Chartering


Chartering :  Unlike liner shipping, chartering is another mode of shipping business which is practiced internationally. A shipper or a charterer may wish to hire a ship from ship owner with a view to transporting  certain quantity of commodities from port A to port B or he may wish to hire a ship for certain period of time, say six months / one year for carriage of goods under his direct supervision against  some mutually agreed remuneration to owner. How to do that ? To do business under above mentioned situation, a contract is needed to be concluded between two parties i.e. charterer or shipper and ship owner, which is known as “Charter Party” in shipping trade. There are three types of charter parties:
·         Voyage charter party refers to a contract where the vessel is chartered for a certain voyage.
·         Time charter party refers to a contract where the vessel is chartered for a certain period of time.
·         Charter-party by demise is different from above two charter parties because under this contract, charterer obtains full control of the vessel. Supply of ship stores, provisions. fuel oil and also appointment  ship’s crew, --  all are done by charterer.

Voyage charter party : Why a voyage charter party is concluded ? Why charterer can’t negotiate with a liner company to fulfill his transportation requirement? The answer is very simple. The following are the reasons :
a)      As a FOB buyer or a CIF seller, the specific transportation requirement of charterer induces him to hire a vessel when liner ship can not ensure needed space.
b)      The line may not have direct services to the ports of loading & discharging as per requirement  of charterer.
c)       The freight is less when charterer hires the entire vessel as compared to the freight payable  for booking space on board a costly liner vessel.
d)      Finally, voyage charter may be concluded even though charterer has no transportation requirement . He anticipates that market rate for charter hire will go up and in that case he can make some profit by rechartering the vessel at higher rate.
Procedure for concluding voyage charter party and standard forms used in the trade : Voyage charter parties are generally negotiated by ‘Broker’ who are professionally sound in respective field i.e there are separate brokers having specialties in commodities like oil, bulk, gas etc. Normally a charterer having a transportation requirement  gets in touch with a broker who is professional in particular field. Then it is the duty of the broker to communicate with ship owner on continuous basis. Negotiations normally take long time for materialization of a deal and it continues between charterer via broker and ship owner until and unless  charter party is finally concluded.
There are great variety of standard charter party forms which are used in the trade. Some forms are ‘shipowner friendly’ and some are ‘cargo friendly’. The most commonly used standard charter party forms are :
a)      The Baltic and International Maritime Conference Uniform Time-Charter and the code name is “BALTIME   1939”.  This form has been adopted by the Documentary Committee of the Chamber of Shipping of the United Kingdom and the Documentary  Committee of The Japan Shipping Exchange, Inc, Tokyo.
b)      The Baltic and International Maritime Conference Uniform  General Charter including F.I.O. alternative etc (As revised  1922 &  1976) and the code name is “GENCON”. This form is used for general merchandise. It has been adopted by Documentary Committee of the General Council of British Shipping, London and the Documentary  Committee of The Japan Shipping Exchange, Inc, Tokyo.
c)       New York Produce Exchange Form which code name is “NYPE  93”. This form is widely used in Time-Charter party. The form has been issued by the Association of Ship Brokers and Agents (U.S.A), Inc, in 6th November,1913 and the same has been amended on several times which finally revised on 14th September,1993. Form has also been recommended by The Baltic and International Maritime Council (BIMCO) & The Federation of National Associations of Ship Brokers and Agents (FONASBA).
The principal clauses in voyage charter-parties
   The shipowner and the charterer are free to make their contract in any form as they deem necessary. But usually they use any one of the standard form of charter party as mentioned above. Even then they can make amendments to the terms and conditions reflected in printed forms, in order to customize their special requirements. In general the following provisions / clauses are found in most voyage charter-parties :
1.       The shipowner agrees to provide a ship and states her position, her capacity and class on the register.
2.       As to the preliminary voyage to the port of loading, the shipowner promises that the ship shall proceed with reasonably dispatch.
                 
3.       The shipowner  makes some representation of fact regarding the ship i.e she is ‘tight, staunch, and in every way fitted for the voyage. In other words, ship is seaworthy for the voyage.
4.       The shipowner undertakes to carry the goods to their destination.
5.       The charterer agrees to provide full cargo.
6.       The charterer agrees to pay freight on the basis of per ton of goods or per cubic foot of space.
7.       A list of excepted perils.
8.       Provisions regulating how loading and discharging to be performed with particular reference to time allowed for these operations, and the rate of demurrage.
9.       A cancelling clause giving the charter the right to cancel the contract in the event of non-arrival of ship by a certain date at a certain port as agreed.
10.   A ‘general paramount clause’, the purpose is to incorporate the Hague-visby Rules.
11.   The ‘amended Jason clause’.
12.   A ‘both to blame collision clause.
13.   An arbitration clause.
14.   A clause concerning payment of commission to the ship broker for negotiating the charter party.
15.   A ‘ceasser’  clause.
16.   A war clause.
17.   A clause incorporating the York-Antwerp Rules 1974 relating to general average.
18.   A clause relating to the duty of the master to sign the bills of lading.

