What is Charterparty?
International Ship Chartering was introduced by the Phoenicians, when traders chartered ships for the Mediterranean and European market. In Ancient Rome, there was a ship chartering market of sorts dealing in Egyptian grain prices on arrival at Ostia.
In other words, chartering ships is not a new concept. The important difference compared to today is that, until the late 19th century, some shipmasters often had full authority to fix cargoes and maximize earnings for the shipowners in return for a profit-share agreement.
Unusually, the shipmasters owned the ships. However, the shipmaster would conduct his negotiations in person in whatever port his ship was moored, draw up a contract with a trader, and tore the contract in half, one half for the trader, one for the shipmaster. This is the origin of the term “Charter Party” an anglicized version of the Latin word “Carta Partita”, meaning a document (Carta), which has been divided or split (Partita). One of the halves was placed on board the ship and the other half was kept by the trader. When the ship arrived at her destination, the receiver of the cargo produced the shipper’s half of the document, thus proving that he was the legitimate owner of the goods
The tremendous growth of world trade in the 19th and 20th centuries led to faster steamships, followed by ships powered by fuel and diesel. Ships were on longer voyages away from their homeports and the shipmasters were no longer able to make their negotiations. So the shipowners employed shipbrokers to find the next cargoes and negotiate the Charter Party terms.
Charterparty is a contract that incorporates the use of a ship for a specific period (Time Charter), or for a quantity of cargo to be carried from one port to another (Voyage Charter). Generally, Charter Party is a written document based upon one of the various Standard Forms devised for specific trades.
In unusual cases, shipowners and charterers may trust each other enough to work on a merely verbal basis. Practically, all charter party forms undergo significant alteration during negotiations. A comprehensive examination of all charter party forms is impracticable but we are going to highlight the important parts of a charter party.
Ships can be chartered in two (2) basic ways:
- Time Charter: if a charterer wants to hire a ship for a period in which the charterer plans to operate the ship as if it were their property, the most suitable contract used will be a time charter
- Voyage Charter: if a charterer wants a single shipment of specific cargo, the contract will most certainly be a voyage charter. Ships that are covered under a time charter usually carry cargoes under sub-voyage charters
In the case of time-chartered ships, costs relating directly to the ship or the crew members are technically expenses of the actual shipowner, not the time charterer.
Frequently, Voyage Charters relate to single cargoes, however, there are occasions that a ship may be chartered on Consecutive Voyage Contracts for a specified number of voyages or a Contract of Affreightment (COA) that could cover a fixed period or a fixed quantity of cargo rather than a specified number of voyages.
Due to the number of disputes that have arisen regarding misunderstandings about certain charter party common phrases, BIMCO (Baltic and International Maritime Council ) introduced Voylay Rules, and FONASBA (Federation of National Associations of Ship Brokers and Agents) introduced Time Charter Interpretation Code 2000. These documents only apply if agreed to by both shipowners and charterers.
Charterparty Bills of Lading incorporate charterparty terms to provide them with full terms and conditions. This ensures that the terms and conditions of carriage under both the bill of lading and the voyage charterparty are largely identical, so the carrier/owner does not face different potential liabilities under different contracts.
The wording of the Bill of Lading will determine which Charterparty Clauses are incorporated into the Bill of Lading. The more specific and clear the wording in the bill of lading is the less dispute there will be. The common areas of disputes are, as follows:
Which Charterparty? If there is only one charterparty, between the shipowner and cargo owner/ charterer, then that must be the charterparty to incorporate. If there is more than one charterparty, a choice must be made. Only one charterparty’s terms can be incorporated into the bill of lading.
Where there is a chain of charterparties, it can be difficult to know which charterparty is incorporated into the bill of lading contract, if the bill of lading does not name the charterparty.
Under English law it is not necessary to name the charterparty in the bill of lading in order to incorporate its terms. The fact that parties to the bill of lading have shown an intention to incorporate the terms of some charterparty is enough.
