What Is a Charter Contract?
Charter contracts are contracts whereby one party, the charterer, leases a vessel from the owner of a vessel, otherwise known as the shipper. Typically, leasing vessels for commercial use is the general purpose of charter contracts, as it enables charterers to avoid the costs of ownership and maintenance. With the exception of time charters, the term of a charter contract terminates when the charterer’s voyage is completed. As a result, these contracts are generally only short term agreements and are governed by the marine law of the jurisdiction in which the vessel is registered, or the flag state.
The classic types of charter contracts are time, voyage and bareboat charters. Although there are several subtypes of charter contracts, such as wet and dry leaseback agreements, coverage of the various types of charters is beyond the scope of this blog post.
Time charters are contracts that require charterers to pay a daily rate for the use of the vessel. Time charters include a termination clause that allows the parties to terminate the charter on a specific date, at the end of 30 days or some other timeframe, or once the vessel arrives at its destination. Time charters fall under the category of period charterparties under the SSPC, which stands for "standard form private and commercial agreements chartering." A few examples of time charters are Virgin Islands’s People of The Virgin Islands v. Caribbean Transportation, 875 F. Supp. 800 (D.V.I. 1995); Sea-Land Services, Inc. v. United States, 707 F.2d 826 (3rd Cir. 1983); and TGI and World Funding Lenders v. Cary Marine, Inc., 26 F.3d 430 (U.S. App. 4th Cir. 1994) .
Voyage charters are contracts that allow charterers to hire a vessel for a specified voyage. A voyage charter agreement becomes effective at the time that the charterer and the vessel owner(s) agree to the terms of the charter. A few examples of voyage charters are Sun Ship, Inc. v. Samson ETP, 695 F.2d 415 (3rd Cir. 1982); Regal Drilling Co. v. West Towing, Inc., 112 F. Supp. 2d 685 (E.D. La. 2000); and Dexter Bedding v. Pac. Factors, 247 F. Supp. 766 (D.C. Penn. 1965). The International Hull Convention places an obligation on ship owners to maintain hull and machinery insurance for vessels under a voyage charter.
Bareboat charters are less common usages of vessels than both a time and voyage charter. A bareboat charter agreement allows a charterer to control a vessel without assigning any of the responsibility for its operation to the vessel owner. Under this type of charter, the vessel owner does not have to supply crew, fuel or lubricants, leaving the charterer with the duty to maintain the vessel and only limiting the owner’s duties to providing the vessel itself. Once the charterer has paid for the use of the charter vessel, all risk and responsibility for operating the vessel passes to the charterer. Some bareboat charters can last for years, imposing the same duties on charterers as time charters. Charterers lack the right to attach the name of vessel owner to any of their documents and neither party has any restriction, once charterer has paid, on how to completely abandon the agreement or the venture. An example of a bareboat charter is PT Karimun Trading Corp. v. Heindel, 664 F. Supp. 63 (D.P.R. 1987).
Key Provisions in Charter Contracts
We have discussed the importance of your independent legal advice to ensure that you get what you want in commercial transactions and that you clearly understand the legal ramifications of your actions. This is important in the context of arrangements made for the chartering of vessels and the requirements of attached contracts which are sometimes very difficult to understand.
A general note about clauses and words – it is recommended that anyone signing any form of contract should get advice from an independent solicitor, including in relation to the particular clauses contained in contracts. It is not always sufficient to use the same lawyer in relation to other aspects of the transaction as this lawyer may be biased towards convincing their client that it is to their client’s benefit to enter into the contract. You must get independent and objective advice from a lawyer who is not acting for any of the parties to the contract. This will involve spending money but could save you money in the long term by avoiding litigation or avoiding otherwise having to sign up to a contract you would not otherwise have done.
