Ship Chartering

Generally, it is possible to have a legally binding shipping contract via oral communication. Ship might be chartered via oral phone conversation. There is precedent to the effect that a charter of a ship can be oral although this not a common practice in the commercial shipping business. The existence of oral charter and provisions of the charter party would depend on the application of the local law of contracts regarding contract formation. Ship charter form and terms of charter party vary somewhat depending on the type of cargo and the type of ship involved. Each specialized trade may have unique legal issues and unique industry practices. Commonly used charter party forms vary by trade. Some examples:

1- BIMCHEMTIME 2005 for Chemical Tankers
2- BOXTIME 2004 for Container Ships
3- NYPE (New York Produce Exchange) 93 for Dry Bulk Ships
4- lntertanko 80 for Tankers

Bareboat Charter is distinguished by whether shipowner has effectively relinquished complete control and possession of the ship to the charterer. Bareboat charters are about the transfer of control and possession of the ship. Courts will likely look at the charter itself, and potentially related facts and circumstances, to determine whether shipowner retains any rights and responsibilities of the ship, such as the right or responsibility to supply the crew or arrange for the ship insurance. On the other hand, a space charter, lot charter or part cargo charter is a charter of only a portion of the ship’s cargo capacity is used, rather than of the whole of the ship. Part cargo charters, space charters, or lot charters are typically between ocean common carriers who often charter space from each other to meet customer commitments. Bareboat charterers acts like they are ship owners with respect to both responsible for the ship’s operation and with respect to ship liability limitation rights the owner may have. Especially, under the United States Shipowner’s Limitation of Liability Act, the shipowner is generally permitted to limit its liability to third parties arising from the operation of the ship to the value of the ship and pending freight at the end of the voyage in which the incident occurred either when the ship reaches port, or if the ship is lost, at the time of the loss. United States Shipowner’s Limitation of Liability Act expressly grants this same right to a charterer that mans, supplies, and navigates a ship at the charterer’s own expense or by the charterer’s own procurement. The existence of a bareboat charter is also an essential element under United States law with respect to whether a non-citizen financial institution or leasing company may own a U.S. flagship engaged in the United States coastwise trade operated by a qualified United States citizen pursuant to a bareboat charter.

Generally, if the ship is chartered out as bareboat, the shipowner will not be liable to third parties harmed through the operation of the ship. Bareboat charter generally relieves the shipowner and the bareboat charterer assumes responsibility for any third-party claims. Nevertheless, maritime law treats a ship itself as a person (in rem), third party plaintiff may seek recovery against both the bareboat charterer and ship. Hence, unless the shipowner has an effective way to obtain indemnification from the bareboat charterer for claims against the ship, the shipowner may still be exposed to some risk of liability to third parties. Such indemnification provisions are typically found in bareboat charter forms, and are supported by associated liability insurance requirements. One exception to the general rule is where shipowner takes steps to operate the ship itself, either directly or through an agent, in situations such as when the bareboat charterer has defaulted. In such a case, the shipowner may become the de facto ship operator, and may, therefore, be liable for any claims arising during the period in which the shipowner is operating the ship in person. Usually, the bareboat charterer is responsible for the condition of the ship. Bareboat charterer is usually responsible for maintaining ships during the charter period. However, unless the charter provides otherwise, the bareboat charterer is usually not responsible for reasonable wear and tear on the ship. As a result, most bareboat charters provide for the parties to engage separate or joint surveyors who inspect the ship at the time of chartering and issue a ship condition report, which can be used as the baseline against which reasonable wear and tear can be measured at the time the charter terminates. Because damage or loss of the ship can occur either with or without the fault of the bareboat charterer, bareboat charter will typically require the bareboat charterer to maintain hull and machinery insurance on the ship, with loss payable clauses directing payments to the shipowner. Bareboat charter agreement may allocate responsibility for any deductible on either shipowner or the bareboat charterer, although such responsibility is more commonly placed on the bareboat charterer. Shipowner will be liable to third parties that are harmed through the operation of the ship if the ship is time or voyage chartered. When a ship is time chartered or voyage chartered, the ship remains under the operational and legal control of the shipowner, who remains responsible to the crew, maintain, and operate the ship. As a result, any harm caused allegedly by ship may be attributed to the shipowner, as well as to the ship in rem. Traditionally, shipowners will typically make sure that it maintains adequate insurance against potential risks that may be incurred in the course of operations under the time and voyage charters. One way that is commonly used to ensure that the insurance package covers charter risks is to include express provisions in time and voyage charters spelling out what trades will be permitted, what cargoes may be carried, and what ports may be used. In addition, voyage and time charters may include provisions under which the charterer agrees to warrant ports as safe, and indemnifying the shipowner against the risks of any breaches of the permitted trade clauses. Shipowner has to be concerned about liability when his ship is chartered out as bareboat charter. Besides contractual rights shipowner will have under the bareboat charter, ship owner’s property (ship) remains potentially liable as if it is a person in the event it is involved in an accident or otherwise causes a legally cognizable harm. This is called in Rem Liability as distinguished from the separate liability of shipowner or bareboat charterer may have in Personam Liability. Potentially for the same actions and liabilities.

