Primarily, there are three (3) types of Charter Parties in use:
1- Time Charter Party
2- Voyage Charter Party
3- Bareboat Charter Party
1- Time Charter Party
In Time Charter Party, the Charterer hires the ship for some time within agreed limits during which time the Charterer has the discretion as to how the ship shall be employed. Usually, Time Charter Hires are paid to the Shipowners on a monthly or semi-monthly basis.
Technical Management of the ship is not transferred to the Time Charterer. Commercial Management of the ship is transferred to the Time Charterer. Time Charterer is more involved with the voyage than Voyage Charterer.
In a Time Charter Party, the Time Charterer supplies and pays for the bunkers, docks, harbor dues. Furthermore, the Time Charterer arranges and pays for cargo handling costs (loading and discharge expenses).
The Time Charterer delivers instructions to the Ship Master as to which ports the ship will steam. Nevertheless, in a Time Charter Party, the Ship Master and Crew Members are the servants of the Shipowner. Therefore, it will be the Shipowner to whom any Vicarious Liability is attributed.
The Time Charterer may negotiate the option to Sub-Charter (Sublet) the ship in which event the Time Charterer’s name will appear as the Disponent Owner which means Time Charterer is deemed to be the Shipowner but not actually the Shipowner.
2- Voyage Charter Party
In Voyage Charter Party, the Voyage Charterer pays Freight to the Shipowner for the carriage of cargo for a particular voyage. The Voyage Charterer may or may not be the owner of the cargo.
In consideration of employing the ship, the Voyage Charterer pays Freight to the Shipowner.
In Voyage Charter Party, depending upon the commodity concerned, Freight may be either an agreed rate per tonne of cargo or a fixed lump sum paid to the shipowner.
In Voyage Charter Party, it is the Shipowner’s responsibility to ensure that the ship carries the cargo from a stipulated loading port to a stipulated discharging port.
In Voyage Charter Party, the Ship Master and Crew Members are the servants of the Shipowner, not of the Charterer. Therefore, the Shipowner will have Vicarious Liability for the negligence of the Ship Master and Crew Members.
The Voyage Charter Party incorporates an Express Term obliging the Shipowner to carry the cargo from the named loading port to the named discharging port. Both loading and discharging port names must be mentioned in the Voyage Charter Party. However, the Charterer may negotiate the option to declare at a later date a port name out of an agreed list of ports or out of a geographical range. For example, ARAG Range (Amsterdam-Rotterdam-Antwerp-Gent Range).
3- Bareboat Charter Party
In Bareboat Charter Party, the Charterer takes over the possession and control of the ship for a certain period. The Bareboat Charter Party is like a lease agreement and the Charterer mans and supplies the ship. Bareboat Charter Parties tend to be used mainly as a method of effectively financing the owning of a ship.
In Bareboat Charter Party, the Charterer takes all responsibility for the ship’s navigation, management, and operation.
In Bareboat Charter Party, a Bareboat Charterer may even change the Ship’s Flag during the period of the lease.
In Bareboat Charter Party, a Bareboat Charterer is regarded as being the owner of the ship for legal liability in respect of the ship during the bareboat charter period.
In Bareboat Charter Party, the Ship Master is the agent of the Bareboat Charterer and not the Shipowner. Consequently, the important feature of the Bareboat Charter Party is that the Ship Master and Crew Members are engaged, employed, and paid by the Bareboat Charterer. Therefore, the Bareboat Charterer is the person to whom Vicarious Liability will be attributed for the acts, neglects, and defaults of the Ship Master and Crew Members.
Difference Between Bareboat Charter Party and Demise Charter Party
Unfortunately, many Academics and Shipping Lawyers use the term Demise Charter Party when referring to a Bareboat Charter Party. Shipbrokers should refrain from using the terms synonymously.
If the Shipowner leases the ship with the Shipowner’s Ship Master and Crew Members it is called a Demise Charter Party. If the Shipowner leases the ship without the Ship Master and Crew Members it is called Bareboat Charter Party.
Charter Party Implied Terms
Common Law implies certain terms in any contract governed by English law. These terms are either implied as a matter of fact by the Courts or may be implied by Statute.
Implied Terms are deemed as incorporated in a contract to give it Business Efficacy. This is undoubtedly the case concerning charter parties.
The Common Law implies four (4) terms for every Voyage Charter Party:
1- Reasonable Despatch
The ship must be ready to commence the voyage agreed on and to load the cargo to be carried and shall proceed upon and complete the voyage agreed upon with all reasonable despatch.
A breach of this implied term gives the charterer the right to repudiate the charter party if the delay is so serious as to go to the root of the contract. Otherwise, the sole remedy would be damages.
2- Seaworthy Ship
At Common Law, the Shipowner’s duty to provide a seaworthy ship is absolute. Even if the shipowner takes all reasonable care, and exercises all due diligence to ensure that the ship is seaworthy, the shipowner will nonetheless be liable for breach of the charter party if the ship is not seaworthy.
At Common Law, the Shipowner’s liability to provide a seaworthy ship is strict, in other words, no-fault liability.
Seaworthy Ship at Common Law Vs Hague-Visby Rules
Under the Hague-Visby Rules, the Shipowner’s duty to provide a seaworthy ship is to exercise all due diligence. Under the Hague-Visby Rules, the Shipowner would only be liable, if the Shipowner had been negligent in ensuring that the ship was seaworthy.
The Shipowner’s absolute warranty at Common Law is different from the duty to act with due diligence under the Hague-Visby Rules.
Furthermore, it is important to distinguish between the obligation of the shipowner to provide a ship that is seaworthy at the beginning of the voyage from the obligation to stow the cargo and care for the cargo after the voyage has commenced.
The seaworthiness obligation also includes a strict duty to ensure that the ship is able to carry the cargo provided by the charterer. In other words, the term Seaworthy is including the term Cargoworthy.
The provisions of the Hague-Visby Rules may also be incorporated into a Charter Party. If the Hague-Visby Rules are incorporated into a Charter Party the standard to which a Shipowner must comply in order not to be in breach of the implied terms may, under the provisions of the Hague-Visby Rules, be less burdensome.
Three (3) types of Charterparty Terms:
3- Innominate Terms
In the Hong Kong Fir Shipping case, the term describing the seaworthiness of the ship was an Innominate Term. It is not feasible to pre-classify the term as being either a condition or warranty when assessing the rights of the injured party, but it is critical to examine the effect of the breach.
A ship would be deemed unseaworthy, by the incompetence of the Ship Master or Crew Members’ knowledge. For instance, prudent Shipowners would not have put the ship into the ocean, knowing of the Ship Master’s lack of knowledge of how to use a particular fire extinguishing system.
A ship would be deemed unseaworthy, at the time of ship delivery, if the ship’s engine room staff is incompetent.
A ship would be deemed unseaworthy, at the time of ship delivery, if the ship did not have a Deratisation Certificate. Without a Deratisation Certificate, the ship could not operate as the Charterparty provided or for the considered intention.
A ship would be deemed unseaworthy, if the ship does not have adequate bunkers for the voyage or, where the voyage is a long one, for the respective stage of the trip during which the loss materializes.
The term “in every way fitted for cargo service” does not impose an absolute obligation on the Shipowners to deliver the ship in a fit condition but simply to use reasonable diligence to do so.
Test for Ship Seaworthiness
The test for Ship Seaworthiness is would a prudent Shipowner have directed the deficiency to be remedied before steaming his ship to the ocean if the Shipowner had known of it? If the Shipowner would the ship is unseaworthy.