Some important clauses and issues that arise in charter party contracts include the following:
Duration of the contract
Proper payment of hire and other charges (e.g. bunker fuel)
Terms of payment
Vessel name for insurance
Commencement date of the contract and weather
Re-delivery and demurrage
Vessel agent – who takes responsibility for appointing them
Statement of facts to be prepared by the master, who can dispute the facts and put forward his or her account of events, attendance requests
Termination – how can the contract be terminated
Overtime
Hunger strike clause
Governing law for contract which may allow for jurisdiction of Australian courts
Liability for cargo damage
Retention of freight
Off hire clauses
Termination of contract without giving notice
Personnel to board vessel
Right to terminate in certain circumstances
Master authority – how to be exercised
Fouling of vessel
Cargo condition
Defense in court for breach of contract
Legal Aspects of Charter Contracts
It is important to discuss the commercial issues affecting the negotiation and enforcement of charter contracts. What is covered in this section is a very cursory look at the ‘legal issues’. This section should assist the reader in identifying and obtaining more detailed legal advice on the issues covered and any other issues not covered in this article. The most important issue for the ship owner is that under English law the charter-party determines the rights and obligations between the parties. It is therefore in its interest to ensure that the legal positions set out above and the intended use of the vessel under the charter-party are reflected in the contract. If not, the owner may not be entitled to the payment it seeks under the contract. This aspect of the contract can be crucial for the owner of a supply vessel. The provision of the service to the Client may be time critical and therefore if it cannot be performed, for example, due to a dispute or mistake, the owner may find itself incurring significant costs carrying out the service by, for example, having to continue to pay wages to crew and maintain the vessel. In addition, the Client is not necessarily contractually obliged to pay the owner for the service. The legal issues, which are removed from the commercial issues, are twofold and relate to compliance with relevant English statute law and the application of English maritime law to the facts of the situation. In order to comply with English law the owner must: It is essential that whoever is responsible for looking at the contract has legal training so that they can identify issues from appearance and this should be not just the head of the organisation, but anyone who has a say in the negotiation. This includes those that negotiate and those that buy. Between them, these people will know what the contract has to say and carefully crafted contracts which use industry terminology will reflect this. It should be remembered that the courts will uphold the sanctity of contract and therefore third parties cannot generally intervene in a contract between two other parties unless they can show that a contract was designed to affect them in some way. It is possible for their role to be put in the contract but English law on this is still developing. As detailed above, failure to observe the correct formalities set out in the statute will, in a limited number of cases, result in the agreement being void. The obligations outlined above may be construed to apply to a contract to perform work other than a bareboat charter. It is therefore not only the case that it is very important for the owner of a supply vessel that the terms of employment or provision of services do not include, or are not treated as having included, a charter-party between the owner of the vessel and the party who engages the vessel to bring it within the coasting trade provisions of English maritime law and thereby mentally enter the restrictions on the operation of the vessel set out above. The owner is also obliged not to engage the vessel in such a way as to bring the vessel within the restrictions when the intention is to avoid those restrictions as this will invoke the requirements of the statute including its criminal sanctions. Section 20 & 21 of the 1854 Act, headed "Coasting trade" sets out a definition of the coasting trade, four requirements to be satisfied to be in the coasting trade and the jurisdiction of the Board of Trade on enforcement of the restrictions. We have touched above on the need to observe strict formalities under English law and that its breaches, in a limited number of cases, will mean that the contract is void. Failure to comply with the requirements of 20(2) will mean that the Court may release the owner or master from the obligation and also expose the owner to criminal sanction.
Negotiating Charter Contracts
As is clear, knowing what will work best for you when negotiating a charter agreement is more likely to lead to success on the day. Having set out your position in order of importance, and the rules (or guidelines) you wish to follow, the next step is to discuss the proposal with the Captain and negotiate. I have been amazed many times to see how often a deal between the Owner and the Charterer can be done by discussion, even when charterers set out their terms in a very one-sided manner, which would appear to leave little room for leeway. I am not talking about a situation where limits have been injected into a form of charter. For example, to limit a yacht’s area of cruising to the MED or Caribbean among other areas is common. However, I am saying that when owners come to the table open to negotiation and travel down the path of opening up dialogue with the charterer, quite often the onerous terms which have crept in don’t really mean much to owners, and this can help entice the charterer to look again at the other way forward . The deal can be done! In order to maximise the opportunity for negotiation, and see how a proposition can work with reasonable adjustment, there’s little point in setting out a list of do’s and don’ts, and countering each clause with addendums, deletions and amendments, if the other party to the discussion is not going to engage. Much of this can be done after, but at the outset, look to start out on the right foot. For example, if the Owner says "well this is how it has always been done", that’s not going to be very helpful, so try to engage the other party by saying, "I can see how you may have been badly burnt and agreed to some onerous terms in the past, however, might it be worth considering doing it differently this time, as it worked for me last time"? The trick is to take everyone along the same path and show how it will benefit you both, once they start to not only listen, but think about what you are saying. With every proposed amendment or deletion, consider the benefits for each party. Show that you are sensible and that it is not just lawyers’ talk! It is also important to explain why certain issues are problematic for you, and how you think a solution can be reasonably achieved. This way, you will not sound like you are simply trying to blame the other party for something which is not in your favour.
