection between these two clauses?
  • ·       Liens: Liabilities Arising From Delay or Failure in Performance, Allen, H. C. (1974). Tul. L. Rev.49, 970. It’s a well-known part of maritime law that liens for breach of contract can easily go against the ship or against her cargo. This article examines a number of these decisions to see what causes them and which way they run. At the end the author adds a note about the damages that usually accompany a failure to perform.
  • ·       LEGAL PROVISIONS ON LAYTIME AND DEMURRAGE IN CHARTERPARTIES., Oana, A. (2012). Analele Universitatii Maritime Constanta13(18). This paper presents the common methods for calculating laytimes and the required conditions for their suspension or demurrage. In the absence of express provisions, the conditions under which damage can become payable are demonstrated.
  • ·       English Maritime Law Update: 2010, Andrewartha, J. (2011). J. Mar. L. & Com.42, 399. This paper examines the current status of maritime law and the conditions that effect the current (2010) maritime shipping environment. This article includes statistics on the state of piracy, increasing financial stability in Asia, and current insurance concerns dealing with international shipping.
  • ·       Claim for Demurrage under Bill of Lading, Tingzhong, F. (1988). Journal of Dalian Maritime University1, 004. This paper examines the legal effectiveness of a recent claim for demurrage under the Bill of Lading. Following the examination, suggestions for perfecting the demurrage clause of the Bill of Lading are offered.
  • ·       Economic Duress and the Availability of a Reasonable Alternative, Nolan, D. (2000). RLR8, 105. This article seeks to answer three questions about economic duress, a situation in which one party is found to have been forced into entering a financial agreement. First, what counts as illegitimate pressure when urging someone into a contract? Second, what causal connection is required to tie this pressure to the acceptance of the agreement by the pressured party? Third, do you have to prove that the pressured party had no other choice than to accept this agreement? This article analyzes the case of Huyton vs Peter Cremer as it seeks to answer these questions.
  • ·       Laytime and demurrage in CIF and FOB contracts, Soyer, B., & Tettenborn, A. (2016). In International Trade and Carriage of Goods (pp. 75-92). Informa Law from Routledge, This paper serves as an explanation of delivery periods and loading and unloading periods of a maritime shipping charter. Demurrage is also defined and elaborated.
  • ·       Historical Perspectives on the Freight Car Supply Problem: The Role of Demurrage, Calabro, P. J., & Speh, T. W. (1976). ICC Practitioners Journal43(4). This article offers an overview of the history of methods that have been used to increase efficiency in the available supply of railroad cars. Demurrage in this industry is considered. The author finds that car users have not offered a workable solution that would address the problem.
  • ·       Railroad Company Not Entitled to Collect Demurrage, Southwestern, H. C. V. S. L. This law journal article outlines a demurrage claim that was seen by the Texas Court of Civil Appeals in 1931. The background of the case is explained, and the opinions of the justices are recorded as they weigh in on the matter.
  • ·       Toward an Effective Demurrage System, Ainsworth, D. P., Liba, C. J., & Keale, M. J. (1972). Toward an Effective Demurrage System (No. Final Rpt). This report summarizes research that attempts to evaluate the efficiency of a rail-based shipping system. The effectiveness of the demurrage system is also analyzed. To more effectively utilize their resources, an improved system of tariffs and demurrage is proposed.

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