Ship Seaworthiness at the Commencement of the Voyage
Charterparty term that “the ship must be tight staunch and strong, and in every way fitted for the voyage” relates to the initial voyage to the port of loading. It refers to the time at which the contract is made or to the time of sailing for the port of loading. The undertaking for seaworthiness implied by law relates to the time of sailing from the port of loading.
The undertaking as to seaworthiness is that the ship is fit to receive the particular cargo at the time of loading so that a deficiency materializing after the cargo has been shipped is no breach of this undertaking and the ship is seaworthy at the time of sailing.
A breach of the implied undertaking of seaworthiness at the port of loading entitles a Charterer to refuse to load the ship. However, the breach would have to be such as to frustrate the object of the Charterparty. The discrepancy appears because the Charterer’s obligation to load the ship is conditional on the ship being seaworthy at the port of loading not upon the ship being seaworthy at the time the contract was made.
At Common Law, ship seaworthiness obligation can be limited by an exemption clause. Under the Hague-Visby Rules, ship seaworthiness obligation can not be limited by an exemption clause.
At Common Law, ship seaworthiness obligation can be limited, however, it must be expressly excluded, and in the most straightforward phrases: the courts adopt a presumption that an exemption clause does not apply to unseaworthiness unless expressly so remarking. Any equivocation in an exemption clause will be construed against the Shipowner.
Ship Saworthiness obligation applies equally to Time Charter Parties as to Voyage Charter Parties.
3- Dangerous Cargo
Common Law implies that Charterers do not ship dangerous cargo without notice. Bill of Lading (B/L) stipulates that dangerous cargo must not be tendered for shipment unless earlier arrangements and written notice have been given to the Shipowner.
The Shipper of Dangerous Cargo would be liable for all resulting damage and cost if the prerequisites are not fulfilled thoroughly.
Cargo may be considered dangerous if that cargo may cause detention of the ship due to legal obstacles.
Unless the Shipowner knows or ought to have known the dangerous character of the cargo, there is an implied warranty by the shipper that the cargo is fit for shipment in a standard way and are not dangerous.
Merchant Shipping Act 1894 (Section 446-450) explains Dangerous Goods. Primarily, the Merchant Shipping Act 1894 (Section 446-450) provides that where a person sends or attempts to send dangerous goods without notifying the Ship Master or the Shipowner by written notice, that person shall be liable for a criminal offense.
Consequently, the Common Law rules create contractual liability between the Shipowner and the Charterer, whereas the statutory rules under the Merchant Shipping Act 1894 create a relationship between the person sending or attempting to send the goods and the State.
4- Ship Deviation
At Common Law, Ship Deviation is solely justifiable where the deviation is to Save Life.
At Common Law, Ship Deviation to Save Property is unjustifiable unless expressly specified in the Charterparty
Under the Hague-Visby Rules, Ship Deviation to Save Property is justifiable.
Furthermore, at Common Law, Ship Deviation is justifiable for the prosecution of the voyage or the safety of the venture. Ship Master is required to use all reasonable care to bring the venture to a successful conclusion protecting the ship and cargo from undue risks. If a ship sustains such damage that repairs are required the Ship Master must put the ship to the nearest port at which such repairs can be conducted. The same principle applies in the case of any other peril endangering the ship or the ship’s cargo.
Ship Deviation would be justified even if necessitated by the ship’s unseaworthiness at the beginning of the voyage if it would be dangerous to keep the ship at sea without conducting such repairs.
In the United Kingdom, Ship Deviation means geographical deviation. In the United States, the Ship Deviation has been extended to comprise other unjustified practices of carrying out the contract.
Some charterparty terms may give the shipowner the right to call at ports of the ordinary trade route. Nevertheless, inadequate general terms will not be taken to grant a right to deviate.
Unless the Bill of Lading (B/L) or Charter Party stipulates the sea route to be followed, the carrier must follow the customary (standard) sea route. Customary (standard) sea route is presumed to be the direct geographical route, but the presumption may be rebutted by evidence of a practice adopted in a certain trade, or by a certain shipping line.
Ship Deviate Clauses will be construed contra proferentum, in other words, against the person who aims to rely upon them.
What are the consequences of Unjustified Deviation?
In the past, it was firmly considered that ship deviation goes to the root of the charter party, which lost the carriers the right to rely on an exclusion clause. The rationale for such a strict view was at one time the equally strict view taken in insurance in that ship deviation in a voyage policy put the assured off risk from the time of deviation.
Today, all voyage policies incorporate a held covered clause which continues the insurance cover in the event of ship deviation. The old strict rule of automatic insurance cover termination for the fundamental breach has been closely analyzed in the general law. It has been held inapplicable to intentional delays by the charterer. Nevertheless, Ship Deviation can be waived, if the charterer continues with the charter after the ship deviation, the charterer cannot subsequently change his mind and raise an objection.
Ship Deviation remains a breach even if the charter party is not repudiated. The charterer will be entitled to foreseeable consequential losses. However, the charterer will not be entitled to foreseeable consequential losses that are too remote from the breach.
Standard Charter Party Forms
Generally, Voyage Charter Parties, Time Charter Parties, and Bareboat Charter Parties are concluded based on Standard Charter Party Forms. Thus, Standard Charter Party Forms are broadly important in the ship chartering practice.
In the mid of the 19th century, shipowners and charterers commenced drafting Standard Charter Party Forms. Initially, Standard Charter Party Forms were drafted and employed by respective contracting parties. Later on, collaborative action was undertaken by a group of shipowners and charterers.
Standard Charter Party Form Examples
Three (3) institutions have played an important role in the development of internationally used Standard Charter Party Forms. Standard Charter Party Forms may be obtained from these organizations’ web pages:
BIMCO, ASBA, and the UK Chamber of Shipping have issued or approved plenty of Charter Party Forms. Most of the Charter Party Forms are so-called Agreed Documents. Agreed Documents result from considering the negotiations between charterers’ and shipowners’ interests. In the ship chartering business, these Charter Party Forms are commonly referred to as Approved Charter Party Forms or Official Charter Party Forms.
Private Charter Party Forms
Besides the BIMCO, ASBA, and the UK Chamber of Shipping’s Standard Charter Party Forms, there are miscellaneous longstanding Private Charter Party Forms that are in widespread use in various trades.
Private Charter Party Forms are sometimes called House Charter Party Forms. Private Charter Party Forms are issued and used by particular companies.
Advantages of using Standard Charter Party Forms
One of the major advantages of using Standard Charter Party Forms is that oftentimes the contracting parties are domiciled in different countries and that the chartering negotiations, which are usually carried out through the intermediary of one or several brokers, are often accomplished under considerable time pressure. By basing the chartering negotiations on Standard Charter Pary Forms, the terms of which are well-known or readily available, the negotiating parties can focus on the specific matters on which the parties require a unique regulation, leaving all other questions to be handled by the terms of the Standard Charter Party Forms. Therefore, the use of Standard Charter Party Forms means that the contracting parties do not run the risk of being caught out by an uncommon clause imposing unreasonable or unanticipated obligations upon the contracting parties.
On the other hand, the use of the Standard Charter Party Forms has the extra advantage from a broad legal perspective, that Standard Charter Party Forms contribute to international uniformity. The use of the Standard Charter Party Forms partially neutralizes the discrepancies between regulations stipulated in the miscellaneous legal systems. Therefore, identical cases taken to arbitration or litigation will tend, to a certain extent, to bring identical results, irrespective of the jurisdiction under which the cases are settled.
