Time Charter Indemnity

Majority of time charters will include a clause entitling the charterer to have full use of the vessel during the charter and undertaking that the master will comply with the charterer’s orders and instructions to this end.

One of the most important rights conferred on the charterer by such a clause is the right to issue bills of lading which the master is required to sign on demand, and which can be enforced by a third party holder against the shipowner even though their terms differ radically from the terms of the charterparty. In return, the charterer undertakes to indemnify the shipowner against any additional liability incurred by him as a consequence of the exercise of these powers.

The justification for the inclusion of such a clause was clearly stated by Devlin J: ‘If the shipowner is to surrender his freedom of choice and put his master under the orders of the charterer, there is nothing unreasonable in his stipulating for a complete indemnity in return.’  The express indemnity is designed to reimburse the shipowner for any additional expenditure or liability incurred as the result of placing his vessel at the disposal of the charterer. Such liability may result either from complying with the charterer’s instructions regarding the employment of the vessel or from the ship master signing bills of lading at the request of the charterer.

So far as the employment aspect is concerned, the shipowner is thus able to recover for physical damage to the vessel resulting from it being despatched to an unsafe port or from the charterer loading dangerous cargo. Again, the shipowner will be indemnified against financial liability to third parties on releasing cargo, at the charterer’s request, without requiring presentation of the relevant bills of lading.

On the other hand, the shipowner will be covered if additional liability is incurred by the master signing bills of lading at the charterer’s request. The crucial test is whether such bills impose more onerous terms on the shipowner than would have arisen under the charterparty. This would occur where the bills fail to incorporate a charterparty exception, or where they become automatically subject to the operation of the Hague or Hague/Visby Rules.

At first sight it might appear that an indemnity clause of this type would entitle the shipowner to recover from the charterer for any additional liability or expenditure arising during the currency of the charter since, in the absence of employment of the vessel, the particular loss would not have been incurred. There are, however, a number of limitations on the shipowner’s right to recover.

First, it must be remembered that under a time charter, as opposed to a charter by demise, the shipowner retains responsibility for all matters relating to navigation and ship management. Consequently, he will not be able to claim reimbursement for loss attributable to negligent navigation or unseaworthiness, even though incurred while carrying out the charterer’s instructions, since these matters fall within the shipowner’s sphere of responsibility.

In the words of Lloyd J in The Aquacharm, ‘It is not every loss arising in the course of the voyage that can be recovered. For example, the owners cannot recover heavy weather damage merely because, had the charterers ordered the vessel on a different voyage, the heavy weather would not have been encountered. The connection is too remote. Similarly, the owners cannot recover the expenses incurred in the course of ordinary navigation, for ex- ample, the cost of ballasting, even though in one sense the cost of ballasting is incurred as a consequence of complying with the charterer’s orders . . .’

Secondly, while a master is expected to comply with the charterer’s instructions within a reasonable time, he is not entitled to act on orders which are clearly beyond the authority of the charterer. ‘I cannot think that a clause in a time charterparty which puts the master under the orders of the charterers as regards employment is to be construed as compelling him to obey orders which the charterers have no power to give.’ Consequently, if the master accepts instructions to proceed to a port that is obviously unsafe or signs a bill of lading, presented by the charterer, which is manifestly inconsistent with the terms of the charterparty, the shipowner will not be entitled to rely on the indemnity clause to claim reimbursement for any resulting loss.

In practice, however, the courts recognise the dilemma confronting the ship master in such circumstances and will invariably give him the benefit of the doubt provided they are of the opinion that he acted reasonably and in good faith.

Finally, of course, there is the question of causation. ‘A loss may well arise in the course of compliance with the charterer’s orders, but this fact does not, without more, establish that it was caused by, and is in law a consequence of, such compliance, and in the absence of proof of such causation there is no right of indemnity.’

Thus the indemnity will not operate when the chain of causation is broken by some act of negligence on the part of a member of the crew. Nor has it been held applicable to cover a situation where a cargo of coal, loaded on the charterer’s instructions, gave off methane gas which was ignited by a spark emitted during repairs to the vessel’s water tanks.

In the opinion of the court, the loading of the cargo was not the direct cause of the explosion. The crucial test in such cases would appear to be whether the loss to the shipowner was the inevitable result of complying with the orders of the charterer.

Recent cases have established that, in the absence of an express provision, a right to indemnity may be implied where, in a time charter, a shipowner places the master under the orders of a charterer. Such an implication is justified on the grounds of business efficacy, ‘in the sense that if the charterer requires to have the vessel at his disposal, and to be free to choose voyages and cargoes and bill of lading terms also, then the owner must be expected to grant such freedom only if he is entitled to be indemnified against loss and liability resulting from it’.

No indemnity will, however, be implied if, on the facts of the case, the shipowner expressly or impliedly agreed to bear the risk at the time the charterparty was concluded. Any implied indemnity will be subject to all the qualifications already outlined in respect of the express indemnity and will be excluded by the presence of a conflicting provision in the charterparty.