Basics of Ship Chartering

Shipping Business Entity

Except for cruise liners, shipping serves as a means to an end, not the end itself; it’s what economists call a derived demand. Ships primarily facilitate trade between buyers and sellers of goods. Most Shipbrokers studying this course will likely be involved in providing services to ships or cargoes. However, understanding the basic elements of business operation is crucial for anyone aiming to succeed or even excel in the shipping industry.

The structure of a business, whether large or small, involves similar elements. In larger organizations, these may manifest as separate departments, while in smaller firms, they might be various tasks handled by a few employees.

SOLE TRADER

A sole trader is an individual who starts and runs a business alone, providing the capital, working alone or with employees, and earning profits as his reward. Setting up as a sole trader doesn’t usually require formal procedures, though the trading name might need to be registered, and some operations may require a license.

The sole trader enjoys complete independence, capable of making and implementing decisions swiftly. The advantages of personal supervision, direct customer interaction, and low overhead costs make the sole trader model particularly effective in specialized shipping sectors. It’s not uncommon to find Marine Surveyors, Consultants, and even small port agencies and ship brokerage firms operating as sole traders. The sole trader is accountable only to himself and is only required to disclose certain information for taxation. However, this form of business ownership isn’t without drawbacks, notably the unlimited liability. This means the sole trader is personally liable for all business debts, risking all personal assets in cases of insolvency.

Managing work-life balance can also be challenging, as the business may suffer during holidays or if the sole trader falls ill. Expansion can be another hurdle for the sole trader, as capital for growth must be sourced independently. While borrowing from banks or private lenders, or partnering up are options, these can diminish independence and might prompt consideration of transforming into a different business structure to better seize opportunities.

PARTNERSHIP

An option for a sole trader seeking expansion is to form a partnership by bringing in one or more business partners. This arrangement, commonly referred to as a firm, is co-owned by the partners. It benefits from increased capital, facilitating business growth. The original owner gains partners who can share in management responsibilities and possibly contribute additional expertise and specialization opportunities, while maintaining the business’s private status. However, partners are still fully accountable for the business’s debts, as was the sole trader, even to the extent of jeopardizing their essential personal assets. Moreover, all business decisions require the unanimous consent of all partners, which can be challenging. Disagreements might lead to the dissolution of the partnership, and the death of a partner could jeopardize the firm’s continuity if the deceased partner’s interest needs to be liquidated to settle his estate.

Typically, partnerships remain small business entities and are well-suited for the types of activities associated with Sole Traders in the shipping industry. Nevertheless, there are exceptions, such as in the UK and other countries where law firms must operate under unlimited liability conditions, regardless of their size. Some jurisdictions offer a “Limited Partnership” model, which safeguards passive partners (those contributing capital without direct involvement in management) by limiting their liability to their investment in the firm.

LIMITED LIABILITY COMPANY (LLC)

A key distinction between smaller business forms and their larger equivalents is the principle of limited liability. In the United Kingdom, this type of company is denoted by the suffixes Ltd (Limited Company) or plc (Public Limited Company) appended to the company’s name. While Company Law varies globally, Private Limited Companies and Public Limited Companies are generally recognizable worldwide.

Limited liability means that a company’s shareholders are only financially liable up to the amount of their shares. Thus, if the company fails, shareholders might lose their investment value but aren’t obligated to cover the company’s remaining debts. (An exception occurs if shareholders haven’t fully paid for their shares; in such cases, they must pay the remaining amount to the liquidator upon insolvency). Creditors of a bankrupt company typically recover only a fraction of what is owed.

Despite this, running a limited liability company is not a free pass for directors to misuse funds without accountability. Every country enacts laws to protect shareholders, especially minority ones, from potential abuses by the majority. Additionally, limited companies are required to have their financial statements thoroughly audited by independent accountants. Once audited, a Profit and Loss Account detailing annual income and expenses, and a Balance Sheet showing assets and liabilities at year-end, must be shared with all shareholders and filed with a regulatory body, such as the UK’s Registrar of Companies. For a small fee, detailed information and financial records of any limited company can be accessed. However, as the saying goes, while annual accounts may reveal some details, they can obscure critical information, highlighting the importance of caution when engaging with limited liability companies, which can falter regardless of size.

Ownership in this context refers to the individuals who provide the capital necessary to operate the company. This capital is expected to yield returns, or dividends, and ideally appreciate in value over time, matching or exceeding inflation rates.

Company capital is categorized into two types. The first is invested in long-term fixed assets essential for operation, such as ships for Shipowners or office equipment for Shipbrokers. The second type, working capital, covers ongoing expenses like rent, wages, and consumables like fuel for ships or stationery for brokers, often paid out before any profits are realized.

It’s important to note that theoretically, a partnership dissolves when a partner dies because it’s essentially an agreement to collaborate among two or more individuals. However, most partnership agreements provide for the continuation of the business even after a partner’s death or retirement. One restriction within a partnership is that a partner cannot sell their share of the business to someone else.

This contrasts sharply with a limited company, where shareholders can generally sell all or part of their shares to another party. In a limited company, a major shareholder might not necessarily serve on the board of directors, though they may influence board appointments. Additionally, English law does not require board members to be shareholders.

The term ‘theoretically’ was used earlier because in many private companies, the founders often prefer to control who joins their venture. This is safeguarded by specific provisions in the company’s founding documents (known in the UK as the Memorandum of Association and Articles of Association), which might include Pre-emption Clauses. These clauses outline the process to be followed if a shareholder wants to sell their shares or if a shareholder passes away, typically requiring that shares first be offered to existing shareholders and specifying how their value should be calculated.

Pre-emption clauses are common in Private Companies but rare in Public Limited Companies (PLC), where there are generally no restrictions on who may hold shares. However, in many countries, acquiring a significant percentage of a Public Limited Company (PLC) necessitates public disclosure of the acquisition.

What then drives a small group of businessmen to choose between forming a partnership or establishing a limited liability company? The appeal of limiting personal financial risk is strong. Indeed, it’s possible to start a limited company with just two £1 shares. The initial working capital might be covered by loans, intended to be repaid with incoming profits. However, such a company, with a minimal ‘asset base,’ might struggle to attract credit.

When seeking loans, banks typically require personal guarantees from directors, placing them in a similar position to partners in a partnership. This may lead some to opt for the simplicity of a partnership over incorporation, especially if it results in lower income or corporate tax liabilities.

HORIZONTAL INTEGRATION Vs VERTICAL INTEGRATION

Conglomerates, composed of various businesses across multiple sectors, typically evolve from smaller, single-activity entities. These conglomerates may expand by acquiring other companies over time for various reasons; these could include profitable private limited companies that needed more resources to grow, or struggling entities that could be purchased inexpensively and revitalized under adept management.

This expansion strategy exemplifies Horizontal Integration. The conglomerate’s varied investments across different industries, countries, and continents provide a wide operational base, buffering the group against risks in any single market.

The benefits of such a diverse portfolio include reduced risk and the potential for stable dividends and capital appreciation, making these conglomerates appealing to investors, especially when specific market segments face downturns.

Conversely, the concept of Vertical Integration represents the antithesis of diversity. It involves controlling all aspects of a supply chain within a particular industry. For example, a vertically integrated group might own forest land, operate sawmills, manufacture furniture, and run a chain of retail stores selling the furniture. Major international oil companies also demonstrate vertical integration, although their operations are considerably more intricate.

SHIPPING COMPANY ORGANIZATION AND MANAGEMENT

In the organizational structure of a ‘shipping services’ company, there are not only operational departments (such as agency and chartering) but also essential service departments. Even in a small firm with just a couple of partners and three staff members, these functions are crucial, though in such smaller settings, the tasks might be handled directly by the partners or assigned as part of staff duties due to the lack of separate departments.

The Secretariat is a critical component of any company, encapsulating vital roles including the salaries department. In many countries, the Company Secretary is the only company position recognized by law, tasked with ensuring compliance with legal standards for limited companies. Although typically subordinate to the Directors, the Secretary holds significant legal responsibility since, theoretically, directors can be dismissed at the Annual General Meeting (AGM) by shareholders. Thus, a more permanent figure like the Secretary serves as the main contact for legal authorities, including tax collectors and the registrar of companies.

Within the shipping company, the secretariat also includes the human resources or personnel department, whose importance cannot be overstated. Handling employment matters affects individuals’ careers significantly, impacting a major aspect of their lives. Moreover, nearly every country has employment laws, such as the UK’s Employment Protection Acts and laws against Sexual and Racial Discrimination, making the handling of these matters not only a moral responsibility but a legal one.

The concept of Constructive Dismissal is one such legal nuance that prevents employers from significantly altering an employee’s work conditions without consent. For example, switching staff from an overtime scheme to shift work typically requires their agreement.

Whether large or small, a business must prioritize how it manages and develops its staff. As most students in this field will work in service companies where human resources are the main asset, managing personnel matters is crucial for both internal professionalism and external success.

The Accounts Department, another critical non-operational section, does more than just track finances. Proper financial management is vital as it greatly influences a company’s profitability. Many business failures are not just due to poor income over expenditure but also due to inadequate cash-flow control. For instance, a company might face challenges if it has to pay suppliers within a month while customers take three months to settle their invoices.

Credit Control is essential, particularly in regions with high interest rates. The role of a credit controller extends beyond simple debt collection; it includes assessing creditworthiness, setting credit limits and terms, and ideally preventing debt issues before they necessitate legal action.

Managing cash flow also involves careful debit-control. It’s important to maintain a good payment reputation without missing out on early payment discounts offered by suppliers, which are integral to effective financial management.

At one extreme, retaining large amounts of money for extended periods in low-interest accounts or, even less productively, in a current account, is not a sound business practice. An effective company typically operates with a modest bank overdraft, using money as a resource. Banks effectively ‘sell’ money wholesale, and your business retails it through the services or products you provide.

Your business should operate efficiently, using its own capital and this modest overdraft to generate a Return on Capital Employed significantly higher than the bank’s interest rate. For instance, in an environment where bank rates are around 12%, a conglomerate might expect its subsidiaries to aim for at least a 25% return on capital for investments requiring significant capital expenditure.

MANAGEMENT ACCOUNTS

Earlier, we noted that the role of an Accounts Department extends beyond just tracking inflows and outflows of money, although this basic function is crucial. Besides maintaining accounts to satisfy auditors, another key function is to produce ‘Management Accounts’. These accounts vary in complexity depending on the size of the business but consistently aim to inform operational staff about the profitability of their efforts. It may seem obvious that activities like fixing ships in a chartering department and earning brokerage should be profitable, but fixed costs like office rents and salaries persist regardless of earnings. Modern conveniences like making international calls might seem inconsequential, but these costs add up and can even exceed commission earnings on some transactions.

Furthermore, overheads need to be paid on schedule, irrespective of when income from brokerages, fees, and commissions is received. Therefore, the financial reports from the Accounts Department provide not only profitability insights but also a snapshot of the cash-flow situation.

The concept of ‘economy of scale’ doesn’t automatically apply. Consider a port agency where the staff is stretched thin, covering for holidays or sickness with overtime that can’t be sustained indefinitely. Pursuing more business in this scenario doesn’t necessarily translate to more profit if it means hiring additional staff without the extra income covering the new hire’s costs.

Therefore, managers need comprehensive accounting data and must apply it judiciously. The head of an agency department must weigh whether to accept new business or if they believe enough in their marketing capabilities to generate sufficient additional work to justify new hires.

For those involved in liner trade as Agents, consider the costs of adding another freight salesman. A common approach is to double the salary and add half to estimate the total cost of employment. Consider the vehicle costs and how much liner commission should go towards sales efforts.

If you’re still following, estimate how much additional gross freight the new salesman needs to generate to be profitable, which might be best expressed in fractions of a million.

Conversely, Marginal Costing, which can be highly profitable when used wisely, involves leveraging spare capacity in facilities, equipment, and staff time. Introducing new business without increasing fixed overheads means that after direct costs are covered, everything else is profit. This positions companies with excess capacity to offer competitive pricing advantageously.

However, the principle of ‘prudence’ must guide decisions, as aggressively pursuing marginal costing opportunities without careful consideration of their impact on overheads can lead to losses. While supermarkets might use ‘loss leaders’ to attract customers, such tactics are less effective in shipping. Some business is maintained merely for its contribution to covering overheads, allowing other activities to generate profit.

If you are the decision-maker, ensure business is retained for its genuine financial contribution to fixed costs and not out of sentimental reasons, such as the notion that an agent never dismisses a principal.

Management Accounting involves much more than just tracking figures; for instance, Budgetary Control is a key component. When I first learned that my department would be subject to Budgetary Control, I was skeptical, despite the Financial Director’s reassurance that “Budgetary Control is not an esoteric exercise. It might seem challenging to generate meaningful financial projections in a ship sale and purchase department, where the sale or near-sale of a large ship can significantly impact commission income. However, many of the fixed costs in such a department can be accurately forecasted. With experience, one can also make a reasonable prediction of the more unpredictable elements of both expenses and income. While actual results may vary significantly, having a budget provides a baseline for identifying where discrepancies occur. If these variances stem solely from market fluctuations, that’s one thing; however, if they arise from controllable factors, then corrective actions can and should be implemented.

In a department like Liner Agency, budgeting can be more precise, and the costs of adding an additional freight canvasser, as mentioned earlier in this lesson, should be relatively straightforward to calculate.

STATUTORY ACCOUNTS

If preparing your company’s end-of-year accounts falls within your responsibilities and you’re qualified, you might choose to skip this part. However, for many who delegate this task to professional accountants, it’s still crucial to understand the insights that can be drawn from a limited company’s published accounts.

Despite the old cynical saying that ‘what is revealed is interesting but what is concealed is vital,’ statutory accounts—those required by the government to be audited and made public—can reveal much about a company’s size and health. These accounts must be truthful by law, and knowing what to look for can be highly informative.

The format of published accounts may vary from country to country, but the essential elements are similar worldwide. Typically, they include a record of the year’s trading and a statement of the company’s assets. The record is usually presented as a Profit and Loss Account, though it might also be called a Trading Account, Income and Expenditure Account, or something similar.

Such an account will display the total Income, often termed ‘turnover,’ which might be detailed further to differentiate income from trading versus other sources like investment income or profit from asset sales. It will then list trading expenses and subtract these from the income to show a trading profit or loss—though many companies just display the trading profit. Interest paid on bank loans or other borrowings is usually listed separately from trading expenses. The figure before tax is often used for comparisons between different periods or companies.

After showing the pre-tax profit, the accounts must list the taxes—referred to as corporation tax, profit tax, income tax, or similar—deducted to arrive at the net profit for the year.

Theoretically, this net profit could be distributed among the shareholders, but it is more common for a portion of the profit to be retained. The Profit & Loss Account will show the retained profit, any interim dividends paid during the year, and the proposed final dividend, which shareholders will approve or reject at the Annual General Meeting (AGM).

It’s important to note that there are different types of shares within a company. While we’ve mainly discussed ordinary shares, there are also preference shares, which have a prior claim on profits for dividends. Preference shares typically do not carry voting rights, unlike ordinary shares. In challenging financial times, a company may forego dividends for ordinary shareholders but still be obligated to pay dividends to preference shareholders.

Another investment method is through debentures, which usually have a fixed interest rate and are often secured by the company’s assets. Interest on debentures is paid before any dividends are considered.

Regarding retained profits, companies often keep some back to fund expansion or new activities rather than seeking additional loans. This reinvestment of profits is commonly referred to as ‘ploughing back the profits’.

Companies often set aside funds for infrequent expenses. For example, a shipowner might allocate money in a reserve for the mandatory four-year ship survey. Similarly, even a small firm may need to reserve funds for building redecoration if stipulated in its lease. A crucial reserve for companies that extend credit is the Bad Debt Reserve, reflecting the unfortunate reality that even stable businesses can suddenly falter and leave debts unpaid. The amount reserved is typically based on past experience and anticipated risk.

In a particularly profitable year, it’s wise for a company to allocate some profits to a general reserve. This reserve can be utilized for unexpected opportunities or to help the company weather a temporary downturn in trade, potentially allowing for dividend payments even in less profitable years. This strategy might explain why some companies distribute more in dividends than their annual profits.

Statutory Accounts usually do not require detailed disclosure beyond what has been discussed, although companies often include explanatory notes detailing specific account items. Current UK Company Law mandates that certain disclosures, such as salaries for higher-paid directors or employees, be included in these notes.

The Profit and Loss Account documents the company’s trading activities over the past year and typically includes the phrase “For the year ended…” It is published alongside the Balance Sheet, which, under the title “As at…”, provides a snapshot of the company’s assets and liabilities on a specific day.

Assets are categorized into two types: Fixed Assets and Current Assets. Fixed Assets are further divided into tangible and intangible assets. Tangible Fixed Assets, like ships for shipowners or buildings for manufacturers, include items expected to last and potentially be sold for cash if necessary. Depreciation accounts for the loss in value of these assets over time, calculated as a percentage each year, to reflect their declining worth due to usage or market conditions.

For example, cars might depreciate by 20% annually over a five-year period, while ships, previously expected to last 20 years, would depreciate by 5% per year. The depreciation rate is agreed upon with Auditors to ensure that the company’s valuation is neither inflated nor understated. The depreciation expense is then recorded in the Profit and Loss Account.

Some Tangible Assets, like land, may appreciate in value, requiring periodic revaluation to accurately reflect their market worth. This poses a challenge for accountants who must balance asset valuation against performance metrics like return on capital employed, avoiding overvaluation that may understate performance or undervaluation that could attract takeover bids.

Investments represent another type of fixed asset. Money reserved for various purposes is often invested to keep it productive. For conglomerates, investments may include the shares of subsidiary companies.

Current Assets differ from Fixed Assets and are typically classified under three categories, including cash held in company bank accounts.

Another category is Inventory, which is tangible yet not fixed, as its purpose is to be utilized in manufacturing processes. Inventory can consist of raw materials or work in progress, and managing it requires a balance. While the inventory holds a specific value to the operational company, should the company cease trading, it’s unlikely that the inventory could be sold for the same amount.

At the start of this section, we noted that the Balance Sheet includes both assets and liabilities—what the company owns and owes. Under Current Assets, we record Debtors, representing amounts owed to the company.

The company’s Chief Accountant or Financial Director will assess outstanding debts and determine the likely unrecoverable amounts, making provisions for these in a “Bad Debts” reserve. The anticipated collectible debts contribute to the company’s value.

Liabilities are what the company owes and are categorized primarily under two headings. The first is Debts to Lenders, often referred to as Loan Capital. Smaller companies might prefer borrowing over issuing equity to avoid diluting ownership. Larger companies might borrow from banks instead of raising capital through public markets. However, it’s crucial to remember that lenders, particularly banks, usually require security for their loans and will claim their dues first in case of bankruptcy.

The relationship between debt and equity, known as ‘gearing,’ is a critical financial metric. A highly geared company (with more debt relative to equity) warrants careful analysis. High gearing isn’t inherently negative, as lenders generally believe in the company’s ability to return their money, but it does place them at an advantage if things go awry.

Under Current Liabilities, we also track what the company owes to Creditors. Analyzing the relationship between Debtors and Creditors provides insight into the company’s Cash Flow management. The term Cash Flow has become crucial in financial discussions, emphasizing the necessity of having funds readily available for expenses like salaries. A mismatch in payment timings to and from the company can quickly lead to a cash shortage, threatening the company’s operation regardless of its profitability on paper.

Assessing Cash Flow from limited public account data is challenging. Generally, you’d want to see Current Assets exceed Current Liabilities. A good sign within those details is if Creditors slightly outnumber Debtors.

Companies might also set aside provisions for Contingent Liabilities, such as potential losses from ongoing legal disputes. Even if a company is confident in a positive outcome, auditors typically require a reserve for any adverse decisions.

