Commercial and Legal Significance of Laytime & Demurrage in English Law and the New Turkish Commercial Code

So far as the global shipping practice is concerned, laytime & demurrage is one of the most complicated topics for both ship-owners and charterers under voyage charter-parties. Thus, the dynamic between the parties has been sought to be balanced through a number of attempts which have been made either by courts or legislators in shipping world.

Commercial Background

As far as time charter-parties are concerned, it is true to say that there is no need for laytime and demurrage clauses, since the owner is capable of being paid by the time charterer even if there is no voyage. In contrast, in a voyage charter-party, technically, time element is not an aspect of the contract, as the freight is calculated for the intended voyage (e.g. from Southampton to Istanbul). The calculation of the freight rate by the owner would be based on, for instance, market rate (freight market) of the moment, speed consumption of the vessel, distance of the voyage, fuel consumption, crewing costs, and so on. In this respect, the voyage charterer is able to use the vessel within the period of the voyage without concerning the measurement of time; nevertheless, it is common to say both voyage charterers and owners would prefer the voyage to be completed in time for their other commercial purposes. As a nature of global shipping practice, however, delay might occur at loading or discharge ports. In this case, the owner can face with a good number of difficulties i.e. losing his vessel for that period so that he might lose another charterer, or he may well be liable under another concluded charter-party immediately after the current one due to not being able to modify the vessel at an agreed date, etc. Thus, in voyage charter-parties, owners insert into their contracts an element of time charter-party, in other words, the effect of a laytime and demurrage clause is to put a time meter into voyage charter-parties.

Legal Background

Having established the commercial background above, as a next step, the legal perspective of laytime and demurrage ought to be analyzed by concerning both English and Turkish legal systems. In order to comprehend the global shipping practice throughout the world, it is true to say that the English legal system must be initially taken into account, since most of the well-known charter-parties are referred to English law as the applicable law (i.e. Gencon 94). To put it differently, in maritime practice, it would be true to say that a large number of maritime disputes are commonly dealt with by London Arbitration, since there are many such as London Maritime Arbitrators Association (LMAA), Chartered Institute of Arbitrators, etc. or English courts.

So far as the Turkish maritime practice is concerned, there are a good number of inconsistencies with the English maritime practice with regard to the understanding of laytime and demurrage mechanism. We shall in due course be concentrating on the new TCC so that we can determine as to whether the new TCC bring any developments. It would appear in this respect that the comparison of these two legal systems might be useful for international traders and shipping practitioners who face with such disputes.

How Does it Work?

Under English law, there is no statute on this particular area of maritime practice so that how many laydays the charterer is able to use. It is therefore clear that the scope of laytime and demurrage is subject to negotiations between the parties. Once agreed laydays are used, the charterer owes the owner a certain figure per day and that figure will vary the freight market. Laytime and demurrage clauses are not a central part of voyage charter-parties; nevertheless, in practice, it is inconceivable that a voyage charter-party would be concluded without involving such clauses.

Under the new TCC, even though the scope of the laytime and demurrage, in principle, is subject the negotiations of parties, there are secondary arrangements. That is to say, in sub-section 2 of 1153, for instance, it is suggested that if the laydays are not clarified in the charter-party, then this period is subject to custom of the port, condition of the vessel itself, etc. In sub-section 2 of 1154, likewise, it has been established that if parties are not precisely agreed upon demurrage; nevertheless, the demurrage is mentioned one way or another in their contract, then it is deemed to be 10 days.

What Loss Do We Have in Demurrage?

Laytime and demurrage clauses are drafted in order to compensate the loss of profit of the owner due to the delay (the loss of profit on the market). In other words, the characterization of laytime and demurrage clauses has been constituted as liquidated damages by the House of Lord in Suisse Atlantique(1). This conceptualizing is significant because if demurrage had been characterized as a penalty clause, the clause would be null and void under the English general contract law, since English courts have identified that the penalty clauses are illegal. Hence, under English law, the demurrage rate is fixed according to the agreement of parties. That is to say, if the freight market has been fluctuated one way or another, demurrage rate shall remain as it was established in the original charter-party.

Proving Laytime and Demurrage

Under English law, if an owner seeks to recover his demurrage from his charterer, all he needs to prove is that the laytime has been lapsed; in other words, he does not need to prove a breach of contract, since it is an agreed sum of damages which fore due on happening of a certain event and that event is the lapse of laytime.

When Does Laytime Start Running?

(i) When is a vessel arrived?