The court has made rules, which show how the correct charterparty should be identified. The first step is to determine who is the carrier under the bill of lading. It would usually be the shipowner, though it may be a time charterer.
The next step is to ask under which charterparty is that carrier the owner? Usually, that charter-party will be incorporated, Pacific Molasses v Entre Rios (1976). It may be a time charterparty or a voyage charterparty. However, if that charterparty is a time charterparty and there is a voyage charterparty further down the chain, then the voyage charterparty will be incorporated instead.
It is the charterparty which is most appropriate to a particular voyage and the carriage of goods [as in Nanfri (1978)]. This is because a voyage charterparty is a contract of carriage and a time charterparty is a contract for the use and hire of a vessel.
A voyage charterparty is more likely to contain terms relevant to a bill of lading contract of carriage than a time charterparty is. However, if there is only a time charterparty then that will be the charterparty incorporated into the bill of lading. The holder of the bill of lading (quite often) and the bill of lading carrier (sometimes) may not have a copy of the charterparty referred to and incorporated into the bill of lading. However, the charterparty will still be incorporated into the bill of lading. However the parties to the bill of lading contract of carriage may not know its full terms.
Voyage Charterparty Forms exist in numerous versions as the shipping business attempts to keep them in line with evolving practices. But, despite this variety, there are some common topics in the Voyage Charter Party Forms:
Name and Description of the Ship: Charter Party specifies the name of the ship and brief description of the ship such as Year of Build, Flag Country, Classification Society, Call Sign, Gross Tonnage (GT), Net Tonnage (NT), Summer Deadweight (DWT), Decks, Holds, Hatches, Grain Capacity, Bale Capacity, Length Overall (LOA), Gears and the Safe Working Load (SWL).
Loading and Discharging Location: Charter Party specifies the loading and discharging location (port or berth) and the number of loading and discharging ports or berths. If two or more berth is specified, berth shifting expenses are usually included in the freight rate agreed. In coaster shipping, the charter party stipulates whether the ship should remain always afloat or whether a safely aground berth is allowed NAABSA (Not Always Afloat But Safely Aground). Description and Amount of the Cargo are provided under this title.
Loading and Discharging Rates: Charter Party stipulates loading and discharging rates in tonnes per day, on which time allowed is calculated.
Laydays and Cancelling Date (LAYCAN): Charter Party stipulates the range of dates under which the ship must arrive and present itself ready for loading at the stipulated loading port. For example, Laycan 20/30 June. Usually, the first date is preceded by the words “laydays not to commence before 20 June” which means the charterers are not obliged to commence loading before that date, although shipowners and charterers may agree to do so during charter negotiations. The cancelling date (30 June) is the latest on which the ship is required to arrive before midnight. Arrival after that time means the ship could be determined to be in breach of the charter party and the charterer then has the option to cancel the charter party. If the ship’s late arrival could be determined to be deliberate, that is, for the commercial advantage of the shipowner then the charterer may be entitled to claim damages for any loss incurred as a result of the undue delay. Charter Party Forms have a clause requiring the charterer to declare whether or not this option will be exercised as soon as it is clear that the ship has been delayed. Therefore, avoiding the ship having to navigate to the loading port and present itself, only to be informed it is canceled. The Cancelling Date is an option to be declared by the charterer and it is not automatic. Furthermore, Charter Party Forms stipulate NOR (Notice of Readiness) which starts the time to count.
Loading and Discharging Costs: Charter Party stipulates whether it is the shipowner’s or the charterer’s expense for cargo handling at both the load and discharge ports. Special attention should be paid to whether or not the cost of any cranes or specialist services is for the account of the shipowner or the charterer.