The undertakings given by the shipowner and the charterer against some of the important clauses as mentioned above, need interpretation enable interested readers to understand its wider implication as well as legal effect on the materialization of charter party.
1.1  Identification of the vessel --  Named or not :  Shipowner has the contractual responsibility to declare a named vessel which will perform transportation of goods under agreed contract and has to be incorporated in the charter party. Legally name of the vessel is very important, because fate of the charter party depends on the fate of the vessel. Once vessels name is declared, shipowner is not in a position to use substitute vessel, if the nominated vessel encounters damage during voyage. In that case charterer can cancel contract on the ground of non-performance. Sometimes it happens that the vessel is not named at the time of concluding the charter party. Shipowner has to  nominate the vessel at later stage before commencement of the voyage. If shipowner incorporates clause in charter party with words “named vessel or substitute”, then he has option in his favour to use substitute vessel under a situation of total loss of the 1st vessel.  
1.2  Cargo Carrying Capacity --  Shipowner has to declare specifically actual cargo carrying capacity of the vessel either in dead weight ton or cubic capacity or both.  Any exaggeration of facts in this regard will hold shipowner liable for breach of contract. Charterer can legally claim compensation from owner  for loss of cargo if he fails to load in the nominated vessel due to misdeclaration.
1.3  Cargo handling Gear and other properties of the vessel :  Detail description of vessels gear i.e number of cranes / winches with breakdown of loading capacity of each unit, specification of cargo hold /hatches, hatch opening etc are to be given in the charter party, regardless of whether charterer performs loading / discharging operation by using ships gear or not. Vessels description also includes heating capacity of crude oil and number of pumps & their capacity in case of tanker, no of reefer plugs available for carrying reefer cargo, nationality/year of built/class etc. In short, vessels gear should be workable and hatches to be clean/ready to receive cargo.
1.4  Seaworthiness : It is an implied undertaking on the part of shipowner as he undertakes to provide a seaworthy ship that will proceed to the port of loading with reasonable dispatch and without unjustifiable deviation. Therefore the undertaking implies that the ship is ready in all respect to receive particular cargo at the time of loading and be seaworthy at the time of sailing. Any defect arising after the cargo has been shipped is no breach of this undertaking. Normally shipowner is blamed for ‘unseaworthiness’, whenever any deadlock arises during loading operation at the load port, any major breakdown of engine at the sailing time and if ship faces shortage of bunker fuel during passage etc. Owner can not escape his liability if any such incident happens. On the basis of acceptable ground as per terms of charter party, if charterer discovers that ship is unseaworthy before the voyage begins, and the defect can not be remedied within a reasonable time, he may repudiate the contract. But after the voyage has begun, the charterer is no longer in a  position to repudiate the contract but can claim damages for any loss caused by unseaworthiness. Although  implied undertaking to provide a seaworthy ship means a ‘condition or warranty’ on the part of shipowner, but practically owners do not undertake such strict liability. Owners try to exercise due diligence while placing seaworthy vessel to the charterer and nothing more.
1.5  The Cargo :  what is the cargo and its quantity to be loaded? This information to be given by charterer explicitly. If the charterer delivers another type of cargo, not mentioned in the charter party, the shipowner is entitled to refuse acceptance of the cargo. In case charterer deliver less cargo than contractual quantity, he will be liable to pay ‘dead freight’ i.e he has to pay compensation to the shipowner for short-shipment.
1.6  Time allowed for loading, Laytime and Demmurage : To speed up loading / unloading and achieve higher productivity, certain time is fixed for both loading and unloading operation and charterer to finish the job efficiently within that allowed time period without any extra cost. This allowed time is known as “Laytime”. If charterer takes longer time than allowed time, he has to pay compensation to the shipowner which is known as ‘Demurrage’. In charter party, a certain amount per day, is kept as Demurrage.  Laytime and demurrage calculation is very complicated and it takes sometimes more than a year to settle such claim of demurrage, through lengthy arbitration process. When laytime starts? Usually laytime starts, when the vessel is an ‘arrived ship’,and she is ready to load or discharge. Again arrived ship depends on whether charter party is a port charter or birth charter party. Under berth charter party, ship must reach to a particular berth if it is mentioned in the charter party. Then laytime will start. Under port charter party, laytime will commence when vessel enters into the area of a port.  After arrival, ‘Notice of readiness to be tendered by the Master or Vessel’s agent to the charterer or his representive. Once NOR is accepted by the charterer, laytime starts to run from next day noon time. There are number of ways for fixing laytime.
    a)  In C/P, a fixed number of days is kept as allowed time for loading or discharging, say five days taking into consideration calendar days or working days. In tanker trade, laytime is calculated on running hours, as oil is transported by pump or pipe line round the clock.
   b)  In C/P, a daily loading rate i.e 1000 tons per day is shown for laytime calculation. If the total quantity to be loaded is 5000 tons, total laytime to load will be five days. Sometimes daily rate is connected with hatch, i.e 200 tons per hatch per day. Laytime may be fixed on the basis of 200 tons per day per workable hatch
  c)  In C/P, if stipulation is that Sundays and holidays Excepted, then laytime will not count these days even if used.  SHEX in a C/P means Sundays & holidays excepted, while SHINC means Sundays & holidays included. Working days mean a working day on which work is normally done at the port and time is counted as 24 hour day from midnight to midnight. There is a stipulation that Weather Working Day. It is a day of 24 hours excluding the time which is lost due to bad weather. So lot of disputes and difference of opinion exists among the experts regarding calculation of laytime in voyage charter parties.  When excess time is used by charterer, not allowed by C/P, then he has to pay demurrage to owner at the  rate fixed in charter party provided the claim is supported by all relevant documents / calculation sheets. The term ‘Despatch’ is the inverse of demurrage. If loading is completed before the expiry of laytime, then shipowner shall pay a compensation to the charterer for time saved and early release of the vessel. This incentive money is called ‘Despatch’ and it is fixed at half demurrage rate as per practice. 

