chartering
chartering
chartering
1. Introduction
A charterparty is a documented contractual agreement defining the terms of conditions between the
buyer and seller, or charterer and owner of a shipping service. Charter party is derived from the
Latin expression for “parted paper.” Before the days of typewriters, the broker would write out the
exact text of a contract in two columns on a single sheet of paper. He would witness the shipowner
and cargo owner signing both columns, tear the paper lengthwise, and give one half to each
principal. Subsequently, in dealing with contractual matters, either principal could verify the
legitimacy of the other’s contract by holding the two halves together to match tear marks.
Vessels can operate under a variety of charters, ranging from a voyage charter (in which the
shipowner contracts to carry a specific cargo on a specific ship for a negotiated price per ton); to a
contract of affreightment (in which the shipowner contracts to carry regular tonnage of cargo for an
agreed price per ton); to a time charter (in which the charterer hires the ship – complete with a
crew – from the owner for a fee per day, month or year); to a bareboat charter (in which the owner
hires out the ship without a crew or any operational responsibilities). The usual relationship is for
the charterer, as the purchaser of a shipping service, to be a shipper in need of a ship to move his
product, and for the provider of the service to be the actual owner of the vessel. Charters assign the
risks and costs of shipping cargoes between the charterer and the owner, and anticipate various
problems that may arise. A good charterparty will provide clear guidance on precisely who is
responsible for the costs in various (sometimes unforeseen) events, whereas a poor charterparty
may force either the shipowner, the charterer or the shipper to spend large sums of money in legal
fees to resolve problems. Therefore, it is extremely important that charparties be drawn up in a way
that protects the positions of all the contracting parties involved.
BIMCO has also produced two time charterparties – BALTIME (Bimco Uniform Time Charter) and
LINERTIME, and a more recent one, GENTIME. Another widely used time charterparty is NYPE 93
(New York Produce Exchange), which was developed by the U.S. Association of Shipbrokers and
Agents and subsequently adopted by BIMCO. BALTIME is generally viewed as the time charterparty
that is most favourable to the owner, while NYPE is considered to be most favoured to the charterer.
For the tanker market, the oil companies have drafted their own time charter forms such as BP-
TIME, SHELL-TIME, MOBIL-TIME, etc.
Generally speaking, there are numerous standardized voyage charterparty forms (due to the huge
variety of trades and goods that can be carried under voyage charters), while variation is much
more limited under time charters where the number of standardized forms is comparatively small.
3. Wording of Charterparties
The wording of most charterparties is used only as a basis for negotiation and, where necessary, the
printed text is altered, deleted or added to, so as to reflect the specific agreement reached (Other
than in “agreed” documents, in which the charterparty wording has been agreed to between a body
that broadly represents owners interests such as BIMCO and a charterer’s organisation for a particular
trade, and cannot be changed without the express agreement of all the organisations drawing up the
document.). The amended “main” form will be supplemented by various additional clauses, also
known as “riders” or “side clauses” that are tailored to the particular business. On some occasions,
an addendum or a side letter will be added to the charterparty to record a particular clause or
clauses that one of the contracting parties wishes to keep confidential from others who might refer
to the charterparty at a later date. For example, the freight (or hire) rate may be treated in a
confidential manner, with the main charterparty clause referring only to a rate/hire rate “as
agreed,” with the actual negotiated figure appearing only in a detachable addendum or side letter to
the charterparty. A charterparty must be correct with respect to its material contents and it should
reflect precisely what the parties have agreed. Its language should be unambiguous so that it clearly
expresses the intention of the parties.
Rather than drawing up a charterparty from a blank (standardardized form), it is common practice
in the shipping business to base negotiations upon a previous fixture, altering main terms and
additional clauses as required. This system saves both time and labour, and also provides evidence
to both shipowners and their brokers that certain charterparty clauses (which they might otherwise
find unattractive) have been previously agreed by other owners. Charterparty forms differ from one
another in various ways and some include peculiarities not seen in others. It is the shipowner’s job
to be aware of the advantages and disadvantages of major charterparty forms, and for shipbrokers
to advise their principals accordingly so that the most favourable agreement can be negotiated.
