What’s In A Contract?

We often sail on or see vessels of various kinds operating into and out of port. These will be ferries, cruise liners, container ships, general cargo ships and bulk carriers, be they dry bulk carriers or tankers. They will always sport particular hull and superstructure colours, as well as having specific motifs and colours on their funnels. But who owns them, and are they sailing for their owners?

The answer may not be as clear-cut as it seems. In an age of tighter economies and vessel operation based on absolute need, it is often the case that vessel fleets are managed and operated by the shipping company, but may be owned by another concern. Such practices can be applied to any aspect of the shipping business, and also can refer to the use of yachts and private vessels.

Let us take an example. A European ferry operator sailing out of the UK to Northern Europe operates several ferries on a variety of routes. The ferries are all painted in the colours of the ferry company, and to the casual onlooker or passenger, it would appear that the ferry is owned by that operator. In some instances, this may well be the case. However, it is not necessarily so. I recently made a visit to the port of Immingham with a group of students, and we were shown around not only the terminal facilities but we also were taken on board one of the ferries, the Jutlandia Seaways (25,609 gt). We were introduced to some of her crew, including the captain, an Estonian. He explained to us that although the ferry was operated by DFDS Seaways, it was chartered in from another company. She is owned by Snowdon Leasing of London, and is managed by Ellingsen Shipmanagement of Stockholm, Sweden. Her crew is also employed by Ellingsen Shipmanagement, and she sails under the UK flag. She was chartered by Ellingsen to DFDS, in whose colours she sails, on a long-term charter basis. In reality, the charter arrangement for the Jutlandia Seaways is a hybrid, comprising a time charter combined with a bareboat charter. Under the time charter, the vessel operates for DFDS but is managed by Ellingsen under the terms of the charter. However, unlike a true time charter, the vessel sails not in the colours of Ellingsen, but rather in the colours of DFDS, in an agreement more akin to a bareboat charter. Other DFDS operated vessels, such as the Princess Seaways and the King Seaways, are wholly owned by DFDS.

The above scenario is not an unusual practice. The ill-fated container vessel MSC Napoli was owned by a consortium of different owners, but was chartered by a ship management company to MSC, which operated the vessel in their colours. After her foundering in the English Channel in early 2007, the main challenge was to find the owners of the vessel in order to conclude a full salvage contract, and this proved a complex task. It is often the case that many people consort to purchase a ship, and then form a contract with a ship management company such as V. Ships to have the ship managed by the ship management company. In turn, the ship management company has the authority to charter the ship out to whichever company seeks to operate the vessel. Ship management in itself is a complex affair which requires significant expertise on the part of qualified shipbrokers to ensure that the ship is managed and chartered out properly. Another example of vessel chartering is a German company called Thomas Rickmers, which owns many vessels and charters them out to several container shipping lines. Many more shipping companies carry out similar ventures.

In essence, the rationale is simple. A shipping company may own a basic core fleet of vessels which it needs on a regular frequent basis, but charters in others according to the ad hoc need for other additional vessels, especially during peak times of the year when traffic increases according to demand. In general, the demand for operational vessels dictates the need to use more vessels, and when the demand decreases, the charter may be terminated. Also, where there is a specific project, such as the movement of particular cargoes from one place to another, specific vessels will be chartered for that purpose. This is very much the case with worldwide capital projects and oilfield projects, where specific amounts of material will be shipped to satisfy the needs of the project. Companies engaged in such charter contracts include UAL, BBC Chartering and Johannes Spliethoff. The shipping company Furness Withy, once a subject of an article in this magazine, was at one time a major shipowner, but over the years has changed to becoming a ship chartering company, chartering vessels from elsewhere according to demand.

Chartering is also a major element of bulk shipping. Bulk shipping, unlike liner shipping, does not rely on a specified frequency of routes and schedules. Cargoes are shipped according to specific need, such as iron ore or coal, grain, fertilisers, raw sugar and forest products. The dry and liquid bulk sector relies on chartering to satisfy its needs, and there is a variety of bulk carriers, from Handysize to Capesize and VLOC dry bulk carriers sailing the seven seas loaded with a variety of dry bulk commodities. This is also the case with the oil tanker sector. Tankers are also chartered on a regular basis for the carriage of crude oil from the oilfields to the markets, and again tankers vary in size and deadweight capacity.