Time Charter Parties : When a charterer or shipper needs a ship for long term employment, say six months or one year, it is advantageous for him to go for time charter. It provides more flexibility and control over ship for fulfilling his transport requirement independently. For example if charterer wants to transport 1,000,000 metric tons of crude oil from Saudi Arabian port ‘Rastanura’ to any port of South Asian Region, then he needs to hire a big oil tanker for a longer period, in order to ensure uninterrupted transportation of the commodity. Time charter arrangement for such deal is the ideal solution for a charterer. Generally standard forms viz “BALTIME   1939” and “NYPE  93”, are used by charterer for concluding time charter party.
The Principal clauses in time charter-parties
In general, following clauses/provisions are found in most time charter-parties :
1.       The shipowner agrees to provide a vessel for a period of time and declares her size, speed, fuel consumption and amount of fuel on board in the charter party.
2.       The port of delivery and the time of delivery of the vessel to the charterer are stated.
3.       Charterer agrees to engage ship only in lawful trades and carry lawful merchandise and only use safe ports where vessel can ‘safely lie always afloat’.
4.       The shipowner agrees to pay wages of ships crew, vessel’s insurance, stores/spares etc. That means owner promises to maintain the ship at efficient level.
5.       The charterer agrees to provide necessary fuel for smooth running of vessel, to pay dock & harbour dues at port of calls and arrange payment for loading and discharging.
6.       The charterer agrees to pay freight fixed on per day basis for hire of the vessel. Sometimes charter party clause stipulates that charterer to make payment of 15 days freight in advance to owner during the tenancy of the contract.
7.       A clause concerning the redelivery of the vessel.
8.       Certain events are stated in the charter party, the occurrence of which withhold hire payment .
9.       The master of the vessel is to work under the instructions and guidance of the charterer.
10.   A list of ‘excepted perils’.
11.   The charterer agrees to indemnify the shipowner for loss or damage to the vessel by careless loading or discharge.
12.   A cancelling clause.
13.   A clause incorporating the York-Antwerp Rules 1974 relating to general average.
14.   An arbitration clause.
15.   A clause concerning payment of commission to ship broker  for rendering his services towards construction of charter party.
16.   A war clause.