Arrival Notices: Charter Party stipulates that the shipmaster gives regular notices of the ship’s Expected Time of Arrival (ETA) at the load and discharge ports. Consequently, the charterer plans cargo loading or discharging facilities and arranges a suitable berth. Normally, ETA Notices are sent by the shipmaster to the port agent, whose duty it is to pass ETA Notices on to the charterer or charterer’s agent. Providing regular ETA Notices during the voyage should not be confused with giving the NOR (Notice of Readiness) which is tendered when the ship arrives at the port and the shipmaster declares that the ship is ready to commence cargo operations per the Charter Party.
Hatch Covers: Carter Party specifies for whose cost and time the opening and closing of cargo hatch covers will be.
Bill of Lading (B/L): Charter Party stipulates who is entitled to sign the Bill of Lading (B/L) and under what reference the Bill of Lading (B/L) will be completed. Charter Party stipulates how the cargo loaded figures will be determined. When the Bill of Lading (B/L) is signed and stamped, the Bill of Lading (B/L) becomes a very vital and valuable document with a crucial role in trade. Bill of Lading (B/L) determines the quantity and condition of the cargo at the time of loading. Once the Bill of Lading (B/L) is signed and stamped, the statement is final except in rare legal situations. Bill of Lading’s (B/L) another major role is as a Negotiable Document of Title. Therefore, a third party who may wish to buy the cargo has to be able to trust the quantity and description recorded in the Bill of Lading(B/L) because it is the only evidence the buyer has about the cargo. In theory, the shipmaster signs and stamps the Bill of Lading(B/L), in practice this duty is usually delegated to the agent. The agent should qualify the signature with a statement that he is signing for and on behalf of the shipmaster and shipowners of the ship. The cargo may only be delivered to the party who legitimately holds the Bill of Lading(B/L) and presents the Bill of Lading(B/L) to claim the cargo. Any deviation from this fundamental principle may only be implemented by the agent on explicit instructions from the principal.
APS (Arrival Pilot Station): defines the point at which a ship may be delivered to a Time Charterer on arrival.
CHOPT (Charterer’s Option): when the charterer has an option under the charter party, for instance, for more than one berth load, or a margin on cargo intake.
DOP (Dropping Outward Pilot): when redelivering at the end of a time charter, whereby the handover occurs after leaving from the final port. This expression ensures that the Time Charterer pays all the costs associated with calling at the Final Port.
DLOSP (Dropping Last Outward Sea Pilot): DOP (Dropping Outward Pilot) is modified to DLOSP (Dropping Last Outward Sea Pilot) to avoid misunderstandings when more than one pilot is required to take the ship to sea, especially at ports where river pilots take the ship from the berth and hand over to sea pilots on passage.
DWCC (deadweight cargo capacity): is the cargo intake tonnage the ship can get to its legal maximum draught (draft), taking into account bunkers, stores, provisions, constants.
ETA (Estimated Time of Arrival): is used when the ship is signifying its arrival at a port.
ETD/ETS (Estimated Time of Departure/Expected Time of Sailing): is used when the ship is signifying its departure from a port.
FIO (Free In and Out): defines that all cargo is to be loaded and discharged free of all expense to the shipowner or carriers but the ship will have to arrange and pay for any stowing of the cargo within the ship. In legal terms, the act of loading in FIO (Free In and Out) and FOB (Free On Board) refers to lifting as far as the ship’s rail. When the cargo has passed the ship’s rail, it becomes the ship’s responsibility and the goods are shipped so far as any Bill of Lading (B/L) is concerned. The opposite applies to the discharging operation.
FIOS (Free In and Out Stowage): defines that all cargo is to be loaded and stowed free of all expense to the shipowner or carriers. Charterers also have to pay for stowing the cargo in the ship, comprising the entire operation even after passing the ship’s rail.
FIOT (Free In and Out Trimmed): defines that all cargo is to be loaded and trimmed free of all expense to the shipowner or carriers. FIOT (Free In and Out Trimmed) is used for bulk cargoes and indicates that charterers have to pay for trimming the cargo. Trimming is the task of leveling the pile of bulk cargo so that the bulk cargo does not remain in a cone shape.