In the ship chartering business, all Standard Charter Party Forms are known by a code name, for example, ASBATIME, GENCON, BALTIME, etc.
TIME CHARTER PARTY
Time Charter Party’s preamble is similar to that of a Voyage Charter Party. However, Time Charter Party’s preamble usually incorporates more details about the ship such as bunker capacity, grain, and bale cubic capacities.
In Time Charter Party’s preamble, the most important added information is the ship’s speed and bunker consumption. Frequently, the ship’s speed and bunker consumption are topics of disagreement between the Shipowners and Time Charterers.
In Time Charter Party, the ship’s present position is stipulated as in a Voyage Charter Party.
In the Time Charter Party, the period of hire is stipulated. In the Time Charter business, the period of hire may be fairly short, maybe for only one trip, it is referred to in the chartering market as a Time Charter Trip (TCT). On the other hand, the period can be for several months or even several years and an area of potential dispute is over the Final Voyage in a Period Time Charter.
In Time Charter Party, the place of ship delivery is stipulated. Time Charterers attempt to negotiate ship delivery at the exact place at which Time Charterers’ business is due to commence.
In Time Charter Party, the first date for delivery and a canceling date is stipulated. Unfortunately, some shipbrokers use the term laydays which here is not strictly correct.
In Time Charter Party, the trading limits are stipulated. The Shipowners may stipulate the geographical limits within which the ship is allowed to trade, or the Shipowners may exclude certain maritime nations for political reasons.
In Time Charter Party, the cargo exclusions are stipulated. Shipowners do not prefer to load some type of cargoes on their ships.
In Time Charter Party, Time Charterers and Shipowners agree on a minimum and a maximum quantity of bunkers to be on board at delivery and at re-delivery and how the bunker price will be determined.
In Time Charter Party, the charter hire is stipulated. Hire may be a daily rate or it may be a rate of so much per deadweight ton per month. Usually, hire is payable in advance, and hire may be monthly or semi-monthly. Furthermore, the place and currency are stipulated. Time Charter Party’s Hire Payment Clause grants the Shipowner the right to withdraw the ship from charter if hire payment is not made on the due date.
Time Charter Party’s Anti-Technicality Clause stipulates that if the hire payment is late, the Shipowners will postpone exercising their right to withdraw the ship to give time, usually, 48 hours, to check whether the lateness is due to a problem in the banking system rather than actual default by the Time Charterer.
In Time Charter Party, the ship re-delivery is stipulated. Time Charterers have to agree on and arrange a port for ship re-delivery. Usually, Time Charterers try to get a deal to the widest possible range of ports for ship re-delivery particularly if the Time Charterers cannot foresee where the ship will end her Final Voyage.
In Time Charter Party, the off-hire clause is stipulated. Some Time Charter Parties incorporate a clause detailing how long, usually 24 hours, will be allowed for the Shipowners to rectify an immobilizing fault before the ship is put off-hire.
In Time Charter Party, the Bill of Lading (B/L) Clause is stipulated. The Bill of Lading (B/L) Clause lays down instructions to the Ship Master regarding the signing of the Bill of Lading (B/L).
In every Time Charter Party, some clauses stipulate what the Shipowners have to provide and what the Time Charterers have to provide.
In every Time Charter Party, some clauses stipulate Arbitration, Commissions, Arbitration, and Protection Clauses.
VOYAGE CHARTER PARTY
Voyage Charter Party Forms may differ widely depending upon the commodity or trade concerned. However, all Voyage Charter Party Forms have similar fundamental anatomy.
In Voyage Charter Party’s preamble, the date and the place, where the negotiations are concluded, are stipulated. Then, the name of the Shipowner and the Charterer is stipulated.
In Voyage Charter Party, the name of the ship together with a description is stipulated. Usually, the description includes the ship’s flag, class, deadweight, draft, year of build, etc.
In Voyage Charter Party, there is a clause that notifies the ship’s present position and the ship’s expected date of readiness to load. Although later in the Voyage Charter Party Form there is a clause stipulating the laydays and canceling date, the Voyage Charterer bases the cargo arrangements on the information in the Voyage Charter Party’s preamble.
The Voyage Charterer would have a case for damages, if the Shipowner deliberately slipped in another cargo and arrived very close to the canceling date as a consequence, conceivably causing the Voyage Charterer to incur demurrage on the trucks, rail wagons, barges, etc.
In Voyage Charter Party, cargo details are stipulated, i.e. the commodity and the quantity. Usually, there is a margin of 5% or 10% MOLOO (More or Less in Owner’s Option) as the exact cargo quantity is affected by the quantity of bunkers and stores on board as well as the allowed draft for that season and the parts of the world that the voyage involves.
In Voyage Charter Party, the places of loading and discharging are stipulated. Here, Shipbrokers must be extremely careful, whether this is a Port Charter or a Berth Charter.
In Voyage Charter Party, the places of loading and discharging may be one or more named ports to one or more named ports. Furthermore, the Voyage Charterer may prefer to defer declaring precisely which ports until nearer the time. Therefore, the Voyage Charterer may state a series of named ports, such as Gent, Rotterdam, or Amsterdam. Alternatively, the Voyage Charterer may state a geographical range, such as North Continent. Voyage Charter Party stipulates a time frame by which a precise port nomination has to be made by the Voyage Charterers.
In Voyage Charter Party, the places of laydays and canceling dates are stipulated. The term laydays is peculiar to chartering business. The term laydays’ origins are not quite clear. Laydays are the days allowed for loading and discharging. Usually, the actual phrases in the clause state “Laydays not to commence before”. Therefore, if the vessel arrives before that date the Charterer is not obliged to begin loading. However, many Voyage Charter Parties stipulate a provision for an early commencement if the Charterer can begin early loading operation.
In Voyage Charter Party, canceling date is practically an option. The Voyage Charter Party is not automatically canceled if the vessel misses the canceling date. The Canceling Date Clause provides the Charterers the option to cancel the vessel if the vessel arrives after the agreed date. Many Voyage Charter Parties have wording to cover the Charterer having to declare his intention when it is obvious that the vessel is running late. Otherwise, in some cases, the vessel arrives at the loading port and presents NOR (Notice of Readiness) only to be advised the Voyage Charter Party is canceled.
In Voyage Charter Party, the NOR (Notice of Readiness) Clause is stipulated. The NOR (Notice of Readiness) Clause may have stipulations about giving ETAs (Estimated Time of Arrivals) at particular times but eventually stipulates when and how the vessel gives the NOR (Notice of Readiness) to load or discharge. The NOR (Notice of Readiness) starts the laytime clock.
Laytime (time used in loading and discharging) is the most disputed part of the Voyage Charter Party.
In Voyage Charter Party, the loading rate and discharging rate are stipulated. In dry cargo chartering, the loading rate and discharging rate are usually expressed as so many tonnes per day. In tanker chartering, the loading rate and discharging rate are customarily expressed as the total number of hours. This clause will specify the day whether SHINC (Sundays Holidays Included) or SHEX (Sundays Holidays Excepted). In dry cargo chartering, the loading rate and discharging rate refer to WWD (Weather Working Days). In tanker chartering, charters are invariably SHINC (Sundays Holidays Included) and have no reference to the weather.
In Voyage Charter Party, the freight is stipulated. Usually, freight is stipulated per tonne but in some cases, freight is stipulated as a lump sum. The Freight Clause spells out when freight is payable, where freight is to be paid, and in what currency.
In Voyage Charter Party, demurrage is stipulated. Demurrage is a type of Liquidated Damages for exceeding the amount of time allowed for loading and discharging.
