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Certificate in Chartering 2014 1-1

Page No.

1. THE BASICS OF CONTRACT LAW 3

1.1 Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.2 Acceptance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.3 Termination Of An Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.4 An Offer Must Be Distinguished From An Invitation To Treat . . . . . . . . . . . . . 51.5 Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.6 Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.7 Condition Or Warranty? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.8 Commercial Certainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.9 Innominate / Intermediate Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.10 Stipulations as to Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2. WHAT IS A CHARTERPARTY? 15

3. The Main Types of Charterparty 18

3.1 Voyage Chartering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183.2 Consecutive Voyages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193.3 Part Charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193.4 Time Charters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203.5 Bareboat or Demise Charters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213.6 Contracts of Affreightment (Coa) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223.7 The Decision Whether to Time Charter or Voyage Charter a Ship . . . . . . . . 22

4. A SHIPBROKERS ROLE IN NEGOTIATING AND FIXING CHARTERPARTIES 24

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244.2 Owners Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264.3 Charterers Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264.4 Competitive Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264.5 Duties Of Brokers Towards Their Principals And Vice Versa . . . . . . . . . . . . 274.6 The Role Of Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284.7 The Role Of The Broker Under Agency Law . . . . . . . . . . . . . . . . . . . . . . . . . 29

CONTENTS

Contents Module 1

1-2 Certificate in Chartering 2014

4.8 Shipbrokers Remuneration: Brokerage/Commission. . . . . . . . . . . . . . . . . . . 294.9 Are Brokers Necessary?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324.10 Fixture Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

5. SUBJECTS 35

5.1 Fixing On Subjects: Be Very Wary Of This: . . . . . . . . . . . . . . . . . . . . . . . . . 355.2 Subject Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375.3 Problems With Subjects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

6. WARRANTY OF AUTHORITY 38

7. FIRM OFFERS 39

7.1 The Fixture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397.2 The Importance of Keeping Records During Negotiations. . . . . . . . . . . . . . . 417.3 Example of a Fixture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

8. CHARTERPARTY FORMS 44

8.1 Types Of Charterparty Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448.2 Time Charter Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458.3 Bareboat Charter Forms (Demise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458.4 Contract Of Affreightment Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458.5 The Balance Between Owners and Charterers Interests in a Charterparty Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478.6 Voyage Charters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

9. SUMMARY/CONCLUSION 49

Copyright IIR Limited 2014. All rights reserved.These materials are protected by international copyright laws. This manual is only for the use of course participants undertaking this course. Unauthorised use, distribution, reproduction or copying of these materials either in whole or in part, in any shape or form or by any means electronically, mechanically, by photocopying, recording or otherwise, including, without limitation, using the manual for any commercial purpose whatsoever is strictly forbidden without prior written consent of IIR Limited.

This manual shall not affect the legal relationship or liability of IIR Limited with, or to, any third party and neither shall such third party be entitled to rely upon it. All information and content in this manual is provided on an as is basis and you assume total responsibility and risk for your use of such information and content. IIR Limited shall have no liability for technical errors, editorial errors or omissions in this manual; nor any damage including but not limited to direct, puni-tive, incidental or consequential damages resulting from or arising out of its use.


A charter party is a contract between a shipowner or ship operator and a charterer. So all the following general theory about the formation of contracts and the termination of contracts also applies to charter parties.

A contract is an agreement between two or more parties (people, groups) who promise to give and receive something from each other (in legal terms this is known as consideration).All contracts are agreements; however, there are many agreements which are not contracts. For example, if an acquaintance promised to pay for the petrol in return for a lift and later omitted to do so, you would not expect to take the matter to court. There was a certain agreement between you but there was no contract.

Contracts are subject to the law of a certain country, usually and officially the place of performance. However, because the place of performance of a shipping contract is likely to be in at least two countries, the usual law which applies to charter parties is English law, partly because that is the law traditionally associated with international transport and international trade and partly because it is widely accepted as being the most universally neutral law with little or no conflict of interest for either party.