Indeed, it is important that everyone involved in the contractual aspects of shipping have a basic
knowledge of common charterparty terms (and alterations) that can be beneficial or otherwise to
potential business ventures. Although some of these technical peculiarities can be learned from
specialized books and texts, a great deal of knowledge can also be acquired from working with
experienced colleagues, comparing blank charterparty forms with previously negotiated contracts,
and reading and analyzing reports of shipping disputes and legal decisions in shipping publications.
Under a time charter, the owner places the services of a manned ship at the disposal of the charterer
against payment of hire calculated on a daily or monthly basis. The charterparty is for a named ship.
Trading limits may be wide or narrow, depending on one’s commercial purposes. A time charter can
also be used for the time required to perform a specific voyage, in which case it is called a time
charter trip. The time charterer pays for bunkers, port and most other trading costs, as well as the
ship’s part of loading and discharging expenses. The owner pays overheads, including capital items,
insurance, maintenance and repair of the vessel and crewing costs. Although the basic risk of delay
is for the charterer’s account, this essential difference between time and voyage charters becomes
less distinct through the use of off-hire clauses (for time charters) and demurrage provisions (for
voyage charters).
Under a voyage charter, the owner places the vessel at the disposal of the charterer for a single,
specified voyage. Remuneration is calculated by reference to the cargo carried (freight), and not
according to the time used (hire). The charterer may be the person who owns the cargo, but may
also charter the vessel for someone else’s account. The “owner” of the vessel from whom the actual
voyager charterer charters the ship may himself be a time charterer or even a voyage cherterer who
sub-charters (sublets) the ship. In cases where the owner is not the registered owner of the ship, he
is normally described as the “time-chartered” or “disponent” owner. Thus, there may be a chain of
charter parties attached to a particular commercial transaction, all of which must be viewed as
separate and distinct. Under a voyage charter, the owner retains the operational control of the
vessel and is responsible for all operating expenses such as port charges, bunkers, extra insurances,
taxes, etc. Costs borne by the charterer are usually those relating to the cargo. Loading and
discharging costs are divided between the owner and the charterer in accordance with their specific
agreement.
• Place where contract made: This can be important, as in the absence of a clause to the
contrary, the place where a contract is made will probably govern which law is to be applied
in the event of a dispute. Thus, if the place is London, English law will likely prevail in the
absence of a clause to the contrary. The place can be defined as where the contract is made
(usually the domicile of the charterer’s broker), not necessarily the business address of one
or other of the principals involved. If the parties wish to be certain that any future dispute
will be heard under a particular jurisdiction, it is strongly advisable that a contract include
an “exclusive jurisdiction clause.”
• Date of charterparty: This refers to the date by which fixture negotiations are concluded
and all subjects lifted (i.e. when all negotiating formalities have been concluded).
• Names and addresses of contracting parties: The contracting parties are the owner (or
disponent owner) and the charterer.
• Name and brief description of vessel: As a minimum, this includes the vessel’s name, age,
flag, type (e.g. bulkcarrier), registered tonnages, classification society and status, deadweight
and draft. Some charterparties allow for a more complete description in the main part of the
document, while others use an additional clause to provide concise details relevant to the
trade / cargo involved.
• Condition of vessel: It is usual for the owner to confirm that the vessel is in a suitable
condition to safely and properly perform the contracted voyage. This confirmation may take
the form of a short phrase or a longer, more detailed clause.
• Vessel’s position: It is necessary to provide the vessel’s position at the time when the
contract is made, as well as her expected date of arrival at the first (or only) loading port.
This date may depend on factors beyond a shipowner’s control (e.g. port delays during the
vessel’s previous voyage), so it is normal practice to qualify the estimated arrival date at the
first loading port with words such as “all going well” or similar.
