Chartering Process Negotiations

Chartering Process Negotiations

Negotiations will normally start with an offer. The offer becomes null and void if the other party has failed to respond within a fixed time limit. If there is response to the particular offer, then the negotiations begin; they may involve a series of offers and counteroffers.

In response to an offer, a party may accept it, reject it, reject it-decline and make a new offer, or make a counteroffer, having accepted some parts of the offer. Once a firm offer has been made, all subsequent counteroffers should be prefixed in one of four ways:

1- “We decline Owner’s/Charterer’s offer and offer instead … “ This indicates that the offer received is rejected in its entirety and a new offer is put forward for consideration.
2- “We accept Owner’s/Charterer’s last offer, except … “ This is a counteroffer in which the receiver accepts certain points (listed under “accept”) but rejects (and counter proposes) on the points listed under “reject.”
3- “We repeat our last.” This is a restatement of the previous communication.
4- “We repeat our last, except … “ This is in fact a new offer signifying the rejection of the proposal received. The new offer may contain terms that would be more likely to be accepted by the other party, bearing in mind the negotiations that have taken place and the other party’s statements.

When negotiations have reached the firm stage, the two parties are committed to their negotiations and cannot make offers or enter into negotiations with the same subject matter with other parties.

Once the chartering negotiations are completed and an agreement is reached, a so-called recap is drawn up. This is essentially a document detailing the terms agreed as well as the charter party form that will be used. The agreement is not completed until any conditions known as subjects have been satisfied.

Chartering Negotiations and Subjects

There is no agreement until all subjects have been lifted. Subjects can include various conditions:

• Subject Details. This indicates that although the main terms have been agreed, details are still pending and will be finalized upon the drawing up of the charter party contract.
• Subject STEM (Subject to Enough Merchandize). The charterer needs to confirm that the proposed cargo is available for shipment, loading berth is available on the proposed dates, and that the ship is acceptable to shippers.
• Subject Receivers’ Approval. The charterers need to confirm that the cargo and the proposed ship are acceptable to the receivers.
• Subject Charterers’ BOD Approval to be Lifted. The board of directors of the charterers may need to give their approval. The charterer’s BOD may also wish to check the ship’s record and performance before final approval.
• Subject Owners’ BOD Approval to be Lifted. The board of directors of the shipowners may need to give their approval. The owner’s BOD may also wish to check the background of the charterers before giving final approval.
• Subject to Owner’s/Charterer’s Full Approval of the Proforma Charter Party dated … ; with logical amendments thereto.

When a fixture is completed, a message confirming the agreed terms is prepared by the brokers and sent to both parties. The message includes all the details and the wording of the contract and is termed the RECAP.

The preparation of the charter party itself will follow, again prepared by the brokers and usually signed by the principals or the shipbrokers acting as agents.

What is RECAP in Ship Chartering?

RECAP in ship chartering refers to a “recapitulation,” which is a summary or brief review of the principal points of an agreement. After a ship owner and a charterer agree on the terms and conditions for the charter of a ship, these agreements are then summarized in a recap.

This document typically includes important details such as:

  1. Name of the ship.
  2. The agreed rate of hire or freight (depending on the type of charter party).
  3. Duration of the charter.
  4. The loading and discharging ports or areas.
  5. The type and quantity of cargo.
  6. Any additional terms or conditions agreed upon, such as laytime, demurrage, or dispatch.
  7. The dates for the delivery/redelivery of the ship.
  8. Name of the parties (the shipowner and the charterer).

Once the recap is agreed upon and confirmed by both parties, it forms the basis for the actual charter party agreement, which is a more detailed and legally binding document. In a nutshell, a recap in ship chartering is a way of ensuring that both parties are on the same page about the deal they’ve agreed upon. It helps avoid any misunderstandings or disagreements in the future.

What is a Clean Recap in Ship Chartering?

In the field of ship chartering, the term “Clean Recap” refers to a recapitulation or summary of the main terms and conditions of a charter party agreement that have been negotiated and agreed upon between the shipowner and the charterer, which doesn’t contain any unresolved points of discussion or contention.

The “recap” part of “Clean Recap” is shorthand for recapitulation, which simply means a summary or concise review. When parties are negotiating a charter party agreement, they’ll typically send recaps to each other to confirm their understanding of what’s been agreed upon so far.