Shipowners generally warrant ship’s seaworthiness. Every charter agreement is deemed to include a generally recognized implied warranty of seaworthiness. Even if the seaworthiness clause is not expressly stated in the charter party. Seaworthiness means the ship is reasonably capable of transporting safely the cargo that it has undertaken to transport within the trading areas specified, under the conditions to be reasonably expected. The shipowner can expressly disclaim the warranty of seaworthiness in a charter and such disclaimers are frequently found in ship lease finance transactions where the shipowner is a bank, financial institution, or leasing company. Nevertheless, even with an express disclaimer, ship owners should be aware of potential liability for any latent defects that may arise prior to the commencement of a charter which would make the ship unseaworthy. Generally, the voyage charterer or time charterer is not liable for the ship’s seaworthiness or negligence of the ship’s crew. Usually, shipowner (or bareboat charterer) remains in control of the ship, when a ship is time chartered or voyage chartered. Voyage or Time Charterer merely directs for commercial purposes and ship will sail within the limits of the charter, where it will load and discharge cargo. Traditionally, time charterer or voyage charterer does not direct crew members and therefore cannot be held responsible for the crew’s actions. Except, if the voyage or time charterer assumes responsibility under the charter for the loading, stowage, or discharging of cargo, then ship charterer is likely to be held responsible if cargo is damaged or there is some other loss associated with such cargo operations. On long-term bareboat charters, and particularly with finance charters, bareboat charterers are responsible to keep a ship compliant with ongoing regulatory changes. On long-term bareboat charters, the bareboat charterer is responsible to keep the ship compliant with evolving requirements at their expense. On short term-charters, shipowners will usually remain responsible for keeping the ship in compliance with all applicable flag-state and international requirements. For example, international air pollution regulations have changed over time to require ships to use low sulfur fuels within certain coastal waters. New regulations and rules may require ships to replace older boiler systems that are not capable of safely using the new bunkers. For ships under time or voyage charters, those costs will be borne by shipowners. On the other hand, ships under bareboat charters, whether those costs will be for the account of the shipowner or bareboat charterer will depend on the specific provisions of the charter. In some cases, that may require a review of the ship owner’s obligation to provide a ship in compliance with international requirements, against the charterer’s obligation to maintain the ship in compliance with such requirements. Bunkers both for a ship’s main engine and auxiliary engines are a significant expense and therefore allocation of responsibility for who pays for a bunker is an important charter consideration. Under a bareboat charter, shipowner would bear no responsibility for bunker costs, since all responsibility for the ship operation will have been allocated to the bareboat charterer. Under a time charter, time charterer typically assumes responsibility to pay for bunkers consumed. Voyage charters may allocate responsibility for bunker costs either way, depending on the preference of the parties. Charterers also must allocate responsibility for issues arising from the quality of bunkers. If the bunker is sub-standard, bunker may damage the ship’s engines, cause the ship to lose power, and result in salvage costs, delays, or even worse, loss of the ship. If bunkers fail to comply with regulations like sulfur content requirements, the ship may be held liable for civil penalties or detentions. Generally, responsibility for the consequences of improper bunkers follows responsibility for the costs of the bunkers, but not always. Time charterer or voyage charterer may not have technical expertise, or personnel, to adequately screen bunker providers, or to test the bunker offered by the providers, and so charterer may rely upon the ship’s engineers to do so even though the time or voyage charterer may be paying for the bunker.

Bill of Lading serves a number of purposes, but the Bill of Lading is generally the contract between a shipper of goods and the carrier who undertakes responsibility for the transportation of the goods. If the ship has been bareboat chartered, the shipowner will not be the carrier, but the carrier could be the bareboat charterer, the time charterer, or the voyage charterer. Bill of Lading will extend its limitations of liability and other protective provisions to the shipowner, thereby avoiding the risk of indemnification claims. In the shipping business, there are basic charter terms unique to shipping. Ship charters and other shipping people employ a number of terms that have become entrenched and carry specific meanings in the industry. Shipping terms may have interesting histories stemming from their origins with some ship casualty or significant maritime decision. Like, charter lease payments, usually referred to as charter hire are sometimes payable regardless of whether the ship performs the charter or not. Such charter hire provisions, where the charterer has no routine right of set-off or reduction in the amount payable to the shipowner, are often referred to as being payable on a hell or high water basis as in charter hire shall be payable, come hell or high water. Hell or high water charter payment provisions are usually found in bareboat charters and not in time charters or voyage charters. Time charter hire or voyage charter hire is usually subject to a right to setoff if the ship does not perform under the charter. FIO stands for Free In, Out. FIOS stands for Free In, Out, and Stowage. FIO and FIOS terms relate to the allocation of responsibility as between the shipowner or bareboat charterer and the time charterer or voyage charterer with regard to the loading and discharging of the ship. Under FIOS terms, the charterer takes responsibility that the ship will be loaded, the cargo stowed and the ship discharged, free to ship owners.