• Cargo: This refers to the commodity and nature of goods to be carried (e.g. in bulk or
bagged); stowage factor (e.g. maximum 55 cubic feet per tonne); and either minimum /
maximum quantities or cargo size margins and in whose option (e.g. 10,000 tonnes, 5
percent more or less in owner’s option).
• Loading and discharging places: This includes not only names of loading / discharging
places (or ranges, as in Bordeaux / Hamburg range), but also the number of safe berths /
anchorages that the charterers are entitled to use at each port, whether the vessel is to
remain always afloat or safe aground, port rotation, lighterage (although this may need a
specialized additional clause), maximum / minimum available drafts, etc.
• Laydays / cancelling: This refers to the spread of dates during which a vessel is to present
herself at the first (or only) loading port, as well as the conditions under which the contract
can be cancelled.
• Cargo handling: Provision as to which of the parties to the contract is to appoint and pay
for stevedores and / or arrange cargo-handling at loading and discharging ports.
• Laytime: This refers to the time permitted to the charterer for cargo handling; when notice
of readiness to either load or discharge is to be tendered or accepted; commencement of
laytime; interruptions to laytime (strikes, holidays, bad weather, etc.); whether laytime to
be normal, reversible or averaged.
• Demurrage / despatch: This refers to the daily amount payable by the charterer in the
event a vessel is detained in port beyond the maximum permitted laytime, as well as any
stipulation as to despatch (at usually half the demurrage rate).
4. Terms of Payment
• Freight: This specifies the freight rate (and whether prepaid or payable on delivery), as well
as currency, method of payment, beneficiary and bank account.
• Strikes: Details risks and responsibilities of both parties in event of a strike (level of detail
can vary greatly among charterparties).
• War Risks: Provides shipowner with right to refuse to let his ship and her crew enter or
remain within an area which has become dangerous owing to warlike activity.
• Deviation: Indicates right of vessel to deviate on passage, normally in order to safe life and
property. May also involve the commonly used P & I Bunkering Clause, which gives owners
the right to deviate for bunkering purposes.
6. Administrative clauses
• Cesser & Lien: Clarifies how and when charterer’s liabilities will cease upon loading, in
return for a lien on the cargo granted to the shipowner.
• General average: Specifies where General Average (if any) is to be adjusted (e.g. in London)
and / or paid and the relevant laws relating to General Average.
• Bills of Lading: Specifies manner in which bills of lading issued are to be drawn up and who
is permitted to sign same.
• Subletting: Circumstances under which a charterer can re-let the contract to another
charterer.
• Clause paramount: Incorporates the Hague / Visby Rules into the contract and into bills
of lading issued thereunder. Appropriate amendment must be made to older C/P forms to
ensure that the latest rules are referred to.
• New Jason: Covers owners rights in respect of American law in the case of collision at sea.
• Ice Clause: Depending on the trade involved, it may be necessary for an ice clause to be
included in the charterparty. The object of such a clause is to prevent the owner and his
master being left with no alternative but to attempt to proceed to a contractual destination
irrespective of ice conditions, and to avoid damages that may be caused to the ship and
cargo as a result.
• P&I Bunkering Clause: Sets out the owner’s right to deviate for bunkers during the
contractual voyage.
• Oil Pollution: This is of particular importance in modern tanker charterparties, for which
anti-pollution measures form an important part.
Following is a very generalized analysis of the most common elements and clauses of time
charterparties:
Details of ship and of contracting parties
• Place where contract made – same general comments as for voyage charter.
• Names & addresses of contracting parties – same general comments as for voyage
charter.
• Description of ship: This description is generally more important in the time charter than
in the voyage charter, and is more precise, including details such as speed(s) and
consumption(s). Because time charterers do not always know beforehand what cargo they
will carry with the ship or what ports and areas the ship will visit, they cannot accept only a
few main details about the ship (as they can in a voyage charter). Often, the charterer will
ask for a copy of the ship’s General Arrangement plan.