In Voyage Charter Party, despatch money is stipulated. Despatch Money is a bonus paid by the Shipowner to the Voyage Charterer if the ship’s loading and discharging operations are completed in a shorter time than allowed. Usually, Despatch Money is at Half the Demurrage Rate (DHD: Demurrage Half Despatch). In tanker chartering, there is no provision for Despatch Money.
In Voyage Charter Party, an arbitration clause is stipulated. Arbitration Clause spells out where arbitration should take place.
In Voyage Charter Party, a commission (brokerage) clause is stipulated. Shipbrokers must insert their names as well as the percentage or amount if Shipbrokers want to take full advantage of the Contracts (Rights of Third Parties) Act 1999.
In Voyage Charter Party, miscellaneous protection clauses, such as Strike Clause, War Risk Clause, Ice Clause, General Average Clause, and Bill of Lading Clause, are stipulated,
What is Freight?
In Voyage Charter, Freight is the remuneration payable to the Carrier (Shipowner or Ship Operator) for the carriage of cargo by sea under a Voyage Charter Party. In Voyage Charter, the Charterer is concerned with the carriage of the cargo and not the use of the vessel itself.
When is Freight Payable?
If there is no provision to the contrary, Freight is payable on the delivery of the cargo, and is calculated on the quantity actually delivered.
In some cases, Charterers and Carriers (Shipowners or Ship Operators) agree that a lumpsum freight shall be paid irrespective of the quantity of cargo carried.
In some cases, Charterers and Carriers (Shipowners or Ship Operators) agree that Freight is to be Paid in Advance. For example, “on signing bills of lading” in which case the Freight will be paid on the Bill of Lading (B/L) Quantity and the Original Bill of Lading (B/L) will not be handed to the Charterer until Freight is received. This clause continues by expressing “ship lost or not lost” which may seem burdensome but merely shifts the burden of insuring the Freight from the Shipowner to the Charterer. FDEDANRSAOCLONL (Freight Deemed Earned Discountless and Non-Refundable Ship and/or Cargo Lost or Not Lost)
In some cases, Charterers and Carriers (Shipowners or Ship Operators) agree on “within X days of signing freight prepaid Bills of Lading (B/L)” which involves the Shipowner giving credit to the Charterer. The goal of such a term is to allow the Charterer to collect payment under a Letter of Credit (L/C).
In some cases, Charterers and Carriers (Shipowners or Ship Operators) agree on “freight payable before breaking bulk (BBB)”. This term gives the Charterer all the voyage time up to the ship’s arrival at discharging port before paying the freight. In these freight payment variations, it is standard to incorporate the terms FDEOSBL (Freight Deemed Earned on Signing Bills of Lading) which also shifts insurance to the Charterer
MOLOO (More or Less in Owner’s Option): the quantity to be loaded being within particular limits at the Shipowners’ option to authorize the Ship Master to calculate how much the ship can take cargo to bring the ship down to the permitted draft. After declaring cargo quantity intake to the Charterer, if the full cargo is not provided by the Charterer, the Shipowner may claim damages in the form of Deadfreight. Deadfreight is the freight due for the missing quantity less any savings as a consequence of the cargo not being loaded.
There must always be right and true delivery of the cargo which gives the Cargo Owners the right of action against the Shipowner for damages in cases where the cargo may arrive at the destination in a damaged state. Cargo Owners are not entitled to refuse payment of freight unless the cargo has lost the total commercial monetary value.
Furthermore, the Charterer cannot deduct from the freight the damage to the cargo. The Charterer would initiate an independent cause of action for the cargo damage unless the cargo damage was caused exclusively by excepted perils whether excepted by express term or by the operation of the Common Law. Unless the Shipowner fails to carry the cargo to the destination agreed, the Shipowner is entitled to be paid the freight.
Freight must be paid in Full without Deductions
In The Nanfri (1978) case, although it was concerned with a Time Charter, the subject of deductions from freight payment was assessed carefully by Lord Denning MR. Lord Denning MR exemplified the question of whether a Time Charterer could set off cargo damages against the Hire.
Lord Denning MR recognized that at one time it had been common to describe sums payable under a Time Charter as Freight but that in modern times a transformation had come about. Payments under Time Charters were now described as Hire.
Lord Denning MR acknowledged that this transformation corresponded to a recognition that the Time Charters and Voyage Charters were quite different. Consequently, the special rule of English law whereby freight must be paid in full without deductions for short delivery or cargo damage could not be applied automatically to Time Charterers. Lord Denning MR stated that Equity would allow a Time Charterer to deduct for short delivery or cargo damage claims against the Hire.
In the case of Lumpsum Freight with the Bills of Lading (B/L) providing that freight shall be payable as per the Charter Party, each Bill of Lading (B/L) Holder will be liable for such proportion of the Lumpsum Freight as his parcels bear to the whole cargo shipped. If a ship arrives at the discharging port, the Charterer must pay Full Lumpsum Freight even if some of the cargo were lost through causes other than excepted perils. In some cases, the Charter Party provides that lumpsum freight is payable in advance and will not be returnable even if the ship and or her cargo is lost.
A lien may be described as a right over the property of another which materializes in respect of a debt owed by the owner of the property to the holder thereof.
There are four (4) types of liens:
1- Contractual Liens: Contractual Liens is dependent upon the provisions as stipulated in the respective contract.
2- Common Law Possessory Liens: Common Law Possessory Liens are dependent upon the possession of the property.
3- Equitable Liens: Equitable Liens are not dependent upon possession. An Equitable Lien arises where Equity holds that a lien should exist. However, in these cases, the Possessory Lien is lost as the holder has parted with possession of the property. The Equitable Lien is ended once the property is sold to a third party who had no notice of the lien.
4- Maritime Liens: Maritime Liens are privileged liens that are materializing in consideration of maritime property. Maritime Liens are not dependent upon the possession of the property. Furthermore, Maritime Liens are not ended by a sale of the property to a third party.
Concerning the Carriage of Goods by Sea, the Shipowner has a Common Law Possessory Lien on the cargo for any Unpaid Freight that is due to the Shipowner and it is earned. The Common Law Possessory Lien is bounded to freight due on certain cargoes that have been carried. In other words, Common Law Possessory Lien is a particular possessory lien and is dependant upon the Shipowner having possession of the cargoes and emerges exclusively in respect of those cargoes.
What happens if the Charterer fails to pay the Freight?
If the Charterer fails to pay the freight due, for instance, at the discharging port, the Shipowner must take action to enforce the cargo lien by retaining continuous possession of the cargoes until the freight is received. Cargo Lien for unpaid freight is the Shipowner’s right under Common Law.
Possessory Liens do not materialize in respect of Deadfreight or Demurrage payments. For the shipowner to have a lien in respect of Deadfreight or Demurrage, there must be express provisions for this within the terms of the Charter Party. In other words, a Contractual Lien.
As the Common Law Possessory Lien arises in respect of Feight due on delivery of the cargo. However, there is no Common Law Possessory Lien in respect of Advance Freight.
In Unpaid Freight cases, the Shipowner can lien on cargo and keep the cargo on the ship. However, in practice, keeping the cargo on the ship is not always feasible due to the forthcoming commitments of the ship. Usually, the Shipowner places the cargo in the custody of a wharfinger and notifies the wharfinger in writing that the lien is attached to the cargo.
Merchant Shipping Act 1894 (Section 497) stipulates the cargo lien. If the freight continues to be unpaid then the Shipowner, through the wharfinger, has the authority in law to sell the cargo after a waiting duration of around 90 days. The funds raised from the sale of the cargo may be disbursed to defray miscellaneous expenses of the sale, handling of the cargo, warehouse expenses, and the freight due to the shipowner.