Under the English common law system, arrival of vessel is one of two prerequisites for laytime to be started. The answer of the question when the vessel is arrived is to be relied upon whether the charter-party is a port or berth charter-party. If it is a berth charter-party, the vessel is deemed to be arrived when it is at berth. As far as the commercial interests of the parties are concerned, charterer is in a better position as opposed to owner, as the vessel is to be arrived later. It shall therefore consequence that the laytime starts running later and lapses later. On the other hand, the owner is in a better position under a port charter-party, since the port is a large area, that is to say, the vessel is likely to be arrived at the port sooner rather than later. The tests of the arrival of the vessel under a port charter-party have been clarified in a case called Johanna Oldendorrf(2) as follows: the vessel must be within the geographical and legal area in which the port has control; it must be at the charterer’s immediate disposes; it could be a usual waiting area.
Under the new TCC, in section 1142, it has been, in principle, referred to the parties’ agreement in order to determine as to whether the vessel has arrived or not. Likewise, in the new TCC, the arrival of the vessel is subject to the parties’ negotiations by choosing either berth or port charter-party contracts. Yet again, if it is a berth charter-party, the situation will appear rather less complicated. In sub-section 2, however, it could be assumed that if the parties were merely agreed upon a loading port or area, then the vessel would be deemed to have arrived while it has been waiting into the waiting area.

(ii) Notice of Readiness (NOR)

English Law

Valid notice of readiness is another aspect of the commencement of laytime. The instinct for the owner is to send the NOR even before the vessel has arrived, as he is willing to start the laytime as early as possible. However, sending the NOR before the arrival of the vessel does not enable the laytime to commence before the arrival of the vessel. Hence, the practical reason of sending the NOR before the arrival of the vessel would appear that the owner would simply seek to carry out the paper formalities (i.e. informing that the vessel is ready) in order to start the meter running by the fact of arrival.

What is a valid NOR? The Court of Appeal decided in The Tres Flores(3) that for a valid NOR, the vessel must be actually ready to load or discharge. In this decision, ‘ready’ means, ready in all respects; in other words, if the vessel is physically unready which shall delay even a moment with regard to her readiness, then the NOR is not valid.

What is the effect of an invalid NOR? Money turns on this question because if a valid NOR is one of the prerequisites for laytime to commence, then in the absence of a valid NOR, laytime cannot start; the owner is not hereafter capable of earning any demurrage. Hence, as it has been suggested by Lord Mustill in The Mexico 1(4), in order for an invalid NOR to be valid, the owner needs to send a second valid NOR. It would appear to follow from what was established in The Mexico 1 case that if the owner did not send a second valid NOR, laytime would never start running and it would therefore enable the charterer to use the vessel for a long time without concerning any demurrage. This consequence would therefore be unpalatable for the mechanism of commercial shipping industry. As a result of this, it has been decided by the Court of Appeal in The Happy Day(5), despite the second non-issued valid NOR, the latest time at which laytime must be started running as from the commencement of discharge is to be relied upon the actual use of the vessel by charterer.

The New TCC

As far as the concept of Notice of Readiness is concerned, in sub-sections 1 and 2 of 1152 under the new TCC, it is clear that unless the date of loading is not specified by the parties, NOR is to be sent after the vessel has arrived in the light of section 1142 above. Since the intended aim of an NOR is merely to provide a documental indication about the readiness of the vessel towards the charterer, sending the NOR should therefore not be depended upon the arrival of the vessel. That is to say, this observation of the legislator would not be justifiable in order for the global shipping practice to be run effectively.

In addition, under sub-section 1 of 1153, it is suggested that laytime is to commence in the following day after charterer’s obtainment of an NOR, unless the occurrence of loading has already started; in which case, the laytime is deemed to be started on the date of loading. In sub-section 4 of 1152, it is suggested that in order for a valid NOR to come into existence, it must be delivered to the charterer. Apart from this clarification, perversely, the new TCC does not render what shall be the consequences of an invalid NOR if there is any.

Conclusion

Having analyzed the commercial and legal complexities of laytime and demurrage issues, in particular the commencement of laytime concept, in the light of the English common law system and the new TCC, it is clearly understandable that these two law systems have regulated the operation of laytime and demurrage concept in different ways, nonetheless, the commercial understanding of the concept is global. It is therefore true to say that traders and practitioners must consider the substantial differences in law in order to preserve their (or clients’) commercial interests under charter-party contracts.

(1) [1966] Lloyd’s Rep 529.
(2) [1973] 2 Lloyd’s Rep. 285.
(3) [1973] 2 Lloyd’s Rep. 247.
(4) [1990] 1 Lloyd’s Rep. 507, 513.
(5) [2002] 2 Lloyd’s Rep. 487.

Author: Caglan Tanriverdi