The “clean” part refers to the fact that all the terms have been agreed upon by both parties, so there are no outstanding negotiations. When you have a clean recap, it means that the shipowner and the charterer have agreed on all the main terms and conditions such as the freight rate, laycan (the period in which the charterer can make the ship available for loading), demurrage rate (a penalty for delay), the duration of the charter, the loading and discharging ports, etc.

A clean recap is therefore typically the final step before a charter party agreement is formally documented and signed. It helps both parties to ensure they are in complete agreement on the main terms of the contract before they commit to it legally.


FIXTURE RECAP is Acceptable in Chartering

The term “fixture recap” is commonly used in the shipping industry, specifically in the context of chartering. A “fixture” in shipping refers to an agreement between a ship owner and a charterer, where the charterer agrees to rent the ship for a specific period or for a particular voyage.

A “fixture recap,” or simply “recap,” is a summary of the agreed terms of the fixture. This usually includes information like:

  1. The names of the charterer and the shipowner
  2. The name of the ship
  3. The agreed rate (in the case of a time charter) or freight (in the case of a voyage charter)
  4. The loading and discharging ports
  5. The type and quantity of cargo
  6. The laycan (the agreed time period when the ship must present itself for loading)
  7. Any other special terms agreed

So, yes, the term “fixture recap” is acceptable and is widely used in chartering. It helps both parties to keep a clear understanding of what was agreed, reduces potential misunderstandings and disputes, and can serve as a reference if needed.


FIXTURE RECAP Legally Binding Contract

A charterparty does not need to be made in any particular form. An Oral Agreement to charter a ship is binding on parties. The form of most charter parties includes a RECAP, the main terms and the riders.

A charter party does not necessarily require endorsement to possess legal force. According to common law, three essential elements must be present for a contract to be binding: (i) the mutual exchange of terms through offer and acceptance, (ii) a clear intent to establish legal obligations, and (iii) the presence of consideration. The existence of these elements will establish a binding contract, irrespective of whether the agreement is formally executed.


Ship Chartering Process and Negotiations

Chartering a ship can be a complex process, with many factors to consider and negotiate. Here is a general outline of the process and some considerations:

  1. Assessing Your Needs: Before you begin the negotiation process, it’s important to understand your requirements. This includes details like the type and size of the ship you need, your preferred route, the cargo you will be transporting, and the duration of the charter.
  2. Find a Ship: Once you know what you need, you will need to locate a ship that meets these requirements. This might involve working with shipbrokers, who are intermediaries specializing in matching charterers with ship owners.
  3. Initial Negotiations: Once you’ve identified a potential ship to charter, you can begin negotiations. This often involves submitting a charter party proposal, which is a document outlining the terms of the charter, including the duration, route, price, and other key details. The shipowner can then either accept the proposal, reject it, or propose changes.
  4. Counter Proposal: If the shipowner proposes changes, they will send a counter-proposal with the modified terms. This back-and-forth process may continue until both parties are satisfied with the terms.
  5. Agreement on Charter Party: The Charter Party is the official contract between the shipowner and the charterer. It outlines all the negotiated terms such as the charter rate, laydays, demurrage, dispatch, and other conditions. Both parties will need to agree to these terms.
  6. Voyage Planning: Once the agreement is signed, the voyage planning can begin. This includes preparing the ship for the journey, loading the cargo, and determining the specific route.
  7. Fulfilling the Charter: The ship then undertakes the voyage as agreed in the charter party. Any changes or issues are managed according to the terms outlined in the agreement.
  8. Redelivery: At the end of the charter period, the ship is redelivered back to the owner. This involves an inspection of the ship’s condition and the settlement of the final hire statement.

During the Chartering Negotiation process, there are a few key factors to keep in mind:

  • Price: Price is usually the most significant point of negotiation. It’s based on supply and demand and can vary based on factors like the ship’s size, type, age, and the route and duration of the voyage.
  • Terms and Conditions: The specifics of the voyage (like the ports to be visited, the cargo to be carried, the duration of the voyage, etc.) are all subject to negotiation. The charterer will want to ensure these terms are favorable and that the ship can meet all requirements.
  • Liability: The agreement should clearly outline who is responsible for what during the charter, from damage to the ship to issues with the cargo.
  • Cancellation Clause: This specifies under what circumstances the charterer can cancel the charter without penalty.
  • Force Majeure: This clause protects both parties from circumstances beyond their control, such as natural disasters or political instability.

