CHARTER

CHARTER

by F R Chowdhury         5/5/2018

In shipping when a ship is hired it is always referred to as being on the charter. The owner of the ship is still referred to as the owner and one who hires the ship or space thereof is referred to as the charterer. The instrument of the agreement is known as the “charter party”, commonly called C/P. There are standard forms for different types of charter devised by various international trade associations and chambers of trade and commerce including the ICC, BIMCO and the Baltic Exchange. C/P is normally drawn by mutually (ship-owner and charterer or their agents) agreeing to various clauses of one of the specific forms with special conditions or exception/ exemption noted by lines. The coal, grain rice, timber, stone, ore, fertiliser, and other trades all have their own forms of charter-party. There are 3 conventional types of charter. They are:

1. Demise or Bare-boat charter
2. Time charter
3. Voyage charter

Demise or bare-boat charter: as the name implies it is the charter in which the charterer hires the ship for a long period of time, mostly in newly built condition directly from the yard, and takes delivery of the ship with no crew, stores or bunkers. In other words, the delivery of the ship is made in its bare state. The charterer employs his staff to man the vessel, puts onboard stores, provision, and spares as considered necessary, takes bunkers, finds cargo and employs the vessel. In most cases, the insurance of the vessel may be also undertaken by the charterer. The charterer takes the responsibility of repair, maintenance, survey, certification, and docking. The owner has no operational responsibility. The oil companies normally operate the tankers under bare-boat registry (often taken as a new delivery from the yard).

The charterer operates the vessel (in lawful trade) in a manner as if s/he is the owner. The charterer can even put his/ her own marking on the funnel. However, the charterer cannot raise any cash/ finance against the ship because s/he is still not the owner. Some countries also allow registration of a ship under bare-boat charter for the period of the charter or if the C/P leads to the eventual sale of the ship to the charterer. However, the C/P has to have a clause allowing the charterer to register the ship under a different flag for the period of the charter. The Administration of the bare-boat registry will evidently seek the consent of the primary register before the vessel is registered under bare-boat registry.

Time charter: The ship is chartered for a specific period, say about six months to a year, at a fixed rate (normally a daily rate) with the option to extend the period to complete a voyage. On mutual consent, the charter may be renewed or extended for a further period. Charter hire is normally paid in advance, say about 15 or 30 days at a time. The owner retains the master and the crew and continues to pay their wages. The owner continues to pay for the insurance (hull and machinery and P&I for the crew). The charterer may take a P&I cover for cargo or other claims. There are special charterers’ P&I clubs to provide coverage of the charterers’ requirements. The owner also remains responsible for repair, maintenance, survey, and certification. The vessel is normally put “off-hire” for the period vessel becomes/ remains non-operational.

The charterer finds the cargo and employs the vessel. He pays for fuel, pilotage and port dues. He also pays for stevedoring, dunnage, lashing, tomming etc., if any. The charterer or his agents issue the B/L (Bill of Lading). If the master is required to sign the B/L he does so “for and on behalf of the charterer”. The owner who also pays for the fresh water consumed by the crew pays lubricating oil, being a part of the ship’s maintenance. The charterer may put its own marking on the funnel.

Normally there is “on-hire” and “off-hire” survey at the time of delivery/ re-delivery to ensure that the ship is returned to the owners in the same state as was chartered. Compensation is paid for any damages caused by the charter. Differences in the quantity of oil and water are normally settled at the rate prevailing at the port of re-delivery. The owners pay for the crew (for routine operation and maintenance) but any over-time for the business of the charterer is paid for by the charterer.

The master abides by and carries out all lawful advice and instruction of the charterers. Charterer’s representative or Cargo Superintendent may be allowed to stay on board for which the owners may claim boarding expenses. Entertainment (hospitality) expenses in respect of pilot, port officials, customs etc. are reimbursed by the charterers.

There are also trip time charters, which are for shorter durations related to one specific voyage between two or more ports. The principle remains the same as long-term time charter parties.