This brings us to why this document is called a Balance Sheet. It essentially aims to balance total Assets against Current Liabilities. But what about other liabilities? The other side of the Balance Sheet includes Shareholder’s Funds, which represent the equity invested by shareholders—the owners of the company. This balance between what is owned and owed completes the financial snapshot provided by the Balance Sheet.

 

QUALITY MANAGEMENT

 

 

CHARTERING MARKETS

It’s crucial for professionals in the shipping industry to frequently remind themselves that the demand for shipping is a derived demand.

When international traders—merchants, buyers, and sellers—decrease their business activities, the demand for shipping naturally declines. This correlation has been starkly evident in recent years, with trade recessions significantly impacting global trade and exacerbating the effects on the shipping industry, particularly during periods of merchant shipping oversupply.

As we delve into the mechanisms of international trade, it is essential at this stage to focus on general principles that directly affect our six ‘disciplines’.

A key point for agents of shipowners is understanding and empathizing with merchants’ challenges. This awareness should not be seen as disloyalty to one’s principal. Recognizing the strengths and weaknesses of counterparts across the negotiating table enables agents to identify futile efforts and opportunities where advantages can be more readily secured for their principals.

For those whose principal is a merchant, such as a charterer, having a deep understanding of how their business operates is indispensable.

Dry Cargo Charterers

In the dry cargo markets, most contracts involve the transport of bulk raw materials, though there are exceptions which we will explore later.

The traditional contract for transporting these materials is the charter party. It’s worth noting the term Contract of Carriage is commonly used, though you might encounter the term Contract of Affreightment (COA) in legal texts, which some argue is a slightly more precise description of transporting goods by sea. However, within chartering circles, Contract of Affreightment (COA) typically refers to a specific type of contract. To avoid confusion, we will use Contract of Carriage throughout these lessons.

A chartering contract is a prime example of a transaction completely driven by market forces. These contracts are negotiated in a free market environment, influenced solely by supply and demand. The relative bargaining power of each party, the shipowner and the charterer, depends on the current market conditions, allowing them to negotiate terms without statutory restrictions.

Typically, a Standard Charter Party Form is used, tailored to the specific trade. However, this standard form is often modified with additional clauses and deletions, reflecting the nuances of the agreement. These amendments, along with the rate, are where intense negotiations may occur, depending on the market’s condition.

CHARTER PARTY

Originally, most Standard Charter Party Forms were introduced by Charterers for two main reasons. Firstly, they required a Charter Party that aligned with their sales contracts for various commodities. Secondly, Charterers often had the upper hand in terms of negotiating power because their static nature allowed them to easily collaborate, even with competitors, to develop terms that suited their collective needs. This leverage often gave them an advantage over individual ships, and in some regions, certain Charterers could even approach a monopoly status.

However, the merchants’ dominance was short-lived. National organizations like the United Kingdom Chamber of Shipping and international bodies such as the Baltic and International Maritime Council (BIMCO) provided a platform for Shipowners to counteract the more biased Charterers’ forms. This collaboration led to mutual agreements that adjusted the Charterers’ terms enough for Shipowners’ groups to endorse them. Often, it was the Shipowners’ groups that eventually published these Charter Party Forms for industry use. For instance, any Charter Party form with a code name ending in ‘CON’ (for CONtract) likely originated from BIMCO, known for their effective and influential documentary committee.

Even in instances where the Charterers’ forms were not embraced by the Shipowners’ organizations, the drafters were prudent enough to avoid creating forms overly biased towards Charterers.

The existence of these Standard Charter Party Forms, recognized globally, significantly streamlines negotiations. Parties can refer to an established con charter, saving considerable time. The clauses in these Standard Charter Party Forms have generally withstood legal scrutiny, ensuring clarity and the avoidance of ambiguous language.

Unfortunately, the attempt to create a universally applicable document often falls short of meeting everyone’s specific needs, leading to the loss of some Standard Charter Party Forms’ convenience due to the necessity for Amendments and/or Additional Typed Clauses by one party or another to tailor the contract to their specific requirements. In certain sectors, the Standard Charter Party Form has become merely a skeleton, supplemented by numerous Additional Clauses (Rider Clauses).

What is the difference between Bareboat Charter and Demise Charter?

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Anatomy of Charter Parties

It’s vital for all shipping professionals and Shipbrokers to have a broad understanding of common elements found in all Chartering Contracts.

Voyage Charters: GENCON (2022) represents the latest update in a series of GENCON charter parties that date back to the 1920s. Like many recent revisions, this version uses a “box form” layout, where necessary details for each fixture are neatly organized into boxes on the front page, simplifying the completion process and allowing key information to be quickly reviewed.

In the top right corner of each box, the printed clauses are referenced and detailed in Part II, numbered from 1 to 19.

It’s important to remember that all Charter Parties result from negotiations between Shipowners and Charterers, often facilitated by Shipbrokers. These negotiations might necessitate amendments to the printed clauses. Additionally, since the GENCON is intended for general trades, both parties may require specific clauses to be added to the standard form to meet their particular needs.

Typically, the details to be filled in the boxes of Part I are all negotiable, discussed during the exchange of offers and counter-offers. While the freight rate often dominates these discussions, the dates and allowed time for cargo operations can also be pivotal.

Examining GENCON Charter Party Form (1994), after the Shipbroker’s details, the document records the date and location where the chartering agreement, or Fixture, was established. Following this are fields for the names of the parties involved and the ship, including its Registered Tonnages, Deadweight (DWT), and any relevant features like cubic capacity or hatch sizes.

Boxes 8 and 9 address the ship’s readiness for the charter, acknowledging that ships do not operate with the predictability of trains. Various factors might alter the ship’s availability for loading. If the Shipowner commits to a readiness date in Box 9 but then accepts intervening business that delays the ship, this could be considered misrepresentation, potentially allowing the Charterer to cancel the contract, with provisions for such cancellation outlined in Box 21.

Boxes 10, 11, and 12 detail the loading and discharging ports and the type and quantity of cargo. Clause 1, referenced in these boxes, mentions the stipulation “. or so near thereto as she may safely get and lie Always Afloat (AA)“, accommodating for situations where certain berths might not allow ships to remain afloat at low tide, often termed as NAABSA (Not Always Afloat But Safe Aground) berths. If a ship is fixed for such a berth, explicit agreement in the charter party is necessary; otherwise, Shipowners are justified in refusing such arrangements.

Regarding cargo, Charterers must provide detailed specifications, and if a “full and complete cargo” is stipulated, the Ship Master and Shipowners can demand enough cargo to meet the ship’s load-line or fill its capacity. Failure to meet this demand incurs Dead Freight charges on the unshipped volume.

GENCON Charter Party Form (1994) Boxes 13 and 14 outline the freight terms—whether per tonne, lump-sum, or another basis—and the specifics of payment. The associated Clause 4 requires careful consideration to align with these freight details.

A critical aspect of freight negotiations concerns who bears the costs and risks of loading and unloading the cargo. GENCON (1994) assumes a scenario where shippers cover loading costs and receivers handle unloading, known as FIO Terms (Free In and Out), indicating no expense to the Shipowners for these operations. In trades where it’s customary for the ship to bear some cargo handling costs, modifications to Clause 5 are necessary. If the ship provides its own cargo handling gear, its use by Charterers for loading or unloading must be explicitly agreed upon, noted in box 15. Additionally, Shipowners expect Charterers to address any stevedore damage identified by the Ship Master during cargo operations.

The GENCON Charter Party Form (1994), particularly in Clause 6, Boxes 16, 17, and 18, introduces a term unique to chartering— LAYTIME. This term, whose precise historical definition may be obscure, refers to the allotted time for loading and discharging operations.

This clause might appear overly detailed to those new to this area, as it covers when a ship is prepared to load or discharge and the duration allowed for these operations. Maritime law books dedicate extensive sections to disputes over Time Counting and the definition of an Arrived Ship, which have significantly benefitted maritime lawyers and are likely to continue to do so.

Over the years, the wording of the GENCON Charter Party Form (1994) Clause has been meticulously refined through various legal and commercial disputes to sidestep common pitfalls. Nevertheless, there will always be potential for further disagreement.

The penalties linked to exceeding the specified laytime are critical because a ship generates revenue only when it is moving, not while idle in port. Consequently, a Shipowner is keen to minimize the time spent on loading and discharging. If the Charterers exceed this duration, the Shipowner seeks compensation through a Demurrage Rate, which is the fee for each day or part of a day beyond the agreed time, detailed in Box 20 and regulated by Clause 7.

In certain dry cargo trades, the opposite may also occur where Charterers can receive a bonus, termed Despatch Money, for completing loading or discharging quicker than scheduled. If such an arrangement is made, it must be specifically noted in a typed clause in the GENCON Charter Party Form (1994).

Clauses 5, 6, and 7 of the GENCON Charter Party Form (1994) address this contentious aspect of port time. Within these clauses, there are several terms that may be unfamiliar:

• Trimming relates to leveling out bulk cargoes like coal to optimize space usage and prevent cargo shifts during the voyage.
• Dunnage involves using timber to prevent metal-to-metal contact between the cargo and the ship’s hold or between items like steel plates, ensuring loose items do not move during transit.
• Tallying refers to verifying the count of packages as they are loaded or discharged.
• Stevedores, while technically denoting those who work directly on the ship during loading or discharging, is often used more broadly to describe all personnel involved in these processes.

Do not worry if the Both to Blame Collision Clause (Clause 11) seems complex and difficult to grasp. It is generally not a concern for Chartering Shipbrokers directly and is acknowledged as an essential part of a charter party, though it can be baffling for those not deeply versed in maritime law.

To outline, a Voyage Charter typically includes the following fundamental elements:

• Date of Charter Party Agreement
• Names of the involved parties
• Name and details of the ship
• Port of loading
• Type and amount of cargo
• Port of discharge
• Laydays and Cancelling dates
• Freight Rate and payment method
• Costs of loading and unloading
• Speed of loading and unloading operations (Laytime)
• Demurrage Rates
• Brokerage Fees (Commissions)

 

Time Charters

Historically, before the widespread adoption of containerization, liner companies frequently utilized Time Charters (TC) to expand their shipping capabilities during periods when demand in the general cargo market surpassed their available fleet. During this era, the Baltime Time Charter Party, endorsed by BIMCO (Baltic and International Maritime Council), was the favored contract. However, this market segment has evolved significantly, and today, the most commonly used time charter form is likely the New York Produce Exchange Form, often abbreviated as NYPE or Produce 46. The designation ’46’ highlights that this form has remained unchanged since 1946, reflecting the chartering market’s conservative nature. Despite an attempt to modernize with the Asbatime Time Charter Party in 1981, created by the Association of Ship Brokers and Agents (USA) Inc., it hasn’t surpassed the NYPE (New York Produce Exchange Form) in usage. The Asbatime Time Charter Party, with its modern Clauses, serves as an excellent reference for understanding the fundamentals of a Time Charter (TC).

The purpose of a Time Charter (TC) is to transfer the commercial management of the ship to the Time Charterer while maintaining technical control under the Shipowner.

Shipbrokers familiar with Voyage Charters (VC) will find the transition to studying the Asbatime Time Charter Party’s provisions straightforward.

In this form, the parties’ names and the ship’s details start the document, similar to a Voyage Charter Party. However, an important addition is the ship’s Speed and Bunker consumption specifications. Given that fuel costs represent one of the Time Charterer’s most significant expenses after the Ship Hire Rate, this information is crucial.

The Time Charter (TC) duration is specified next. It can be outlined in months or years or defined for a Time Charter Trip (TCT) with designated start and end regions and an estimated duration.

Instead of a Loading Port, a Delivery location is specified, requiring the ship to be “tight, staunch, strong and in every way fit for the voyage.” While the commercial operation of the ship shifts to the Time Charterer, there are typically restrictions on carrying hazardous materials or visiting politically sensitive destinations, as stipulated by the Shipowner.

The contract delineates the responsibilities of the Shipowner and those that fall to the Time Charterer.

Notably, the arrangement concerning Bunker fuel is critical; it is essential for the Time Charterers to compensate for the fuel onboard at Delivery and for the Shipowners at Redelivery.

The crucial clause that outlines the daily rate of hire specifies it must be paid semi-monthly in advance. Somewhat unexpectedly, the place of redelivery is mentioned right between the rate of Ship Hire and the payment terms.

A stringent condition concerning the ship hire payment grants the Shipowner the authority to withdraw the ship from the time charterer’s service if payment is not made punctually. Historically, Shipowners have been known to reclaim their ships to capitalize on better market conditions when payments were delayed even briefly due to banking delays. Nowadays, it is common to include a technicality clause to provide the Time Charterer a brief grace period to rectify such issues.

Similar to a Voyage Charter (VC), there is a clause that specifies when time should start to count. This isn’t as contentious as in Voyage Chartering but is still crucial to allow the time charterer some hours to assume control. Likewise, there is a Laydays/Cancelling Clause like in a voyage charter.

A critical aspect to address is the suspension of ship hire payments whenever the ship is unavailable to the time charterer; this is covered under the Off-hire Clause. The most common reason for a ship to go off-hire is a temporary technical breakdown. However, on a long-term Time Charter (Period Time Charter), the ship may need to go off-hire for routine maintenance. The Off-hire Clause accounts for all such instances, including the revert of bunker consumption to the shipowner’s account while the ship is off-hire.

Other clauses range from actions to take in the event of a war to the time charterer’s right to paint his logo on the funnel, provided it is repainted at the Time Charter’s conclusion.

Careful reading of the entire document is advised, particularly those clauses detailing how the ship master must adhere to the time charterer’s instructions. It’s a delicate balance for a Ship Master on a Time Charter (TC) to fully cooperate with the time charterer while maintaining his primary allegiance to the Shipowners.

In summary, the fundamental components of a Time Charter (TC) include:

• Date
• Names of the involved parties
• Ship’s name and details
• Speed and Bunker Consumption
• Duration
• Delivery and redelivery locations
• Operational limitations
• Hire Rate
• Laydays/Cancelling Dates
• Commissions

 

Dry Cargo Chartering Dynamics

The practice of Dry Cargo Chartering is prevalent across many global cities, yet London maintains a prominent role, influenced by its strategic location. Historically, Shipbrokers and traders in London engaged with Eastern markets in the morning and the Americas in the afternoon—a practice that somewhat persists today. However, the advent of advanced communication technologies has transformed chartering from a face-to-face interaction at places like London’s Baltic Exchange to a digital exchange conducted via networked computer systems, internet-based platforms, and telephone, leveraging a network of contacts to stay market-informed.

The shift from personal interactions to digital communications is lamented by many in the Shipbroking community, as face-to-face dealings once fostered a strong sense of community and were governed by an ethical code through institutions like the Baltic Exchange. While its role as a physical marketplace has diminished, the ethical standards it upholds remain vital in the modern shipping industry.

The participants in the shipping markets of London and other global hubs include Charterers and their agents, Shipowners, and Shipbrokers, each playing versatile roles. At one end of the spectrum, some agents or Shipbrokers operate as part of a Charterer’s or Shipowner’s in-house team. For instance, major grain houses and some Greek shipowners with offices in London, New York, and Athens often manage their chartering operations internally.

Another role is that of the Exclusive Shipbroker, who manages all chartering activities for a particular Charterer or Shipowner. This arrangement allows the Shipbroker to gather extensive market intelligence, offering informed advice to their principal without conflicts of interest.

Conversely, some prefer the Competitive Shipbroker model, where several Shipbrokers vie to secure the best deals for their principal, aiming for market coverage and expediency. This method can be effective but is not without its downsides, as even ethical Shipbrokers may hesitate to suggest strategic market waits, fearing loss of business to competitors.

An additional figure in this landscape is the Intermediate Shipbroker, who facilitates transactions between principals from different nations, each represented by local agents. These Shipbrokers navigate a delicate balance, ensuring impartiality as they do not directly represent either negotiating party.

Each of these roles underscores the complex and dynamic nature of ship chartering, where strategic insights, ethical considerations, and market agility play critical roles in navigating the ever-evolving demands of global trade.

 

Tanker Market Dynamics

The tanker market is distinctively specialized, setting itself apart not only from dry cargo markets but also dividing into specific sectors within its own domain.

Crude Oil

Crude oil transportation is the most visible segment of the tanker market, often spotlighted during geopolitical tensions in the Middle East. This segment also garners attention due to environmental concerns when spills occur, releasing vast quantities of oil into marine ecosystems.

The economics of scale play a pivotal role in the operation of this market, with the size of vessels primarily constrained by their draft limitations. The historical closure of the Suez Canal, which prompted the circumnavigation via the Cape of Good Hope, demonstrated the feasibility of supersizing tankers, leading to the construction of Very Large Crude Carriers (VLCCs) and subsequently Ultra Large Crude Carriers (ULCCs). The drive towards ever larger vessels was eventually tempered by practical limitations on ship drafts, construction costs, and a downturn in oil demand which curbed the trend towards larger builds. Despite this, the largest vessels in operation today are still predominantly crude oil tankers.

Petroleum Products

The second primary market involves the transport of refined petroleum products. Economical distribution has often meant locating refineries closer to end consumers, which supports the use of larger crude carriers for long-haul routes, while refined products are distributed from coastal refineries. Political and economic factors have historically influenced refinery locations, with significant shifts in refinery capacity from regions like the Middle East to consumer-end locales to optimize distribution networks.

Refined petroleum products vary widely from highly volatile substances like gasoline to heavier products like fuel oils. These products are categorized into ‘clean’ and ‘dirty’ oils based on the level of handling care and tank cleanliness required, with clean oils demanding stringent control over tank contamination to avoid compromising the product quality.

Chemicals and Other Products

The chemical transport segment, a diverse and complex category, handles a myriad of sophisticated petrochemical products that require specialized handling due to their volatile or toxic properties. This necessitates specific tanker features like deck showers for immediate decontamination and specialized tank coatings to prevent cargo contamination.

Tankers for chemical transport often need to maintain pristine tank conditions as these chemicals are typically used directly in manufacturing without further refinement. Challenges include the compatibility of tank coatings with different chemicals, with stainless steel often being the material of choice due to its wide-ranging chemical resistance.

Specialized tankers for parcel delivery of mixed chemical cargoes feature intricate piping and pump systems to manage the diverse requirements of multiple consignments simultaneously.

Additionally, tankers are not limited to chemical products; they also transport other bulk liquids like vegetable oils, wines, and industrial chemicals like sulfuric acid and ammonia. The most specialized among tankers are those designed for transporting liquid natural gases (LNG) and liquid petroleum gases (LPG), which require advanced engineering to safely handle these highly volatile cargoes.

Thus, the tanker market is a highly specialized field within the shipping industry, characterized by its segmentation into crude and product tankers, each with unique operational requirements and challenges.

Tanker Charter Parties

The tanker sector utilizes various charter types including single voyage, consecutive voyage charters, time charters, and contracts of affreightment, with the latter often more prevalent in liquid cargo movements than in dry bulk.

Tankers operate under distinct charter forms developed by major oil corporations like Shell, BP, and Exxon for their proprietary use. Organizations like Intertanko (representing independent tanker owners) and ASBA (Association of Ship Brokers and Agents) also create standardized forms for broader industry application.

Examples include the Intertankvoy Charter Party from the International Tankers Owners Association and Shell’s Time Charter Form.

Tanker Charters share foundational elements with Dry Cargo Charters but tend to feature simpler clauses due to the isolated nature of oil installations from typical port complexes. This simplifies the Readiness to Load and Time Counting Clauses.

Oil loading and discharging, involving merely connecting hoses and starting pumps, is straightforward, typically requiring minimal labor and capable of operating round-the-clock. Consequently, Loading/Discharging Clauses in Tanker Charters may span only a few lines.