LI (Liner In) or LO (Liner Out): is the opposite of Free In or Free Out. The shipowner pays for loading or discharging the cargo. It has various combinations such as FILO (Free In, Liner Out) or LIFO (Liner In, Free Out).
Min/Max (Minimum/Maximum): this expression is followed by many tonnes means that the cargo is a fixed quantity without any margin, plus or minus.
MOL (More or Less): is used to indicate an option on cargo intake, usually stated in a percentage form. For example, 5% MOL.
MOLCO (More or Less Charterer’s Option): is used to indicate an option on cargo intake is in Charterer’s Option, usually stated in a percentage form. For example, 10% MOLCO.
MOLOO (More or Less Owner’s Option): is used to indicate an option on cargo intake is in Owner’s Option, usually stated in a percentage form. For example, 10% MOLOO. Usually, MOLOO is favored by shipowners because it allows for alterations in the amount of bunkers and stores on board.
NAABSA (Not Always Afloat But Safely Aground): in coaster shipping, NAABSA term allows the ship to lay aground at low tide where the seafloor conditions are suitable for a ship.
NOR (Notice of Readiness): is tendered by the ship, usually through the agent. NOR (Notice of Readiness) declares the time and date that the ship arrived in all respects ready to load or discharge the cargo. NOR (Notice of Readiness) determines the commencement of laytime per the charter party terms.
ROB (Remaining On Board): is used to indicate any bunkers, cargo, or freshwater remaining on board the ship either on arrival or on departure.
SHEX (Sundays Holidays Excepted): Laytime not to count during Sundays and Public Holidays.
SHINC (Sundays Holidays Included): Laytime counts during Sundays and Public Holidays.
SSHEX (Saturdays Sundays Holidays Excepted): Laytime not to count during Saturday, Sundays, and Public Holidays.
SSHINC (Saturdays Sundays Holidays Included): Laytime counts during Saturdays, Sundays, and Public Holidays.
FHEX (Fridays Holidays Excepted): Laytime not to count during Fridays, and Public Holidays in Islamic countries.
SWL (Safe Working Load): specifies the capacity of the ship’s gears, cranes, and derricks to handle the certified lifting capacity.
TIP (Taking Inward Pilot): the location and time at which the pilot boarded the ship inbound to port and usually used for the start of a Time Charter. The opposite of DOP (Dropping Outward Pilot), TIP (Taking Inward Pilot) ensures that the costs of entering the port are for the Time Charterer’s account.
WCCON (Whether Customs Cleared Or Not): defines that laytime will count regardless of whether customs authority to load or discharge has been granted.
WIBON (Whether In Berth Or Not): defines that laytime will count whether in berth or not.
WIFPON (Whether In Free Pratique Or Not): defines that laytime will count even if the ship has still been waiting to get Free Pratique from the Health Authorities.
WIPON (Whether In Port Or Not): defines that laytime will count whether in port or not when the ship waits outside the port at the customary anchorage area for a free berth.
WW (Weather Working): is used where laytime only counts when weather permits cargo operations.
WWWW: is a combination of WCCON, WIBON, WIFPON, and WIPON. WWWW indicates that laytime will begin to count, subject to the NOR (Notice of Readiness) requirements, as soon as the ship arrives at an area outside the port normally considered to be the waiting area.
An agent will frequently be dealing with the buyers and sellers of cargo and will certainly encounter other sets of abbreviations. These are sales terms and as such, are not likely to appear in a charter party. They are, however of interest to the agent because, in the absence of information from the shipowner they will often indicate likely charter party terms. It is not unknown for sales terms and charter party terms to appear contradictory, in which case the agent must seek clarification from the shipowner principal at the earliest opportunity.
Most Common International Sales Terms (Incoterms)
CFR (Cost Freight): the seller arranges for the goods to be sold on a delivered basis to the buyer and the costs of the seaborne transportation are included.