What is NOR (Notice of Readiness)?
NOR (Notice of Readiness) is the written advice submitted by the Ship Master or the Ship Agent to the Charterers stating that the ship is in all respects ready for loading or discharging operation. Charter Party stipulates the details of the tendering of NOR (Notice of Readiness).
Usually, the NOR (Notice of Readiness) Clause stipulates the office hours when notice may be tendered. There is frequently a Time Lapse between the NOR (Notice of Readiness) being tendered and the time starting to count. For instance, the NOR (Notice of Readiness) Clause may stipulate that NOR (Notice of Readiness) has to be tendered on a weekday within normal office hours. A vessel could have arrived on Friday evening and the loading operation commenced as soon as the ship berthed but time to calculate Laytime (Lay Days) and any eventual Demurrage or Despatch will only commence according to the NOR (Notice of Readiness) Clause unless the NOR (Notice of Readiness) Clause stipulates otherwise. Until a Valid NOR (Notice of Readiness) is tendered the Laytime Clock does not start to tick.
Even a vessel would normally have achieved significant Demurrage but as the NOR (Notice of Readiness) was not valid for some reason, the Charterers claim that no time counts at all and the vessel owes Despatch Money. Maritime participants highlight the importance of the NOR (Notice of Readiness) and its effect on when time starts counting.
What is Laytime (Lay Days)?
Laytime (Lay Days) is the time contracted between the Shipowners and the Charterers during which the Shipowner will make and keep the ship available for loading and/or discharging without payment additional to the freight payment.
Under the terms of the charter party, the Shipowner must make the ship available for the Charterer, at the agreed place, and contrariwise, the Charterer must make the cargo available and must bring the cargo along to the ship for loading operation.
Laytime (Lay Days) is the length of time allocated free of charge to the Charterers by the Shipowners, under the terms of the Charter Party, to load or discharge the ship.
What is Demurrage?
If the Charterers have delayed the ship in loading and/or discharging beyond the time specified in the Charter Party, in other words, Laytime (Lay Days) is Exceeded, then that will amount to a Breach of the Charter Party and the Charter Party may call upon the Charterer to compensate to the Shipowner Liquidated Damages known as Demurrage.
What is Despatch Money?
Under the terms of most Dry Cargo Charter Parties, but not in Tankers Charter Parties, if the Charterers load or discharge the cargo in a period that is shorter than the agreed Laytime (Lay Days) in the Charter Party, the Charterers may be entitled to a bonus, in other words, a reward that is known as Despatch Money.
Total Laytime (Lay Days)
The total Laytime (Lay Days) available to the Charterers depends upon the terms of the Charter Party.
In dry bulk chartering, particularly where the cargo would be damaged by being wetted by rain. Therefore, it is customary for the Laytime (Lay Days) available to the Charterers to be expressed as WWD (Weather Working Days). WWD (Weather Working Days) indicates that if Laytime (Lay Days) has started to count, bad weather prevents the berth from loading or discharging operations, that bad weather time does not count. Even if the vessel is waiting off the berth, at the anchorage, and the bad weather prevents operation on vessels on the berth in front of the vessel concerned, time ceases during the time of the bad weather. WWD (Weather Working Days) expression describes the type of day. WWD (Weather Working Days) expression does not refer to work on that particular vessel.
In SHEX (Sundays and Holidays Excepted) Charter Party, if the Charterers work during these periods and the Shipowners and the Charterers negotiate how SHEX (Sundays and Holidays Excepted) is dealt with in three (3) ways:
1- SHEX even if used
2- SHEX if used actual time used to count
3- SHEX if used half actual time used to count
When calculating Demurrage or Despatch, Shipbrokers estimate the total Laytime (Lay Days) available to the Charterers by taking into account all these elements and any delays through mechanical breakdowns, strikes, etc
In tanker chartering, for example, the total Laytime (Lay Days) available to the Charterers is invariably expressed in Running Hours. Running Hours indicates that once the time starts to count there is no exception for holidays or bad weather.
What is Demurrage?
What are the Damages for Detention?
The Charterer may detain the ship beyond the agreed Laytime (Lay Days) whilst loading or discharging operation and set this extra time against the Charterer’s payment of demurrage. Nevertheless, there are two (2) qualifications for Demurrage:
1- The ship is not obliged to remain at the port indefinitely and any unreasonable delay may frustrate the purpose of the Charter Party.
In other words, once the ship has been detained on demurrage for a reasonable time, the Shipowner may be entitled to treat the Charter Party as a Frustrated Contract and order the ship to steam away.
2- The Shipowner may order the ship to steam away once the Charterer has repudiated the Charter Party. The Charterer has repudiated the Charter Party where it is apparent that there is no possibility of the contractual obligations being performed and that further delay will inevitably frustrate the purpose of the Charter Party.
Once on Demurrage, Always on Demurrage
The primary principle when dealing with Demurrage is that Once on Demurrage, Always on Demurrage. In other words, Demurrage is payable on all time lost after the expiration of the Laytime (Lay Days) including Sundays, Holidays, and any other excepted times such as Strikes, etc.
The length of time for which Despatch Money is payable relies on the terms of the Charter Party. Despatch Money may be paid on:
1- All Time Saved
2- All Working Time Saved (All Laytime Saved)
All Time Saved means actual time saved to the Shipowner and includes both Laytime (Lay Days) and Calendar Days. On the other hand, the Charter Party may stipulate the Despatch Money to be paid on All Working Time Saved (All Laytime Saved).
Additional information regarding Laytime (Lay Days) is incorporated in the VOYLAYRULES (Voyage Charterparty Laytime Interpretation Rules) which have been prepared by BIMCO (Baltic and International Maritime Council) and FONASBA.
Port Charterparty Vs Berth Charterparty
Before Laytime (Lay Days) may start, there are three (3) major conditions that must be fulfilled by the Shipowner before the Charterer is obliged to start loading the ship:
1- Arrived Ship: the ship must have arrived at the destination as expressed in the Charterparty.
2- NOR (Notice of Readiness) if required, must have been correctly tendered and received by the Charterer or the Charterer’s Agent.
3- The ship must be Ready and must be fit to receive the cargo
1- Arrived Ship
The ship must be an Arrived Ship at the spot where according to the terms of the Charter Party, the ship should load or discharge the cargo. This is crucial because Laytime (Lay Days) may only start to run if the ship is an Arrived Ship.
Some Charterparties stipulate the Port to which the vessel should proceed are called Port Charterparties.
Some Charterparties stipulate that the vessel shall proceed to a specified actual loading Berth in a port are called Berth Charterparties.
If the Charterparty stipulates that the vessel shall proceed to a berth to be named by the Charterer, the situation is the same as if the named berth was stipulated in the Charterparty.
If the berth is named in a Charterparty, the vessel must get into that Berth before the vessel can be considered as an Arrived Ship. In Berth Charterparties, the Shipowners bear the risk of the berth being congested even if the congestion may have been generated by the terminal operators’ inefficiency
If the Charterparty stipulates a Dock as the loading place, the vessel is considered as an Arrived Ship as soon as the vessel gets into that Dock, even though the vessel cannot get to the Berth immediately and must therefore wait before the vessel can commence loading operation.
In Port Charterparties, it is not always straightforward to decide whether the vessel is an Arrived Ship.
