Public Dock Clause — What Gives?

April 20, 2014

WHAT IS THE PUBLIC DOCK CLAUSE AND WHY has it been getting so much attention lately by oil majors, chemical producers and trading companies?

The Public Dock Clause is most commonly found in commodity sales contracts for cargo deliveries at ports in North America and the Caribbean. While this clause can be drafted in many different ways with varying degrees of effectiveness, it generally stipulates something like:

When a Vessel is loaded or discharged at a public dock laytime shall commence when the Vessel is All Fast. The terminal party will not be responsible for any delays or demurrage incurred while waiting for a berth.

The genesis of this clause began about 35 years ago when oil majors introduced the concept of Public Dock to limit their liability for demurrage incurred at third-party terminals where they have no control of the berthing order of barges and vessels. Participants in the commodity trading arena can better plan their product deliveries and receipts when they are in control of the storage terminal, thus reducing the likelihood of delays i.e. demurrage. The problem arises when the market participants commit to load and discharge windows that they cannot warrant at facilities where they have no direct control over the terminal operations. Thus the underlying logic of the Public Dock clause is that the terminal party should not be “penalized” for demurrage incurred by the vessel party in waiting to berth which is wholly outside the terminal party’s control.

The reason that this clause has been getting so much attention lately lies in the fact that about 80% of unsettled demurrage charges at these companies—receivables and payables–is directly attributable to this thorny clause. Oftentimes the same companies that benefit by the clause are at other times on the opposite side of the transaction table resulting in no net gain overall.

Not only is the demurrage exposure significant, the man hours spent debating the applicability of the clause in a futile attempt to resolve these outstanding claims is also a recognized concern.

Issues that are hotly debated include how to treat berthing delays outside the scope of berth congestion e.g. terminal breakdown, lack of cargo, berthing ships out of turn, port closure, weather delays, etc.

Another question that begs clarity is what EXACTLY defines a terminal as public? As per the American Association of Port Authorities “Public Docks” are owned and operated by the Port Authority. That said, how can privately held terminals that offer storage space to customers constitute a public dock when their line-up and dock schedules are not readily accessible? A dock that endeavors to berth ships on a first-come, first-serve basis does not necessarily make a terminal “public”. That is simply the most equitable way for a private terminal owner to service all of their leasing partners.

And last, but not least, another hot issue involves the debate of whether or not the clause was mutually agreed in the deal in the first place. In particular, Vessel nominations are sometimes disputed throughout the cargo loading process and well after the Vessel has sailed without clarity as to the governing terms.

In addition to the aforementioned problems, the public dock clause also fails to incentivize efficiencies at third-party terminals. Neither the terminal operator nor the storage customer has a vested interest in mitigating inefficiencies when it does not directly impact their bottom-line. Inherently inefficiencies are easily overlooked when parties are not held accountable.

In view of the existing problems with the Public Dock clause, major oil companies and trading houses established a working group spearheaded by the LEAP organization (Leadership for Energy Automated Processing) to develop a clearly worded LEAP Public Dock Clause that parties can freely reference within their contracts to eliminate future disputes.

In order to accomplish this mission by year-end, LEAP’s working committee met in Houston on March 5, 2014 and will continue to meet quarterly (with conference calls in between). The established goals include (1) the development and publishing of objective standards that can be used to designate a terminal as Public Dock, (2) the creation and publishing of a list of Public Docks in North America and the Caribbean that adhere to the objective standards, (3) the development of a process by which other terminals may be added to the list, and ultimately (4) the creation of a standard clause that could be voluntarily inserted into the General Terms and Conditions of buy/sell contracts and their confirmations to reference the LEAP Public Dock Clause.

LEAP’s mission is to promote efficient and reliable transaction processing in the trading of crude oil and refined petroleum products by means of automation and standardization. This is a mission that majors actively support including BP, Chevron, Shell, Nexen, Morgan Stanley, and Glencore, to name a few, that were in attendance at last month’s meeting. Also in attendance were vendors that showcased their innovative solutions to some costly problems:

Stage 3 Systems – Email overload
Chinsay – Taking risk out of the freight contracting process
PortVision – Marine terminal optimization
Haugen Software – Laytime is money, don’t overbuy

Subsequent to the LEAP meeting, Haugen Consulting received a request for our interpretation of the application of the Public Dock clause in the following scenario: “Ten hours after the vessel tendered Notice of Readiness to a public dock the port was closed due to adverse weather for 14 hours. The Vessel berthed five days later. Does the weather delay negate the public dock clause?” Obviously there is not enough information in this example to draw a conclusion. Simply put, this is one example of how the clause wreaks havoc within the industry and further reinforces the importance of the LEAP Public Dock initiative.