CIF (Cost Insurance Freight): the seller arranges to sell the goods delivered but also includes the cost of insurance on the goods while in transit.
FAS (Free Alongside): the cargo is free to be delivered alongside the ship. Free of all costs to the shipowner or carrier but costs thereafter, loading and stowing, are for the ship’s account.
FOB (Free On Board): the cost of loading the cargo is for the account of the shipper and not that of the carrier or consignee.
In the time charter, there has to be a ship handover (delivery) from the shipowner to the time charterer who will then become the disponent owner at the commencement of the time charter. Likewise, at the end of the period of the time charter, there has to be a ship handing back (redelivery) from the time charterer to the shipowner.
In many time charter forms, there is a wording to the effect that the ship, at the end of the period, must be redelivered from the time charterer to the shipowner “in like good order and condition, fair wear and tear excepted”. Hence, that the condition of the ship, together with many other things, has to be settled at the commencement of the time charter and its completion. Usually, surveyors perform these inspections, termed “On-Hire Survey” and “Off-Hire Survey”. Customarily, two (2) agents are employed, one representing the shipowner and the other the charterer, at the starting and finishing of a Time Charter.
It is the responsibility of the shipowner’s agent to bring the ship to the point at which it is agreed with the time charterer that the hire will commence. Time Charter Party stipulates where and when the ship has to be delivered, which may be at a nominated port or a specific berth. The On-Hire Survey will then take place there. The actual time of ship delivery and redelivery may well be at a geographical point not connected to the shore such as DOP (Dropping Outward Pilot) and TIP (Taking Inward Pilot). A time charter party may stipulate delivery to be passing a strait or even passing a particular meridian of longitude in mid-ocean. Consequently, the ship’s logbook sets the time of delivery or redelivery. The shipowners and charterers will have agreed where the physical inspection of the ship for the On-Hire Survey or Off-Hire Survey has to take place. Generally, some estimations such as bunker consumption have to be agreed upon between the shipmaster and the surveyor to cover the distance between the point of survey and the point of delivery or redelivery.
On-Hire Survey or Off-Hire Survey checks:
- overall condition of the ship’s cranes
- apparent damages at holds, hatches, or decks before the commencement of the time charter
- ROB (Remaining On Board) bunkers, freshwater, and lubricants at the commencement of the time charter
- Class Certifications and Safety Certifications are valid and in good order
- The ship is properly manned per the ship’s certification
The time charterer either appoints a surveyor to represent its interests or agrees to enter a joint survey, the result of which is agreed to be binding on either side. Any hold or hatch cover damage is recorded and either rectified by the shipowner before the time charter commences or it is agreed that this damage exists and will not be held against the time charterer at any future date. Any rectification required to be carried out to make the ship fit must be done before the time charter commences. Any time used will be for the shipowner’s account.
The shipowner’s agent coordinates and manages the formalities and the on-hire survey. The on-hire certificate (delivery certificate) is countersigned by the shipmaster and the time charterer or time charterer’s agent. The on-hire certificate shows the bunkers and freshwater ROB (Remaining On Board), exceptions, time, date, place that the hire commenced. Up to the point of delivering the ship to the time charterer the shipowner’s agent is responsible for all traditional agency activities and requirements of the crew members. Furthermore, all berth costs to that point are also for the shipowner’s account. Once the ship is delivered, all further costs, including the appointment of a ship agent, transfer to the time charterer. The time charterer’s agent takes over the full agency responsibility of the ship in respect of all port costs, cargo handling, and navigation orders.
