Risks of Non-Compliance of CL.19.7 CL.20 under BPVOY4.

FOREWORD:

Traders, have always wanted freedom to craft trades the cost and time justifies.

Trade innovation pushs for more “trading optionality” ( to get the multiple products, routes, mode of transportation flexibility) actionable within the smallest timeframe possible and match the supply with the demand.

This also underscores that shipping is nested by an ancillary web of commodity sale & purchase contracts.

WHAT DOES FREIGHT COVER ?

Freight is a fixed amount in ($/MT) and is the return to the shipowner for undertaking the voyage for the shipper.

Freight is payable by the shipper on discharge and strictly covers the voyage between point A to point B together with a specified amount of time for the loading and discharging operations, also known as laytime.

DISPUTES

Freight does not cover any unusual time or costs due to shippers, and  additional disputes may arise when the liabilities and risks  are not  carefully apportioned in the S&P or C/P contracts.

Moreover an organization exert an operational veto on parties either by contract or because of logistical constraints created by a natural bottleneck monopoly.

real hands on expertise

DEMMURAGE & MARKET CONTEXT.

For a trader, the “outcome” of laytime and demurrage is equally important as the gross profit of a commodity transaction.

When the three following elements are reunited:

Trade is slowing down, the prompt futures contract value of the commodity is unusually weaker than the next month and multi-parties are involved in a transaction, demurrage has the potential to become a powerful earnings engine.

“IN THE SHIPPING MARKET, DEMURRAGE DOES GENERALLY TEND TO BENEFIT OWNERS” 

I agree that Owners will disagree. Demurrage represents a premium given the possible opportunity cost of further trading on completion of voyages and as such, demurrage does generally tend to benefit owners.

[read Afra CAR-USG, VLCC CAR-Far East]

Without necessarily pointing out that this specific example is all about the demurrage play – overall it is probably a positive earning booster for owners so an owner (disponent owner or trader) wants to track demurrage rates for the duration units end up earning it for to make decisions. (fixing, ballasting…)

For a refiner, trader could this also be regarded as an implied cost of the optionality or a convenience premium ?

However, I’d like to also allude that demurrage is different in other modes of transportation.

In the commodity transportation market context of North America, rail demurrage is not a profit center.

Although congestion in this supply chain segment is factored into the commodity basis (when Grains is competing with Oil shippers for scarce rail resources is triggering delays), demurrage rates do not compensate users for accrued congestion.

barges boston

 

Assuming that a Volcker Rule Trading Desk, is offered a Fuel №2 oil part-cargo held by another trader onboard a LR2 by STB off the Atlantic Coast. To tender a valid NOR, their vessel must be ready to undertake barge lightening operations (legally and physically).

The CITGO terminal in Boston has limited berthing (1) plus and this operation is also susceptible to delays(shifting, stoppages, awaiting approvals from USCG… Both the Bank and the consignee (the CITGO barge terminal) in particular, want to ensure there are no questions over when NOR can be validly tendered to avoid disputes LATER.

Some Considerations

First consider that an accountant has barely a time windows to close its month. Terminal operations have the primary role of managing product flow to ensure commodities bought and sold by its customers arrive safely not play around with the accountant (in reality, the communication cloud is never as good as we claim it is). 

Secondly, In the AP, Accruals for demurrage are “a best guess” based on information that may or might not be accurate.

The differences that are posted to variance accounts, is a topic unto itself. Accountants have to run after the AP clearing that is modified to what will be paid for.

Thirdly, suppose that Vessels, Barges and Terminals Operations and Accounting have the perfect, communication, can identify claims, have high analytic skills and the very deep commercial shipping know-how: [which we will be all first assume]

How this “auto-assessement” of the performance is benchmarked ?

The Quarterly Demurrage cost ($) per transportation unit vs Quarterly Demurrage Claims per unit can provide a fair assessment of the realized performance.

However the inconvenient truth is that oftentimes this ratio is pretty closed to 1 for traders/shippers/refiners, meaning that close to zero or nothing is recovered.

On the other side, shipowners have always room for improvements starting by speeding up claim negotiation and collection cycles. These are areas where Demurrage Desk is excelling.

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Risks of Non-Compliance of CL.19.7 CL.20 under BPVoy4

Credit: Timebar for demurrage claims, Skuld

 The interpretation of BPVoy4 as applied by Mr Justice Hamblen is strict on owners.

The case shows that owners have to be very careful to fulfil all requirements of the charterparty when presenting a demurrage claim to charterers. Failure to do so may result in the demurrage claim being time barred.

  bpvoy4 19.7

Beepvoy4 cl 20 Claims time bar

English law has traditionally had a strict approach to contractually agreed time bars between commercial parties as well as applying stringently the stated requirements for the bringing of claims by one party against another.

A particular area where this approach is seen most often, is in relation to provisions for demurrage claims in charterparties.

It is not unusual, especially in the tanker trade, to see short time bars of 90 days, plus detailed lists of necessary documentation that must accompany the filing of a claim.

Where these are not complied with in an exacting manner, it can often lead to the claim failing. Recent English case law reaffirms this orthodox position.

In the recent case of the M/V “Adventure” [2015] EWHC 318 (Comm), Mr Justice Hamblen interpreted an amended BPVoy4 charter party and applied a 90 days timebar provision for owners’ demurrage claim.