Customary Anchorage Area
In some cases, a vessel may have to wait at a Customary Anchorage Area until a berth becomes available and the vessel can proceed thereto. If the Customary Anchorage Area is within the Legal, Geographical, and Administrative area of the port, and the vessel is at the Immediate and Effective Disposition of the Charter, the vessel is an Arrived Ship. The subject of an Arrived Ship under a Port Charterparty has been the subject of vast judicial discussions in courts and arbitrations.
Arrived Ship Cases and Parker Test
The leading Arrived Ship cases are the Maratha Envoy (1977) and Johanna Oldendorff (1974).
In The Aello (1961) case, the usual waiting place for ships arriving at the port of Buenos Aires was close to the loading berth, but owing to temporary congestion the Port Authority determined that ships that arrived and had no cargo waiting for the ship must wait at a point which, though within the limits of the port, was some 22 miles from the loading place. Therefore, the ship had to wait there. It was held at the Court of First Instance, by the Court of Appeal, and by the preponderance of the House of Lords, that the ship was not an Arrived Ship.
In The Aello (1961) case, the Court of Appeal had specified a ship’s arrival as being in the commercial area of the port. The commercial area is within that part of the port where a ship can be loaded when a berth is available.
In The Aello (1961) case, in the Court of Appeal, Lord Justice Parker formulated Arrived Ship Test. Lord Justice Parker believed that a vessel was an Arrived Ship once within the commercial area, in other words, where the vessel could be loaded when a berth was available, albeit that the vessel could not be loaded until a berth was available. The preponderance of the House of Lords accepted the interpretation of an Arrived Ship and consequently, The Aello (1961) case was considered as having designated the Parker Test as being the law.
In the Johanna Oldendorff (1974) case, Lord Reid over-ruled what was formerly known as the Parker Test which had been based on The Aello (1961) case.
In the Johanna Oldendorff (1974) case, Lord Reid thought that it was not enough that the ship should be within the commercial area of a port to be deemed an Arrived Ship.
In the Johanna Oldendorff (1974) case, Lord Reid found the expression commercial area far too imprecise. To be deemed as an Arrived Ship the vessel, if the vessel cannot immediately proceed to a berth, has reached a place within the port where the ship is at the Immediate and Effective Disposition of the Charterer.
In the Johanna Oldendorff (1974) case, Lord Reid stated that if the ship is at a place where waiting ships usually lie, the ship will be in this position unless there are extraordinary circumstances; proof of which would lie in the Charterer. If the ship is waiting at some other place in the port then it will be for the Shipowner to prove that the ship is as fully at the disposition of the Charterer as the ship would have been if in the vicinity of the berth for loading or discharging operations.
In the Johanna Oldendorff (1974) case, the preponderance in the House of Lords was of the opinion that the Parker Test should be overruled.
In the Johanna Oldendorff (1974) case, it was a Port Charterparty, and the Charterers nominated Liverpool/Birkenhead as the port of discharge. The MV Johanna Oldendorff arrived at Mersey Bar anchorage on 2nd January 1968, but no berth was nominated by the Charterers. The following day MV Johanna Oldendorff cleared with customs and was ordered to proceed to anchor at the Bar Light Vessel. This position was about 17 miles away from the berths but still in the port area. The ship lay at anchor at the Bar from January 3rd to 20th, ready, as far as it was concerned, to discharge. The Bar was the customary waiting place for bulk grain vessels. The Shipowners tendered NOR (Notice of Readiness) to discharge on January 3rd, 1968. The issue was who was liable to pay for the delay. That depended on whether the MV Johanna Oldendorff was an Arrived ship. The House of Lords held that the ship, when anchored at the Bar, was an arrived ship because it was at the immediate and effective disposition of the charterers at a place within the port area where waiting ships would usually lay.
Lord Reid’s Reid Test was applied in the later case of the Maratha Envoy (1978). However, in Maratha Envoy’s (1978) case, it was held that the ship was not an Arrived Ship because neither in a port charter nor a berth charter was a voyage brought to an end by the arrival of the ship at a waiting place outside the named port of discharge.
2- NOR (Notice of Readiness)
NOR (Notice of Readiness) is the written advice submitted by the Ship Master or the Ship Agent to the Charterers stating that the ship is in all respects ready for loading or discharging operation. Charter Party stipulates the details of the tendering of NOR (Notice of Readiness).
3- The ship must be Ready and must be fit to receive the cargo
The Carrier (Shipowner or Ship Operator) must satisfy before the commencement of Laytime (Lay Days), is that when the ship has arrived at her destination the ship must be ready in all respects to commence loading before Laytime (Lay Days) will commence. In other words, the ship must be ready in all of her holds to give the Charterer full control of every part of the ship available for cargo. The ship must be adequately equipped and her gear in perfect working order ready for the reception of the cargo. Furthermore, the ship must be in Free Pratique to be accepted as a ready ship because, no matter how physically ready the ship may be, until the Port Health Officials have approved the ship, nobody is authorized on board.
What is Free Pratique?
Free Pratique dates back to the days when severe diseases, even plagues, moved around the world in vessels. In some ports, vessels are obliged to fly a Yellow Signal Flag on arrival. Yellow Signal Flag indicates that Port Health Authorities are not yet on board. After the Port Health Authorities are on board and granted a Clean Bill of Health, the ship would be declared to be in Free Pratique. Today, in most modern ports, the ship is interrogated by radio about any obvious diseases on board and so long as there are none and the ship has not arrived from somewhere where some contagious disease is rife, the ship will be granted Free Pratique by radio. Nevertheless, Free Pratique by radio is not yet in every port and the Ship Agent’s recommendation can be helpful here. Usually, the Ship Agent provides a SOF (Statement of Facts) in which the date and time of every step of the cargo operation are recorded. SOF (Statement of Facts) records when the ship arrived, when the NOR (Notice of Readiness) was tendered, when loading or discharging operation commenced, public holidays, etc. Furthermore, SOF (Statement of Facts) records stoppages due to bad weather, breakdown of machinery, etc.
What is Cesser Clause?
Cesser Clause may be encountered in many forms of Voyage Charterparties. Cesser Clause stipulates that the Charterer’s liability shall cease upon the load of the cargo on the ship.
Cesser Clause has been expressed as a Cesser-Lien Clause because it is co-extensive with the right of the Shipowner to have a lien on the cargo for any outstanding Demurrage and Deadfreight. Under the terms of the Voyage Charterparty, the Charterer understands exactly at what stage the Charterer’s liability towards the Shipowner shall cease, but in return, the Shipowner retains the right to have a lien on the cargo for outstanding demurrage and deadfreight payments. Consequently, the Shipowner not only has a lien on the cargo for the Freight itself but additionally for other ancillary subjects such as Deadfreight and Demurrage incurred at the port of loading. Furthermore, the Charterer remains responsible for Freight and Demurrage, if any, incurred at the port of discharge but only to such extent as the Shipowner is unable to obtain payments thereof by exercising the lien on the cargo.
Cesser Clause in the Voyage Charterparty will not free a Charterer who is also a Shipper. The Charterer who is also a Shipper is sued as such from liability to pay Freight arising on the Bill of Lading (B/L). Even though the Bill of Lading (B/L) stipulates for Freight As Per Charterparty since the Cesser Clause protects only the Charterers as such and not the Shippers.
It is not sufficient to include in the Bill of Lading (B/L) a clause purporting to create a lien. The Charterer’s liability will not cease unless the lien is effective. Therefore, if the local law or practice at the port of discharge is such that no lien can be exercised by the Shipowner, then the Cesser Clause does not protect the Charterer from liability. The rule that the Cesser Clause does not protect the Charterers against claims for which no lien is given by the Bill of Lading (B/L) applies even when the form of Bill of Lading (B/L) to be signed is specified in the charter and one is signed in another stipulated form. Furthermore, the fact that the Charterer is also the Consignee of the cargo will not destroy the Charterer’s exemption under such a clause.