Voyage charter: It is, in fact, an agreement between the owner (carrier) and the charterer (shipper) to carry a given quantity of cargo from a point A to a point B at an agreed rate of freight per ton. It normally refers to a quantity with +/- 2% option for either party. The ship will serve “Notice of Readiness” on arrival at loading port when it is ready for loading. If it is on liner terms the owner (carrier) employs stevedores at both ends and pays for it. However, the charterer must provide the cargo to the hook for loading and away from the hook at the port of discharge. However, in most voyage charter the loading and discharging are done by the charterer. The C/P will stipulate either on FIO (free in out) or FIOST (free-in-out, stowed and trimmed) basis and the rate at which the loading and discharging will be done by the charterers. If stipulated in the C/P the ship may give notice of arrival at the port of discharge to charterer and the charterer’s agents may handle the ship.

The C/P stipulates a given rate of loading/ discharging (time factor) and if the charterer fails to maintain the flow at the given rate and causes delay to the ship then demurrage is payable by the charterer to the owner at a pre-agreed rate. Similarly, if the charterer handles the ship at a rate faster than stipulated and thereby releases the ship ahead of schedule then the owner pays to the charterer “despatch” money which is normally fixed at a rate lower than the demurrage. Generally, it is fifty percent or half of the agreed demurrage rate.

In a voyage charter, the owner meets all expenses relating to the ship and its operation. The charterer pays for the cargo carried at the agreed rate.

Bulk import by state-owned organisations through tender/ quotation normally invite bids for a certain quantity of a specific cargo (normally import) to be delivered to a point at an agreed rate. This involves the supplier to buy the goods and ship it through voyage charter. The ship is required to serve notice of readiness and the importer (consignee) will take delivery of the goods at a stipulated rate of discharge with provision for demurrage. If a B/L is required for banking purpose then it is signed with a clause “all terms and conditions as per C/P”.

It is quite possible for the same ship to be first on a bare-boat charter with one party, time charter with a second party and then finally on a voyage charter or liner engagement. In modern global shipping, there is also a charter for space or slot charters.

NYPE and GENCON: NYPE and GENCON charter parties are most frequently used for time and voyage charters respectively. These are standard forms which have undergone many revisions. There are also many bespoke (tailor made) charter parties for genre-specific shipments. BIMCO is one of the major organisations which introduce specific Rider Clauses to Charter Parties, depending upon the frequent changes to shipping trade. The Piracy Clause is one such example of a new introduction since the Somalian Piracy operations created problems with shipping routes.

Disputes and Arbitration: Like every contract, Charter Parties may also have their usual disputes. Resolving these is through an appropriate Clause such as the Arbitration Clause. The most frequent place agreed is in London with English law to apply. Arbitrators are generally members of the LMAA. The arbitrators “award” is often accepted as a solution to the dispute. There are however a good number of these being challenged at the court of First Instance with further appeals working its way up to the House of Lords where major maritime cases are discussed and judgments are issued. These form the backbone of English Maritime Law.

The Ship Broker: The intermediate party to drawing up a Charter is the ship broker, who is the common party to the Owner and the Charterer. Reputable brokers are also members of BIMCO as well as members of The Institute of Shipbrokers in London where they preach and practice the term “Our word, our bond”.

Fixture Notes: There are however Owners and Charterers who engage in Charter Parties directly. Sometimes they tend to fix vessels on a “Fixture Note” which is a brief contract having just the major points of a Charter such as Freight (or Daily hire rate), Laycan, Loading and Discharging rates and Demurrage and Despatch rates. They avoid the use of lengthy charter parties.

COA: And finally, we also have the existence of COAs or Contract of Affreightment, the main purpose being to “oblige a carrier to lift a fixed or determinable quantity of cargo of a specified type over a given period of time.” Usually, this contract is not restricted to one particular vessel but operates as a series of voyage charters.

(Original by F R Chowdhury in July/ 2011 & revised by Capt. Ghulam Hussain in Dec/ 2017).