The term “Chartering” refers to the arrangement of the use of vessels and containers for the purpose of the transport of cargo by sea. There are several terms used for the purpose of chartering, which are:

– Bareboat (Demise)
– Voyage Charter
– Time Charter
– Slot Chartering (Containers)

In general, the chartering principle refers to the carriage of bulk cargoes by dedicated bulk carriers, but it can also refer to the carriage of general or specific cargoes on a general cargo carrier, as well as the carriage of containers on a container vessel. The carriage of general or specific cargoes as well as container carriage is covered under the slot chartering arrangement, to be covered later in this section.

A vessel is owned by a shipping line, but is not necessarily managed by that company. That vessel may be managed by a separate vessel management company, whose responsibility is to crew and maintain the vessel, as well as ensuring that its operation remains profitable. The vessel management company (or the shipping line, whoever manages the vessel), then employs shipping agents to represent the vessel and the company when it arrives in port, and to ensure that its cargo is arranged, managed, loaded and unloaded correctly and efficiently. In many cases, the space on board the vessel is chartered by way of the slot chartering method, but often the whole vessel is chartered by another trader wishing to arrange the transportation of a cargo or a series or group of cargoes from one port to another. In the main, such chartering concerns the use of bulk carriers for the purpose of the transportation of raw materials such as minerals, grain, petroleum, fertilisers or timber. Equally, bulk shipments of finished products such as road vehicles, steel, aluminium, heavy machinery and refrigerated cargoes can be transported in a consignment large enough to fill a ship to capacity. The contract made for carrying these bulk consignments is known by the generic title of “Charter Party”, a term derived from the Latin “Charta Partita”, literally translated as “A Letter Divided”. In the early days of such agreements, a contract was copied exactly, and the paper on which the two parts were written was then cut in half, so that each of the contracting parties could keep one segment which agreed entirely with the other. The present-day Charter Party is a maritime contract by which the charterer, a party other than the shipowner, obtains the use of a ship for one or more voyages (Voyage Charter), or for a specified period of time (Time Charter).

Vessels transporting cargoes under the terms and conditions set out in a charter party are known as “private carriers”, in that they are operated to cater for the needs and schedules of the shipper and the vessel owner. In direct contrast to this arrangement, a carrier which offers transportation for all goods offered between the specific ports it serves is known as a “Common Carrier”, given that it regularly operates on such routes, often as what is described as a “liner” service. The term “Common Carrier” can also be used to describe a company which owns or operates container and logistics services, as well as consolidating cargoes into containers, but does not own its own vessels; it uses the services of vessels owned by other shipping companies for the transportation of its containers. Such an entity is known as an NVOCC (Non-Vessel-Owning Common Carrier), and it charters slots, or spaces for the loading of containers, on container vessels operating on specific routes on an agency basis. Certain NVOCCs act as liner or shipping agencies for shipping lines in several ports worldwide, and in general they issue their own FIATA Bills of Lading for each cargo shipped.

An important distinction can be made between a private carrier and a common carrier. A ship loaded with cargoes belonging to a single shipper is a private carrier, whereas a vessel carrying the property of two or more shippers is a common carrier. In this respect, if a bulk carrier is carrying a single load of iron ore, for example, between Brazil and Rotterdam, and that cargo is destined for a single buyer, then that vessel is a private carrier. On the other hand, if a vessel is carrying several thousand containers from the Far East to Rotterdam, with each container load destined for a variety of different importers, then the vessel is deemed to be a common carrier. The same is true for a vessel carrying a variety of cargoes on her deck from the UK and Norway bound for the Brazilian offshore oilfields. A private carrier undertakes the service specified by the owner of the cargo, in that it loads the particular cargo at the place designated by the shipper, transports it to the destination named in the contract, and delivers the cargo according to the conditions laid down in the contract or charter party, including the specific International Term of Delivery (INCOTERM), usually FOB or CIF (the INCOTERMS will be covered later in this text).