Despite tanker size variations, the total time allotted for loading and discharging is commonly 72 hours, supported by shipboard pumps sized to match. While Demurrage is a factor in Tanker Charters, Despatch Money is rare.

A notable distinction in Voyage Charters for tankers versus dry cargo is how freight rates are structured. In the oil industry, rate flexibility is crucial due to rapid shifts in production and refining demands, necessitating adaptable loading and discharging options even within a single charter.

To address this, a system of nominal rates covering every potential combination of loading and discharging ports for crude oil was developed post-World War II. Initially, separate scales in the USA and UK led to the unified Worldscale System, which adjusts freight rates through a fixed schedule plus or minus a market percentage.

For instance, a charter at “Worldscale 90” indicates an agreement to pay 90% of the Worldscale rate for the selected voyage regardless of the specific ports chosen.

Worldscale sets Standard Tanker Freight Rates (in US Dollars per tonne) for a “standard” tanker across virtually all potential crude oil voyages, updated regularly, with provisions for rate calculation in unlisted scenarios.

By analyzing reported crude oil fixtures, the fluctuations in tanker freight rates are observable, though predicting these shifts remains challenging.

Tanker Market Specialists

The Tanker Market is prominently influenced by the Oil Majors, those vast multinational entities known globally, not just for their extensive operations in oil extraction and processing, but also for their retail gasoline outlets. These Oil Majors, with annual budgets surpassing the GDP of many nations, historically maintained large fleets of tankers and numerous long-term Time Charters.

Recently, there has been a shift. These companies have downsized their fleets, increasingly relying on charters from Independent Tanker Owners instead of owning vessels directly.

It’s common for these companies to operate their own in-house chartering departments, leading to situations where typically only a single Shipbroker facilitates transactions between the Shipowner and the Charterer. A Shipbroker’s prowess lies in swiftly identifying available ships and promptly informing Charterers of emerging cargo opportunities, ensuring the right vessels are presented without delay.

Post the oil crises of the seventies, the market saw not just traditional charterers but also speculators and oil traders entering the fray as Charterers.

Furthermore, charterers in the chemical sectors are diverse, whereas those dealing with less common cargoes like gas, vegetable oils, and wine are comparatively limited.

The brokerage segment of this trade mirrors the specialization seen throughout the industry, with many brokers dedicating their entire careers to specific sectors such as crude oil, refined products, or chemicals, with some focusing exclusively on niches like vegetable oils.

 

SHIP SALE & PURCHASE

While chartering often involves the temporary engagement of a ship, purchasing a ship entails a significant capital expenditure, often amounting to millions in dollars, pounds, or other currencies.

There are three primary sectors in the Ship Sale and Purchase market:

1. New Buildings
2. Demolition (Scrapping)
3. Second-hand Tonnage

The most vibrant sector is undoubtedly the second-hand ships market, as it is unusual for a ship to remain with the same Shipowner from the shipyard to the scrapyard. Ships often have an operational life of about 20 years, though a depressed freight market can shorten this duration. During such a lifespan, a ship operator’s needs can change significantly.

Unlike the Chartering Markets, where participants are specialists in their specific areas, any Shipowner might at times be either a buyer or a seller. The motivation to sell could stem from the need to offload ships made redundant by shifts in trade patterns or to replace obsolete vessels with newer, more modern ones.

New Buildings

Purchasing a new ship ranks among the more complex and expensive transactions, potentially even more intricate than many multimillion-dollar deals. Unlike constructing an office building, where the total floor space is determined before construction begins, a ship undergoes several design stages before it’s seaworthy.

Even with today’s advanced computer technology, the exact dead-weight cargo capacity of a ship might not be known until near completion. While there won’t be substantial deviations, it’s important to note that a ship is influenced by both architecture and hydrodynamics—the science of how liquids exert forces.

Contracts for new ships can be signed at various design stages. Often, these agreements are based on general specifications with clauses accounting for adjustments that arise as detailed designs are developed. Shipbuilders may create wax models of the hull to test in mile-long tanks, potentially leading to significant design modifications based on performance insights. For instance, tank tests might suggest extending the ship’s length to enhance performance, beneficially increasing its cargo capacity if size isn’t a limiting factor.

In some scenarios, buyers might hire a naval architect to draft precise plans for the desired vessel, then shop these plans around to different shipyards to secure the best deal.

During the late 1950s, standard ship designs became popular, such as the ‘Freedom’ types and the successful SD14—a 14,000-ton vessel capable of 14 knots, constructed at the Austin & Pickersgill yard in Sunderland. While no modern ships carry a ‘brand’ name today, many shipyards offer ‘off-the-shelf’ designs, like those for ‘Panamax’ bulk carriers.

The primary benefit of opting for a standard design—or a vessel originally constructed for another owner—is not only the significant savings on design costs but also the advantage of pre-addressing many operational issues in previous builds.

Naval architecture remains a sophisticated field, yet the unpredictable forces of sea and weather cannot be fully replicated in lab conditions.

Recent discussions among ship science experts suggest that the benefits of increasing ship sizes have plateaued. Any further size enhancements would require extensive reinforcements to manage stress, potentially raising the cost per dead-weight ton rather than reducing it.

Demolition (Scrapping)

Eventually, the last option for a ship that is no longer economically viable to maintain in trading condition is to sell it for scrap.

However, age isn’t always the driving factor for scrapping, as demonstrated during the oil crises of the late 1970s and 1980s. Before the recession, there was a soaring demand for crude oil carriers, with every capable shipyard fully booked to build VLCCs or ULCCs. The subsequent recession drastically cut oil demand, leading some new tankers to move directly from the shipyard to lay-up berths. For many owners, without prospects for trade or funds for mothballing, scrapping was the only viable option.

Interestingly, while discussing scrapping, it’s not uncommon for a shipowner to scrap an obsolescent ship even if there are higher offers for it to continue trading. This seemingly paradoxical decision can be influenced by tax implications, where obtaining a high sale price for an aging ship may lead to unfavorable tax consequences.

Furthermore, selling an old ship to make room for a new addition can inadvertently increase market competition. This is because the Shipowner introduces an additional vessel into the market that may compete directly with their new ship. This is particularly problematic if the old ship is sold for trading purposes at a low capital cost, potentially enabling a competitor to operate it economically. Therefore, some Shipowners prefer scrapping as a way to manage competition and market dynamics effectively.

Second Hand Tonnage

The bulk of transactions in the ship sale and purchase market involves second-hand vessels, where Sale and Purchase brokers play a critical role.

Shipbrokers cultivate relationships with both potential buyers and sellers, as well as with other Shipbrokers. Similar to dry cargo chartering, it is common for both buyers and sellers to engage their respective Shipbrokers.

Sale & Purchase Shipbrokers regularly create and distribute circulars to Shipbrokers representing potential buyers. The efficacy of a Sale & Purchase Shipbroker’s office hinges on effectively maintaining a database of all ships currently on the market. A computerized system is ideal for this, offering versatility in data retrieval. Such a database allows for queries under various categories, like ships within specific DWT ranges or age brackets, equipped with particular features like double decks and cranes. The accuracy of this system is contingent on the quality of the data entered.

The process of selling a ship typically involves:

Once a buyer’s requirements are identified, ships matching these criteria are proposed, with details derived from owners or their brokers and supplemented by information from Lloyd’s Register or other Classification Societies like Lloyd’s Register (LR) or Bureau Veritas (BV).

Key details include the ship’s DWT, draft, year and place of build, dimensions, cargo handling capabilities, deck arrangements, and machinery details. For specialized ships, additional information such as passenger capacity or refrigeration machinery might be included.

For vessels intended for scrapping, details about light displacement and the material of propellers and spare shafts are crucial.

The sale particulars also outline the asking price and the location for inspection and delivery.

Regardless of the medium—electronic or paper—the Shipbrokers’ forms usually carry a disclaimer about the accuracy of the provided information.

If a buyer is interested, they may request cargo capacity and general arrangement plans to assess the ship’s suitability. These plans provide details about cargo accommodations and other specifications, which can vary by country.

It is not the Sale & Purchase Shipbrokers’ role to comment on the ship’s condition, except to disclose known issues. Typically, the buyer’s Technical Staff or Marine Surveyors will inspect the ship to assess its condition. Accessing the ship’s classification records is critical as they contain her entire operational history, including any damages and repairs, providing insights into potential weak spots that require close examination during physical inspections.

The timing of inspections relative to negotiations varies; sometimes they precede negotiations, or offers may be contingent upon a satisfactory inspection. It is rare for a ship to be dry-docked during initial inspections.

When it’s time to deliver the ship, the process involves executing and delivering a Bill of Sale, which, under English Law, must be executed under seal.

The Bill of Sale is exchanged for a letter releasing the deposit and a Banker’s Draft covering the balance of the price. If there is an additional payment for bunkers and stores, it is handled concurrently.

Delivery often coincides with insurance coverage transitions, which typically update at noon, making this the preferred time for handing over the ship.

Sale & Purchase Shipbrokers must ensure the new Shipowner has secured insurance and verify the transfer of crucial documents, either on board or ashore, including:

• Certificate of Registry
• Load Line Certificate
• Deratization Certificate
• Safety Construction Certificate
• Safety Radio Certificate
• Safety Equipment Certificate
• Classification Certificates
• Plans

Sometimes, the Sale & Purchase Shipbroker is tasked with registering the ship under the new Shipowner’s name. This requires presenting the following documents at the Registrar:

• Bill of Sale
• Declaration of Ownership
• Appointment of Managing Owner or Ship’s Husband
• Additionally, if the Buyer has not previously owned a ship:
  • Articles of Association
  • Certificates of Incorporation
  • Appointment of Public Officer

Often, the Bill of Sale must be notarized and stamped with the visa of the Buyer’s Consul.

Transactions involving ships sold for Demolition (Scrapping) are notably simpler, as they do not involve dry-docking, registration, or classification issues. However, arrangements for towage contracts or cargo voyages to the final port of destination may be necessary.

Financing Ship Purchases

Understanding the financial challenges a buyer faces in securing funds for a ship is crucial for a Sale & Purchase Shipbroker, alongside the technical and commercial aspects.

Major companies might finance purchases using their own funds or by expanding their share capital. However, securing a bank loan backed by a ship mortgage is a typical approach for many buyers.

A wise buyer would initiate preliminary discussions with their bank to outline the fundamental terms. These discussions aim to ensure the bank is confident that the buyer can generate sufficient revenue from the ship to cover both the loan and interest payments. While the specifics of these discussions are more suited to an accounting class, it’s important to note that such negotiations might delay finalizing the sale due to the bank’s need to verify that the ship meets the agreed business plan.

For newbuilds, Progress Payments are common, involving several installments from the signing of the contract to the final payment after successful sea trials.

In some instances, buyers can negotiate loans for new ships directly through the shipbuilders, which was more straightforward in the past. The previous availability of soft credit has been blamed by some for contributing to the shipping industry’s past recession, though we may be seeing recovery now.

Typically, international agreements allow for financing up to 80% of the ship’s purchase price at interest rates below market levels, with the buyer providing the remaining 20%. There have been instances where creative financing provided front-end finance and grace periods during which no repayments were necessary. While such arrangements minimized initial financial risks for the Shipowner, they also contributed significantly to the shipping industry’s deep recession.

The downturn led to the closure of many shipyards and pushed the search for cheaper labor globally, shifting shipbuilding from traditional hubs to new regions with no prior history in the field.

Most transactions for new ships are directly negotiated between the buyer and the shipbuilder, with Sale & Purchase Shipbrokers rarely involved, although there are brokers who specialize in newbuilding contracts.

Valuing Ships

Numerous Sale & Purchase Shipbrokers have earned a strong reputation and are frequently enlisted as Valuers for various critical assessments. An independent expert valuation of a ship’s worth may be necessary for several reasons including:

• Legal disputes and arbitration processes.
• General Average (GA) calculations, where the ship’s value helps determine the owner’s contribution.
• Determination of salvage awards.
• Settlement of insurance claims.
• Independent evaluations for governmental acquisitions.
• Asset revaluation for corporate financial reporting.

Such valuations pinpoint the market value of a vessel at a specific moment and should not be mistaken for a physical survey. The valuations provided by Sale & Purchase Shipbrokers are contingent on the assumption that the ship is in a trading condition suitable for its age.

Performing valuations is a challenging task as the Sale & Purchase Market is as volatile as the freight market, and ships are rarely identical. Providing a credible expert opinion that withstands rigorous scrutiny demands extensive knowledge and expertise.

 

 

Ethics in Shipping Business

The concept of ethics is often intuitively understood until one attempts to define it precisely. Derived from the Greek term that closely mirrors the Latin for “morals,” the concept of ethics has been the subject of scholarly discussion since the advent of written records, covering the nuanced distinctions between good and evil, right and wrong, and virtue and vice.

A cynical view from a Cockney might describe ethics as what one is caught not adhering to, whereas a more charitable perspective from a nineteenth-century English novelist suggests living by the golden rule: “Do as you would be done by.”

Ethics are not only challenging to define but are also dynamic, evolving over time. Business practices that are acceptable today might have been deemed unethical a century ago. For instance, in some regions, making unofficial payments for preferential treatment is tolerated, if not fully endorsed, whereas such practices are condemned elsewhere.

Our ethical frameworks are often influenced by the professional environments in which we operate, learning from peers, mentors, and the broader business community.

Legal systems handle criminal actions and breaches of contract, but ethical behavior relies on an unwritten mutual trust essential for maintaining industry operations. Consider a chartering scenario where multiple Shipbrokers compete to secure a Charterer’s business through ethical—or unethical—means. For example, a Shipbroker might create a fictitious offer from a Charterer to prompt a Shipowner to initiate negotiations. Such actions, while not necessarily illegal, clearly breach ethical standards.

This example illustrates the distinction between illegal actions and unethical behavior. Had the Shipowner accepted a fabricated offer, the named Charterer could repudiate the contract, leading to legal action against the Shipbroker for Breach of Warranty of Authority. However, if no contract is formed due to the Shipbroker’s careful manipulation, no legal action would ensue despite the ethical breach.

Ethical conduct extends beyond individual interactions; trust is paramount, whether between Principals and Agents or among Shipbrokers themselves. For instance, it’s customary for a Principal to continue working with the Shipbroker who first introduced viable business.

Ethics also permeate legal frameworks; for instance, a Bill of Lading (B/L) is considered evidence of a contract typically based on a verbal agreement. Ethical conduct in this context involves resisting shortcuts and dishonesty in favor of diligence and integrity.

The Baltic Exchange in London exemplifies commitment to ethical conduct, particularly beneficial given the face-to-face interactions that discourage deceit among colleagues. The Baltic Exchange has instituted a formal “code” of ethical behavior, which outlines specific unacceptable practices within shipbroking. Violation of these rules can lead to expulsion and loss of reputation.

Outside the Baltic Exchange, while formal regulatory mechanisms may be less prevalent, the tight-knit nature of the shipping community helps in self-regulating ethical behavior. Ultimately, maintaining one’s reputation and livelihood in the shipping industry hinges as much on the fear of social ostracism as it does on a genuine commitment to ethical business practices.

Maritime Fraud

Maritime fraud, unfortunately, is a prevalent issue across various commercial sectors, often leading to significant financial burdens due to direct losses and the costs of preventative measures.

Shipping business, with its global scope, provides ample opportunities for fraudulent activities, exploiting the high level of trust that the industry requires.

Insurance Fraud

Insurance fraud is rampant across various sectors, not just maritime. One notable case involved travelers purchasing low-cost insurance at airports to cover luggage loss. These travelers repeatedly filed claims for supposedly lost luggage, which allegedly contained expensive items. Despite the modest value of each claim, the lack of scrutiny due to the dispersion of claims across multiple insurers led to substantial payouts.

Similarly, in the maritime industry, some dishonest Shipowners and merchants conspire to over-insure ships and cargoes, then orchestrate their sinking in remote areas during bad weather to claim excessive insurance money.

The case of the MT SALEM, which involved a large-scale insurance fraud, is particularly infamous. Under the guise of MT SOUTH SUN, the ship loaded 195,000 tons of crude oil in Kuwait for delivery to Genoa. While en route, she changed her name to MT LEMA, illegally discharged her cargo near Durban, and filled her tanks with seawater to appear laden. Renamed MT ALEM, she then “sank” after an explosion off Senegal. The scheme was almost successful until rescue teams found the crew with their suitcases, suggesting premeditation.

Insurance companies employ investigators to scrutinize suspicious claims, but tracking and prosecuting fraudsters remains challenging. These acts of fraud not only affect insurers but also impose higher premiums and financial burdens on honest policyholders, proving that insurance fraud is far from a victimless crime.

Documentary Fraud

We all recognize a Bill of Lading (B/L) and its crucial role in global trade, serving as proof of goods loaded on a ship, a Document of Title (DOT) to these goods, and as security. In our offices, we hold drawers filled with blank Bill of Lading (B/L) forms. These could be filled out, signed, and stamped ORIGINAL, making them indistinguishable from an authentic Bill representing actual cargo to those untrained in such matters. How can we be sure that the signature isn’t that of the Master or his Authorized Agent?

The simplicity with which shipping documents can be forged or altered is well known among criminals, leading to numerous fraudulent documents being presented to Banks for Letters of Credit (LC), to Shipping Companies for cargo release, or to individuals as valid titles, all aiming to deceitfully acquire funds or goods.

Other Fraud Types

Fraud is prevalent in many business sectors, though it might not always make headlines. These frequent, undetected acts cumulatively cause significant financial damage to the shipping industry.

For instance, when booking cargo, many shippers tend to underreport the size of their cargo to pay less Freight. This deception might only be caught by attentive deck officers during loading, or if the company conducts random cargo size checks before shipping. Those committing such fraud rely on these discrepancies going unnoticed, and even if caught, they might claim it was an innocent mistake. This additional verification cost ultimately affects both the guilty and the innocent, showing that the impacts of fraud extend beyond the immediate victims to the broader shipping community.

Another example is the “Letter of Indemnity (LOI)” or “Back Letter” issued by a dishonest shipper to the Ship Master or Ship Owners in exchange for a Clean Bill of Lading (B/L). If a shipment, such as chemicals in drums, is loaded and noted by the Chief Officer to be in poor condition, the Ship Master would typically not issue a Clean Bill of Lading (B/L) without a clause noting the condition. To bypass this, shippers may offer to indemnify the Ship Master and Ship Owner against any claims for damaged cargo, effectively misrepresenting the cargo’s condition. This act could deceive the Bank, the Consignee, or an innocent third party into paying for cargo that is not as described, which is a clear act of fraud.

Other Illegal Activities

While not all illegal activities in shipping are classified as fraud, they are unlawful and harmful to the industry’s reputation. Such activities include smuggling contraband, arms, or drugs, often without the knowledge of the cargo or ship owners, and human smuggling, sometimes facilitated by bogus crewing agencies claiming illegal migrants are seafarers.

Piracy is another significant threat, endangering not only cargo and vessels but also the lives of crew members who often cannot defend against armed pirates.

Detecting and Preventing Fraud

Detecting and preventing international shipping fraud is complex. Fraudulent Acts are often sophisticated and carried out over long periods, going unnoticed by the victims. Companies hesitant to admit being defrauded may suffer silently to avoid reputational damage. For example, an employee at a Liner Agency might manipulate freight booking processes to embezzle funds, leaving consignees perplexed when asked to pay freight charges they believed were prepaid.