• Period of time charter: The period of the time-charter should be entered, together with a
margin on either side of the formal period. As it is difficult to determine beforehand when
the ship will be redelivered, wording of this section will contain a certain amount of
flexibility through the use of the word “about.”
• Intended trade: Refers to the areas of the world in which the vessel is to be employed (e.g.
“worldwide but always within Institute Warranty Limits”), and also lists those countries
and parts of the world specifically excluded from the permissible trading area.
• Cargoes: Besides the trading limits, the most important constraint on the time charterer’s
freedom to use and direct the ship is the restriction on the kinds of cargoes that can be
carried on the ship In some cases, the type of vessel involved will determine permissible
cargo types. However, in cases of ships that are intended and suitable for many kinds of
cargo, the time charterparty will usually describe permissible cargo as “lawful merchandise
non-injurious to the vessel,” or similar. Note the difference compared with the voyage
charterparty where the description and specification of the cargo have a more central
position.
• Owners provisions: Specifies that owners are to provide crew, stores, maintenance of the
vessel, etc.
• Charterers’s Provisions: Specifies that “whilst on hire,” charterers are to provide voyage
instructions; bunkers, pay for ports expenses, etc.
• Delivery and redelivery: Notices to be given by each party for vessel’s delivery onto and
redelivery off of time charter; place(s) of delivery / redelivery; on and off-hire surveys; and
delivery laydays / cancelling.
• Bunkers: It is common practice for time charterers to take over and pay for bunkers
remaining on board upon delivery, and for owners to do the same upon redelivery, the
quantities and prices of fuel, diesel, and / or gas being negotiated when fixing. The grade of
bunkers supplied to the vessel is also of considerable importance and usually the subject of a
suitable charterparty clause or phrase.
• Hire and financial matters: Amount of hire that is paybable, when, where and to whom (as
well as arrangements for other payments less deductions for items such as port expenses
and cash for the master). Basic rule is that hire shall be paid from the moment when the ship
is delivered to the charterers until she is again redelivered to the owners at the termination
of the charter period. Under some circumstances – mainly defined in off-hire clauses (see
below) – time charterers are relieved from their obligation to pay hire to the owners.
• Off-hire: Provisions leading to off-hire situation (e.g. poor performance; strike of crew;
drydocking, etc.) and appropriate deductions from hire.
• Performance: If, without reasonable cause, a vessel fails to perform to the description
entered in her time charter, an off-hire claim for poor performance is likely to result
(Although tanker time charters normally carry a provision that performance to a standard
better than expected will result in a reward for the owner, there is no such provision for dry-
cargo charters).
• Vessel’s maintenance: Often expressly indicates that the owners will deliver the vessel to
the charterers in a “seaworthy” condition, and that the vessel be kept in the same good order
and condition during the charter period (although even without express agreement, the
owner still has a duty with respect to seaworthiness and maintenance).
• Cargo claims: Agreement as to which of the contracting parties is responsible for cargo
claims.
• Masters / Officers: Appointment of ship’s personnel by the owner. The master is the
owner’s legal servant but is to act under orders of charterers as far as ship’s employment is
concerned.
• Pollution: Rights and responsibilities of parties with respect to clean up costs and fines
pursuant to pollution incidents; list of certificates required to be on board a time chartered
ship.
• Exceptions: Rights of contracting parties to cancel the charterparty in case of events making
it virtually impossible to perform (e.g. force majeure, acts of god, etc.).
• Bills of lading: Specifies manner in which bills of lading are to be drawn up, the signing of
same, and protection for the owner in case of paper inconsistencies.
• War: This clause has same objective as it does in a voyage charterparty – to provide the
shipowner with the right to refuse to let his ship and her crew enter or remain within an
area which has become dangerous due to war-like activity – it is important to use a war
clause designed for time-charterparties rather than using one designed for voyage
charterparties.