We can now analyse the three main types of charter available, and how they work. Chartering is a very important activity within the shipping industry, and indeed constitutes a major element of present-day shipping business. In some cases a charterer may own cargo and employ a shipbroker to find a ship to deliver the cargo for a certain price, called the freight rate. Freight rates may be on a per-ton basis over a certain route (e.g. for iron ore between Brazil and China, or for coal between Colombia and the UK) or may alternatively be expressed in terms of a total sum, normally expressed in US Dollars, per day for the agreed duration of the charter. A charterer may also be a party without a cargo who takes a vessel on charter for a specified period from the owner and then trades the ship to carry cargoes at a profit above the hire rate, or even makes a profit in a rising market by re-letting the ship out to other charterers.

As a brief introduction, let us look at the abbreviated definitions of a typical charter.

– A voyage charter is the hiring of a vessel and crew for a voyage between a load port and a discharge port. The charterer pays the vessel owner on a per-ton or lump-sum basis. The owner pays the port costs (excluding stevedoring), fuel costs and crew costs.

– A time charter is the hiring of a vessel for a specific period of time. The owner still manages the vessel but the charterer selects the ports and directs the vessel where to go. The charterer pays for all fuel the vessel consumes, port charges, and a daily ‘hire’ to the owner of the vessel.

– A bareboat charter is an arrangement for the hiring of a vessel whereby no administration or technical maintenance is included as part of the agreement. The charterer pays for all operating expenses, including fuel, crew, port expenses and hull insurance. Usually, the charter period (normally years) ends with the charterer obtaining title (ownership) in the hull. Effectively, the owners finance the purchase of the vessel.

– A demise charter shifts the control and possession of the vessel. The charterer takes full control of the vessel along with the legal and financial responsibility for it.

Depending on the type of ship and the type of charter, normally a standard contract form called a charter party is used to record the exact rate, duration and terms agreed between the shipowner and the charterer. Examples of such forms can be found on the BIMCO (Baltic International Maritime Council) website.

The Voyage Charter is a maritime contract under which the ship owner agrees to transport, for an agreed amount of money (technically known as freight) per tonne of cargo loaded, a stipulated quantity of a named cargo between two or more designated ports. The ship owner retains full responsibility for the operation of the ship and costs relating to its voyage (its Voyage Costs). The charter agreement lasts for the duration of the voyage or specific number of voyages determined in the terms of the charter agreement deemed necessary to transport the specific consignment or consignments from one port to another.

Under the terms and provisions of a Voyage Charter, the ship owner is obliged to provide a fully operational and seaworthy vessel, and in all respects fitted to carry the proposed cargo on the proposed route. The charterer in turn is required to provide a full load of the named and described item or commodity and to that end may demand that the ship owner stipulate, as warranties or verifiable facts, the following details:

– The name and classification of the vessel
– The flag and nationality of the vessel
– The IMO registration number of the vessel
– The deadweight tonnage and capacity (in cubic feet or metres) below decks