Sophisticated criminals often exploit international jurisdictional protections, complicating the pursuit and adding significant costs and time to any legal action. However, companies can mitigate risks by verifying customer credentials, performing credit checks, and engaging with trade and commerce bodies. Additionally, education and training provided by organizations like the International Maritime Bureau (IMB), BIMCO (Baltic and International Maritime Council), and others play crucial roles in combating fraud. Police and customs authorities worldwide also strive to prevent fraud and pursue criminals, enhancing overall industry security.

 

 

SEABORNE TRADE

Shipping is an international enterprise. It involves numerous professionals like Shipowners, Ship Operators, Shipbrokers, Ship Managers, and Ship Agents, all focused on moving goods, equipment, and people across the globe. For anyone engaged in shipping, a robust understanding of maritime geography is essential. Shipbrokers, for example, will benefit greatly from resources like Lloyd’s Maritime Atlas or the “Ship’s Atlas”. Knowing the locations of oceans, seas, continents, countries, ports, and waterways is crucial.

In this type of course, teaching geographic details is not feasible; instead, it’s learned through frequent atlas consultation. Shipbrokers should cultivate a fondness for maps and keep an atlas at their desks to explore in spare moments, thus becoming familiar with the global environment in which they operate.

Transporting goods by sea or waterways remains the most cost-effective mode per ton-mile. Remarkably, over 95% of global trade is conducted via sea, highlighting its pivotal role in international commerce. Innovations in ship and cargo handling efficiency have steadily reduced the costs of sea transport, fostering an increase in traded volumes.

The primary commodities shipped in vast quantities across the world’s oceans include crude oil, oil products, coal, metal ores, and grains. These commodities and their specific trading patterns warrant closer examination.

Oil Trade

Crude oil is the most significant commodity traded globally today, essential for powering transport, heating, power generation, and various other applications. The relentless global demand for oil underscores its importance.

Crude oil is extracted from major fields located in regions such as the Arabian Gulf (AG), the Caspian Sea, Equatorial West Africa, the Caribbean and US Gulf, northern and eastern South America, the North Sea, among others.

Economic factors dictate that transporting crude to refineries near end-users is most efficient, meaning the largest ships (Crude Oil Carriers) often travel the longest distances. While there are exceptions, this practice generally holds true for crude oil shipping.

The world’s largest ships are crude oil carriers, their size mainly constrained by the water depth at major loading and discharging points, which are frequently located offshore to accommodate their deep drafts. These facilities allow operations in water depths that would be impractical in traditional ports.

Designed specifically for their task, crude oil tankers are dedicated to this trade and are seldom used for other purposes. Many operate fixed routes between specific terminals throughout their service lives.

Coal Trade

Coal serves as a crucial energy source, utilized both for generating electricity and as a heating element in various industrial processes, including steel production. Despite its significant environmental impact, coal remains responsible for approximately 40% of global electricity production.

Transportation of Coal

Coal is predominantly transported in bulk carriers, which may be equipped with their own cranes for unloading, although loading is typically done via shore-based conveyors. When ports at both loading and unloading points can accommodate deep water vessels, Capesize Bulk Carriers (over 80,000 DWT) are preferred for their cost efficiency on larger scales. In scenarios where size restrictions apply, smaller vessels such as Panamax Bulk Carriers (60 – 80,000 DWT) or Handymax Bulk Carriers are utilized.

The unloading of coal is generally carried out using cranes fitted with grabs, particularly at specialized terminals that cater to steelworks or power stations.

Ores Trade

Most of the world’s metals are derived from smelting mineral ores such as iron ore or bauxite, typically a considerable distance from the mining sites.

Iron Ore, crucial for producing iron and steel, represents the most significant traded product in this category. Historically, ores, which are denser than coal (with coal having a stowage factor of about 50 cubic feet per tonne compared to iron ore’s approximate 14 cubic feet per tonne), were transported in specialized bulk carriers featuring small holds above large double-bottom ballast tanks to manage this density. Today, however, ores are generally transported in versatile bulk carriers equipped with adjustable ballasting systems and reinforced bulkheads to handle a broader range of bulk cargoes.

Ores are usually handled at specialized terminals that feature deep-water berths for large bulk carriers and expansive areas for stockpiling, facilitating the transfer of cargo into ships via high-capacity conveyors.

Discharging typically involves specialized gantry-type grab cranes, with the removed cargo transported from the quay via conveyor belts to storage areas.

Grain Trade

Most grains traded globally in bulk are intended for human or animal consumption, including wheat, sorghum, soya, rice, and seeds from crops like rape, sunflower, flax, and cotton. Some grains are processed into pellets or meal.

Grains typically have a Stowage Factor (SF) similar to coal (e.g., bulk wheat stows at about 45 – 50 cubic feet per tonne). In shipping terminology, cargoes are often referred to as “HSS,” denoting Heavy Grains, Soybeans, and Sorghums, which have a bulk stowage factor of around 50 cu ft per tonne.

Certain grains and seeds transported in bulk are considered hazardous due to their potential to shift at sea. To counter this, some vessels feature Self-Trimming capabilities or special wing tanks that redistribute cargo to eliminate void spaces in the hold. Alternatively, bulk grain cargoes might be Over-Stowed with bagged grain to stabilize them.

Grain loading is typically conducted using grain elevators from shore-based silos. With time equating to money in cargo handling, advanced grain loading equipment can load ships at rates exceeding 30,000 tonnes per day. Discharge methods vary, with the most efficient being Pneumatic Suction Systems found at major grain-importing ports, though other systems include mechanical bucket or screw elevators, or simply using shore cranes for grabbing.

Grain production for export is concentrated in the world’s fertile agricultural regions, such as the grain belts of Canada and North America, South America’s Argentina, Uruguay, and Brazil, as well as Australia, New Zealand, and countries in the Far East like Thailand. Grains and seeds are bought by densely populated industrial regions and also shipped to developing nations for purposes ranging from seeding and consumption to famine relief. The availability of grains for international trade is heavily influenced by harvest quality globally, impacting volumes, prices, and trading patterns.

Setting up an integrated container service demands substantial capital investment in specialized ships, port facilities, terminals, depots, handling equipment, and transportation links including road, rail, and waterways, as well as the containers themselves. Consequently, such services initially involve large deep-sea container vessels operating between major terminals, complemented by smaller feeder vessels that connect these main hubs with lesser ports and terminals in the region.

This Hub and Spoke model has evolved to provide very fast and reliable container transit times. Today, there are hardly any locations globally that cannot access Door-to-Door (DTD) container services.

Ports and Their Development

Ports globally have evolved alongside the communities they support, often spurred by natural harbors that initially attracted settlers. Others emerged to export local resources, like grain ports in the Americas or mineral-specific terminals built in remote areas for coal or ore extraction.

A port’s growth or decline hinges on multiple factors:

• Water depth
• Weather protection
• Cargo storage space
• Infrastructure, such as road and rail links
• Labor availability

The geographical position can also dictate a port’s fate; Liverpool and Felixstowe serve as prime examples. Liverpool, despite robust facilities and a dense hinterland, isn’t expanding. Modern container ships prefer routes that include northwest European ports, making cargo transport from southern or eastern England more economical. Conversely, Felixstowe has seen rapid growth due to its strategic location on these routes, despite its primarily agricultural hinterland.

It’s challenging to pigeonhole ports due to their diverse facilities and activities. However, certain types of ports can be identified:

• Entrepot Ports: Major hubs like Rotterdam facilitate cargo transfer between ships, accommodating larger to smaller vessels or barges.
• Naval Ports: Locations like Plymouth or Portsmouth serve national navies, often selected for strategic reasons.
• Ferry Ports: These include Dover/Calais and Folkestone/Boulogne, connecting short sea routes between neighboring countries.
• Outports: Historical river ports now surpassed by newer maritime facilities closer to the sea, like Tilbury which has overtaken much of London’s river-based shipping.
• Fishing Ports: Smaller ports near fishing grounds, equipped to quickly dispatch catches inland.

Most ports handle diverse cargo, with larger ones managing everything from bulk goods like grain to containers and oil. Rotterdam exemplifies this versatility, offering comprehensive facilities.

Free Zones: These designated areas, near or within ports, are treated as outside the host state for customs purposes. Goods enter free of import duties, which are only due if items enter the host state’s territory. Benefits in free zones can include tax breaks and regulatory exemptions, varying by location and contributing to their business appeal.

Shipping professionals should maintain up-to-date port information from major publishers, though it’s wise to verify details through local agents due to potential changes.

Port Restrictions

Communications concerning port limitations often include abbreviations or terms that need to be clearly understood. Some commonly used ones include:

LOA (Length Overall) – This refers to the ship’s actual length that determines whether it can enter a port, berth, or discharge location. Some vessels might be unable to access ports due to their length, which could be affected by factors such as meandering rivers.

Beam – This is the ship’s actual beam, significant for situations where there might be a lock or channel the vessel must navigate to reach its discharging or loading berth. The beam could also influence operations at the cargo installation where the reach of the loading or discharging equipment may be a limiting factor. Shipowners are often asked to provide extra details about the ship, like the distance from the ship’s rail to the hatch coaming, to check if the shore cargo equipment can access the ship’s hold.

Draft – If the discharge port is specified in the charter party and no draft restriction is noted, it is the Shipowner’s responsibility to ensure the ship complies with the port’s draft limitations. If the ship is fixed to a range of discharge ports, the responsibility shifts to the charterers, who must be aware of the vessel’s arrival draft to nominate a safe berth.

Charterers might also need additional information, such as the distance from the waterline to the top of the hatch coaming in a fully ballasted condition, to guarantee the vessel can fit under the shore facilities throughout the loading or unloading process.

Airdraft – This term generally describes the height from the ship’s waterline to the top of the hatch coamings or to the highest fixed point on the ship, like the radar mast, in a fully ballasted condition. This measurement is crucial when a vessel must navigate under a bridge to access a berth or in scenarios like Genoa, where proximity to an airport restricts vessels’ air draft to avoid interfering with aircraft flight paths.

SWAD (Salt Water Arrival Draft) – Represents the maximum draft a loaded ship should have upon reaching a discharge port, which varies by location.

FWAD (Fresh Water Arrival Draft) – Similar to SWAD but applies to freshwater environments, typically on rivers.

BWAD (Brackish Water Arrival Draft) – Pertains to areas where rivers meet the sea, combining fresh and saltwater.

Note: Ships have a greater draft in fresh water than in seawater due to specific gravity differences, with fresh water at 1.000 and seawater typically at 1.025.

Bar Draft – This is required when river silt accumulates to form bars, necessitating vessels to load to a draft that allows safe navigation over the bar to top off in other ports, like the Martin Garcia Bar in the River Parana, topping-off at Buenos Aires, or loading in Bangkok, completing at Kosichang.

In some ports like Buenaventura (Colombia), there is primarily one wharf/berth split into import and export sections. The water depth at low tide is 24′, requiring vessels to agree to NAABSA (Not Always Afloat But Safe Aground) terms due to a bar at the port entrance that can only be crossed at specific times around high tide.

Apart from physical restrictions like LOA and BEAM, other factors such as weather conditions, including ice, may also impose constraints on port entry at certain times of the year.

War Zones or areas naturally prompt shipowners to first consider the safety of their ship and crew and secondly, the additional insurance premiums required while operating in such zones.

Canal Restrictions

In addition to the constraints already discussed, access to some ports and regions relies heavily on canals and waterways.

Waterways often pose challenges due to size limitations, as observed in the Thames River where increasing ship sizes have led to the decline of docks closer to the city and the development of those further downstream.

This issue is even more pronounced in artificial waterways, designed to enhance access but may now restrict modern ship sizes. An example is the St. Lawrence Seaway, a network of canals connecting the North American Great Lakes to the ocean. While the Great Lakes are deep, the dimensions of the canal locks, determined by civil engineering needs and ship requirements, limit ships to a maximum draft of 26 feet in fresh water, a length of 222.5 meters, and a beam of 23.16 meters. The largest vessels that can navigate the Seaway have a deadweight of about 30,000, loading up to 18,000 on the Seaway draft and then topping off at Montreal. The complexity of the St. Lawrence Seaway and lock system necessitates ships to carry extra equipment like special fairleads for mooring lines and on-board sewage systems to prevent lake pollution. Ship managers planning to enter the Lakes are advised to prepare well ahead.

Despite operational halts during three winter months due to ice, the St. Lawrence Seaway remains a crucial conduit to the grain and industrial centers of the USA and Canada.

The Panama Canal, opened in 1914, is a critical link between the Atlantic and Pacific oceans, bypassing the lengthy journey around South America’s southern tip. This canal’s significance, especially to Japan, has led to studies for a second, larger canal. The current locks accommodate ships up to 274.3 meters in length and 32.3 meters in beam, with a possible draft of nearly 40 feet in fresh water if rainfall is sufficient. The term ‘Panamax’ is now a staple in shipping, describing ships designed to the canal’s maximum capacity.

The older Suez Canal, completed in 1859, requires no locks due to the level alignment of the Mediterranean and Red Seas. Its lack of locks has allowed for adjustments in size over the years, now permitting ships with a draft of up to 53 feet, including fully laden ships around 150,000 DWT and ballasting ships up to 370,000 DWT.

New Panama Canal Restrictions

Following the Panama Canal’s expansion in 2016, larger ships, known as New Panamax or NeoPanamax, are now able to navigate through the Panama Canal. These ships can have a length up to 366 meters (1,200 feet), a width of 49 meters (160 feet), a draft of 15.2 meters (50 feet), and a maximum height of 57.91 meters (190 feet). The term New Panamax (Neo Panamax) has become a standard part of shipping terminology, referring to the largest dimensions permissible by the canal.

Political Restrictions

Geopolitical tensions also restrict shipping routes. For example, ships that visit Israel may face bans from Arab nations, affecting their ability to trade with these countries or transit the Suez Canal. Similarly, ships that dock at ports in Turkish-controlled Cyprus may be barred from Greek ports due to governmental policies.

Trade Union Disputes

International Transport Workers’ Federation (ITF) might ‘black’ a ship over crew contract disagreements. The ITF’s influence is notable in Scandinavia and Australasia, where local shore labor may support seafarers in disputes, potentially preventing ships from entering or leaving ports.

References to political exclusions are often found in time charters, where the owner may restrict the ship’s trading locations to avoid being blacked. Voyage charter parties also include clauses addressing strikes, lock-outs, politically motivated blockades, and other hostile actions.

Natural Phenomena

Tides significantly impact merchant shipping by influencing the drafts available and, in some instances, dictating the optimal times for port activity. These tidal movements are driven by the gravitational pull of both the sun and the moon. Although the sun is substantially larger, the moon’s closer proximity means it has a more than double the tidal influence compared to the sun. During new and full moons, the combined gravitational forces of the sun and moon create exceptionally high tides known as Spring Tides. Conversely, during half-moon phases, their gravitational forces counteract each other, resulting in more moderate, Neap Tides. The moon’s elliptical orbit causes its distance and tidal impact to fluctuate, leading to the publication of tidal predictions to aid navigation across numerous locations. The accompanying diagram illustrates the differences between Spring and Neap Tides.

It’s also beneficial to determine how long favorable tidal conditions will persist to ensure that cargo can be offloaded and ships remain Always Afloat (AA). In certain ports, it may not be feasible for vessels to stay continuously afloat. In these situations, the term NAABSA, which stands for “Not Always Afloat But Safe Aground,” might be used. To provide extra assurance, it can be specified that this practice is customary for vessels of similar size to lie aground.

 

Weather and Navigation

Ocean Currents

Ocean currents are categorized into three types: (a) those driven by wind, (b) those resulting from the distribution of water masses with varying temperatures, salinity, and density, and (c) tidal currents.

Ocean Currents flow at various depths across all oceans, but mariners and shipbrokers typically focus on surface currents and their effects on ships. The primary drivers of ocean currents are the prevailing winds that blow across the sea surface.

Warm currents originating from the tropics, like the Gulf Stream, not only provide a temperate climate for the British Isles but also ensure ports as far north as Narvik in Norway remain free of ice throughout the year. In contrast, polar currents, such as those reaching the north of Japan, bring severe winters to Hokkaido, despite its southern latitude compared to England.

Sea Fogs are common where warm, moist winds encounter cold currents, reducing the temperature and causing condensation. Notable areas for sea fog include off the coast of Newfoundland, where the warm North Atlantic drift meets the cold Labrador Current (with the highest frequency from May to September). Similar phenomena occur off the coast of California (June-December), in the Bering Sea (June-August), the Baltic regions (November-January), and Hudson Bay (June-September).

Cold Currents from the Polar Regions also pose significant hazards to shipping during summer thaws, such as icebergs that break away from ice caps and glaciers. These icebergs, often carried by the Labrador Current, are found around Newfoundland before they disintegrate in warmer waters. The primary danger of an iceberg to ships is that seven-eighths of its mass is submerged, and due to their irregular shape, they may overturn. Moreover, the combination of sea fog and icebergs around Newfoundland severely complicates navigation, although recent technological advances have somewhat mitigated these risks.

Cyclones

Cyclones are low atmospheric pressure areas and come in two types: depressions typical of temperate latitudes and the more intense tropical cyclones, covering smaller areas typical of the tropics and known as Tropical Cyclones. In both hemispheres, these cyclones circulate in opposite directions around their center or eye—anti-clockwise in the Northern Hemisphere and clockwise in the Southern Hemisphere. In N.W. Australia, late-summer tropical cyclones, known as “Willy-Willies” (January-April), recurve southeast, cross the coast, and bring heavy rain to areas like Darwin and Port Hedland.

In the China Seas, these tropical systems are called Typhoons, occurring mainly from May to December, peaking between July and October. The Philippines and southern China are significantly impacted by these storms, which bring powerful winds, torrential rains, and potential tidal waves to ports like Shanghai and Manila.

In the Arabian Sea, the cyclone is referred to as a Monsoon, derived from the Arabic word “Mawsim,” meaning season. This term initially described the seasonal winds of the Arabian Sea and now broadly applies to wind systems with a seasonal reversal in prevailing direction. The monsoon, particularly strong in eastern Asia up to about 60°N and dominant in South East Asia, brings intense gales from June to August, with tropical storms extending from May to November. Ports like Bombay and Bedi on India’s west coast frequently experience heavy rains, strong winds, and rough seas during this period.

The West Indies and Gulf of Mexico experience tropical cyclones or revolving storms known as Hurricanes. These usually form east of the islands, occasionally near the Cape Verde Islands, and move westwards, causing extensive damage across multiple islands before recurving northeast. Hurricane season runs from June to November, peaking from August to October. The term is also used for tropical cyclones off Queensland, Australia, where winds can reach speeds exceeding 75 miles per hour, equivalent to a force 12 on the Beaufort Scale. Ports like Havana (Cuba) and Miami (Florida) are particularly affected.

Ice

Ice is a crucial climatic condition affecting shipping, especially in ports that freeze during winter. Key areas impacted by ice include:

(a) The Baltic Sea (1st November to 31st March): ports like St Petersburg, Helsinki, Luleå, and Stockholm. (b) The St. Lawrence River (31st December to 31st March): ports like Montreal, Baie Comeau, and Port Cartier. (c) The St. Lawrence Seaway (15th December to 1st April): with opening and closing dates subject to annual winter severity. The St. Lawrence Seaway Authority announces the closing date well in advance and may allow passage after this date under certain conditions, though late transits can incur significant fines.

Additional ice-prone areas include Albany on the Hudson River and Churchill, only navigable from late July to October due to its remote location in Hudson Bay.

Advancements in ship design have led to the development of icebreakers, particularly in Finland and Russia, which strive to keep ice-affected ports open during harsh winters. However, severe conditions often surpass even these specialized ships’ capabilities.

General Impact

Severe weather not only disrupts safe navigation but also affects cargo handling and inland transportation. Extreme cold can cause steel to become brittle and machinery to fail. Diesel oil may wax or freeze, and extreme temperatures can impair human performance. Monsoon rains and tropical storms can damage ports, warehouses, and transportation infrastructure, complicating shipping and logistics operations.

