Impact of Laytime and Demurrage Clauses in Oil Trade Sales Contract (By Leena Asher)
Laytime disputes and demurrage claims under charter parties are the stable diet of shipping and maritime lawyers globally. The payments and receipts of monies as demurrage or post fixture claims being recognized well both by tanker owners and charterers not only as devices encouraging efficient usage of time in loading and discharging operations but also as hedges against fluctuating freight markets. The Maritime law reports and the literature are replete with decisions and guidance on the application and construction of the Laytime and Demurrage clauses in the Charterparties.
Laytime and Demurrage Clauses (L&D) clauses have been attracting much attention and analysis in their original base contracts i.e. Charter parties. They also exist in International Sales Contracts where it raises two issues. First, what is the link between Laytime and demurrage clause in a sales contract and its relevant charter party. Secondly, when the interpretation of the clauses is applied, are we guided by charter parties or court decisions? A new approach is been taken towards the drafting of such clauses separately in the contracts, keeping the verbiage, precise and accurate. Charterparties are concluded in most cases in order to perform obligations under sale contracts and charterers find themselves liable under charterparties for delays caused by their counterparties under their sales contracts.
This brings us to the two points of discussion, both of which related to the link between Laytime and demurrage clauses in sales contracts and charterparties.
Purpose of Laytime and Demurrage clauses in the Sales Contracts
Oil tanker owners have a vested interested in ensuring that their voyage charterer does not delay their asset. I.e. The oil tanker. Time delays caused have a direct of prolonging the duration of the voyage beyond the profit margins allowed by the oil tanker owner in settling of the final freight. Tanker owners enforce this interest by stipulating for Laytime and demurrage in the agreed charterparty. Where the charterer is also a CIF or CFR seller of the commodity, he may find himself paying demurrage on account of a delay caused by the buyer during the discharge operation. This is co-relation of capital cash flow in the oil trading market. Precisely the reverse my occur where the charterer is the FOB Buyer. The very purpose of the Laytime and demurrage clause in the sales contract is the ability to pass on to the counter party, the cost of demurrage paid to the shipowner by the charterer, which has been in the first place, caused by the counter party.
The financial link between Laytime and demurrage clauses in Sales Contracts
The financial link between the two clauses – is the Laytime and demurrage clause in the sales contract intended simply to indemnify the party to the sales contract against losses suffered under the counterpart clause in the charter party or, does the clause in the sales contract stand quite independently of the liability under the charterparty?
What is the legal link between these clauses: when applying and construing the Laytime and demurrage clause in a sales contract, do we need to transplant in the sales contract all the law surrounding similar clauses created in the context of charterparties? The Laytime and demurrage clause in a sales contract stands free and independent from their counterparties’ charterparty. Laytime and demurrage clauses in sales contracts should be construed and applied as clauses in sales contracts, not as adjuncts to charterparties. Their interpretation should therefore be colored not by direction of the charter parties but by their relationship to the contractual duties of being a FOB or a CIF buyer or seller.
Of specific interest here at the Start of Laytime. A Valid NOR may not necessarily be the same of what the charterers have been charged by the oil tanker owners compared to what can be onward charged to the counterparty. The commencement of Laytime in the charterparty or a Valid NOR may depend on various factors which the charterers can use to accept as a Valid NOR. A Valid NOR from oil tanker owners to charterers may not necessarily be the same Valid NOR from charterers to their buyers. Also of mention is the commencement of Laytime is relevant at the first discharge port but not at the second and third port, where the Laytime is to start at arrival immediately at arrival at the port.
Loading Duties in FOB Contracts
While we are aware that the CIF Buyer is under no obligation to discharge the cargo, it is impossible to suggest that an FOB seller is under no implied obligations to lead – and, if the FOB seller is obliged to load, he must be under the obligation to do so within a specific time. It is of the essence in the FOB Sales contract that the seller performs his obligation to deliver by loading the goods free on board. The obligation is also of the essence in the sense that the seller must deliver the goods within the shipment period stipulated in the sales contract subject to of course the buyer making the arrangements for the engagement of shipping space allowing the seller to ship within the shipping period where the sales contract leave such arrangements to the buyer.
However, to say that the FOB seller is under an implied duty to place the cargo free on board the vessel within the period stipulated in the sales contract does not mean so necessarily that the FOB seller is bound to load within the stipulated time to avoid the buyer’s potential liability to the oil tanker owner for demurrage.
Can laytime start once the oil tanker has “arrived”?
Where the charterparty names a port as the terminal for loading or discharging operation, then subject to any term in the charterparty stipulating for the giving of a notice of readiness, laytime starts as soon as the vessel reaches the named terminal. I.e. Once the oil tanker has “arrived” at the port. The precise ambit of the port consequently becomes an issue between owner and charterer i.e. any time spent idle between “arrival” and berthing for the benefit of the charterers eats into the laytime agreed in the charterparty and brings closer the moment at which the owner starts earning demurrage. It is interesting to identify who bears the risk of congestion between the arrival and berthing of the vessel. Who bears this risk? Is it between oil tanker owner and charter or between buyer and seller in the sales contract? To undertake a liability for demurrage while the vessel is in port but waiting for berth would be an open-ended commitment in a contract for the purchase of what must probably be a part cargo. In fixing the start of laytime in a sales contract, overriding regard should be had to the nature of the sales contract rather than to the charter party origins of laytime.
A Valid Notice of Readiness
In the case where there is ambiguity towards start of laytime, laytime runs from the moment the seller places the cargo at the disposal of the buyer. Even when the contract provides for a Notice of Readiness to be provided, laytime still runs from the moment when a Valid NOR has been provided, such that the risk of congestion remains with the CIF seller or charterer.
Conclusion
Although the points of reference discussed above are all inter-linked and related the ultimate interest is the ability to dissect and clarify the risk to which any particular party is exposed because all of this translates into a dollar value which makes the Laytime and Demurrage industry worth billions of dollars annually. Traders and execution officers responsible for carrying out the trade deal are to be familiar with the interstices of the law of laytime and demurrage in the charterparty as it has been evolving and developing in the Commercial courts and beyond.