Operational characteristics such as speed, fuel consumption and date of last drydocking are not a concern of the charterer, since these issues are only the concern of the shipowner, and therefore would normally be omitted from the warranties (additional details not otherwise specified as terms or conditions) of the voyage charter. The charter party always stipulates the port in which the vessel is to be delivered or “tendered” by the owner. It also specifies the beginning and the ending of the period of days during which tender of the vessel may be made. This period is known as “lay days”, as the vessel may well be lying idle while berthed at the quayside prior to being loaded in readiness for the voyage specified in the charter. In order to obtain maximum revenue from the voyage, the shipowner directs the master of the vessel to accept as much cargo as the safety of the vessel will permit, up to the level permitted by the Load Line (the Plimsoll Line) marked on each side of the hull of the vessel. Once the vessel has been tendered or delivered, the charterer is expected to have the cargo waiting at the quayside so that no time is lost in loading once the vessel has been delivered to the charterer. Any delay incurred as a result of the cargo not being ready for loading is classed as “laytime” for the vessel, and may be incurred as costs against the charterer, known as “demurrage”. The voyage charter must also specify and state precisely the responsibilities of the contracting parties for the loading, unloading and stowage of cargo aboard the vessel, and thus which party is liable for costs incurred as a result of cargo handling by the port authority, in terms of the use of dockside cranes and quayside personnel. The “net form” of charter makes this task the responsibility of the charterer, whereas the “gross form” charter or “liner terms” contract simply states that the charterer is obliged only to provide the cargo at the loading port and to accept it at the port of destination, often under the terms of a CIF Contract. The freight cost charged includes the cost of stevedoring and all other voyage expenses. The shipowner bears full responsibility for the proper loading, stowage and discharge of the cargo, and passes these costs on to the charterer as part of the overall freight cost.

The Time Charter is a maritime contract setting out the terms under which a person or party other than the shipowner obtains the use of the vessel for a specified period of time to trade and transport cargoes within broad but defined limits, carrying any cargoes not positively barred or prohibited by the wording of the contract.

Time Charters normally contain restrictions concerning the types of cargo which may be carried aboard the vessel. These restrictions range from any lawful cargo not deemed as being injurious or harmful to the vessel, to specific cargoes which may not be loaded aboard the vessel, such as toxic substances or livestock. Compensation, known as charter hire, may be defined at an agreed sum per deadweight tonne per month or at a fixed amount per day.

The shipowner remains in all aspects the operator of the vessel. The charterer, among other obligations, assumes responsibility for loading and discharging the cargoes, especially where certain INCOTERMS such as FAS, FOB, C&F, CIF and DAT are concerned.

The charterer also pays the costs of vessel fuel (bunkering), pilotage, harbour and light dues, wharfage and dockage (berthing), among other items of operational cost such as port handling and conservancy charges.

The time charter (and, for that matter, the bareboat charter) directs where the vessel may sail. Because marine insurance underwriters are very definite as to the areas of the world where they will accept responsibility for damage sustained by vessels they insure, the time and bareboat charter parties provide a space in which the limits of the ship’s voyaging are stipulated, including entry into sea areas vulnerable to icing up during winter months, for which an “ice clause” applies.

The Bareboat Charter (or Demise Charter) is a maritime contract by which the vessel itself is transferred in all but title from the owner to a separate party for a specified period of time. It is the least used, for the reasons that it imposes the heaviest burden upon the charterer, who becomes the de facto operator of the ship. Among members of the legal profession, it is referred to as a “Demise Charter”. The charterer pays compensation (charter hire), either at an agreed amount per deadweight tonne per month or at a fixed sum per day. All burdens and responsibilities of operation, including hiring officers and other crew and maintaining the vessel in good condition, are assumed by the charterer, who legally is said to be the owner pro hac vice (for this period).

The term “bareboat” refers to the fact that the fully-operational ship is delivered to the charterer in its “bare” state, i.e. that it has on board no crew, no stores, little or no fuel, and no navigational charts. The term “demise” refers to the transfer of possession (but not ownership), command, and control of the chartered vessel from the owner to the charterer for the length of time covered by the contract. Although this type of charter is the least used out of all the charter types, it is still a common occurrence where vessels are chartered out by one shipowner to other shipowners for the purposes of temporary expansion of their fleets in order to satisfy the demands of specific markets, such as container transportation. Under the bareboat charter, the shipowner is required to provide to present a fully seaworthy and operational vessel that is fit and suitable for the service intended. Once the vessel is accepted by the charterer, the responsibility of seaworthiness no longer rests with the owner but passes to the charterer. The charterer has the full right and responsibility of recruiting the officers and crew of the vessel, although they may be nominated by the shipowner if required. The vessel’s entire crew thus become the employees of the charterer. All voyages undertaken by the vessel are specified by the charterer, and all associated costs per voyage are incurred by the charterer.

