Time Charter Indemnity
Majority of time charters will include a clause entitling the charterer to have full use of the ship during the charter and undertaking that the ship master will comply with the time 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 (B/L) which the ship 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 time 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 ship 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.
Shipowner will be covered if additional liability is incurred by the master signing Bills of Lading at the Time Charterer’s request
In a time charter, the shipowner retains control over the vessel’s navigation, while the charterer is responsible for deciding the cargo to be carried and the ports to be visited. When a master signs a bill of lading (B/L) at the charterer’s request, it can potentially expose the shipowner to additional liabilities, particularly if the B/L contains terms that deviate from the charter party agreement or if the charterer provides inaccurate cargo descriptions or instructions.
To protect the shipowner from these additional liabilities, a charter party should include an indemnity clause that specifically addresses the master signing bills of lading at the charterer’s request. This clause would typically require the charterer to indemnify the shipowner for any losses, damages, or liabilities arising from the master signing the B/L under the charterer’s instructions.
An example of such an indemnity clause might read as follows:
“The Charterer shall indemnify, defend, and hold harmless the Shipowner from and against any and all claims, liabilities, losses, damages, costs, and expenses (including, without limitation, reasonable attorneys’ fees and expenses) arising out of or relating to the Master signing bills of lading at the Charterer’s request, including but not limited to:
a. Any breach by the Charterer of any representation, warranty, covenant, or agreement contained in the bills of lading or any documents executed in connection herewith;
b. Any inaccuracies, discrepancies, or misrepresentations in the cargo descriptions, quantities, or other particulars provided by the Charterer to the Master for inclusion in the bills of lading;
c. Any deviation from the terms of this Charter Party resulting from the Charterer’s instructions to the Master;
d. Any claims made by third parties, including but not limited to cargo owners, consignees, or other entities, arising out of or relating to the Master signing the bills of lading at the Charterer’s request.”
By including such an indemnity clause in the charter party, the shipowner can be better protected against additional liabilities that may arise when the master signs bills of lading at the charterer’s request.
What is Express Indemnity in ship chartering?
In ship chartering, Express Indemnity refers to a specific provision included in a charterparty (the contract between the shipowner and the charterer) that outlines the obligation of one party to indemnify, or compensate, the other party for certain losses, damages, or liabilities arising from specific events or circumstances. Express Indemnity clauses are negotiated and included in the charterparty to provide a clear understanding of the indemnification responsibilities between the parties.
An Express Indemnity clause in a ship chartering agreement typically addresses issues such as:
- Breach of contract: If one party breaches the terms of the charterparty, the breaching party may be required to indemnify the non-breaching party for any losses or damages that result from the breach.
- Negligence or willful misconduct: If a party’s negligent or willful actions cause harm or damage to the other party, the responsible party may be obligated to indemnify the affected party for any resulting losses or damages.
- Third-party claims: If a third party brings a claim against one of the parties due to actions or omissions of the other party, the responsible party may be required to indemnify the other party for any losses, damages, or liabilities arising from the claim.
- Violation of laws or regulations: If one party violates any applicable laws or regulations, and such violation results in fines, penalties, or other liabilities for the other party, the responsible party may be required to indemnify the affected party for the associated costs.
An Express Indemnity clause provides a clear and mutually agreed-upon framework for allocating risk and responsibility between the shipowner and charterer, thus helping to prevent potential disputes and minimize uncertainties in the event of an issue arising during the charter period.
What is Implied Indemnity in ship chartering?
In ship chartering, Implied Indemnity refers to an indemnification obligation that arises due to the nature of the relationship between the shipowner and the charterer, even though it is not explicitly stated in the charterparty (the contract between the shipowner and the charterer). Implied Indemnity arises from common law principles or legal precedents, where courts have recognized that certain duties and obligations exist between the parties in a chartering agreement, even if they are not expressly mentioned in the contract.
An Implied Indemnity in a ship chartering context usually covers situations where:
- One party incurs a loss due to the other party’s actions or omissions, and it would be unjust for the affected party to bear the loss. The responsible party may be required to indemnify the affected party, even if there is no express indemnity provision in the charterparty.
- The charterer has control over the operation and management of the vessel, including the selection and management of the cargo, and the shipowner suffers a loss as a result of the charterer’s actions or decisions. In such cases, the charterer may be required to indemnify the shipowner for the resulting losses, even if there is no express indemnity clause in the charterparty.
- A third party brings a claim against the shipowner due to the charterer’s actions or omissions, even though the shipowner was not at fault. In such cases, the charterer may be required to indemnify the shipowner for any losses, damages, or liabilities arising from the third party’s claim.
It is important to note that the scope and applicability of Implied Indemnity in ship chartering can vary depending on the jurisdiction and the specific circumstances of the case. To minimize the risk of disputes and uncertainties, parties to a charterparty may choose to include express indemnity clauses that clearly outline the respective indemnification responsibilities of the shipowner and charterer.
Time Chaterparty Clause to Indemnify Shipowner
This Time Charterparty (“Charterparty”) is entered into on [Date] between the Shipowner (“Owner”) and the Charterer (“Charterer”) for the purpose of chartering the vessel [Vessel Name] (“Vessel”). In accordance with the terms and conditions set forth herein, the parties agree to include an indemnification clause to protect the Owner as follows:
- The Charterer shall indemnify, defend, and hold harmless the Owner, its affiliates, officers, directors, employees, agents, and representatives (collectively, the “Indemnified Parties”) from and against any and all claims, liabilities, losses, damages, costs, and expenses (including, without limitation, reasonable attorneys’ fees and expenses) (collectively, “Losses”) arising out of or relating to:
a. any breach by the Charterer of any representation, warranty, covenant, or agreement contained in this Charterparty or any documents executed in connection herewith;
b. any injury, loss, or damage to persons or property, including but not limited to the Vessel, its crew, and cargo, caused by or resulting from the Charterer’s negligence, willful misconduct, or violation of applicable laws, regulations, or other legal requirements;
c. any fines, penalties, or sanctions imposed on the Owner or the Vessel as a result of the Charterer’s failure to comply with any applicable laws, regulations, or other legal requirements;
d. any and all actions, suits, proceedings, demands, assessments, judgments, and settlements arising out of or relating to the performance of the Charterer’s obligations under this Charterparty, including but not limited to any claims made by third parties against the Indemnified Parties; and
e. any and all environmental claims, damages, and liabilities, including but not limited to any clean-up or remediation costs, fines, penalties, or sanctions, resulting from the Charterer’s activities under this Charterparty or the Charterer’s negligence or willful misconduct.
- The Charterer’s indemnification obligations under this clause shall survive the termination or expiration of this Charterparty.
- Nothing in this clause shall limit or exclude any other rights or remedies the Owner may have under this Charterparty, at law, or in equity.
- The Owner shall promptly notify the Charterer of any claim or demand for which indemnification is sought under this clause and shall cooperate with the Charterer in the defense or settlement of such claim or demand. The Charterer shall not settle any claim or demand without the Owner’s prior written consent, which shall not be unreasonably withheld or delayed.
By signing below, both parties acknowledge and agree to the terms and conditions set forth in this Time Charterparty Indemnification Clause.
[Shipowner’s Name] [Charterer’s Name] [Title] [Title] [Date] [Date]