At the end of a time charter period, the ship is redelivered from the time charterer to the shipowner. The time charterer’s agent is responsible for bringing the ship to the point agreed for redelivery and to make the ship available for the shipowner’s inspection. The time charterer’s agent coordinates and manages the formalities and the off-hire survey. The off-hire certificate (redelivery certificate) is countersigned by the shipmaster and the time charterer or time charterer’s agent. If any damage has occurred during the ship’s period on time charter, it is the time charterer’s responsibility to rectify these defects before the ship is redelivered to the shipowner or to agree on reimbursement instead of actual repairs. Repair time and costs incurred are for the time charterer’s account. The off-hire certificate shows the bunkers and freshwater ROB (Remaining On Board), any over-carried damage for later repair, exceptions, time, date, and place that the location of redelivery. It is the time charterer’s agent’s responsibility to coordinate and manage an off-hire certificate (redelivery certificate).
The shipowner’s agent is responsible for ensuring that the ship is delivered back from the time charterer (redelivered) to the shipowner in a like condition to the commencement of hire. The shipowner’s agent is instructed to appoint an off-hire surveyor who should be given a copy of the on-hire survey listing any defects that were over-carried and cannot be determined as time charterer’s damage. Any further damage that is discovered should be advised by the shipowner’s agent to the time charterer for repair. ROB (Remaining On Board) bunkers and freshwater should be determined and only when the ship is in a handover condition should the agent accept the redelivery certificate presented by the time charterer. Once the ship is redelivered, the shipowner’s agent is then responsible for all costs and operational requirements of the ship.
Printed Charterparty Forms
Printed Charter Party Forms may undergo significant alteration during negotiations because these forms are quite out of date. For instance, the Chamber of Shipping Welsh Coal Charter 1896, the most regularly used coal charter party still contains clauses that are unchanged from 1896 or even earlier. The reason why both charterers and shipowners still use the old charter party forms is that so much of the printed wording has stood the test of time and charterers and shipowners prefer to stay with the version they know rather than adopt a new form. In the grain business, conservatism tends to explain why the Baltimore Form C, first produced in 1913 and amended in 1971, is used more than the Norgrain form, first produced in 1973 and amended in 1989.
GENCON Charter Party is a standard voyage charter party, the form used for trades where no specialist form exists, is preferred to the Multiform Charter Party, even though the GENCON Charter Party has had very few changed since 1922. This compares with the Multiform, which was issued in 1982 and revised in 1986. But, it is the Multiform Charter Party that will be used as the example simply because, being more modern, the printed wording reflects present circumstances more closely.
Charterparty and Port Agent
There are many port directories available, however, all port directories have an unavoidable time lag between compilation and publication. Consequently, the only certain way for a shipowner to obtain the latest information about port conditions is to consult a reputable local agent. For instance, berthing is directly affected by the ship’s draught (draft) and the depth of water available. Likewise, the relationship between safety and draught (draft) also arises in the discharging clause of a charter party. Although the Multiform Charter Party form favorably envisages all cargoes to be fixed on a FIOS (Free In Out Stowage) basis, in the real world there are seldom when loading or discharging costs are for the ship’s account and a shipowner wants to know what these are before they can even perform a meaningful voyage estimate, a crucial preparatory to any chartering negotiations.
BIMCO (Baltic and International Maritime Council) publishes great info about local taxes throughout the world, but even this booklet cannot be as up-to-date as a local agent. During the chartering negotiations, a port agent may give important advice about local regulations for opening and closing of hatch covers, local labor unions, tallying, etc.
The port agent must be able to give a reasonably precise estimate of the ship’s likely expenses including towage, pilotage, boatmen, linemen, and also the port charges such as tonnage dues, environment dues, canal dues, and berthing dues. The ship’s agent should send proforma port DA (Disbursement Account) as soon as possible during the chartering negotiations which affect the voyage estimations and charter party. In the shortsea (coaster shipping), the margin between a profitable voyage and a loss-making one can be fine. For instance, failing to inform that a tug will be required can turn a profit into a loss for the shipowner. The port agent should at this point agree on the fee they will be charging for their services. The shipowner can add these costs with their estimated operating costs and bunkers into a voyage estimation to determine the level of freight to obtain in the chartering negotiations.