The courts adopted an approach that is called Strict Contra Proferentum. Strict Contra Proferentum means against he who seeks to rely upon it.
Cesser Clause is relied on by the Charterers, Lien Clause is in favor of the Shipowners. In the reconciliation of the Cesser Clause and Lien Clause, the courts hold that the reconciliation is to be effected by bearing that the Cesser Clause only applies in so far as the Lien Clause is effective.
The Cesser Clause did not avail the Charterer where the Shipowner had a lien on cargo which the Shipowner could not enforce owing to local laws or practices. If the Shipowners had no alternative remedy against the Consignees of the Cargo, the Cesser Clause could not be construed as cutting out the Charterer’s primary liability in respect of damage to the cargo.
What is Ship Hire?
In Time Charterparty, the remuneration payable to the Shipowner by the Time Charterer is called Hire. In other words, the ship is hired for a particular Trip (Time Charter Trip – TCT) or for a period of time (Period Time Charter)
Hire Vs Freight
In Time Charterparty, the remuneration payable to the Shipowner by the Time Charterer is called Hire. In Voyage Charterparty, the remuneration payable to the Shipowner by the Voyage Charterer is called Freight. The term Hire itself is more conducive to rental rather than Freight.
Usually, the Time Charter Hire payment is paid either on a semi-monthly or monthly basis in advance. The Time Charterparty stipulates that if the ship suffers any loss of time through deficiency of crew, breakdown or machinery, or other damage preventing the normal working of the ship, then the Hire payments shall cease until the ship is again in an efficient condition to resume the voyage. In this case, any Prepaid Hire would be returnable by the Shipowner to the Time Charterer as the Hire had not been effectively earned.
Usually, the Time Charterparty stipulates the amount of Hire which must be paid. If there is a discrepancy between the Local Time (LT) at the port of delivery and that at the port of redelivery, the Shipowners are allowed to claim to hire only in respect of the Actual Time which has elapsed from the moment of delivery of the ship.
In the Time Charterparty, if the Hire is payable in advance at so much per ton on the DWT (Deadweight) capacity of the ship, there is an implied obligation on the Shipowner to inform the Charterer accurately as to the DWT (Deadweight) capacity of the ship.
In the Time Charterparty, if the Shipowner wrongly and in breach of the Time Charterparty deprives the Charterer of a time of use of the ship, the Charterer can deduct a sum equivalent to the hire for the time so lost. This right does not extend to other breaches or defaults of the Shipowner. This right does not extend to where the Ship Master has failed to keep accurate ship logs and to disclose ship logs to the Charterer. This right does not extend to where there has been a breach of the Shipowner’s duty as a bailee of the bunkers to use the bunkers per the Charterer’s orders. The logic for this is that none of these breaches actually affect the use of the ship.
What is Anti-Technicality Clause?
The Shipowner may withdraw the ship in default of hire payment by the Time Charterer. Most of the Time Charterparties include an Anti-Technicality Clause that provides that the Shipowner should give the Time Charterer a certain period of notice to correct the cause for delay of payment before exercising the right of withdrawal of the ship.
Anti-Technicality Clause was introduced because of the number of cases where Shipowners, in periods of the ship market booming, took advantage of a few hours’ delay in hire payment to withdraw the ship to take advantage of the higher ship market.
Ship Withdrawing Problems
Ship Withdrawing from a Time Charter has its problems. In many cases, Unscrupulous Time Charterers have taken ships on Time Charter and paid the hire correctly until the Unscrupulous Time Charterers have loaded the ship with cargo for which freight has been paid in exchange for Freight Prepaid Bill of Lading (B/L). At that moment, the Unscrupulous Time Charterers vanish with the cash. The problem which materializes for the Shipowner is that the Consignee has title to the goods so the ship is obliged to conclude the voyage and deliver the cargo. In some cases, the Time Charterers’ economic problems are genuine, and even if the cargo is not Freight Prepaid, the fact remains that the ship is full of cargo for which reasonable legal arrangements have to be made. Therefore, Ship Withdrawing is no cure-all, and dealing with the Time Charterer may often be the better approach to follow.
Most Common Disputes in Time Charter
Time Charters tend to be prone to two (1) other areas of dispute:
1- Ship’s Performance
2- Final Voyage
1- Ship’s Performance
In Time Charter, the most common dispute between the Shipowner and the Time Charterer is the Ship’s Performance (Speed and Bunker Consumption). The Time Charterer’s first allegation is that the ship’s performance was overstated in the Time Charterparty.
Usually, in the Ship’s Performance arbitrations, the arbitrators examine the ship’s bridge and engine room logs as well as weather reports to ascertain whether given less severe weather the figures would prove correct or whether there has been a misrepresentation in the Time Charterparty. In misrepresentation cases, it will be a Breach of a Warranty so damages rather than cancellation of the Time Charter is the correct outcome.
2- Final Voyage
In some cases, a Time Charter may be for a considerable period, and timing re-delivery to the exact end of the agreed time is not possible. A Time Charterer who deliberately commits the ship to a Final Voyage which apparently means that Ship Re-delivery will be substantially late will be in Breach of the Time Charterparty. If the shipping market is weaker than at the time the ship was fixed, it is unlikely that the Shipowner will complain. However, the Shipowner will complain when the shipping market at end of the period is much firmer than at the commencement. How much extra hire the Time Charterer should pay to the Shipowner for the over-extended period may resolve the dispute.
What is General Average (GA)?
Three (3) interests are at risk during a sea voyage:
General Average (GA) Vs Particular Average (PA)
In Particular Average (PA), as a general rule, any loss that any of these interests (Ship, Cargo, Freight) sustains must be borne by that interest alone. In other words, the loss is to be borne by the particular interest incurring it. For instance, if one of the ship’s boats is carried away in a windstorm, this is a Particular Average Loss and must be borne by the Shipowner alone.
In General Average (GA), extraordinary sacrifices are made or expenditure is incurred for the benefit of the whole adventure the loss is borne by all in proportion and is known as a General Average Loss. Therefore, Shipbrokers must distinguish between the Particular Average (PA) and the General Average (GA).
In the General Average (GA) case, the party who has suffered the loss is entitled to a contribution from the other involved parties. Furthermore, damage done to the property of Third Parties may be the subject of the General Average (GA).
General Average (GA) Requirements
The circumstances under which a General Average (GA) contribution may be claimed are:
1- There must be a Real Common Danger. An interest that was never in peril cannot be compelled to contribute to a General Average (GA).
2- The danger must be a real one. If the Ship Master believed that the ship was on fire and caused steam to be turned into the hold to extinguish it and the ship was never in fact on fire, it was held that the consequential damage to the cargo was not a General Average Loss.
3- The Danger must not be due to the default of the party claiming the contribution. For example, if the cargo is thrown overboard because the cargo is dangerous, the cargo owner cannot claim for General Average (GA) contribution.
4- There must have been a voluntary and reasonable sacrifice of the property in respect of which General Average (GA) contribution is claimed. For example, the cargo is thrown overboard to lighten the ship in stormy weather.
5- The interest called upon for General Average (GA) contribution must have been saved.
In the General Average (GA) case, the extra expenditure incurred to avert the danger must be extraordinary.