Dispute Resolution in Charter Contracts
A frequently asked question relates to the most common disputes arising from charter contracts. The range of disputes is quite broad, but there are several common strains. Many disputes relate to delays, either those arising in port, on route, or in relation to discharge. There is also a relatively high frequency of disputes over damages caused to cargo carried by 3rd parties, eg due to poor stowage or damage caused by salt water ingress. All of these disputes are often resolved on an arbitration basis. For example, a 2BL charter party will make the charterer expressly responsible for loading and discharging the vessel within an agreed range of times, usually without any reference to the vessel’s specific capacities. If the Charterer fails to load and discharge within the agreed range of times then demurrage kicks in. The question sometimes arises, however, as to what allowances are to be given to Charterers in the event of delays which must be quantified as against the allowance for the laytime. In particular, how do you avoid being penalised in respect of a delay for which you are not responsible? If, for example, stevedores fail to turn up, or a shovel or crane is unavailable, to which party does the delay accrue, if any? In addition, demurrage is payable on a per day basis for delays exceeding the permitted range. What do you achieve for your allocated time and for demurrage? The general principle is that you cannot double get paid. In other words, demurrage is payable only where a sufficient degree of culpability can be attributed to the delay. If, for example, it can be shown that the delay was equally attributable to Casualty A and to Charterers’ Culpable Breach, for example, Charterers would be none the better off.
Future Developments in Charter Contracts
A number of trends could affect charter contracting in the coming years. For example, digital technology is reshaping many businesses. A charterer may have all relevant information about a charter contract in its own electronic document management system. If the charterer and owner adopt differing IT systems, it can lead to inefficiency. At some point, owners and charterers could consolidate their IT systems so they are able to carry out data management in a more streamlined manner. The industry might also move toward a more sophisticated means of tracking the amendments of clauses in contracts, so that future adjustments to charter agreements are more efficient.
Environmental regulations also could impact charter contracts. For example, the International Maritime Organization’s (IMO) target to reduce greenhouse gas emissions by at least 50% by 2050 is one the goal of many within the industry. If this target is achieved, the industry will produce a greater share of its electricity and loss fuel consumption will fall, while efficiency is increased. The aim is to create an internal incentive for the entire industry to reduce fuel consumption and greenhouses gas generation. While more expensive measures, such as hiring scrubbers for vessels, have been used to deal with changes in environmental regulations , it might be possible to amend existing charter clauses to deal with such future changes in regulations. To prepare for regulatory change, drafting should take into account the flexibility for adoption of such future changes with regard to standards that are not yet legally required.
Finally, with tensions between the U.S. and China rising, it is possible that this trade war might have an indirect impact on charter contracting. To the extent the economic relationship between two countries is tense (definitions of what constitutes "tension" vary), longer period chartering between the countries may not be as desirable as time charters. In other words, instead of being chartered by a Chinese shipowner for a certain period, a vessel might be chartered on a time charter from the U.S. to a Chinese shipowner before being re-spot-chartered.
There could also be a shift in the choice of governing law, meaning the law of a country in the Asia-Pacific region might be more commonly chosen as governing law when it comes to this region. As well, with tariffs rising on the U.S. side against China, there’s a possibility that cargoes may be moved from U.S. ports to Chinese ports. This will mean much more utilization of Chinese-flagged ships and therefore stronger competition in the flag and flag state-related issues.