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Types of Charter in the Shipping Industry

Question:

Describe about the Ship Chartering.
 

The shipping industry involves an activity called chartering. This activity in its simplest form involves a rental agreement where a charterer contracts to rent a ship from the ship owner. Depending on the type of charter and the type of ship involved in the rental agreement, the standard contract is called the charter party which requires specific details about the rate, duration and the terms which are decided by the ship owner and the charterer. The time charter refers to renting a ship for a fixed period of time. The general trend of chartering involves renting a ship for a specific number of voyages; however a time charter is hired for a specified number of days or period (Wijnolst and Waals 2011).

The activity of chartering can be of different types which involve different types of charters. Thus, there are five popular types of charter namely the voyage charter, time charter, contract of Affreightment, trip time charter and bareboat charter.

  • The Voyage charter is the most popular and involves renting a ship along with its crew for a voyage which starts from a load port till the discharge port. Under the voyage charter, the charter usually reimburses the ship owner for his services on per ton or lumpsum basis.
  • Time charter is referred to the activity of renting a vessel for a specific time, instead of specific number of voyages. Under the time charter, the vessel owner manages the ship while the charterer decides the destination and the number of ports where the ship stops. The additional costs like fuel, commission and port charges are borne by the charterer.
  • Contract of Affreightment is a rental contract very similar to voyage charter however under contract of Affreightment; the vessel owner agrees to carry a specific number of cargoes for a specific period on a pre-determined route.
  • Trip time charter is similar to a time charter however a trip time charter is for a shorter trip and for a specified route (Morgan 2013).
  • Bareboat charter is a rental agreement to hire a vessel where the complete possession and control of the vessel is transferred to the charterer and he takes both financial and legal responsibility of the vessel (Hoff et al 2010).

As stated above, a time charter is referred to renting a vessel for a specific time. There are many features of a time charter, some of which are stated as follows:-

  • It is the responsibility of the vessel owner to provide a seaworthy vessel along with an efficient crew and master for the vessel to safety reach its final destination
  • The activity such as loading, packing and discharging of cargo safety is the responsibility of the charterer (Coghlin et al 2014).
  • The charterer has the authority to give the master of the vessel instructions about where and when the cargo needs to be shipped (Lindstad, Asbjørnslett and Strømman 2011).
  • Additional costs like fuel, commission and port cost are to be borne by the charterer.

There are two very popular types of time charters namely the Baltime and the New York Product Exchange (NYPE). The first one is considered very favorable for the ship owners while the later one favors charterers. 

  • The primary responsibility of a ship owner in Time Charter contracts is proper description of the ship. The said description is required to be detailed. Under the time charter, the charterer take commercial employment of the ship which requires him to have knowledge of the commercial value of the ship, thus, a detailed description of the ship including details of its construction helps the charterer upgrade his knowledge (Weixia and Lindenbaum 2016).
  • The next responsibility of a ship owner under the time charter contracts is of delivery of the ship. Under time charter contracts, sometimes a port is specified for deliver and sometimes an area is mentioned, thus, delivery always does not conclude the way decided and is determined by the charterer on a later date. Thus, if the vessel arrives too early, the charter is not obliged to take delivery till lay day and if it arrives too late, the charterer can cancel the agreement (Branch 2012).
  • Another responsibility of the ship owner under time charter contract is to deliver the ship to the charterer in a good condition and guarantee its seaworthiness. The ship should satisfy the terms of the contract signed between ship owner and the charterer. This responsibility extends to maintain the ship in good condition during voyage. The responsibility of the ship-owner does not extend to always keep the ship free from issues throughout voyage but has the obligation to take quick actions and remedy defects as soon as they are brought to notice. The charterer can sue the ship-owner if the ship is not delivery “in every possible way fit for cargo services” (Chenya 2011).

Under the time charter contract, the ship-owner bears the risk of delays unless the time charter contract has an exemption clause, which can exempt the ship owner if he established that the delay was due to an event mentioned in the exemption clause (Jansson 2012). 

Under the time charter clause, the charterer is obliged to bear the risk of delay, which requires the charterer to pay the hire price for all the days the ship is delayed unless the contract has any express term decided on the said matter. Thus, in most time charter contracts a hire-off clause is incorporated which clearly specifies when a charterer is exempted from paying the prices agreed for hiring the vessel (Kamwetu 2013). There are two types of hire-off clauses generally used in time charter contracts namely the “net loss of time clause” and “period clause”. The New York Produce Exchange (NYPE) and the Baltime form consist of the “net loss of time clause”. This clause makes the charterer deduct from the hire he is entitled to pay only if a list of qualifies off-hire events have caused the charterer to suffer some real loss of time in the entire duration of the voyage. Thus, there is no off-hire clause, unless some time is genuinely loss. Thus, the charterer is only permitted to declare that a ship is off-hire when services offered by the vessel are delayed or interrupted. For example, if ship is loading cargos despite having engine failure, there is no loss of time (Goulielmos and Psifia 2016).