Documentation, such as Marine Bills of Lading or Sea Waybills, for the cargo carried by the vessel in question may be issued by the charterer. If the master of the vessel is required to sign these Bills, as well as the Mate’s Receipt, the documents must indicate or state that the vessel’s master is the agent of the charterers. The shipowner is not deemed responsible for loss or damage to the cargo, but the ship may be subject to liens (rights of possession) by cargo interests. Under the terms of the laws of Carriage of Goods at Sea, the carrier is deemed responsible for the cargo while it is on board the vessel. In this case, the party accepting liability for the carriage of the cargo is the charterer, who has undertaken to perform the contract of carriage in agreement with the shipper or owner of the cargo.

Slot Chartering is a term which refers to the chartering of space aboard a vessel for freight of various kinds. It is generally used to refer to containerised freight, as it concerns the “slotting” of a container on board a container vessel, and generally concerns the allotting of space on board a vessel of one shipping line for containers belonging to another partner, or other, shipping or container line.

A container load may be a single consignment destined for one buyer (FCL), or may be a groupage or consolidated consignment comprising several loads, each destined for a different buyer (LCL). In each case, each cargo belongs to a different owner, and may be booked aboard the vessel separately from the other cargoes. However, the representative of each shipper or cargo owner, in this case a freight forwarder, arranges a space aboard the vessel by entering into contact with the shipping agent. The shipping agent may be the liner agent representing the shipping line, or may be an NVOCC, as described earlier in this text.

In the case of the container business, the shipping agent or NVOCC arranges for a container to be despatched to the premises of the shipper or consolidator, where the individual or consolidated consignment is loaded into the container. The space for that container is then arranged aboard a specific vessel in the form of a “slot”, or space, either above or below deck depending upon the nature of the consignments concerned. That slot is effectively chartered from the shipowner or operator of the vessel, depending upon whether the vessel is chartered out under the terms of a bareboat charter or not. In reality, shipping agents may charter slots on a series of vessels depending upon their relationship with the shipping lines. In the case of shipping conferences, where several shipping lines pool their maritime resources and fleets together to operate on a specific set of routes, the shipping agents or container operators will be able to charter slots on several vessels, each of which belong to a different shipping line, but which operate collectively on the same set of routes, for example between the Far East and Europe. The shipping agent hires in the container at a fixed container (box) rate, which applies to any of the shipping lines operating on the specified routes, and then sells the space to the shipper either at a fixed box rate for the container or at groupage or consolidation rates, based on the volumetric weight of each of the consignments consolidated inside the container.

The slot refers to a specific single voyage, as once the container has been offloaded at the port of destination the terms of the charter cease to apply. Another slot charter arrangement will be made for the return of that container to its point of origin. The same is true of any consignment loaded directly aboard the vessel without being containerised. In cases where the cargo is of an outsize nature, or is being despatched to a specific destination outside the scope of container operations on a general cargo vessel, the slot applies to the space booked aboard the vessel. An example of this is the transportation of oil and gas equipment destined for offshore operations.

A vessel belonging to a shipping line can be chartered under a voyage or time charter arrangement for the purposes of the shipment of such equipment to a particular customer located in the area where the offshore activities are being undertaken, e.g. Angola or Brazil. However, the deck or hold space on board that vessel may also be booked on a slot charter basis, i.e. that each cargo may be booked separately with the shipping agent by the supplier for loading aboard the vessel. That slot charter only applies to the shipment of that consignment on a single specified voyage, and is completed once the vessel has been unloaded at its destination. Unless further shipments have been booked for the vessel’s return voyage, it will return empty, although in reality it may well be loaded with equipment for return to the UK or Europe. As with container loads, each cargo is covered by a specific document, usually a Bill of Lading, which refers to either the container in which the cargo is loaded and the details of the cargo itself, or to the cargo itself where a container is not utilised. That Bill of Lading refers to the details of the consignment and/or container details shown on the Cargo Manifest, which is produced once all the slots have been arranged aboard the vessel.

There are other specific terms used with charter arrangement depending upon the type of charter and what it contains.