Weather Routing

Modern advancements in weather reporting and forecasting have empowered specialist companies to provide navigational guidance to ship’s masters. Upon contracting with a Weather Routing service, the Master receives detailed weather predictions for their voyage, along with recommended courses to steer clear of adverse conditions. Throughout the journey, the ship maintains communication with the routing service to report actual weather conditions encountered and to receive updates or modifications to the planned route based on the latest forecasts.

This service not only facilitates safer and quicker passages but also generates valuable data that can serve as expert evidence in disputes related to weather impacts on voyages.

Even without specific routing advice, satellite communication systems allow ships to access real-time weather information, including forecasts, charts, and satellite imagery. Despite these technological advancements, there are still incidents of ships sinking or disappearing, often attributed to severe weather conditions.

The insurance sector recognizes the heightened risks associated with climatic conditions, prompting shipowners to incur higher premiums if they operate beyond the Institute Warranty Limits (IWL), which were revised and renamed as International Navigating Limits (INL) effective 1 November 2003.

Oceans cover 70.8% of the Earth’s surface, significantly more than the land area, which accounts for 29.2%. All the world’s oceans are saline, but salinity levels vary due to factors such as mixing and circulation, evaporation rates, and fresh water influx. The highest salinity occurs in the Tropics due to intense evaporation, while it is lower at the Equator because of heavy rainfall and reduced evaporation. Near the poles, melting ice dilutes the salinity further.

Navigational and Seasonal Zones

Climatic conditions continue to impact modern ships. Reflecting on the history of shipping from the late 19th century, social reformer Samuel Plimsoll advocated for the safety of mariners, leading to the introduction of a system marking the minimum freeboard on all British ships. This evolved into an international convention in the early 1930s, incorporating the ‘Plimsoll Mark’ which considers water density differences and mandates greater freeboard in regions prone to severe weather. Some Loadline Zones, as shown in the Maritime Atlas, are permanent, while others are seasonal.

The permissible loading depth of a ship determines its cargo capacity, directly influencing the freight charges. It is crucial, therefore, to consider this factor when calculating voyage estimates. As ships traverse different Loadline Zones during a voyage, often crossing into multiple zones, they must adhere to the specific maximum draft limits of each zone. These limits can vary seasonally, making it necessary to also consider the timing of these transitions.

 

INTERNATIONAL TRADE AND SHIPPING

International trade is a multifaceted phenomenon that must be examined from various perspectives. Those involved in the shipping industry are particularly concerned with aspects directly linked to the transport of goods. To provide effective services, it is crucial for them to understand not only their own requirements but also the needs and challenges faced by the shippers, merchants, and traders they serve.

The intricate framework of international seaborne trade consists of thousands of voyages, transferring goods across borders. Each voyage involves multiple legal relationships, including Charter Parties, Contracts of Affreightment (COA), Contracts of Agency, Contracts of Employment, and Contracts for the Sale of Goods—the cornerstone of international trade. These sales contracts are fundamental, as they necessitate the other essential relationships and are the primary reason goods are shipped overseas. Understanding the legal implications is vital, as they significantly influence the practical aspects of international trading.

Key Elements of a Basic Contract

A contract for the sale of goods typically includes four essential elements:

i) The Offer
ii) The Acceptance – must mirror the terms of the offer to avoid becoming a counter-offer and should be delivered in a reasonable manner and timeframe.
iii) Consideration – the ‘price’ paid by both parties, reflecting what each receives in return for fulfilling their part of the contract.
iv) Intention to Create Legal Relations – the parties must intend for their agreement to have legal consequences.

In a cargo sale contract, it’s crucial to determine when ownership of the goods transfers from the seller to the buyer, when payment is due, and when the risk of loss or damage to the goods shifts from the seller to the buyer.

International Sales Considerations

In international sales, it’s common for each party to make offers based on their own Standard Terms. Discrepancies between these terms can lead to a legal conclusion that no valid contract exists. Adopting internationally recognized standard terms, such as the INCOTERMS provided by the International Chamber of Commerce (ICC), helps ensure clarity and agreement on contract terms, establishing a valid contract where both parties understand their rights and obligations.

Legal Definitions and Goods Classification

Under English law, a sale of goods is defined as a contract to transfer property in goods for monetary consideration, referred to as the price. This transaction transfers ownership, or ‘property’, of the goods in exchange for payment.

Types of Goods

• Specific Goods: Identifiable at the contract’s formation.
• Unascertained Goods: Not yet produced or designated at the time of the contract, such as goods that are part of a larger bulk not yet allocated to the contract.

For example, selling 100 tons of wheat from a 5,000-ton stock involves unascertained goods until the specific 100 tons are earmarked for the buyer.

Property and Risk Transfer

The passing of property, or ownership, has specific legal implications:
i) The buyer is obligated to pay the price upon ownership transfer.
ii) The risk of loss or damage also transfers to the buyer.
iii) The seller has specific remedies if the buyer refuses to accept the goods.

The property generally passes when the contract is made for specific goods and upon appropriation for unascertained goods. The timing can vary, especially in international sales, where arrangements might delay the transfer of property and risk.

Understanding Risk

Risk pertains to the potential for damage to the goods. The party bearing the risk is responsible for any resultant damage.

For instance, if goods are sold and remain in the seller’s warehouse but ownership and risk have transferred to the buyer, any damage (like from a fire) is the buyer’s responsibility. Conversely, if the seller retains ownership and risk due to specific arrangements, even if the buyer physically possesses the goods, the seller bears any loss from damage during this period.

It’s crucial to fully grasp how the transfer of property and risk operates within the context of international trade, ensuring clarity and preparedness for all contractual outcomes.

 

INTERNATIONAL CONTRACTS OF SALE – INCOTERMS

After exploring the basic structure of a contract for the sale of goods, we now shift our focus to international sales contracts to see how they differ from the standard model. Numerous standard terms are commonly used in international sales, and to ensure global consistency in understanding these terms, the International Chamber of Commerce (ICC) has published a set of agreed definitions known as Incoterms. The latest version is Incoterms 2020. Below is a brief overview of Incoterms, outlining the responsibilities of buyers and sellers under each contract. For detailed information, it is recommended to consult the ICC publication Incoterms 2020.

To apply the definitions of Incoterms to a contract, the parties must explicitly state their intention to do so. Without this explicit agreement, the clarity provided by Incoterms might not be enforceable.

Incoterms are designed to accommodate a range of trading conditions, from sales at the point of origin, such as EXW (Ex Works), to delivered terms like DDP (Delivered Duty Paid). These terms are not mere creations of the ICC but reflect preferred trading conditions in international commerce. The choice of term can depend on various factors including the type of goods, transportation methods, payment methods, and market conditions at the time.

International trade is highly dynamic, influenced by new transportation modes, enhanced communication, shifts in supply and demand, banking practices, and numerous legal frameworks, both national and international.

To keep pace with these evolving conditions, the ICC routinely revises Incoterms based on trader preferences and changes in commercial practices, consulting with trade bodies and other relevant entities. Many recent updates have been made to support the growing use of electronic data interchange.

List of INCOTERMS:

• EXW Ex Works
• FCA Free Carrier
• FAS Free Alongside Ship*
• FOB Free On Board*
• CFR Cost and Freight*
• CIF Cost, Insurance and Freight*
• CPT Carriage Paid To
• CIP Carriage and Insurance Paid To
• DAF Delivered at Frontier
• DES Delivered Ex Ship*
• DEQ Delivered Ex Quay*
• DDU Delivered Duty Unpaid
• DDP Delivered Duty Paid

(*) Indicates Maritime Incoterms.

The terms are organized into groups. The “E” term (Ex Works) where the seller makes the goods available at their premises, the “F” terms where the seller must deliver goods to a carrier specified by the buyer, followed by “C” terms where the seller arranges carriage but does not assume risk after shipping and dispatch. Lastly, the “D” terms, where the seller bears all costs and risks needed to bring the goods to the destination country.

Under each term, INCOTERMS clarify the duties of both the buyer and the seller throughout the transport chain, establishing who pays for what, when payments and ownership transfer, and when risk shifts from one party to the other.

While costs transfer at specific points along the transport chain for each term, it is crucial to note that the risk may transfer at different points. We will further explore this distinction under each key term.

Shipbrokers should be familiar with the fundamental implications of all 13 terms, particularly the Maritime Incoterms. For comprehensive details, reference should be made to Incoterms 2020, but the explanations provided herein highlight the key aspects.

FAS – (Free Alongside)

Under this term, which specifies the loading port (e.g., “FAS Amsterdam”), the buyer is responsible for designating the port (and possibly the specific berth) where the goods should be delivered and the delivery date(s). The seller’s obligations end once the goods are placed alongside the ship at the specified time. At this point, property and risk transfer to the buyer, and the obligation to pay arises.

FOB – Free on Board

FOB is one of the most widely used forms of International Sales Contracts. Under this arrangement, the seller is tasked with bringing the goods to the designated port and loading them onto the ship. Once loaded, the responsibility for the goods, including freight and insurance, transfers to the buyer.

The buyer must nominate an effective ship and agree on a port in advance, such as “FOB Mersin” or “FOB Istanbul.” If the buyer fails to make an effective nomination within the contract’s timeframe, they may renominate as long as the contract period has not expired. After the ship is nominated, the seller must load the goods over the ship’s rail, transferring risk and making the price payable at that time. However, the transfer of property might be delayed, for instance, if the Bill of Lading (B/L) transfer is delayed.

It is the buyer’s responsibility to arrange their own insurance, but the seller must provide sufficient information to facilitate this. If the seller fails to provide necessary information, the risk remains with them.

Variations on the FOB Contract

There are several modifications to the standard FOB contract, which need to be agreed upon in advance and clearly stated within the contract. Examples include:

• FOB Stowed: The seller covers the cost of stowage, transferring risk and property upon stowage, not just when goods are loaded over the rail.
• FOB Stowed & Trimmed: Specifically for bulk cargoes, where the seller also covers the cost of trimming the cargo.
• FOB with Services: The seller may need to arrange additional services like securing shipping space.

CIF (Cost, Insurance, and Freight)

This contract is a prevalent form of International Sales Contract, encompassing not just the provision of goods but also arranging their carriage and insurance. Goods sold CIF include these costs in the selling price. The seller must ensure the goods shipped match the contract description and manage the carriage and insurance on standard terms for the trade.

CFR (Cost and Freight)

In a CFR contract, similar to CIF, the buyer is responsible for arranging insurance. This format is favored in jurisdictions that require importers to insure shipments with national insurers.

DES – (Delivered Ex Ship)

Under DES, the seller must deliver the goods directly from the ship at the specified port of discharge, covering both freight and insurance. Unlike other terms, property and risk transfer upon delivery at the port, with payment due when property transfers. This term closely aligns with the basic sale model but is unsuitable for transactions involving Documentary Letters of Credit.

DEQ – Delivered Ex Quay 

DEQ goes a step further than DES by requiring the seller to also manage unloading and cover any import dues. The seller is accountable for all charges and risks until the goods are delivered on the quay. If the parties agree, terms may be adjusted to ‘duty unpaid’ if the buyer is to handle import duties, or ‘VAT unpaid’ if specific taxes like VAT are excluded from the seller’s responsibilities.

NON-MARITIME INCOTERMS

Besides the maritime international Contracts of Sale, it’s essential to grasp the international contracts involving other modes of transport. Below is a summary of these terms, particularly focusing on the transfer of risk.

EXW – Ex Works

Under EXW, the buyer assumes all risks and costs starting from the seller’s premises, including loading the goods onto a vehicle. The buyer is responsible for all insurance, carriage, and export formalities.

FCA – Free Carrier

For FCA terms, the seller delivers the goods to a carrier at a specified point. Risk transfers to the buyer at this point, who then takes on the responsibility for insurance and transportation. This term is applicable across various transport modes, including multimodal transport.

CPT – Carriage Paid To

Under CPT, the seller pays all transport costs to the destination specified by the buyer. However, the risk passes to the buyer once the goods are handed over to the first carrier, regardless of the transport mode.

CIP – Carriage and Insurance Paid

Similar to CPT, except the seller also arranges insurance for the goods up to the final destination, covering all forms of transport.

DAF – Delivered at Frontier

The seller bears all costs and risks up to the frontier specified before customs clearance at the destination. The buyer takes over for customs clearance and subsequent transportation and insurance.

DDU – Delivered Duty Unpaid

Here, the seller delivers goods to a specified place within the import country, assuming all risks and costs except for duties, taxes, and other charges associated with import clearance.

DDP – Delivered Duty Paid

Under DDP, the seller is responsible for all costs until the goods reach the buyer’s specified destination, including all import duties and taxes. Sometimes, the duty and/or taxes might be excluded, and the buyer handles these payments.

Understanding the Scope of Incoterms

These terms might be expanded upon or altered, but any modifications need to be clearly stated in the contract, as they aren’t covered by the standard Incoterms. Terms like “FOT”, “EX QUAY”, “C&F”, and “C.I.F.F.O.” indicate such variations, with FOB being particularly adaptable to specific needs.

Practical Considerations and Market Forces

When selecting Incoterms, both parties must consider practicalities such as ease and cost of transport arrangements. For instance, it might be more efficient for a seller in Japan to handle the loading of goods to the port than a buyer in the USA who isn’t familiar with local practices. Conversely, the buyer may better manage import procedures in the USA.

Market conditions can also dictate terms. In a seller’s market, a producer might prefer terms that minimize risk and ensure swift payment. In a buyer’s market, a seller may need to accommodate the buyer’s preferred terms to secure a deal.

Ultimately, the terms of international sales are negotiated compromises, influenced by market conditions, practical logistics considerations, and each party’s ability to manage different segments of the transportation chain.

 

REMEDIATION FOR BREACH OF CONTRACT IN INTERNATIONAL SALES

Understanding the available remedies for breaches of contract is crucial in international goods sales. Here, we examine common remedies under English law.

Remedies for the Seller

A buyer typically breaches a contract by failing to accept or pay for goods. The remedy available to the seller depends on whether property (ownership) has transferred:

• If property has passed, the seller can demand the full contract price.
• If property has not passed, the seller can seek damages for non-acceptance, calculated as the difference between the contract price and the resale price, often resulting in minimal recovery.

Stoppage in Transitu

The right of stoppage in transitu, granted by the English Sale of Goods Act, allows the seller to halt goods in transit and reclaim them if the buyer becomes insolvent. This right hinges on the buyer’s insolvency and the goods still being in transit. It is enacted by notifying the carrier, with the seller responsible for any due freight.

Lien

If the seller still possesses the goods when the buyer becomes insolvent, they may exercise an unpaid seller’s lien and retain the goods despite an obligation to deliver.

Remedies for the Buyer

A buyer can seek remedies if the seller breaches any contract conditions, such as:

• Late, short, or non-delivery
• Delivery of damaged goods or those not meeting the seller’s specifications
• Tender of defective documents

The buyer may reject the goods or documents and claim damages for non-delivery, calculated as the difference between the contract and market prices at the intended delivery time. If the buyer opts not to reject the goods, or loses the right to do so, they may sue for damages based on the difference between the delivered goods’ value and what their value would have been had they been delivered as agreed.

Specific Performance

Similar to the seller’s right to sue for the price, the buyer may demand correct delivery of goods through an Order for Specific Performance, granted only if the goods are irreplaceable and not available elsewhere, making it a rare judicial remedy.

Law and Jurisdiction

These examples use English law. The applicable law for a contract depends on its stipulations or, absent such stipulations, the parties’ nationalities and the performance locations. A contract might specify adherence to English law and jurisdiction, or these may be inferred from the transaction’s context.

Jurisdiction issues can arise independently of the governing law, meaning an English court might rule on a dispute while applying foreign law based on the contract’s stipulations.

International Considerations

The UK government, like others, is considering adopting the UN Convention on Contracts for the International Sale of Goods, which could significantly change the legal landscape for these agreements.

 

 

 

FINANCE IN INTERNATIONAL TRADE

International trade involves complexities due to distance and time, creating conflicts between buyers and sellers. The buyer aims to ensure goods are delivered correctly, timely, and with minimal impact on cash flow. Conversely, the seller focuses on securing payment and minimizing the delay between shipment and receipt of funds, maintaining their cash flow efficiently.

This dynamic affects those involved in international transport because payment methods and timings often hinge on the accurate preparation and presentation of documents, adherence to shipping schedules, and any constraints on shipment or transshipment.

This section will explore payment roles in international trade, associated risks, and strategies for risk mitigation.

Methods of Payment

Payment methods in international sales are negotiable and depend on the mutual trust and financial standing of the parties involved. Market conditions can influence payment terms; a buyer’s market may offer more favorable conditions than a seller’s market. All payment methods incur costs unless conducted in cash without documentation.

Various payment methods offer differing levels of security and benefits for both parties:

• Cash with Order (Advance Payment): Secure for the seller as payment is received before shipment, posing risks for the buyer due to potential delays and contract fulfillment issues. It’s common for buyers to pay a deposit when signing a sales contract.
• Open Account: Most advantageous for the buyer, where goods are shipped and documents sent directly to the buyer who pays according to agreed terms, often extended over months. This method is common among financially stable companies within national markets and is gaining traction internationally among firms with established trading relationships, especially within regions like the European Community.
• Bill of Exchange: This document functions like a post-dated cheque, allowing payment deferment, often up to 90 days. This arrangement benefits the buyer by easing cash flow, potentially enabling the purchase of larger quantities. For sellers, it facilitates increased business volume. Unlike a cheque, a Bill of Exchange is negotiable; the seller can discount it at a bank before maturity for immediate but slightly reduced payment.

Detailed Payment Arrangements

When agreeing on a Bill of Exchange, interest rates on the unpaid amount are typically set. Payment terms might include an initial percentage due upon receipt (or document transfer) with the remainder spread across several Bills of Exchange due at staggered intervals (e.g., 30, 60, and 90 days).

Upon agreement, the buyer issues the Bills of Exchange as partial payment. The seller may hold these until their due dates or discount them earlier for immediate liquidity. Banks or discount houses purchasing the bills might further trade them or hold them as security until maturity.

Conclusion

Payment terms in international trade are often a balanced negotiation reflecting the needs, risks, and capacities of both parties. Market forces significantly influence these terms, dictating more or less favorable conditions depending on the supply-demand balance. Each payment method and arrangement carries its own set of implications, affecting how trade partners manage financial risk and cash flow throughout the transaction lifecycle.

Documentary Letter of Credit (LC) in International Trade

Introduction

A Documentary Letter of Credit (LC) is a prevalent payment method in international trade, offering a balanced security solution for both buyers and sellers. This method hinges on the carrier or their agent’s efficiency in handling the documents involved.

How it Works

A Documentary Letter of Credit (LC) is a commitment by a bank to pay the seller upon presentation of specified documents, such as a Bill of Exchange, within a set timeframe, provided these documents adhere strictly to the terms outlined in the Letter of Credit (LC).

Key Participants

1. The Buyer (Applicant for Credit) – The individual or entity that initiates the Letter of Credit (LC).
2. The Seller (Beneficiary) – The recipient of the Letter of Credit (LC), paid upon fulfilling the document conditions.
3. The Issuing Bank – The buyer’s bank that issues the Letter of Credit (LC).
4. The Advising/Confirming or Paying Bank – Handles the seller’s payment once conditions are met.

Documentary Credit Principles

It is crucial for banks to adhere to the exact terms of the Letter of Credit (LC) without reinterpretation. The International Chamber of Commerce (ICC), along with other stakeholders, has established the ‘Uniform Customs and Practice for Documentary Credits’ (UCP) to standardize the interpretation of documentary credits globally.