All aspects of the agreement are negotiable, and it’s important to ensure you are satisfied with the terms before finalizing the agreement. It may be beneficial to seek legal advice or work with a professional shipbroker to ensure you are making the best possible agreement.

Ship Chartering Negotiations

How ship chartering negotiations typically work:

  1. Identification of Need: The first step in any negotiation process is identifying a need. A company or individual will determine they need to transport goods, identify the quantity and type of goods to be transported, and where they are going to and from.
  2. Shipping Market Research: Next, the charterer will conduct some market research. They will look at the current market conditions, including charter rates, the cost of fuel, and current supply and demand in the market.
  3. Shipbroker Engagement: A shipbroker is typically involved in the negotiation process. The broker will use their extensive contacts and knowledge of the market to find potential ships for the charterer.
  4. Request For Proposals (RFPs): Once potential ships have been identified, the charterer, often via the broker, will send out a Request for Proposals (RFPs) to the owners of those ships.
  5. Bid Review: The charterer will review the bids that come back from the RFP process, again typically with assistance from the broker. They will compare charter rates, terms, and the condition and suitability of the ships.
  6. Negotiation: Once the charterer has identified the most suitable ship(s), they will enter into a negotiation with the ship owner. The negotiation will cover not just the charter rate, but also the length of the charter, payment terms, any special requirements, and liability in case of any issues or delays. This negotiation may take place directly or via the shipbrokers.
  7. Charter Party Agreement: Once the terms have been agreed upon, they will be formalized in a charter party agreement. This is a legal document that outlines all the agreed terms and conditions of the charter.
  8. Confirmation and Execution: Once the Charter Party Agreement is signed, the ship is prepared for the cargo and the voyage begins according to the agreed schedule. Payments are made as agreed upon in the Charter Party.

Throughout this process, it is crucial for both parties to engage in good faith negotiations, communicate clearly, and have a thorough understanding of the market and legal conditions. Each negotiation is unique and may vary based on the type of charter (time charter, voyage charter, bareboat charter, etc.), the cargo, and the specific conditions of the market at the time.


Ship Chartering Negotiations and Formation of the Charterparty

A charter does not necessitate adherence to a specific format. An oral accord to engage a ship holds legal weight for the involved parties. The composition of the majority of charter parties typically encompasses a synopsis, the principal stipulations, and supplementary provisions.

Ship Chartering Negotiations and Subjects

During the process of negotiations, if the charter incorporates expressions such as “subject to,” it indicates that the involved parties are not yet inclined to establish a legally binding agreement. Consequently, the intention to generate legal obligations and establish a binding contract is absent.

A binding contract is solely established when the parties explicitly agree to eliminate all outstanding “subjects” or conditions. In the case of The Junior K [1988] 2 Lloyd’s Rep 583, the negotiations between the parties culminated in a telex message stating “sub dets Gencon CP.” Despite the telex encompassing all the vital provisions of the charter and the absence of any unresolved operational matters between the parties, there was no binding contract since the contract was still subject to the finalization of the details of the GENCON charter, and such a condition had not been lifted.

If the parties have commenced the execution of the charter, they may be regarded as having waived the “subjects.” For example, the delivery and acceptance of the ship would be deemed as a performance of the contract. This performance would result in the establishment of a binding contract, even if the charter was initially contingent upon the signing of an agreement (refer to The Botnica [2007] 1 Lloyd’s Rep 37).

It is important to note that the aforementioned position, as outlined under English law, may differ from that of US law, which places emphasis on determining the presence of the “essential” or “main” terms of the charter.

Examples and Effects of Subjects in Ship Chartering Negotiations

Various formulations fall under the category of ‘subject to.’ These encompass expressions like ‘subject to contract,’ ‘subject to details,’ and ‘subject to’ a specific condition or requirement.

When ‘subject to contract’ or ‘agreement to be finalized’ is utilized, it implies that a formal agreement must be established before a contract becomes legally binding. This is commonly regarded as a precondition for a contract, effectively preventing its existence until fulfilled. However, as previously mentioned, the execution of a contract may waive a party’s right to rely on the ‘subject to contract’ clause.

When a contract is ‘subject to’ a particular condition or requirement, the nature and manner in which the parties negotiate determine whether said condition is a precondition or a performance condition. In the former scenario, no contract exists until the relevant condition is satisfied, and only then does it become binding. In the latter case, a binding contract is already in place, and the parties are obligated to fulfill the condition.