The Part Charter is usually based on voyage charter party model, and occurs when a shipowner cannot locate a charterer with a full load. Part charters can be very suitable if the cargo is too large or bulky to be carried on a liner vessel, but too small to justify a full vessel charter.

The Recap is a document transmitted when a fixture has been agreed, setting forth all of the negotiated terms and details. This is the operative document until the charter party is drawn up.

In the case of Hire, the charterer compensates the owner for use of a vessel. The term “On hire” means that the ship is in service as contracted. The term “Off hire” means that the ship is temporarily unavailable to the charterer.

The Fixture is the conclusion of charter negotiations between owner and charterer, when an agreement has been reached to charter a vessel.

The Disponent Owner is the name used to describe a charterer who acts as an owner by sub-chartering a vessel, and assuming an owner’s liability to the subcharterer.

Freight is the compensation or consideration paid to the owner by the voyage charterer for use of a vessel, although this can be confused with the same term being used to describe the payment made by a cargo shipper to the bill of lading issuer.

The Contract of Affreightment is the contract reached between the shipowner and the charterer whereby the charterer agrees to pay the shipowner for the use of the vessel to carry cargo at an agreed fixed freight rate for the entire voyage. The ship owner agrees to carry a number of cargoes within a specified period of time on a specified route. The agreed frequencies of cargo may require the use of more than one ship.

Wharfage charges/dues/taxes can be a contentious issue but are usually considered to be for the Shippers/Receivers account and there may also be many other statutory levies on cargo or freight that may apply. Many Shippers/Receivers are unaware of these additional costs and do not include them into their costing and consequently may be left with an unexpected considerable expense at the completion of a project.

The application of charter terms is rather more explanatory. Let us suppose that an oil company needs to charter a series of vessels to carry a variety of oilfield materials from Europe to West Africa. The materials are too bulky to be containerised, and are of sufficient quantity to require a time charter basis for three vessels to carry the equipment over a period of 2 years between Europe and West Africa to support a major offshore drilling campaign.

The oil company enters into an agreement with a vessel-owning company based in Germany to arrange three vessels to carry the equipment to West Africa. The agreement covers the following:

– The three vessels required (including names and registry of vessels, etc)
– The length of time the vessels will be required
– The route the vessels will be employed on
– The precise dates of start and finish of the agreement
– The cargo specified
– The agreed freight rate
– Loading & Unloading of the vessel
– The agreed INCOTERM (e.g. FCA, FAS, FOB, CFR, CIF, DAT)
– Bunkering costs
– Pilotage
– Harbour Dues
– Wharfage
– Berthing.

These costs must be agreed upon before the charter party is agreed and signed, as these elements and who is liable for them constitute part of the contract. The oil company agrees with the ship owner all these factors plus any other clauses which will be included in the charter party. These clauses include:

– Bunker clauses (where the charter agrees to pay for all bunker fuels required for the vessel’s voyage)
– Ship clauses (stating that the ship is seaworthy)
– Lighterage clauses (showing as port of discharge any safe port in a certain range)
– Negligence clause (excluding the shipowner’s or carrier’s liability for loss or damage resulting from an act, default or neglect of the master, mariner, pilot or the servants of the carrier in the navigation of manoeuvring of a ship, not resulting, however, from want of due diligence by the owners of the ship or any of them or by the ship’s husband or manager)
– A Ready Berth clause (i.e. a stipulation to the effect that laydays (the days that a vessel lies inactive at a port) will begin to count as soon as the vessel has arrived at the port of loading or discharge “whether in berth or not”. It protects the ship owner’s interests against delays which arise from ships having to wait for a berth

The charter party will only expire once the full term of the time charter has expired and the contract has been carried to the satisfaction of both parties.

Vessel chartering of any kind is a major global business, and accounts for a huge share of the international shipping sector. Given its importance, it is prudent to consider the extent to which charter contracts are being concluded every year, and how many of the vessels which we see are not owned by a shipping operator, but are in fact chartered in by them. Pass me the paint brush, will you?