Letters of Credit (LC) are typically described as “Irrevocable,” meaning they cannot be revoked once issued and will expire if documents are not presented in time. A seller, unsure of the buyer’s financial stability, may request the Letter of Credit (LC) to be confirmed by a bank in the buyer’s country, guaranteeing payment irrespective of other conditions if the correct documents are presented.

Letters of Credit (LC) Opening and Conditions

When a buyer instructs their bank to open a Letter of Credit (LC), they must specify the type of credit and conditions under which the bank will release funds to the seller. For example, payment might be due upon the buyer’s sight draft accompanied by specific documents that ensure the timely and accurate delivery of goods. Conditions might prohibit part-shipment while allowing transshipment, with documents required within 15 days post-shipment. The expiry date marks the final date for the seller to present these documents.

Operational Mechanics

Typically, a Letter of Credit (LC) is opened through an intermediary bank located in the seller’s country. However, exceptions exist, and a Letter of Credit (LC) can also be opened in the buyer’s country and be payable there, contingent on local foreign exchange regulations. The intermediary bank acts as the Advising/Confirming or Paying Bank.

Document Compliance and Timelines

The seller must present the required documents within the stipulated timeframe and ensure their absolute compliance with the Letter of Credit (LC) terms to avoid delays. Inaccuracies in documentation can lead to significant payment delays and disrupt the buyer’s ability to timely receive the goods. A study showed that 57% of documents are initially rejected by banks, which could delay payment and delivery significantly.

Conclusion

The Documentary Letter of Credit (LC) is a critical tool in international trade that balances risk, control, and payment assurance between the buyer and seller, making it essential for both parties to understand and strictly adhere to its terms.

 

Documents for Letters of Credit (LC)

Invoice: The invoice acts as proof of the contract between the buyer and seller and details the quality, quantity, unit price, and total price of the goods shipped. In certain cases, the buyer may require the invoice to be certified by an independent organization like a Chamber of Commerce or even require validation by a consul from the buyer’s country. Some nations, due to import regulations, also demand a Consular Invoice besides a commercial invoice.

Shipbrokers familiar with liner documentation will recognize that the format used here mirrors the aligned layout commonly used in most Bill of Lading (B/L).

Insurance: For transactions covered by a Letter of Credit (LC) that are CIF (Cost, Insurance, and Freight), a certificate of insurance is required.

Bill of Lading: This document is crucial in Letters of Credit (LC) due to its role as a title document, serving as the primary security for payment. The Bill of Lading (B/L) must accurately reflect the cargo description and comply with all stipulations of the Documentary Letter of Credit (LC). Even minor discrepancies can lead to payment refusals or delays.

In the Letter of Credit (LC), the term Clean is specifically used to describe the Bill of Lading (B/L). A Bill of Lading (B/L) would not be considered clean if it includes any endorsements about the cargo’s condition, as such endorsements would almost certainly lead to rejection by the bank.

Other Documents: Beyond the mentioned documents, the buyer may also require additional certifications such as a Certificate of Origin, a Phytosanitary Certificate, a Certificate of Analysis, or other types of independent inspections. These documents are crucial for the buyer to verify that the goods invoiced are as expected, as payment will be exchanged simultaneously with the release of these documents.

 

CONFIRMING HOUSES

In discussing international trade finance, it’s typical to envision the seller and buyer in separate countries. Another model involves ‘Confirming Houses,’ also known as ‘Export Houses.’

This trading method originated in European countries with extensive overseas territories in the early twentieth century and has since spread to most industrialized nations.

Confirming Houses play a dual role as both agent and principal. Purchasing negotiations might occur directly between the overseas buyer and the seller, or the buyer may engage a Confirming House to source and order goods on their behalf. At shipment time, the Confirming House validates its responsibility for payment upon shipment as its title suggests. In certain contracts, a Confirming House may assume complete liability as a principal towards the seller while acting as an agent for the buyer. Regardless of the sales contract terms, the Confirming House always acts as a principal in dealings with the carrier.

RISKS IN INTERNATIONAL TRADING

Understanding international trade requires awareness of the inherent risks for buyers and sellers.

International trade involves risks like long-distance transportation and handling of goods to distant locations, plus unexpected changes in transport costs and currency values.

FOREIGN EXCHANGE FLUCTUATIONS

In international transactions, either or both parties might engage in foreign exchange transactions to facilitate payment for goods or services.

Exchange rates can fluctuate, affecting the actual amount received by the seller or paid by the buyer. For example, a German exporter selling goods to the USA for $100,000 at an exchange rate of $1.25 to the Euro expects to receive €80,000. If the exchange rate shifts to $1.50 to the Euro by the payment date, the seller receives only €66,667, potentially turning a profit into a loss.

Traders can handle currency risks in several ways. They might opt to take a chance on exchange rate fluctuations, buying or selling currency on the “spot” market at transaction time, hoping rates move favorably. However, for large transactions or those on tight margins, this risk may be too great. In such cases, banks offer alternatives like Forward Exchange Contracts or Foreign Currency Options to hedge against potential losses. Often, companies use a combination of these strategies to balance risks and minimize costs.

One common method to mitigate the impact of rate fluctuations is for parties to agree with their bank to buy or sell a currency at a future date but at a rate fixed when the contract is made, providing predictability for both buyer and seller.

Spot Rate

The rate at which currencies are exchanged at the present moment (today) is referred to as the Spot Rate. You will often see these Spot Rates listed in the financial sections of more ‘serious’ newspapers. Two rates are typically quoted: the bank’s selling price and the bank’s buying price. (Remember, there are two sides to every transaction. If you are buying, the bank is selling, and if you are selling, the bank is buying).

Forward Exchange Contracts

A forward rate can be determined for a set period ahead, typically up to three months from the contract’s date, though it can extend beyond this. For instance, a contract initiated on 1st November for two months forward would mature on 1st January. Sometimes, an exporter may not know when the buyer will complete payment, leading to uncertainties about when to exchange foreign currency with the bank. In such cases, an ‘option dated forward contract’ is preferable, allowing the exporter to choose the precise time to exchange currency within pre-set dates. It’s crucial to understand that an option dated forward contract doesn’t offer the choice to forego the transaction; it only allows selecting the transaction’s timing. Forward rates derive from the spot rate, either for bank selling or buying, with forward rates used to determine the contract price.

Forward Rates are quoted as either a premium or a discount, reflecting differences in interest rates within the interbank market, rather than anticipated future exchange rates. For instance, currencies with lower interest rates than the £ sterling are considered at a premium, while those with higher rates are at a discount. When a currency is cheaper in the future, more will be obtained for pounds if selling, but less if buying compared to the spot rate.

If it’s a Forward Option Contract, the bank may quote the rate at either the start or end of the option period. For example, with a three-month forward option affecting the second or third month, the rate could be the one-month rate at the start or the three-month rate at the end. If the currency carries a premium, the bank will sell at the end rate and buy at the start rate. Conversely, if the currency is at a discount, the bank will sell at the start rate and buy at the end rate, always opting for the most beneficial rate. This arrangement provides certainty and stability about the future rate, allowing the customer to adjust pricing accordingly. The contract rate is fixed at the time of agreement, and the option exists for the customer to select the transaction timing during the option period. Once agreed upon, the contract must be fulfilled.

The four main principles to remember are:

1. The bank buys high.
2. The bank sells low.
3. A discount is applied to the spot rate.
4. A premium is subtracted from the spot rate.

As the bank aims to profit, it sets the option contract rate to its advantage.

Foreign Currency Options

Foreign Currency Options offer a more adaptable method for managing potential currency rate fluctuations. Unlike a Forward Currency Contract, the holder is not compelled to execute the option if it proves unfavorable. This type of contract grants the right, but not the obligation, to buy or sell currency at a predetermined rate. If the currency’s value improves, the option may simply expire unused, yet it still provides essential protection against potential negative shifts in currency rates. If adverse fluctuations occur, the option to act remains available.

Foreign currency options are beneficial for businesses that may need a specific foreign currency in the future but are unsure about it, such as during international price negotiations that use a known exchange rate. If the transaction proceeds, the rate secured could be better, but will not fall below the option rate. Should the transaction not materialize, the option can simply expire.

Banks offer two primary types of options: the ‘European’ style, where the exercise date, also known as the ‘strike date,’ is set, and the option can only be executed on this date. The ‘American’ style option, on the other hand, allows execution at any time up to the strike date. Purchasing an option involves a cost known as the premium, paid upfront to the Bank. This cost is typically a percentage of the currency amount and depends on the agreed ‘strike’ rate, the duration and type of the option, and the Bank’s evaluation of currency volatility and interest rate differences.

Consider an exporter who will not accept less than $1.25 when converting his Dollar sales to Euro. To guard against a poorer rate, he might buy an ‘American style’ currency option to sell one million US Dollars at a ‘strike price’ of $1.25, expiring in six months. If the market rate falls below $1.25 during this period, he can exercise the option and sell at $1.25 through the Bank. If the market rate is higher, he can let the option lapse and sell at the market rate.

Traders who regularly deal in specific foreign currencies often maintain foreign currency accounts with banks to manage their funds without being compelled to convert at unfavorable times. However, some countries impose restrictions on these accounts to protect their national currencies, and traders may need government approval to trade in foreign currencies.

Transaction Costs in International Trade

International trade is inherently complex, presenting traders with numerous challenges beyond those faced in domestic markets. These transaction costs are varied and include risks related to international payments and adverse currency fluctuations. Transport costs, influenced by factors like market conditions and fuel prices, can also vary significantly.

Some traders mitigate risks associated with unpredictable freight costs by trading in Forward Freight Agreements (FFAs).

Trading in Futures—which are prevalent for various commodities from crude oil to orange juice—amounts to speculating on future market prices. This market exists as long as there are parties on opposing sides who stand to gain or lose from future price shifts. For instance, a European instant coffee manufacturer might be concerned about a potential rise in coffee bean prices due to uncontrollable factors like poor harvests or political instability. Conversely, a Kenyan coffee bean grower fears prices might drop below production costs by the time the crop is ready to sell.

If, as a coffee buyer, I can agree with a seller to bet that the price of coffee beans won’t increase more than 5% in six months, I commit money to this bet. If the price exceeds this limit at the set date, the seller compensates me based on the difference from the agreed price. Conversely, if the price is lower, I compensate the seller similarly.

This arrangement is strategic for both traders involved, who both have significant stakes in coffee market trends. If the price exceeds our agreed level, I benefit financially despite having to buy at a higher market price, offsetting my gains from the futures deal with increased costs in the physical market.

Baltic Freight Index

A market for freight futures emerged during the 1980s, driven by traders’ perceived need. In 1985, the Baltic Exchange launched the Baltic Freight Index to mirror the freight levels in key sectors of international dry cargo shipping as accurately as possible. Over time, shipping routes have been adjusted to match shifts in market importance, allowing them to be “weighted” in the “real” (physical) freight market. A review of Lloyds List reveals how these “indices” are currently composed, each representing fluctuations in specific segments of the freight market.

On any given day, it’s unlikely that actual fixtures will reflect all or any of the voyages comprising the index. Consequently, a panel of ten leading international shipbroking firms provides their estimated rates for the voyages of the day to the Committee, which then excludes the highest and lowest estimates and averages the rest to determine that day’s index level.

Besides daily index calculations, the Baltic Exchange facilitated a platform for trading freight futures, known as BIFFEX (Baltic International Freight Futures and Options Exchange). Although the marketplace shifted from the Baltic Exchange to the London Commodity Exchange in 1991 and later to the London International Financial Futures Exchange, the Index remained central to trading activities.

Charterers, who have agreed to ship commodities at a future date, worry about potential increases in freight rates, which could diminish their profits. To safeguard against this possibility, they can “buy” freight futures contracts. If freight rates soar when they need to book a ship, any loss in the physical market may be partially compensated by gains from their futures positions.

Conversely, Shipowners face the risk of freight rates falling, which would impact their potential earnings. They mitigate this risk by “selling” futures contracts in the same market. If freight rates unexpectedly rise, they will benefit from higher earnings in the physical market but will face losses in their futures trades.

In an “index-based” futures contract, delivering actual cargo or a ship to settle a position isn’t feasible, so all contracts in the freight futures market are cash-settled based on the index level at the position’s maturity.

These markets rely on the engagement of shipowners and charterers willing to “buy” and “sell” contracts. If they are active in the physical markets mirrored by the index (for instance, charterers might be grain traders from the US Gulf to Northern Europe, and shipowners might operate Panamax Bulk Carriers in the Atlantic), they can anticipate the index reflecting their actual trading conditions. Their participation in the futures market serves as “hedging” against their physical market activities, balancing potential gains and losses and thus minimizing exposure to severe market swings that could be financially damaging.

Moreover, parties who are neither shipowners nor charterers also engage in buying and selling contracts in the freight futures markets, adding liquidity. While they do not engage in “hedging” as they have no direct stake in the physical market, their speculative investments aim to yield profits by the end of the trading day.

This form of hedging is highly specialized, demanding substantial market expertise and knowledge, and should only be pursued with thorough understanding and expert advice.

 

INSURANCE IN SHIP CHARTERING

Insurance is crucial in trade as it creates a secure environment for business operations. The uncertainties and risks associated with international trade make insurance particularly significant. Without insurance, fewer people would be willing to engage in international trade. Companies would have to “insure” themselves by setting aside substantial capital reserves to cover potential losses, which could restrict business management and profit-making opportunities.

Insurable Interest

Typically, insurance can only be secured by someone who has an interest in the insured goods or property. The Assured (the person covered by the insurance) must stand to lose from any mishap. This is because without an insurable interest, the person may not adequately care for the property or goods and could potentially benefit from their loss. Absence of an insurable interest would render any claim void.

Key aspects of insurable interest in marine/cargo insurance include: a) A tangible object must be exposed to marine peril. b) The Insured must have a legal relationship with the object that results in a benefit from its preservation or a detriment from its loss or damage.

In marine insurance, unlike other insurance types, the Insured does not need to hold an insurable interest at the time of effecting the insurance but must have it at the time of loss to claim under their policy.

The most straightforward type of insurable interest is the absolute ownership of the insured goods, although other forms of interest are also recognized.

A buyer maintains an insurable interest in goods whether sold FOB (Free on Board) or CIF (Cost Insurance Freight), and retains the right to reject them if they are not as specified in the contract and return them to the seller, who retains ownership until payment.

The seller retains an insurable interest while they bear the risk or own the goods, or both. If goods are rejected by the buyer or if there is a Stoppage in Transitu, rights revert to the seller. Insurance becomes critical when risk transfers from the seller to the buyer at the time of handover during a ship sale & purchase.

Carriers and shippers also have insurable interests due to their respective liabilities to cargo owners and in covering advance freight payments.

A Charterer holds an insurable interest due to their liability to the shipowner. For example, if a Charterer secures a ship to load at “a good and safe berth, always afloat” and the ship grounds due to shallower than expected waters, the owner can hold the charterer accountable for any hull damage. Similarly, if a charterer’s “harmless” cargo corrodes the ship’s holds, they are liable for the damage.

Time Charterers bear additional liabilities regarding their control over the ship while it is hired, thus requiring broader insurance coverage compared to a voyage charterer. Charterers can secure specific insurance for these liabilities.

Insurers themselves have an interest in the risks they underwrite, which they can mitigate through re-insurance.

Commission to Agents and Brokerage Fees can also generate an insurable interest. For example, it is common for Shipbroking Firms to insure the Brokerage under all their time charter fixtures.

A Shipbroker, if making a significant error in the fixture of a ship leading to a claim by an owner or a charterer, should secure “Professional Indemnity Insurance” against such risks.

TRADE TERMS IN EXPORT SALES

In any export transaction, insurance responsibilities are determined by the terms agreed upon in the sale contract. When INCOTERMS 2020 are included, these responsibilities, including who arranges and pays for insurance, are explicitly defined.

For instance, under an FOB (Free On Board) agreement, the exporter bears the risk for the goods until they have passed over the ship’s rail. Typically, the exporter will secure insurance for this part of the transport. After the goods cross the ship’s rail, the risk transfers to the buyer, who must then arrange for insurance coverage.

In a CIF (Cost Insurance Freight) arrangement, the seller is responsible for obtaining a transferable Marine Insurance policy at his own expense to cover the goods during transit.

The ability to transfer the insurance policy in a CIF sale is crucial. While the seller initiates and pays for the insurance while the goods are in transit and still under his ownership, damages are most often identified post-discharge, when the goods have been transferred to the buyer.

WARRANTIES

In insurance terminology, a warranty is a specific commitment by the insured to meet certain conditions. Section 33 of the Marine Insurance Act specifies that a warranty must be strictly adhered to, irrespective of its relevance to the risk. Non-compliance results in the insurer being freed from liability. For example, if the insurance stipulates certain packaging requirements for the insured goods and these are not followed, any claim may be denied if the goods are improperly packaged, even if the packaging did not cause the loss.

a) Express Warranties These are explicitly stated conditions within the contract requiring the insured to perform specific actions. Failure to meet these conditions can lead to the policy being voided.

b) Implied Warranties These are conditions considered by law to be part of the insurance contract, even though they are not expressly stated.

In Marine Insurance, two significant implied warranties must be considered: i) At the start of the insurance period, the venture must be legal and within the insured’s control. ii) The ship must be seaworthy and suitable for the intended voyage.

TYPES OF POLICIES FOR CARGO

Facultative Insurance

This insurance type is specific to individual shipments or sendings. Due to the complexity of arranging insurance, exporters who frequently send goods abroad may find it overly burdensome to use this type of insurance for every shipment.

Open Contracts

For exporters, standardizing insurance costs is beneficial. It allows sellers to estimate insurance costs accurately when quoting prices or agreeing on sales terms. Consequently, open contracts have become popular with the expansion of international trade.

Open contracts include three variations: floating policies, open covers, and open policies.

Floating Policies are intended to supplant facultative insurance. They provide coverage for a specified total value of goods, such as leather goods shipped from Shanghai to Istanbul over six months, up to a value of $3,000,000. Initially, the policy outlines a general risk description, but details of the goods and ships are declared before each shipment. Declarations continue until the predetermined coverage limit is reached, exhausting the policy. Declarations for each shipment are made on special forms, and the policy’s remaining value decreases accordingly. The assured must declare each shipment, and the insurer must accept it if it meets the agreed terms. Since policies are not issued for each shipment, Certificates of Insurance are provided instead. If selling under CIF terms, it’s crucial for the seller to ensure the contract allows for presenting a certificate instead of a policy. A downside is that insurers typically require a premium deposit related to the total policy value, adjusted later based on actual cargo declarations.

Open Covers offer automatic coverage for a set period, which could be a year or longer, or indefinitely until cancellation by either party. This arrangement secures all shipments at fixed premium rates, providing flexibility and price stability for the exporter. Open covers can include various complex terms, such as limits per ship (per bottom) or limits on the value of goods at one location pre-shipment. They may also incorporate specific Institute Clauses. Sometimes, floating policies are used alongside an open cover.

Open Policies resemble open covers but are not bound by a specific time frame and remain effective until canceled. These policies are tailored to suit the intricate demands of modern multi-modal transport. Procedures for declarations are designed to fit the assured’s needs, benefiting both the broker and insurer by standardizing a large volume of business.

Advantages of Open Cover or Policy:

1. Continuous automatic coverage eliminates the risk of failing to insure, a more common issue than one might expect.
2. Known insurance costs allow exporters to accurately include insurance in their CIF pricing, important when insurance costs can be significant.
3. Insurers often offer better terms for annual policies compared to individual cover arrangements.
4. Regular dealings with the same underwriter may facilitate negotiating settlements for claims that might not typically be recoverable, compared to negotiating with different insurers for each shipment.

