Can smart contracts reduce the cost, inefficiency of demurrage claims?

Can smart contracts reduce the cost, inefficiency of demurrage claims?

Demurrage has always been a source of disputes and costs to shippers, yet the increasing focus on bottlenecks and efficiency in the supply chain has brought the issue to a head. (See the recent article at JOC.com: Forwarders: Unreasonable demurrage-detention on the rise). The underlying challenge is one of misaligned incentives. Carriers need to ensure efficient use of their assets, be it a container, a railcar, or an oceangoing vessel, and see demurrage as a potential revenue stream, while shippers naturally want to minimize the cost of demurrage by disputing the claims. As a consequence, demurrage claims management and resolution drains resources and time throughout the supply chain, from raw material shipments to containerized consumer goods.

While treating the root cause of the problem would require an overhaul of the entire legal concept of demurrage, the prevalence, and cost of demurrage disputes can be reduced through increased transparency and better flow of information between stakeholders. For instance, recording all timestamps of events relevant to the laytime calculation and agreeing on their validity would already get you far. Simply put: give shippers and carriers fewer possible points of contention.

While overhyped in many areas, smart contracts and blockchain technology may actually have a role to play here. A smart contract is a computer protocol intended to digitally monitor, verify, and execute certain terms of a contract, in our case whether (and how much) demurrage is payable. When housed on a blockchain, the execution and verification of a smart demurrage contract would be decentralized and based on a consensus mechanism between nodes in the network. Any information recorded on the blockchain would also be immutable and could be shared with relevant stakeholders. The nodes in this context would be some entity with presumed knowledge of the true state of the asset or cargo handling process. It could be an onboard sensor, a satellite feed of ship position data, or human “oracles” such as longshoremen and the ship’s captain. The nodes record relevant information on the blockchain, such as the timestamp for a milestone in the cargo-handling process along with the state of the cargo, container, or vessel. Having shared access to such timestamps, and running a consensus mechanism to verify their validity, would reduce the scope for disputes on the calculation of laytime and demurrage.

The new technology’s challenges

There are challenges of course. The complexity and inefficiency of running the bitcoin blockchain is well known, but at least the proof of ownership can be verified using mathematics and “on chain” resources only, enabling trustless operations. As soon as a blockchain has to interact with the real world — whether this involves human experts (oracles) or Internet of Things (IoT) sensors — trust in the input data coming from “off-chain” resources becomes an issue. This is because the oracles may be affiliated with either the shipper or carrier and, thus, may have diverging economic incentives. We note that human input would be required for the foreseeable future. For instance, there simply is no mathematical algorithm that can verify whether the cargo hold of an oil tanker is sufficiently clean to accept the next nominated cargo such that it is considered ready for loading in the legal sense.

However, this too can probably be resolved. For instance, human oracles can be incentivized economically for providing correct information through tokens that obtain economic value from the economic savings in the supply chain, and their reputation on the network penalized for behaving badly (i.e., the star rating system of Uber and others). Similarly, network consensus on the quality of IoT data from specific sensors can be developed over time. Such a system is required to align incentives and ensure the quality of the data recorded on the blockchain. After all, data entered on the blockchain are, in principle, immutable, and the age-old principle of “garbage in, garbage out” still applies.

No doubt these problems will be overcome in time as the technology matures. We believe blockchain technology and smart contracts for demurrage resolution represents a promising use case in logistics. At the very least, this important discussion could help to focus attention on the low-hanging fruits and economic benefits gained from digitization and increased transparency in the global supply chain.

Professor Roar Adland and Dr. Haiying Jia are visiting scholars at the Center for Transportation and Logistics, Massachusetts of Institute of Technology, and are members of the MIT CTL Blockchain Research Team. Contact Adland at roaaad@mit.edu and Jia at hjia@mit.edu.

Comments

Bitcoin and Blockchain aside, the issue most BCO's and/or truckers have has nothing to do with disputed time frames between the parties. Rather the contentious issue is "we can't get the container" within the free time allowed. "The terminal was jammed and we couldn't pick up the container." Having a smart contract and precise information on when events occur is important, but the real contention is the inability to access the terminal to pick up the loads. The free time expires and in most instances, a demurrage bill is issued (commercial issues set aside here). That's the real issue to be resolved, getting access to the loads within the free time provisions.