Demurrage, Dispatch, and Lay Days are terms used in connection with a voyage charter. Under a voyage charter, the shipowner has agreed to carry cargo from one point to another, and has priced the charter based on the ship owner’s evaluation of the time that the voyage will take. However, the time that the charterer will require for loading and discharging the cargo is less predictable. In order to manage that loading and discharging time uncertainty, the shipowner will allow a certain number of days for loading and discharging, referred to as Lay Days. Demurrage is the term for the amount the voyage charterer agrees to pay to shipowner if the loading or discharging takes longer than the agreed-upon lay days. Dispatch is a related concept and is the amount that the shipowner agrees to pay to the voyage charterer if the ship is loaded or discharged faster than the allowed lay days. Traditionally, dispatch is priced at 50% of demurrage rate. These concepts have arisen overtime to promote efficient utilization of ships and in an attempt to allocate risk for delays upon the person best suited to affect the loading or discharging timing of the ship. In the case of a voyage charter, it is the charterer and not the shipowner who purchases, uses, and sells the cargo and therefore is usually in the best position to arrange for an efficient loading and discharging of the ship. Dead Freight is another term associated with voyage charters. In many voyage charters, the charter hire is stated in terms of the amount of cargo to be carried. If the charterer loads less cargo than the shipowner expected, the shipowner is still obligated to carry out the voyage, but will realize less revenue than expected. To protect against that risk, a voyage charter will commonly state an agreed minimum amount of cargo to be carried. If the voyage charterer loads less than the minimum freight agreed to, then the voyage charterer will be obligated to pay an amount, known as dead freight based on the shortfall. In tanker chartering, vetting is a concept most closely associated with oil companies that charter ships to carry their products. Because the value of the cargo is so high, because delays due to ship breakdowns or port state detentions could be disastrous in a fast-paced market, and because of the risk of both legal liability and reputational harm from oil spills or other casualties, many charterers insist upon the right to carry out their own ship condition inspections before chartering ships, or as a predicate to continuing charters. Such inspections, known as vetting inspections can be very extensive, examining ship certificates and documents, the physical condition of the ship, and qualifications and experience of the crew.

Cesser Clause is a charter term whereby the charterer’s obligation to pay charter hire ceases if, for specified reasons, the ship is unavailable to transport cargo or load and discharge cargo. Cesser clauses arise in situations where the charterer may have already sold the cargo even before the ship has delivered it.

Both to Blame Collision Clauses are intended to protect limitation of liability clauses commonly found in charters and bills of lading from a loophole that could arise as a result of the maritime law on the allocation of collision damages. Under maritime law, a court will allocate damages as between the parties at fault on the basis of their comparative fault, but both parties will be jointly and severally liable to the victims of their fault. That means that the injured party can sue either of the parties at fault for the full amount of the damage, and that the paying party can in turn seek contribution from the other party at fault. Usually, the ship owner’s liability for cargo damage is limited to a certain amount, such as the $500 per package limitation in the United States Carriage of Goods at Sea Act (COGSA). Hence, when there is a collision through the fault of both cargo-carrying ship and another ship, the cargo owner’s right to damages from the cargo-carrying ship may be limited. However, the cargo owner’s right to damages from the other ship at fault will not be limited. Therefore, the cargo owner can sue the other ship for the full amount of its damages, under the maritime law of joint and liability. The other ship will then sue the cargo-carrying ship for contribution based upon the cargo-carrying ship’s degree of fault, so that the other ship does not bear a disproportionate share of the damages. In that way, cargo owners can avoid, and cargo-carrying ship can be denied, the contractual or statutory) limitation of liability. The Both to Blame clause undoes that result, by setting out an indemnification agreement under which the cargo owner agrees to indemnify the cargo-carrying shipowner against any liability for the cargo owner’s damages paid to another ship in excess of the limitation amount.

General Average is an internationally accepted common-law rule that allocates losses incurred by one party for the benefit of all interests in a voyage and is based on the long-standing authority of a shipmaster to sacrifice some cargo or property or incur reasonable expenditures to save the ship and its remaining cargo. For example, consider a case in which a ship on a voyage with a load of cargo suffers some unexpected casualty due to weather, and is forced to incur costs for a salvage tug to assist the ship into port; or a case in which a shipmaster determines that it is necessary to jettison some cargo to save the ship and the rest of the cargo. Maritime law has long treated such expenses or losses as appropriate for being averaged among all parties benefited. On completion of the voyage, an average adjuster is appointed to calculate the costs of the salvage claim or the value of the lost cargo, and the value of the ship and cargo saved. After the valuation, the adjuster will generally allocate the loss against the shipowner and the cargo owners on the proportionate basis of their respective interests in the voyage. Charters frequently include clauses specifying the rules for determining exactly how the general average will occur. By far the most common provisions call for application of the internationally and generally recognized rules known as the York Antwerp Rule 1974.

New Jason Clause is related to general average. Because under general maritime law, cargo owners would not be required to contribute to general average if the loss was due to ship owner’s negligence, ship owners typically insist on New Jason Clause that reverses that rule, and requires cargo owners to contribute to general average regardless of whether the loss was caused by the negligence of the shipowner.