Determining whether a subject condition is a precondition or a performance condition can be challenging, and there are differing opinions in legal precedent. In the case of Astra Trust v Adams [1969] 1 Lloyd’s Rep 89, the phrase ‘subject to satisfactory survey’ was considered a precondition, meaning that no binding contract existed until a satisfactory survey had been completed. However, in The Merak [1976] 2 Lloyd’s Rep 250, the same wording was deemed a performance condition instead. Consequently, a binding contract was in effect, and the parties were obligated to conduct the survey. If the survey was not carried out or was insufficiently executed, thus failing to meet the performance condition, it could lead to the termination of the contract.

A ‘subject’ is more likely to be treated as a precondition when it involves the exercise of personal or commercial judgment by one of the parties. For instance, if the ‘subject’ depends on one party’s conclusion of a contract with a third party, it is likely to be considered a precondition. As a result, a ‘Suppliers’ Approval’ subject was recognized as a precondition because it entailed a commercial judgment, specifically the selection of third-party suppliers for the terminal and cargo. Consequently, it was determined that no binding contract existed until such a ‘subject’ had been lifted (refer to Nautica Marine Ltd v Trafigura Trading LLC (The Leonidas) [2020] EWHC 1986).

Under specific circumstances, notwithstanding the fulfillment of the condition, an additional accord must be forged amongst the involved parties prior to the contract being deemed as binding. For instance, in The John S Darbyshire [1977] 2 Lloyd’s Rep 457, the expression “subject to satisfactory completion of two trial voyages” signified that a binding contract would only come into effect once the trial voyages were successfully undertaken and the parties had mutually agreed to engage in a contractual relationship. The inclusion of trial voyages implies that the charterer would be afforded an opportunity to assess the ship, thereby precluding an automatic conclusion of the contract upon the completion of said voyages.

Do both Shipowners and Charterers have to sign a Charterparty?

A charter does not require a signature for its enforceability. According to common law, three essential elements must be present to establish a binding contract. These elements are: (i) the offer and acceptance of terms by the parties, (ii) an intention to create legal obligations, and (iii) consideration. The existence of these elements creates a binding contract, even in the absence of a signature.

What if conflicting terms are found in the summary, primary terms, and additional clauses? Some standard form charters include a provision that specifies the precedence of a particular section over others. For instance, the GENCON 1994 stipulates that the provisions in Part I shall prevail over those in Part II. In another example, the NYPE 2015 states that the provisions of the additional clauses and riders shall take precedence over those of the primary terms.

Unless explicitly stated otherwise, the terms and amendments in the riders will override the primary terms, and the summary will supersede the riders. This is because the summary is considered the most recent version of the agreement between the parties. However, the courts will endeavor to reconcile conflicting terms to the extent possible.

However, if a formal charter is eventually drafted and signed by the parties, the terms of the signed charter will take precedence. The summary will still be relevant in interpreting the final terms of the signed agreement.

The negotiations conducted before the contract is formed can also provide insight into the parties’ intentions regarding the superiority of certain sections of the charter. However, these negotiations cannot override the terms of the charter itself.

Do Charterparty Guarantees need to be incorporated into the Charterparty?

Generally, assurances must be rendered in writing and duly signed. However, a guarantee remains legally binding even when electronically signed by a broker, provided that the broker possesses the necessary authority from their principal.

Moreover, a guarantee retains its enforceability even in the absence of a singular document containing the entire contractual agreement. A notable case illustrating this point is Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd and Another [2012] 1 Lloyd’s Rep, where the guarantee and the terms of the charterparty were encompassed within two separate emails dispatched by the broker to the owners.

When establishing a charter guarantee, owners must ensure that the guarantee is properly issued, avoiding a mere assurance from the charterers to secure a guarantee. In The Anangel Express [1996] 2 Lloyd’s Rep 299, the charter agreement included the following language: “Charterers agree to provide a performance guarantee as per Owners’ specifications on… official letterhead and signed by…”. This was regarded as a mere commitment by the charterers to procure a guarantee, lacking the status of an enforceable guarantee.

While English law exhibits some flexibility, parties intending to invoke the guarantee should always verify the specific requirements applicable in the guarantor’s country of residence/registration to ensure enforceability. Certain jurisdictions may mandate the registration of guarantees.