The case was an appeal to the High Court of England from owners, of an arbitration award from Mr. Simon Gault and Mr John Schofield. The arbitration tribunal had held that owners’ demurrage claim failed since owners had not fulfilled the documentary requirements under the CP, and that the claim was consequently timebarred.

Mr Justice Hamblen upheld the tribunal’s award and dismissed the appeal.

Product tanker MT Adventure

In the M/T Adventure) [2015], while every one will agree the vessel was on Demurrage and that the owner has suffered commercial damage, the owner has lost his Demurrage on a technicality.

The owners brought a claim  in the amount of US$ 364,847.78 as a result of delays at both load port, Sitra, and discharge port, Port Sudan. The following documents were provided by owners by email:

(a) An invoice for US $364,847.78 dated 5 August 2011;

(b) A laytime/demurrage calculation for Sitra and Port Sudan;

(c) A Notice of Readiness for Sitra;

(d) A statement of facts for Sitra;

(e) Four Letters of Protest for Sitra;

(f) A Notice of Readiness for Port Sudan;

(g) A pumping record for Port Sudan;

(h) A statement of facts for Port Sudan;

(i) Four Letters of Protest for Port Sudan;

(j) An Empty Tank Certificate for Port Sudan

Charterers disagreed with the demurrage calculation, and argued that since owners had not presented copies of the port log and time sheets from both load and discharge port together with their original demurrage claim, owners had not provided charterers with “all supporting documentation substantiating each and every constituent part of the claim” as required by clause 20.1.

Since owners had not corrected their claim by submitting the further documents within 90 days after completion of discharge, charterers argued that owners claim was time barred under clause 20.1.

The owners submitted that the proper construction of clause 20.1 only requires presentation of “essential” supporting documentation, which generally means the NOR and Statement of Facts, and that such documents were presented. Owners cited The Pera*, The Oltenia** and The Abqaiq*** in support of their position.

Mr Justice Hamblen agreed with the Charterers.

The judge first considered which documents are covered by clause 19.7.3 where he found that the wording “connotes contemporaneous records kept by the vessel relating to the cargo operation. The pumping log is the most obvious example of such a document but some vessels may keep similar but different records.

Further Mr Justice Hamblen held that the port log and time sheets are clearly supporting documentation for the claim made. Mr Hamblen considered the documents to be “primary documents containing factual material which should be made available to the charterers so that they may satisfy themselves that the claim is well founded, consistent with the purpose of the clause.

Based on the above, Mr Justice Hamblen held that “Clause 20.1 is not limited to a requirement to provide “essential” supporting documentation only and that it is to be construed in the manner outlined above. I also conclude that the tribunal was correct to find that all supporting documentation was not provided as required by the clause with the consequence that the claim for demurrage is time barred.

The appeal was dismissed.

[In the M/T Adventure) [2015], while every one will agree the vessel was on Demurrage and that the owner has suffered commercial damage, the owner has lost his Demurrage on a technicality( and subtantial legal fees since under The English rule. the party who loses in court pays the other party’s attorney’s fees.]

The interpretation of BPVoy4 as applied by the English High Court is strict on owners.

The case shows that owners have to be very careful to fulfil all requirements of the charterparty when presenting a demurrage claim to charterers. Failure to do so may result in the demurrage claim being time barred.

The same care must be observed by charterers who act as disponent owners in a chain of charterparties.

________________________
* [1985] 2 Lloyd’s Rep. 103

** [1982] 1 Lloyd’s Rep 448

*** [2012] 1 Lloyd’s Rep. 18

Credit: Timebar for demurrage claims, Skuld

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STS COAL demurrage desk 2

Exclusive advisor to leading energy marketers and producers with energy merchant assets, complex risk fundamentals applied to a macro view on prices, spreads and non-linear dynamics, I impart the knowledge and business skill sets necessary for the professional staff to function effectively.

Simon Jacques is a certified Energy Risk Professional, as distinguished by the prestigious Global Association of Risk Professionals. His Transactional & Operations expertise in commodities is based on hundreds of engagements with some of the world’s leading houses and banks in energy and agricultural commodities at Commodity Merchant Trading and Shipping Advisory Services, the international commodity merchant trading consultancy dedicated to help a clientele comprised of traders/merchants and banks to achieve world-class competency in commodity trading and trade finance.

Commodity Merchant Trading and Shipping Advisory Services can see the same issues of the Law Professor but their team is also able to put the commercial and contractual aspect of shipping in the context of Terminal Operations and Seafaring.

For Traders, or Refiners and Shippers it is a structured approach based on 4 pillars  Analysis, Defence, Negotiation and Collection.

Simon Jacques

Advising the producer, processor and end-user in North America.

1-226-348-5610

 

 

© 2015 Navigating the commodity markets with Freight and Spreads

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One thought on “Risks of Non-Compliance of CL.19.7 CL.20 under BPVOY4.

  1. Demurrage and Market Context:

    -At the End of June, Mediterranean crude markets have strengthened, boosted by the absence of Iraq’s Kirkuk from the prompt spot market, prompting end-users to replace barrels.

    “The situation is a Total Disaster,” for a trader, has to cover barrels at an higher price and has to pay damages liable to time above allowed laytime.

    “There has been no news from SOMO, and units have been waiting for nearly a month on demurrage.

    Like

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