The New York Product Exchange (NYPE) 93 is a charter form which is widely used for dry cargo charter under the time charter contracts. The NYPE 93 was issued by the Association of Ship Brokers and Agents (U.S.A) on 6 November 1913. Since its formation, the NYPE 93 form has been amended several times with last amendments on September 1993. The NYPE 93 is highly used in the commercial shipping industry and is recommended by the Baltic and International Maritime Council (BIMCO) and The Federation of National Associations of Ship Brokers and Agents (FONASBA) (Grammenos and Papapostolou 2012). The NYPE 93 form is in a form of a contract between the vessel owner and the charterer defining the details of the contract which includes party names, description of the ship, duration and many other terms which are usually incorporated in a shipping cartel contract. One of the important terms of a time charter contract is the Off-Hire clause which is most of the times included in the time charter contract (Baughen 2012).

Features of Time Charter

Thus, the off hire clause in the NYPE 93 form protects and favors the charterer exempting him from paying hire charges for any time that is lost due a list of events which are not under the control or with no fault on part of the charterer.

Events leading to off-hire and remedies available to a Time Charter

The off-hire clause in the NYPE 93 form details out a list of many events that lead to off hire including events that create loss of time due to deficiency, strike or shortage officers, crew or the port, damages arising out of breakdown of fire, machinery or engine. Loss of time also includes time lost due to arrest or detention of the ship excluding arrest or detention which is a result of any fault on part of the charterer or his employees and servants or detention by accidents of vessel or cargo unless they result from an inherent defect in the vessel, its quality and durability, dry-docking or painting bottoms of the vessel which disturbs the entire working of the vessel or for any similar reasons which prohibits the vessel to function its duties and work efficiently. In case of any of occurrence of any of the above mentioned events, the charter is exempted from paying hire rates from the occurrence of any loss of time (Kirkaldy 2012). 

Conclusion

Thus, the time charter contracts are a type of a rental contract which a vessel owner and a charterer enter into for a specific period of time. The responsibilities of the vessel owner and the charterer depend upon the terms of the contract along with the type of charter contract and the type of ship. Thus, under the time charter contracts, an exemption clause called “off hire” is usually incorporated to protect the interest of the charterer. This off hire clause exempts a charterer from paying hire costs to the ship owner from the moment time is lost during a voyage without ant fault on part of the charterer, his employees and servants. Thus, the off hire clause in the NYPE 93 is highly recommended to serve the best interest of the charterer.  

Reference List 

Baughen, S., 2012. Shipping law. Routledge.

Branch, A.E., 2012. Economics of shipping practice and management. Springer Science & Business Media.

Chenya, L., 2011. The Analysis on Off-Hire Clause of the Time Charter.Journal of the Postgraduate of Zhongnan University of Economics and Law,5, p.028.

Coghlin, T., Baker, A., Kenny, J., Kimball, J. and Belknap, T., 2014. Time charters. CRC Press.

Goulielmos, A.M. and Psifia, M., 2016. Shipping finance: time to follow a new track?. Maritime Policy & Management, 33(3), pp.301-320.

Grammenos, C.T. and Papapostolou, N.C., 2012. US shipping initial public offerings: Do prospectus and market information matter?. Transportation Research Part E: Logistics and Transportation Review, 48(1), pp.276-295.

Hoff, A., Andersson, H., Christiansen, M., Hasle, G. and Løkketangen, A., 2010. Industrial aspects and literature survey: Fleet composition and routing.Computers & Operations Research, 37(12), pp.2041-2061.

Jansson, J., 2012. Liner shipping economics. Springer Science & Business Media.

Kamwetu, M., 2013. The Off Hire Clause; a case of Any Other Cause?.

Kirkaldy, A.W., 2012. British Shipping, Its History, Organisation and Importance. BoD–Books on Demand.

Lindstad, H., Asbjørnslett, B.E. and Strømman, A.H., 2011. Reductions in greenhouse gas emissions and cost by shipping at lower speeds. Energy Policy, 39(6), pp.3456-3464.

Morgan, M., 2013. Have recent off-hire, war risk and piracy clauses improved the position of time charterers by distributing the risk of delay caused by pirate attacks on their time chartered vessels more equitably as between owner and time charterer? (Doctoral dissertation, University of Cape Town).

Weixia, G. and Lindenbaum, J.A., 2016. NYPE 93 Arbitration Clause: Where Ends the Open-End, The. J. Mar. L. & Com., 37, p.245.

Wijnolst, N. and Waals, F., 2011. Shipping industry structure. Delft University Press.

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