General Average (GA) contribution is made by all who have benefited from a General Average Act. General Average (GA) parties may be:
1- The Charterer in respect of Freight payable under the Bills of Lading (B/L), if the Charterer uses the vessel as a general vessel to carry cargo.
2- The Shipowner in respect of the Ship and the Freight payable under the Charterparty, if any, and, if not, under the Bill of Lading (B/L).
3- The Cargo Owner in respect of the Cargo.
4- The Container Owner, if any containers are not owned by the Shipping Line or the Cargo Owners. In other words, leased-in containers.
General Average (GA) Process
In the General Average (GA) case, the liability is enforced by the Shipowner on behalf of all interested parties, by exercising the lien over the cargo. If the Shipowner fails to exercise the lien on cargo, the Shipowner may be sued by those entitled to General Average (GA) contribution. Commonly, a General Average (GA) Clause is inserted into a Charterparty (contract of carriage) that incorporates the York-Antwerp Rules.
York-Antwerp Rules are a standard set of rules relating to the General Average (GA). The York-Antwerp Rules have been revised several times. The York-Antwerp Rules do not constitute a complete or self-contained code. York-Antwerp Rules need to be supplemented by the general Common Law provisions which are applicable to the Charterparty (contract of carriage). For example, the Carriage of Goods by Sea Act 1971 (Article V) expressly provides that nothing therein “shall be held to prevent the insertion in a Bill of Lading of any lawful provision regarding General Average.”
York-Antwerp Rules established a uniform method for the calculation of General Average (GA) contribution. York-Antwerp Rules are the most significant source of a General Average (GA). Most Charterparties (contracts of carriage of goods by sea) include the York-Antwerp Rules.
The Shipowner has to declare General Average (GA). General Average (GA) parties pay their share (Average Bonds and Average Guarantees). Average Bonds and Average Guarantees have to be obtained from Cargo Owners before they can take delivery of their goods.
General Average (GA) Insurance
All prudent traders should make sure their Cargo Insurance covers General Average (GA). Finally, Average Adjusters are appointed to calculate the precise share that each of the interested parties must pay. In the General Average (GA) case, the extra work that the Ship Agent has to undertake when General Average (GA) is declared. Therefore, the Ship Agent’s extra expenses have to be included in the total General Average (GA) Expenditure.
What is Amended Jason Clause?
Amended Jason Clause should be inserted in all Bill of Lading (B/L) for voyages to and from the United States. The need for an Amended Jason Clause arises because of an important difference between American law and English law.
In American law, the Harter Act 1893 (Section 3) stipulates that if the Shipowner exercises due care to make the ship seaworthy, neither the Shipowner, the ship, the Ship Agent, nor the Charterer is liable for damage or loss arising from faults or errors in navigation, or in the management of the ship.
After the Harter Act was enacted, it was presumed that since the Harter Act exempted the Shipowner from liability for losses arising from Negligent Navigation, the Shipowner was entitled to recover in General Average (GA) for the ship’s sacrifices which had minimized the greater loss for which the Shipowner was now relieved from the liability. Nevertheless, in the Irrawaddy (1897) case, the Supreme Court of the United States stated that the exemption in the Harter Act 1893 did not entitle the Shipowner to claim a contribution for a General Average (GA) loss due to the negligence of the Shipowner’s Servants. Therefore, it became customary to insert a clause in Bills of Lading (B/L) for ships trading to and from the United States, expressly declaring that the Shipowner could recover in General Average (GA) in the event of negligence, provided that due diligence had been exercised to make the ship in all respects seaworthy. This is known as the Jason Clause. The original Jason Clause has been amended several times and the one in use is now commonly known as the Amended Jason Clause.
What is Safe Port?
In most Voyage Charterparties or Time Charterparties, the most general restrictions upon the places to which a ship may trade is that of requiring the ship to be ordered to Safe Ports or Safe Berths. According to the English courts, Safe Ports or Safe Berths must cover both Geographical and Political safety. T
In the Eastern City (1958) case, Sellers L.J. defined the Safe Port. Sellers L.J. expressed that, for a port to be safe, the particular ship must be able to: “Reach it, use it, and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship”.
If the ship is unable to do this, the port may be unsafe even if the nature of the danger materializes from political elements rather than physical elements.
Most of the Time Charterparties and Voyage Charterparties incorporate an Express Warranty on the part of the Charterer that the ship will only be ordered to Safe Ports. In Time Charterparties, such a term may, in most cases, be Implied (Implied Warranty), even in the absence of Express Warranty terms. If a Voyage Charterparty is silent about the port, it is more complicated.
If a Voyage Charterparty includes any port within a geographical range, the Charterer is still required to nominate a port that may not be particularly named, the position is likely to be similar to that of a Time Charter. Therefore, the Charterer may be held to warrant the safety of the port that the Charterer nominates. However, this is not an absolute rule.
If a Voyage Charterparty includes a single named port, it is extremely uncertain, in the absence of Express Warranty terms, that the Shipowner is accepting an obligation to go to that port and must therefore satisfy himself that it is a Safe Port. In this case, it is hard to see how a warranty of safety on the part of the Charterer could be implied into the Charterparty. Identical arguments may be applied when the Charter names more than one port if this is by reference to an Express List of Port Names, rather than a generic range of ports. Even though the Charterer would still have to nominate the actual port, the Charterer could only do so from the expressed list to which the Shipowner may be taken to have agreed.
Safe Port Period
If the warranty of Safe Port is specified, it is crucial to determine the time at which the warranty is given and the period to which the warranty relates.
In the Evia (1982) case, a ship under a Time Charterparty, which stipulates the Time Charterer to order the ship to Safe Ports only, was ordered by the Charterer to steam to Basrah. The ship arrived at the Basrah port on the 20th of August 1979, and discharging operation was completed on the 22nd of September 1979. However, the ship was unable to leave the port as a consequence of the outbreak of large-scale hostilities between Iran and Iraq. The Shipowner claimed damages from the Charterer.
House of Lords held that there would be judgment for the Charterer. Although the war was an event that was capable, in principle, of rendering a port unsafe, at the time the nomination was given, the war had not been declared between Iran and Iraq and the Charterer had been entitled to nominate the port. House of Lords considered whether or not the safe port warranty was a continuing warranty applying from the time when the port was nominated to the time when the ship had completed the call. Lord Roskill held that there was no justification for such an argument. The warranty of Port Safety was given by the Charterer at the time when the Charterer nominated the port and related to the prospective safety of the port at the time when the ship was expected to be there. Therefore, it did not matter if the port was unsafe at the time it was nominated, provided it would be safe at the time when the ship needed to use the port. Consequently, in this case, it did not matter if the port subsequently became unsafe.
What if the real circumstances change between the time of safe port nomination, and thus the warranty, and the time when the ship arrives at the port? Lord Roskill stated that if a prospectively safe port subsequently became unsafe due to changed circumstances, the Charterer had a secondary obligation to give Fresh Orders so that the ship could steam to a Safe Port.
The fundamental issue of how the doctrine could be applied to Voyage Charters was expressly left open. Where the Charterer has no right to nominate an Alternative Port, any such implied secondary obligation would be inconsistent with the express terms of the Voyage Charterparty so that if the named port became unsafe, it could be argued that the Voyage Charterparty had become frustrated.
In both Voyage Charterparties and Time Charterparties, an additional problem will arise if the Charterer becomes obliged to nominate an alternative port, but the Bill of Lading (B/L) does not include provisions entitling the ship to deviate in the changed circumstances which have occurred. Consequently, it can be noticed that the position remains unclear.