All charter parties are bilateral contracts, that is, they are agreed to by both parties the owners and the charterers but it is important to realise that it is extremely rare for both parties to agree to be mutually bound by a blank form of charter party without any amendments. Many owners and charterers frequently use proforma contracts as the basis for future negotiations, i.e. previous fixtures which had been negotiated and all their terms agreed upon, so that a new negotiation would only have to require agreement on basic relevant changes such as rates of freight and demurrage or hire, lay/can dates, vessels description (unless the same vessel is carrying the next cargo), cargos description and quantity.

LEARNING OUTCOMES

After reading this module, you will be able to understand:

the basics of contract law and its importance to chartering;

the main types and the purpose of charter parties;

the different styles and uses of charter parties used in different trades; and

a shipbrokers role in negotiating and fixing charter parties.

1. THE BASICS OF CONTRACT LAW

Certificate in Chartering 2013 (FLP2324) 1-3

Basics of Contract Law Module 1


The following points are considered to be essential to the formation of a legally binding contract:

Offer and Acceptance

Consideration

Capacity

Legal relationships

Legality

Consensus ad idem (Agreement a meeting of minds).

1.1 OFFER

Every contract must start with an offer by one person to another, i.e. the offeror intends to be legally bound by the terms stated, if accepted by the offeree.

I may offer to sell my car to you for 1,000, and, if the offer is accepted, I am legally bound by the terms of my offer. I may not later increase the price or change the agreed terms.

1.2 ACCEPTANCE

Once a valid acceptance of an offer has been made and a contract is in existence, neither party can escape from the terms expressed unless both parties agree.

Please note: Acceptance may only be made by the person to whom the offer was made, unless the offer is made to the public at large.

For example:

An offer made to a specific person may be accepted by that person only.

Carlill v Carbolic Smoke Ball Co. (1892). In an advertisement, the company promised to give 100 to anyone who purchased its remedy for influenza and who nevertheless caught the illness within 14 days. The advertisement added that, in order to show good faith, the company had deposited 1,000 with a bank to meet any claims. Mrs Carlill bought the remedy, followed its instructions, caught influenza and claimed 100. The court awarded Mrs Carlill 100 and held that:

An offer may be made to the world; it does not have to be to a specific person.

Although the general rule is that advertisements are not offers, the fact that 1,000 had been deposited with a bank showed that it was a firm offer and legal relations were intended.

Communication of acceptance may be implied by the conduct of the acceptor.

Module 1 Basics of Contract Law


1.3 TERMINATION OF AN OFFER

An offer can be terminated by the following events:

Refusal

The other party refuses to accept the offer.

Counter-offer

It may happen that the offeree does not wish to accept the terms of the offer made and suggests changes to the conditions.

Revocation

Depending on the situation, the offeror may revoke or withdraw the offer at any time before acceptance has been achieved.

Lapse of Time

For instance, if a person made an offer to buy perishable goods, such as bananas, it would be reasonable to expect an immediate and prompt acceptance. However, when more durable goods are on offer, a long period of time may be considered reasonable.

Death

Death by either party before acceptance terminates an offer, unless the acceptor does not know of the offerors death and the dead persons personal representatives are capable of performing the contract. This would not apply if the dead persons personal services were needed.

1.4 AN OFFER MUST BE DISTINGUISHED FROM AN INVITATION TO TREAT

It is important to know which party makes the offer and which party accepts it. In the case of goods on display in a shop, it has been decided that it is the customer who makes the offer to purchase and the shopkeeper who accepts it. The price displayed on goods is not the offer, it is only an invitation for the customer to make an offer and the amount shown is an indication of an acceptable price.

Consider self-service shops. Goods were individually priced; the customer took them off the shelf and placed them in a basket. When was the offer made and when was it accepted?

1.4.1 Consideration

Consideration is merely the agreed price in a bargain. The price does not necessarily have to be money but it must have monetary value. For example, a bookseller promises to sell you the book and your consideration is the promise to pay the price. You could pay the equivalent of that price by providing a service to that value (for example by cleaning the windows of the shop) or by providing another commodity of that (or an agreed) value in exchange this is known as barter trade or counter trade. For example, fertilizer is



frequently sold to Vietnam in exchange for rice or coffee to the same value as the fertilizer, instead of being bought in exchange for money.