EFFECTING INSURANCE

While safe delivery of shipments is preferred in international trade, the risk of needing to claim insurance is real and frequent. It’s crucial to carefully arrange insurance, especially under an open cover, to ensure claims are covered. The deficiencies of a cover often only become apparent when a claim is filed, making comprehensive and specifically tailored insurance essential.

Assessing Risk in Marine Insurance

Understanding the factors influencing an underwriter’s decision to accept a risk involves reviewing the type of information they require:

a) Cargo and Packing A detailed description of the cargo and its packaging is essential. Information such as whether the goods will be containerized, and if so, the type of packing within the container, is necessary. For non-containerized goods, details about whether they will be shipped in cartons, drums, crates, or bales are required.

b) Method of Shipment Complete information about the shipping method is crucial, including whether it will be containerized, and specifics like door-to-door delivery, groupage consignment, or multiple drop-offs. For non-containerized goods, details about whether it will be a conventional shipment, chartered vessel, or any special arrangements regarding transshipment should be provided.

c) Voyage The length of the voyage and the destination significantly influence the premium. This factor also affects War and Strikes Rate charges, especially in regions experiencing warlike activities. If the shipment involves storage, such as at a distribution center, the insurer needs to know whether the cover should extend to onward transmission.

d) Basis of Valuation In exports where goods are sold and resold, valuations can fluctuate. Establishing a value beforehand is advantageous, particularly for valued policies where the insurer may include expenses and profit. An agreed value forms the basis for claims. For exports, a common valuation basis might be ‘CIF invoice value plus 15%’, which would be used for claims under an Open Policy.

Conditions of Marine Insurance

Marine insurance policies are crafted for specific risks, unlike standard household or auto policies. It’s beneficial to focus on the three main types of Institute Cargo Clauses that have replaced older versions since January 1, 1982.

Institute Cargo Clauses (C) These clauses cover major perils like fire, explosion, and vessel mishaps, excluding malicious damage unless additional cover is purchased. This provides basic coverage for significant mishaps.

Institute Cargo Clauses (B) Beyond what “C” clauses cover, this set includes risks like earthquakes, volcanic eruptions, and water ingress, plus total loss of packages lost overboard or during loading/unloading. Like “C,” it excludes deliberate damage, with extra coverage available through the Malicious Damage Clause.

Institute Cargo Clauses (A) These are the most comprehensive, covering “All Risks” of loss or damage, excluding ordinary leakage, wear and tear, and inherent vice. This clause is prevalent for dry cargoes.

Common Conditions to Institute Cargo Clauses (A), (B), & (C)

i) Clause 4.3 Packing Excludes claims from inadequate packing or preparation of the cargo.

ii) Clause 4.6 Insolvency Excludes losses caused by the financial default of the vessel’s owners, managers, charterers, or operators.

iii) Clause 4.7 and 4.8 Atomic Weapons Excludes damages from non-warlike use of atomic weapons, focusing on misuse or accidental misuse.

iv) Clause 7.3 Terrorists Excludes damages caused by terrorists or those acting from political motives, relevant in specific countries and for inland transit.

Despite the choice of basic insurance conditions, it is typical to include War & Strikes risk cover. It is crucial to understand the specifics of these clauses, as there are common misconceptions about what is covered under such conditions in the insurance industry.

 

Institute War Clauses

These clauses provide coverage for loss or damage resulting from hostilities, warlike operations, civil war, revolution, rebellion, insurrection, and similar events. However, it’s important to note that this coverage only applies while the insured interest is aboard the overseas vessel; it starts when the cargo is loaded and ends once discharged at the destination. This means war risks coverage only applies at sea and not during land transportation. Additionally, the coverage explicitly excludes loss or damage from atomic or nuclear weaponry.

Institute Strikes, Riots & Civil Commotions Clauses

Consider a scenario like a dock strike in Liverpool:

1. If your cargo is delayed by such an event, the transit period will extend, increasing risks like theft and pilferage. Standard cargo policies usually provide continued coverage during these extended periods.
2. The insurance covers physical loss or damage caused directly by strikers, locked-out workers, or persons involved in labor disturbances, riots, or civil commotions, and those acting maliciously.
3. What is explicitly excluded is loss or damage resulting from strikers passively withdrawing their labor.

With non-perishable commodities, the duration of the voyage may not impact the cargo, but perishable goods face different risks under prolonged transit times. It’s possible to negotiate additional coverage for such risks, although it’s often overlooked.

Premiums

Premium rates for exporters are personalized based on individual claims history. Underwriters consider numerous factors such as the commodity, insurance conditions, packing quality, shipping arrangements, and destination. However, the most influential factor is the exporter’s past claims history. Exporters can reduce insurance costs by proactively engaging in loss prevention measures, which will be elaborated on in discussions about loss prevention strategies.

Claims Procedure

Efficient handling and prompt settlement of claims are crucial:

1. Inform insurers immediately about any claims or potential claims.
2. For losses likely exceeding certain minimum amounts, insurers generally require a survey report from Lloyd’s Agents, available globally, who inspect and advise on repairs.
3. Promptly file claims against the carrier or shipowner as delays can affect insurers’ rights to recovery.
4. Do not issue clean receipts if loss is evident; clause the delivery docket/consignment note accordingly.
5. Insurers may require documentation such as Insurance Certificates, Commercial Invoices, Bills of Lading (B/L) or Consignment Notes, delivery receipts, correspondence with carriers or shipowners, repair estimates, and the Surveyor’s Report.

Marine insurance claims are settled in the policy’s currency; if local currency payment is needed, the insurance certificate and premium should also be in that currency. Surveyor’s fees are part of the recoverable claim.

The Principle of Average

Average, believed to be derived from the Arabic word “awariya,” refers to partial loss, categorized into particular average or general average:

• Particular Average (PA) concerns accidental loss or damage to specific items, involving only the claimant’s cargo or ship.
• General Average (GA) involves losses shared by all parties in a venture because the loss benefits everyone, like cargo sacrificed to save a voyage.

Costs from a general average incident are distributed among all parties based on the value of their goods. Average Adjusters specialize in calculating each party’s contribution. Cargo is released upon receipt of an Average Bond and sometimes an Average Guarantee from the cargo owner’s insurers.

General Average (GA) is complex, and Shipbrokers seeking deeper understanding should pursue a specialized Marine Insurance course.

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INTERNATIONAL SHIPPING ORGANIZATIONS

Numerous international organizations are involved in shipping, spanning both intergovernmental and private sectors, with many relying on elected honorary officers. Below are some of the more significant and influential bodies, categorized as follows:

• Shipowners’ Organizations
• Shipbrokers’ and Agents’ Organizations
• United Nations (UN) Organizations
• Other shipping-related bodies

These organizations are dynamic, adapting to the rapid changes within the shipping industry and the world. The Internet is an excellent resource for staying updated on their latest developments, and brief overviews here link to their websites for current information.

International Chamber of Shipping (ICS)

Founded in 1921 and renamed in 1948, the International Chamber of Shipping (ICS) represents National Shipowners’ Associations and Shipping Companies, accounting for half of the global merchant fleet. The International Chamber of Shipping (ICS) is involved in various aspects of shipping including technical, legal, and operational matters and has consultative status with several intergovernmental agencies such as the IMO (International Maritime Organization), World Customs Organization, the International Telecommunications Union, and UNCTAD.

Based in London, the ICS shares a secretariat with the International Shipping Federation (ISF), an international employers’ organization focused on maritime manpower issues. The ISF operates entirely on member subscriptions based on fleet size, providing a platform for global shipowners’ and managers’ associations to discuss human resources, training, welfare, and traditional employment issues.

The joint website of the International Chamber of Shipping and the International Shipping Federation, www.ics-shipping.org, includes a list of member organizations like the Hellenic Chamber of Shipping, The Cyprus Shipping Council, The Japanese Shipowners’ Association, and the UK Chamber of Shipping, with links to each.

INTERCARGO

Founded in 1980 by the late Antony Chandris to represent dry cargo (bulk) shipowners, INTERCARGO was inspired by the model of INTERTANKO. Initially drawing members primarily from Greece, Scandinavia, and Hong Kong, it now includes over a hundred companies controlling about 30 million tons deadweight. INTERCARGO is the only international shipowners’ group exclusively advocating for Independent Shipowners in the dry bulk sector, focusing on policy rather than day-to-day operational issues.

INTERCARGO collaborates with other organizations to avoid duplicating efforts and participates actively in the IMO ((International Maritime Organization) with observer status. Its services include information, advice, guidance, and representation through an active committee structure.

For the latest on INTERCARGO’s initiatives, visit their website at www.intercargo.org

INTERTANKO

Established in 1970, INTERTANKO advocates for the interests of Independent Tanker Owners with goals of “safe transport, cleaner seas, and free competition.” Representing over 75% of independent tanker tonnage globally, INTERTANKO acts as a central service and intelligence resource for its members, which include 240 tanker owners and operators, plus 300 Associate Members.

INTERTANKO is known for its influence in advocacy, interest in documentary standards for tanker chartering, and focus on maritime safety, particularly for tanker operations.

Visit www.intertanko.com to explore more about INTERTANKO’s activities and access additional resources related to tanker shipping.

BIMCO (Baltic and International Maritime Council)

Founded in 1905, BIMCO (Baltic and International Maritime Council) began as the Baltic and White Sea Conference, created by shipowners active in the Baltic and White Sea trades, primarily to enhance the profitability of the timber trades.

Over time, BIMCO (Baltic and International Maritime Council) broadened its focus beyond just dry cargo bulk trades and renamed itself the Baltic and International Maritime Conference, later updating “Conference” to “Council” to reflect its expanded role.

Today, BIMCO’s (Baltic and International Maritime Council’s) membership spans globally, comprising Shipowners and Ship Operators (who represent 60% of the global merchant fleet), Shipbrokers and Ship Agents, Maritime Lawyers, and Protection and Indemnity Clubs (P&I Clubs). BIMCO’s (Baltic and International Maritime Council’s) key objective is to address issues impacting its members by fostering cooperation over confrontation and ensuring that the economic implications of new regulations on shipowners are thoroughly evaluated.

BIMCO (Baltic and International Maritime Council) is renowned for issuing essential shipping documents such as Charter Parties (CP) and Bills of Lading (B/L), often in collaboration with organizations like the Chamber of Shipping and FONASBA (The Federation of National Associations of Ship Brokers and Agents), and at times following negotiations with charterer or shipper associations. While these documents are a prominent aspect of BIMCO’s (Baltic and International Maritime Council’s) work, its range of activities extends far beyond.

In recent years, BIMCO (Baltic and International Maritime Council) has also been proactive in offering educational opportunities, organizing one-day or two-day seminars in various maritime centers worldwide. These events have drawn significant attention from local shipping communities eager to learn from distinguished industry experts.

Recognizing the advantages of digital communication early on, BIMCO (Baltic and International Maritime Council) ventured into computer-based systems in the late 1980s. Members now have online access to a wealth of resources, although some content remains exclusive to subscribers. A considerable amount of valuable information, including drafts of BIMCO’s (Baltic and International Maritime Council’s) approved charter parties and other documents, is available at www.bimco.org.

BIMCO (Baltic and International Maritime Council) has consistently maintained its headquarters in Bagsvaerd, Copenhagen throughout its history.

 

SHIPBROKERS’ and SHIP AGENTS’ ORGANIZATIONS

Institute of Chartered Shipbrokers (ICS)

Founded in 1911, the Institute of Chartered Shipbrokers (ICS) began during a time when London was a bustling hub for shipping, particularly noted for its timber trade. Initially named the Baltic and White Sea Conference, it quickly expanded its focus beyond just the Baltic and White Sea regions to encompass broader maritime concerns, prompting a change to the Baltic and International Maritime Conference, and eventually to Council.

Institute of Chartered Shipbrokers’ (ICS’s) global membership includes Shipowners, Ship Operators (who represent 60% of the world’s merchant fleet), Shipbrokers, Ship Agents, Maritime Lawyers, and Protection and Indemnity Clubs (P&I Clubs). The organization is dedicated to maintaining high ethical standards, similar to those historically associated with the Baltic Exchange. To uphold these standards, Institute of Chartered Shipbrokers (ICS) has developed rigorous educational and training programs, and in 1920, it was granted a Royal Charter by the Privy Council.

The Royal Charter tasked the Institute of Chartered Shipbrokers (ICS) with examining qualifications for professional membership, which includes a service period in shipping. Members can achieve the status of Membership (MICS) or, with significant professional influence, Fellowship (FICS) and earn the title of Chartered Shipbrokers.

Over the years, shipping complexities have grown such that the term ‘Shipbroker’ now covers various specialties within the industry, including tanker chartering, Ship Management, Sale & Purchase Shipbrokers, Port Agency, and Liner Trades. In 1989, Institute of Chartered Shipbrokers (ICS) updated its charter to include corporate membership and to allow global membership beyond the UK and the Commonwealth. For more information, visit www.ics.org.uk

Baltic Exchange

Established as a private limited company, the Baltic Exchange is owned by its shareholders, including Member Companies, their Principals and Representatives, and Individual Members. Its primary activities involve the International Freight Market, where members facilitate the chartering of ships internationally. Additionally, member companies engage in the sale and purchase of ships and aircraft, all on an international scale.

Historically, the Baltic Exchange began in 1823 as a club for patrons of The Baltic Coffee House, evolving from an earlier establishment known as The Virginia and Maryland. It merged with The London Shipping Exchange in 1900, and a dedicated Exchange building was completed in 1903 at 14/20 St. Mary Axe, with further development in the mid-20th century.

Membership is open to UK-registered corporations and individuals, with specific eligibility criteria for corporate representation and individual membership. Baltic Exchange is governed by a Board of Directors (BOD), responsible for upholding ethical trading standards and regulating member conduct through disciplinary actions.

The Baltic Exchange also provides various operational facilities and information services to its members, including separate client bank accounts and mandatory insurance for errors, omissions, and Breach of Warranty of Authority. The organization benefits financially from membership fees and rental income from owned properties.

For further details and member resources, visit the Baltic Exchange’s website www.balticexchange.com

Ethics at the Baltic Exchange

The guiding principle of the Baltic Exchange, encapsulated by the motto “Our Word Our Bond” emphasizes the critical role of ethics in trading. Members depend on mutual trust and the assurances of their principals, with many contracts initially agreed upon verbally and later confirmed in writing. This foundation of ethical trading within the Baltic Exchange community is built on the principle of mutual respect—treating others as one wishes to be treated.

Periodically, the Baltic Exchange Directors identify practices they deem inconsistent with the Baltic Exchange’s ethical standards, including:

1. Organizations acting as Freight Contractors/Freight Speculators who tender named tonnage without Shipowners/Disponent Shipowners’ authorization.
2. Delaying due payments of commissions for Ship Hire/Freight that has been earned and paid.
3. Misusing information from Baltic Exchange Members to conduct business directly with overseas principals or their local brokers, circumventing the Exchange.

The Baltic Exchange also provides a suite of freight indices, real-time market data, and a comprehensive shipping database accessible through its internet portal.

Despite the destruction of its building by a terrorist bomb in 1992, which disrupted its daily trading activities, the Baltic Exchange’s spirit persists. Now situated a short walk from its original location on St Mary Axe, the Exchange continues to influence shipping and the City of London, albeit with limited trading sessions. Detailed information about the Baltic Exchange Code and more can be found at www.balticexchange.com

Federation of National Associations of Shipbrokers and Agents (FONASBA)

Founded in 1969 by national European associations of Ship Brokers and Ship Agents, the Federation of National Associations of Ship Brokers and Agents (FONASBA) addresses the needs of the Liner Agent, the Tramp Port Agent, and the Shipbroker involved in chartering. Representing about 26 countries globally, FONASBA speaks with authority on shipping-related issues and collaborates with national and international entities to promote the profession’s fair and equitable practice. Its initiatives include:

1. Advocating for its members when fundamental professional interests are at stake.
2. Facilitating the improvement, simplification, and standardization of shipping contracts and documents.
3. Promoting efficient information exchange to further the profession’s interests internationally.

Federation of National Associations of Ship Brokers and Agents (FONASBA) has actively participated in updating charter parties and other shipping documents through its Chartering and Documentary Committee. This includes producing various forms and codes to ensure clarity and balance in contractual agreements.

The secretariat of Federation of National Associations of Ship Brokers and Agents (FONASBA) is located in London and maintains a consultative status with UN Trade and Development (UNCTAD), representing the interests of Shipbrokers and Ship Agents at international meetings in Geneva.

Additionally, it oversees ECASBA (The European Community Association of Shipbrokers and Agents), focusing on member benefits within the European Union.

More information about FONASBA’s activities is available at www.fonasba.com

International Federation of Forwarding Agents’ Associations (FIATA)

FIATA, originating from its French title Federation Internationale des Associations de Transitaires et Assimiles, was established in Vienna in 1926. This non-governmental organization, integral to the shipbroking industry, represents over 40,000 freight-forwarding firms across 150 countries.

Active in Airfreight, Customs, Multimodal Transport, and Shipping, FIATA has committees that contribute to the development of recommended documentation for the industry.

Further details about FIATA and a complete list of members are available at www.fiata.org

 

UNITED NATIONS (UN) ORGANISATIONS

International Maritime Organisation (IMO)

The focus of the International Maritime Organisation (IMO) is Safety at Sea. Until 1982, it was known as the Inter-Governmental Maritime Consultative Organisation (IMCO).

In 1948, a United Nations (UN) conference adopted a Convention to establish the International Maritime Organisation (IMO), making it the first international body dedicated exclusively to maritime matters. The International Maritime Organisation (IMO) was officially formed in 1958. Four years prior, an international convention addressing marine pollution from ships (particularly oil in tankers) was adopted. The International Maritime Organisation (IMO) assumed the responsibility of enforcing this convention, ensuring that from the outset,

“the improvement of maritime safety and the prevention of marine pollution have been International Maritime Organisation’s (IMO’s) most important objectives.”

The International Maritime Organisation (IMO) has updated several treaties, including the International Convention for the Safety of Life at Sea (SOLAS), with a 1960 version replacing the 1948 edition. Its measures cover areas such as machinery and electrical installations, navigation safety, handling dangerous goods, and nuclear ships.

Headquartered in London, the International Maritime Organisation (IMO) is the only specialised United Nations (UN) agency based in the United Kingdom.

The governing body of the International Maritime Organisation (IMO) is the Assembly, which convenes biennially. It comprises 132 Member States and one Associate Member. Between Assembly sessions, the Council, consisting of 32 Member Governments elected by the Assembly, acts as the IMO’s governing body.

The International Maritime Organisation (IMO) operates as a technical organisation, with committees and sub-committees like the Maritime Safety Committee (MSC) and the Marine Environment Protection Committee (MEPC) conducting most of its work. These committees have been instrumental in adopting approximately 30 conventions and protocols and over 600 codes and recommendations related to maritime safety, pollution prevention, and related issues.

Evidence indicates that measures implemented by the International Maritime Organisation (IMO) have had significant positive effects. For instance, ship collisions have greatly decreased in areas where IMO-approved traffic separation schemes have been implemented.

Recently, the International Maritime Organisation (IMO) introduced the International Safety Management (ISM) Code, which mandates safety standards for all seagoing ships and their operating companies.

Updated information on the International Maritime Organisation’s (IMO’s) conventions, codes, rules, and publications is available on its website: www.imo.org

The International Maritime Organisation (IMO) itself lacks direct enforcement power for its conventions. After adoption, these conventions must be integrated into the laws of Flag States, which are responsible for ensuring compliance. Classification Societies typically handle surveying and issuing compliance certificates, while inspection and enforcement are carried out by Port State Control (PSC) organisations under the direction of Flag States and maritime nations.

