Disputes over demurrage and detention charges

Disputes often arise between container users (usually the consignees or consignors under bills of lading) and carriers under contracts for the carriage of goods by sea over rent charged for use of a container beyond the free time. At present, laws are silent on such issues as the rate for calculating such charges, the amounts that can be claimed and the time limits for lodging such claims.

Plaintiff and defendant

In current judicial practice, there is general agreement as to the identity of the parties with rights to, and the parties liable for, demurrage/detention charges for the use of a container beyond the free time.

The attitudes of courts in this regard are relatively clear-cut. For example, the Answers II to Questions on Trial Matters Relating to Disputes Over Demurrage/Detention Charges for the Use of Containers Beyond the Free Time Under Contracts for the Carriage of Goods by Sea (Answers), given by the Shanghai Municipal Higher People’s Court specify that if a dispute arises over such matters, the plaintiff may be:

1. a shipping company with legal personality;
2. a branch established in accordance with the law by a shipping company with legal personality;
3. if the shipping company has executed a container management agreement with a domestic shipping brokerage or shipping agency, the domestic shipping brokerage or shipping agency that it has appointed to be responsible for the recovery and management of containers in China; or
4. another legal person or organization that has the authority to impose demurrage/detention charges for the use of containers beyond the free time.

According to the Answers, the consignee may be named as the defendant in the following circumstances:

1. if, after taking delivery of the goods, the consignee fails promptly to return the container during the free time;
2. if the consignee delays taking delivery of the goods, objectively causing the use of the container to exceed the free time; or
3. if the consignee refuses to take delivery of the goods, objectively causing the use of the container to exceed the free time.

The consignor may be named as defendant:

1. if the bill of lading has not circulated normally, remaining in the hands of the consignor. In such cases the consignor, as a party to the carriage contract, is liable due to breaching its obligation to arrive promptly at the port of destination to take delivery of the goods and handle other relevant matters; or
2. if no one takes delivery of the goods at the port of disembarkation, objectively resulting in the container being occupied for an extended period of time or even being under customs surveillance, making it unavailable for normal turnaround.

Charge rate

Under normal circumstances, the rights and obligations of the parties in respect of the use of a container is determined based on what is specified on the relevant equipment interchange receipt.

Some interchange receipts expressly specify that the 1992 Calculation and Imposition of Demurrage/Detention Charges for the Use of International Containers Beyond the Free Time Measures (Measures) are to serve as the basis for calculating the charge rate. In general, although the Measures have been repealed, if the parties have agreed to use them as the basis, courts will hold that this decision should be respected.

However, when an equipment interchange receipt for a freight container does not specify a definite basis of calculation, it can be determined in line with trading practice. At present, the courts will in such circumstances refer to average market price or the charge rate published by the carrier in its agent handbook, place of receipt exchange or website. If the container user has established a course of dealing with the carrier and has not expressed any objections to the carrier’s published fee rates, it should be deemed to have accepted those rates.

Liability limits

If a container is not returned for a long period of time, the demurrage/detention charges incurred may exceed the value of the container itself.

In such circumstances, the courts have, in the past, taken two different positions on the calculation of the demurrage/detention charges.

The first position held that the demurrage/detention charges should be calculated until the date on which the carrier actually recovered the container, even if the sum involved exceeded the actual value of the container itself.

The second position held that demurrage/detention charges should be limited to the actual value of the container.

In recent years, however, the courts have taken the second position, thereby effectively setting a limit on the liability of the consignee or consignor for payment of demurrage/detention charges.

Limitation of actions

The common position of the courts is that a dispute over demurrage/detention charges for the use of a container beyond the free time is based on the relationship between the carrier and the consignee or consignor under a contract for the carriage of goods by sea. Accordingly, the one year limitation of actions applicable to contracts for the carriage of goods by sea applies to such disputes, counting from the date on which the rights holder learned or ought to have learned that its rights had been infringed. That date should be deemed as the day immediately following day on which the liable party exceeded the free time.

Under many circumstances, if the limitation period for action has expired, but the container has not been returned and the demurrage/detention charge is continuing to accrue, the courts tend to be relatively cautious when determining whether the rights holder’s commencement of an action has exceeded the one year limitation period.

Henry Lee is a partner at LC & Co.

Steven Zhou is a lawyer at LC & Co.