Some of the above important clauses need to be discussed for better understanding of the issue.
Substitution Option / Period of Hire : A clause sometimes provide that the shipowner is entitled to substitute another vessel during the currency of the charter party, if the  vessel faces a situation of total loss or  constructive total loss due to sea peril .  A normal clause in C/P states the period for which the vessel is hired. Sometimes the time limit is fixed at charterer’s option i.e  charterer hires the vessel for 24/30 calendar months with options to redeliver the vessel within time limit 24 to 30 calendar months from the date of delivery. Sometimes the period of hire is expressed in different ways i.e ship is hired for the period necessary to perform one  time charter trip via safe ports East Coast Canada within trading limits where charterer has option to redeliver the vessel on completion of the trip.
Delivery / Seaworthiness of the vessel :  A usual clause is included in the C/P that the vessel to be delivered at specified port in such available berth where she can safely lie always afloat. Clause also states that charterers to receive the vessel at the port of delivery and to take over & pay for the fuel oil including bunkers remaining on board the vessel at current market price.
Seaworthiness implies that owner provides a vessel which is ‘in every way fitted for cargo services’. Shipowner is held liable for non-compliance of this condition, when it is found that engine room staff is incompetent / inadequate to operate the ship and no deratisation certificate is available on board, at the time of delivery of the vessel to the charterer. Vessel becomes unseaworthy, if there is any significant defect in the vessel, which renders her practically impossible to go for sea voyage or unload the cargo. Any defect of the vessel which may create some delay in the voyage or in the loading / discharging operation can not be termed as ‘unseaworthiness’. Therefore the vessel to be in every way fitted does not impose an unlimited obligation to the shipowner but it is normal expectation that the owner will exercise due diligence to provide a seaworthy vessel.
  Vessel’s Speed : It is an important information which owner has to declare in C/P alongwith other particular description of the vessel. This declared speed is an warranty which will be applicable at the date of her delivery to the charterer. If the vessel can not maintain the declared speed during the currency of the charter party, owner has to pay compensation for time lost due to shortfall of speed subject to exceptions clause. For example, a vessel chartered under time charter-party, has declared as capable of maintaining steaming at 15 knots. But in actual voyage, she could achieve only 12 knots. Under this situation, owner is guilty of breach of warranty, and is liable to pay compensation to charterer.
 Trading Limits / Right of Withdrawl : Sometimes charter party clause specifies that the vessel must use safe ports within certain area i.e say vessel to perform one time charter trip via safe ports of East Coast Canada or UK Continent Gibraltar-Hamburg Range. This trading limits is defined as ‘always within Institute Warranty Limits’. Loss of time caused due to violation of this clause will be on charterer’s account.
       A usual clause of C/P states that payment is to be made in cash without discount every 30 days in advance. Any default of payment as per this clause, shipowner have the right to withdraw the vessel from charterer’s service.
  Frustration of a charter party : Both the shipowner and the charterer will be discharged from their obligations under the charter party if it becomes frustrated. Frustration of C/P may arise from various reasons :
·         Impossibility of performance.
·         Unnecessary delay in the execution of C/P.
·         Subsequent changes in the clauses of C/P
In short, this is all about chartering business, which is being practiced by shipowner and charterer in
international shipping trade.
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10 comments:

  1. This is a good common sense blog. I am very glad to read this.
    Herbal Potpourri

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    1. Thanks Legal Puffs for your compliment. Your can share your views on other important articles also..

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  2. Thanks for your valuable and directive guidance...I am also running logistic industry...through this i come to know which are the area i need to improve...its really an pleasure to post comment on this blog.

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    1. Thanks for your comments. If you have any query on the contents of the article, pl feel free to submit. I shall try my best to answer.

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  3. I love all details that you give in your articles.
    Herbal Incense

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    1. Its my great pleasure that you liked my post. It is knowledge sharing platform on various aspects of shipping. Would appreciate if you share your views on other topics published in the blog. If you have any specific question on this article, pl feel free to ask. Thanks.

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  4. Thanks for providing such an useful and informative information about Interesting Things. Glad to read it. Will bookmark your post and visit again for more informative post. Keep Sharing.
    Herbal Incense

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    1. Thanks for your nice compliment. I would be glad to answer if you have any query on this article. International shipping operates under a wide and complex scenario of business environment. So there is no limit to know & learn from this field.

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  5. what is competing options for voyage charter and time charter in ship employment?

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    1. Charterer or the Shipper has to decide whether he should go for voyage charter or time charter. If charter requires a vessel for a particular voyage from port A to B, then he will go for voy charter. But if he needs a vessel for long term employment to ensure uninterrupted transportation of cargo in large volume say 50000 tons of rice from Port A to Port B, then time charter option would be more suitable for him. From ship owner's point of view, ship's employment in time charter compared to voyage charter, is more beneficial because it ensures higher revenue earnings with less hazard. I would request you to share your views if any.

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