UNITED NATIONS COUNCIL FOR TRADE & DEVELOPMENT (UNCTAD)

Unlike the International Maritime Organisation (IMO), which is a technical organisation, UNCTAD is more politically oriented. As indicated by its name, UNCTAD focuses on trade and development, with a bias toward assisting developing nations. UNCTAD openly acknowledges its primary mission as supporting the so-called “third world.”

Based in Geneva, UNCTAD has a shipping division staffed by a dedicated team. Their efforts have yielded mixed success. For instance, the Non-Mandatory Minimum Standards for Shipping Agents, introduced in March 1988, received strong support from nearly all participating nations. Similarly, their maritime training programmes tailored for developing countries are highly regarded.

However, UNCTAD’s attempts to regulate liner trade through the Code of Practice for Liner Conferences, remembered for the 40-40-20 rule, have been less successful. The convention was overtaken by commercial developments, and efforts to revise it have been unsuccessful.

UNCTAD also introduced the Hamburg Rules, designed to regulate shipowners’ liabilities in a manner more favourable to merchants compared to the widely adopted Hague or Hague/Visby Rules. Despite this, insufficient ratification by nations has limited their impact.

Efforts to standardise charter party clauses have also failed to gain traction. This is likely because many stakeholders in the chartering industry are content with the current arrangements.

It would be unfair to judge UNCTAD solely by these high-profile challenges. The organisation’s successes, though less publicised, are noteworthy. Achieving any consensus is a remarkable feat given the diverse perspectives and objectives of its members, divided between developed and developing nations.

For additional information on UNCTAD’s activities and proceedings, visit: www.unctad.org

 

 

International Association of Classification Societies (IACS)

The top ten classification societies, along with two associate members, constitute the International Association of Classification Societies (IACS). These societies oversee 90% of the global cargo carrying capacity through standards they set for ship design, construction, and ongoing compliance.

The International Association of Classification Societies (IACS) commits significant efforts to developing and maintaining classification standards for ships. It advocates for ethical conduct among its members and promotes transparency in classification practices.

To join the International Association of Classification Societies (IACS), classification societies must meet stringent quality criteria regarding systems and procedures. There have been instances where societies were suspended from membership for not maintaining required standards.

The International Association of Classification Societies (IACS) has faced scrutiny following several major maritime accidents, where certifications by its members were publicly questioned. It has sought to mitigate concerns about the influence of commercial interests on the classification standards applied to ships. For updates on IACS’ recent activities, visit www.iacs.org.uk

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International Transport Workers’ Federation (ITF)

The International Transport Workers’ Federation (ITF), though only widely recognized in recent times, was established in the late nineteenth century as a global secretariat for transport unions. International Transport Workers’ Federation (ITF) now includes over 400 trade unions from nearly 100 countries, representing over four million transport workers.

Originally, the International Transport Workers’ Federation (ITF) was formed when the concept of a flag of convenience did not exist. However, as this trend emerged, the International Transport Workers’ Federation (ITF) viewed it as a threat to unionism and the standards of seafarers’ working and safety conditions. In 1950, during their Stuttgart Congress, the International Transport Workers’ Federation (ITF) devised a ‘Plan of Action’ demanding shipowners comply with specific minimum conditions, threatening boycotts to enforce compliance.

Although parts of that resolution are still active, the initial ambitious goal to block flags of convenience through an international blockade culminated in only a four-day boycott in 1958.

A more viable resolution emerged at the 1971 Vienna congress, where a standard agreement was established for ships with crews lacking a proper union-employer negotiated agreement. These agreements also required contributions to an ITF fund supporting the campaign and seafarers’ welfare initiatives in ports and aboard ships.

The ITF’s strength lies in its extensive union network, enabling easy immobilization of ships through coordinated actions such as tug crew and lock-keeper strikes. The unions typically support ITF-endorsed boycotts due to their commendable goals.

However, the ITF’s approach can sometimes lead to accusations of hypocrisy or extremism. For instance, the International Transport Workers’ Federation (ITF)has been criticized for boycotting a reputable Japanese line that provided good working conditions but did not contribute financially to the ITF.

The International Transport Workers’ Federation (ITF) claims to advocate for raising Filipino crew wages to its approved levels, significantly above the general wage standards in the Philippines. However, some suggest the ITF’s real intent is to deter hiring Filipino crews to encourage hiring from shipowners’ home countries.

Nevertheless, the ITF’s influence and fundraising efforts should not be underestimated; they have enabled the placement of permanent International Transport Workers’ Federation (ITF) officials in major ports and the provision of significant support to seafarers’ welfare organizations worldwide. International Transport Workers’ Federation (ITF) has led initiatives in many critical situations where crews faced danger or were stranded without resources, supported by an excellent intelligence network.

 

 

COMMUNICATION IN SHIP CHARTERING

Communication encompasses the effective transfer of information between at least two parties, involving the transmission and receipt of information.

The shipping business and ship chartering are heavily reliant on effective communication. In this industry, the communicative skills of shipbrokers are essential.

English serves as the “lingua franca” of the shipping world, and proficiency in English is crucial for advancing beyond a basic level in the sector. However, communication involves more than just language proficiency.

Basic Principles of Business Communication

1. Your primary focus should always be on the receiver—the person or people with whom you are communicating.
2. As this is not a creative writing course, the paramount rule is to ‘keep the communication short and simple.’ The shipping and Ship Chartering industry is replete with jargon and abbreviations, making it crucial to ensure that your counterpart understands the terminology used.

For instance, the term “Laydays” might become obscure just a short distance away from the Ship Chartering scene.

3. Effective communication requires selecting the most appropriate medium and style. You should consider the receiver’s preferences—whether they favor humor or formality, and whether they respond better to words or numbers, including their views on rhetorical questions.
4. Timing is critical, especially in the Shipping Business and Ship Chartering where different international time zones can complicate communication. For example, a shipowner in Sydney requiring information first thing in the morning would not appreciate a call from your London office at 10:00 hours, which would be 20:00 hours in Sydney.
5. Preparation is key to avoid timing issues. This involves being confident in your message and understanding the receiver’s context as much as possible.

Modes of Communication in Ship Chartering

Communication can be spoken, written, or visual.

The Spoken Word

A significant amount of shipping business still relies on telephone or face-to-face conversations. Confidence and sincerity are crucial for effective spoken communication. While using jargon, remember to moderate strong accents and dialects to ensure clarity. For instance, a conversation between a speaker with a broad Scots accent and another speaking Cockney may require adjustments from both sides for clarity, especially if the telephone connection is poor.

Formal Meetings

A meeting must have a purpose and an agenda, managed by a chairman, a secretary, and other members, with decisions recorded in the minutes.

Participating in or chairing a formal meeting is somewhat between a one-on-one conversation and public speaking. Discussions deserving more than a casual chat should maintain a degree of formality.

Meetings are costly in terms of time, which translates directly to money in the shipping business. There is a story of a company modifying its boardroom’s clock to display the cost of meetings in real-time based on attendees’ salaries.

A meeting should have a clear objective, and all attendees should understand the purpose, whether it is a briefing, a problem-solving session, or a discussion on multiple topics. An agenda should be circulated well in advance, and members should come prepared, not just speak off the cuff. Tough chairmen might limit discussions to topics pre-circulated as ‘papers.’

If part of a series, the minutes of the previous meeting should be reviewed promptly, focusing on the ‘action by’ column to ensure accountability.

As the Chairman

Your responsibilities include setting the meeting agenda and ensuring all procedural elements are in place, such as verifying the presence of a quorum and the absence of unauthorized attendees. The meeting should proceed orderly, allowing everyone a chance to voice their opinions without dragging on too long.

In summary, whether participating in or leading a meeting, it’s crucial to manage the discussion effectively, maintain a receptive mind, and respect formalities to ensure productive outcomes.

Ensure clarity when proposing an action, giving the secretary ample time to record the names of the proposer and seconder before voting. Count the votes for and against, and identify abstentions to ensure they tally with those eligible and present.

In settings like an Annual General Meeting, it’s common to introduce and second proposals such as adopting the accounts before discussion—a standard procedure when outcomes are predetermined. However, in less formal gatherings, discussions often shape the proposals.

Ideally, the Chairman will present a clear proposal, hoping to declare it “carried unanimously” (everyone in agreement) or “carried nem con” (no objections). If votes need counting, results are announced by majority favor or opposition.

At times, voting may split evenly, including the Chairman’s vote. Typically, the Chairman then casts a deciding vote favoring the status quo, preserving the pre-debate conditions for reevaluation. Constitutions may require larger majorities for specific decisions, so always consult the by-laws for guidance on required majorities.

Occasionally, members unhappy with a proposal might “table an amendment,” which must be voted on before the main proposal. If passed, it automatically defeats the original proposal. For instance, amending a proposal to dismiss Joe Bloggs immediately with one granting a month’s notice—if passed, changes the outcome significantly. Managing amendments carefully is crucial as they can significantly alter decisions.

For those interested in formal meeting procedures or simply fascinated by parliamentary tactics, “Roberts’ Rules of Order” is an invaluable resource. Originally authored by an American army officer in 1876, it draws heavily from English parliamentary practices and is a revered guide in many regions.

Public Speaking and Broadcasting in Ship Chartering

Public speaking can be daunting, transforming nervous energy into compelling delivery. Know your subject well, especially if responding to questions. Familiarize yourself with any technical setups, like microphones or studio equipment, to prevent panic due to unfamiliarity.

Techniques like controlled breathing and strategic speech timing can be learned. Adopt the “threes rule”: introduce, elaborate, and recapitulate three main points to maintain and enhance audience engagement.

However, even the best delivery can’t salvage a poorly constructed speech. In broadcasting, where audience reactions aren’t immediately perceptible, thorough preparation and rehearsal are essential.

Telephone in Ship Chartering

The telephone is an indispensable shipping business tool, offering direct and instant communication. Always prepare with relevant notes or a word processor to ensure accuracy and efficiency in conversations.

Record key details from telephone discussions promptly to maintain accurate business records. Use the phone to maintain active engagement with colleagues, especially those hard to meet in person. Ensure your enthusiasm and professionalism are conveyed through your tone and choice of words.

Written Word in Ship Chartering

Written English differs significantly from spoken language. Listening to a speech intended for publication highlights its formality compared to casual conversation.

Maintain a certain formality in written communications, even in personal correspondence. Avoid contractions and overly casual language, but strive to keep your tone warm and personable without sacrificing correct English.

Ultimately, your writing should reflect your personality without feeling forced. Clarity and reader-friendliness are paramount. Understand your audience, especially in formal assessments like examinations where clear communication is crucial for good marks.

Remember, while you may aspire to artistic heights with your writing, the primary goal is to engage and please your readers, adhering to established grammatical and stylistic norms.

Punctuation, Grammar, and Syntax

For those without a strong command of English, simplicity is key. Complex sentences that require re-reading for clarity should be avoided.

This lesson emphasizes adhering to grammatical rules, yet there is flexibility. Reading classical literature introduces long and complex sentences, a style crafted by literary masters. However, for clear communication, it’s advisable for us to use shorter sentences and more frequent paragraph breaks than rules might dictate.

For Shipbrokers, certain elements may irritate readers, such as:

• Poor spelling, e.g., ‘recieve’ instead of ‘receive’.
• Split infinitives, e.g., ‘the way to properly fill a container’ instead of ‘the way to fill a container properly’.
• Ending a sentence with a preposition, which the old adage humorously advises against (“a preposition is a word you must never end a sentence with”).
• Overuse or incorrect use of hyphens instead of appropriate punctuation marks.
• Omitting the question mark at the end of a question.
• Misusing apostrophes, which denote possession (e.g., “the owner’s ships” for one owner, “the owners’ ships” for multiple owners) or omitted letters (e.g., won’t for “will not”).
• Basic grammatical mistakes like using “different to” or “different than” instead of “different from”.
• Using a punchy ‘journalistic’ style, which might not suit the business context.

Misplaced pronouns can lead to confusion; they should clearly refer to the last noun mentioned. Using capital letters for terms like Bills of Lading is not necessary, but consistency is key if you choose to do so.

Market Reports

When crafting a report, remember the reader is likely very busy. Structure your report with clear sections: an introduction, development, conclusion, and recommendations, regardless of length.

Use short sentences and clear paragraphs marked by headings to guide the reader. Main headings should be in capitals and underlined, with subheadings in mixed case and underlined.

For complex reports with many cross-references, maintain a consistent method of organization:

• Traditional: Use a hierarchical format with Roman numerals, capital letters, numbers, lowercase letters, and lowercase Roman numerals (e.g., II, B, 1, a, iii).
• Decimal: Use a sequential format like 1; 1.1; 1.1.1; etc.

Choose one system and stick to it to avoid confusion.

Market reports should be narrative and subdivided into areas of interest, with headings and sub-headings to direct readers. Maintain a consistent ‘house style’ and ensure any changes are approved and suitable for the audience.

For market reports recommending actions, such as post-visit summaries, start with an introduction explaining the purpose of the visit. Offer a brief recommendation, then logically present supporting points. Include complex data in appendices to maintain narrative flow, concluding with a summary that reinforces your recommendations.

Overall, clear and thoughtful communication in writing not only conveys your message effectively but also reflects your professionalism and attention to detail.

Letters

A letter represents you. Its style, layout, and the paper used all convey messages about you.

For example, in a recent exam, a question specified writing to a personal friend, yet some began their letters with “Dear Sir.” Always start by noting the date and any reference code, then consider how to appropriately address the recipient.

Here are some guidelines:

a) For a company, use “Dear Sirs” and close with “Yours faithfully,” keeping the ‘f’ in ‘faithfully’ lowercase. If addressing a specific person like Mr. J Bloggs for faster processing, still use “Dear Sirs” and “Yours faithfully.”

b) When you know the recipient’s name and they are not overly formal, address them directly, e.g., “Dear Mr. Bloggs,” and close with “Yours sincerely.”

c) Always include a heading if the letter could cover various topics.

Avoid overusing “I” and “we.” Focusing on “you” generally elicits a warmer response, as communication is fundamentally about relating to human nature. Be concise but thorough enough to explain your point.

Clearly indicate who is writing; type your name and position below your signature for clarity. Some companies prefer the phrase “For and on behalf of Bloggs and Co Ltd” before the signature. This practice varies by region, so when in doubt, include your company’s name above the signature.

Layout Choose a consistent layout for your letter. The “fully blocked” style aligns every line with the left margin, though the date can be placed on the right to aid filing clerks.

Writing for the Media

When crafting an article for a magazine, adapt your style to fit the publication’s ‘house style,’ which can be understood by reviewing past issues. For instance, a cynical piece may not be appropriate for a serious magazine, whereas a light-hearted publication might not welcome overly scholarly articles.

Press Releases

A press release must capture an editor’s attention among thousands of others. It should be newsworthy and timed well, such as aligning with a journal’s special feature on Singapore if you are promoting your business there. Releases can be “embargoed until…” if necessary.

Press releases should be typed with double spacing for easy editing and annotation. Include a contact number and ensure the contact person is readily available, as editors might seek more information for a more extensive feature.

Press releases often provide more value than expensive advertising, creating lasting awareness rather than immediate gains.

Memoranda

Also known as ‘memos,’ these are typically concise messages used within organizations for reminders or instructions. Use a brief heading and ensure the language is economical.

Legal and Parliamentary Material

Legal texts are dense and filled with specialized language. Approach them one clause at a time and use a dictionary if needed. Understanding these documents grows with experience.

When negotiating commercial relationships, recognize that what may feel like a binding agreement might not legally hold. Never sign any document without fully understanding its implications. Asking for clarification is better than making an uninformed decision.

Always remember, legal expertise comes with time, and it’s crucial to fully grasp legal documents before agreeing to them.

Visual Communication

“A picture is worth a thousand words.” Visuals can enhance both spoken and written communication, though overusing them may lead to confusion. We’ll explore how to effectively utilize various types, focusing on videos, slides, and models. These tools are valuable in presentations if applied with appropriate expertise and confidence.

Graphs

Graphs are useful for illustrating relationships between two or more data sets. While they may not provide the precision of tables, they quickly highlight trends and changes. For example, a hospital graph tracking a patient’s temperature fluctuations is a common application.

On a graph, the horizontal axis (x-axis) is ideal for constant factors like time intervals, while the vertical axis (y-axis) is used for variables such as temperature or price. Understanding a graph involves recognizing that each point represents a pair of values, and the connecting lines or curves visually depict how changes in one variable (x) impact another (y).

The Use of Graphs in Economics

Graphs are particularly effective in illustrating economic concepts, helping to visualize theoretical relationships and economic behaviors.

Charts

Pie Charts: A pie chart is a circular diagram divided into segments, each representing a proportion of the total. To enhance clarity, especially when segments are similar in size, percentages are also displayed. To construct a pie chart, each percentage is converted into degrees (percentage x 3.6), totaling 360 degrees for the complete circle.

Bar Charts: Bar charts provide a straightforward method to display data. Data points are plotted along two axes—a vertical and a horizontal axis—simplifying the representation of statistical information.

Tables

Tables are the simplest form to present data. They can be quickly typed, do not require drawing tools, and effectively organize and clarify figures. This format is excellent for conveying complex data clearly and concisely.

SHIP CHARTERING COMMUNICATION TYPES

COMPUTER

The Shipping and Ship Chartering business, like all industries, increasingly relies on computers. Understanding the technology isn’t necessary, but its usage is crucial.

Fax

Short for facsimile or tele-facsimile, this system transmits photocopies or scanned images of documents via a standard telephone line. This is particularly beneficial in Shipping and Ship Chartering, for instance, allowing the transmission of a charter party with all modifications and additions to a correspondent. The ability to send diagrams and handwritten notes enhances its utility. An advanced feature, though not universally available, includes verification to satisfy legal and judicial requirements, confirming that the recipient’s machine is the intended one and that it has properly received the message.

Electronic Mail (E-Mail)

E-mail has swiftly become a standard business communication tool due to its cost-effectiveness, ease, speed, and near-instantaneous nature. It enables simultaneous transmission to multiple recipients and allows forwarding. Attachments like documents and images can be sent and modified by the recipient without additional processing. E-mail is essential for internal use within large organizations and for secure network communications. However, it has its drawbacks, including potential security issues, susceptibility to spam, and the possibility of system failures.

Electronic Data Interchange (EDI)

EDI is employed by large organizations and government bodies to transmit data efficiently between computers, eliminating the need for paper-based documentation. This technology is particularly valuable in the Shipping and Ship Chartering industry, where multi-modal transport systems depend on electronic document transmission. Despite initial challenges with new technologies, standardization and technical improvements are likely to increase its acceptance in the shipping sector.

Data Storage and Retrieval

Computers in business allow for the rapid storage and retrieval of vast amounts of data. For instance, a Sale and Purchase Broker can quickly access a database to find ships that meet a buyer’s criteria and instantly communicate this information to the client. Such capabilities enhance accuracy and speed, providing a competitive edge.

Subscribers to information services, like Lloyd’s Register of Ships, can access updated data instantly using their unique passwords, an invaluable tool in industries that rely on quick access to precise information.

The Internet and E-Commerce

The Internet facilitates various business activities, including e-mail communication, remote data access, electronic banking, and data interchange. Additionally, it serves as a vast resource for businesses via the worldwide web, which offers access to information and e-commerce opportunities.

Most businesses maintain websites that showcase their services, provide customer information, and facilitate electronic transactions. Online shopping has become a standard aspect of business, allowing customers to buy goods, book services, and download information directly from websites.

While chartering a ship or booking cargo space online is more complex than typical e-commerce transactions, numerous organizations facilitate these activities over the Internet. However, completing such transactions entirely online without additional communication methods may take time to become widely accepted within the shipping community.

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