If a person promises to give you 100 as a gift at the end of the month, the promise would not be enforceable because it is a free gift. It has not been supported by a promise from you to do anything in return.

1.4.2 Capacity

Usually any person can make a contract, although the law sometimes protects certain classes. When a person is denied full contractual capacity, the purpose is to protect and not to prohibit and any difficulty in enforcing the contract is usually experienced by the party with full contractual capacity. This particularity applies to minors, drunks or mental patients who have less than full capacity.

However, mental patients will be liable on contracts made during a lucid period (i.e. when they are sane).Please note: a mental patient whose property is under the control of a court may not make a contract.

1.4.3 Legal Relationships

When dealing with offer and acceptance, it is essential to any contract that the parties intend to create a legal relationship. This point can be particularly complicated when dealing with social or domestic agreements.

For example: a married couple, who had decided to separate, reached the agreement that the husband should take over the wifes ownership of the house once she had completed the payment of the mortgage. Since the intention to be legally bound existed between the two parties living apart and consideration had been provided, this decision was approved.

1.4.4 Legality

There is a rule of law that no court action will arise from an illegal act. Consider, for example:

Contracts to commit a crime.

Contracts to corrupt public life.

Immoral contracts.

Contracts which require either party to act against the law the court will not help the guilty party.



1.4.5 Consensus Ad Idem (Agreement)

If a party agreed to enter into a contract because of fraud, misrepresentation or mistake, the contract may be considered void. What may appear superficially to be a valid contract may be invalid, because consent was affected by one of these elements. There is no consensus ad idem, i.e. no real agreement, if one party enters into a contract believing that certain facts, which are important to the contract, are different from what actually exists.

Originally contract terms were divided into two types: conditions and warranties.

All contract terms are important but some are more important than others. Contract terms describe the obligations of the parties under the contract. Terms that are classified as conditions are considered to be vital to the contract and of fundamental importance. Terms which are classified as warranties are not as important. They are still obligations under the contract but they are not vital they are of secondary importance.

1.5 CONDITIONS

Conditions have been described as obligations that go so directly to the root or substance of the contract, or which are so essential to its very nature, that their non-performance may be fairly considered by the other party as a substantial failure to perform the contract at all.

1.6 WARRANTIES

Warranties have been described as terms which, although they must be performed, are not so vital that a failure to perform them goes to the root or substance of the contract.

This becomes important when considering what remedies to apply. Because a condition is a term that is vital to the contract, breach of a condition gives the innocent party not only the right to damages (i.e. to seek monetary compensation) but also the right to repudiate the contract, i.e. the right to refuse performance of their own obligations under the contract. The innocent party can, however, choose (elect) to affirm the contract and claim only damages. This is sometimes called innocent partys election. Because a warranty is not so important, a breach will not justify a refusal to perform the contract. The only remedy for breach of a warranty will be damages.

1.7 CONDITION OR WARRANTY?

Conditions are said to go to the root of the contract. This includes any term that is part of the description of the thing sold. A condition can be a statement of fact or a promise. If the statement of fact proves to be untrue, or if the promise is not fulfilled, the innocent party may treat the breach as a repudiation and is then allowed to refuse further performance of his side of the contract. The following are the tests that the courts use to ascertain whether a term is a condition or not.

Relative importance to the parties (description of the subject matter).The more important a term is to the parties, the more likely it is to be a condition.



Glaholm v Hays (1841)A ship was chartered to go from England to Trieste and load a cargo there, the vessel to sail from England on or before 4th day of February next. The ship sailed from England several days after 4th February and, on her arrival at Trieste, the charterers refused to load the vessel and treated the contract as repudiated. It was held that the charterers were entitled to be discharged from the contract. The court claimed to be looking at the intention of the parties. They held that the term had been included in the contract in order to make sure that the ship sailed from England on 4th February, at the latest. The only way to ensure that this would happen was to make the term a condition.

The underlying idea is that the term is so vital to the contract that, unless it is fulfilled, the other party does not need to fulfil his side of the bargain.

Consider the importance and distinguish from a cancellation clause (which is neither a condition nor a warranty but an option).

1.8 COMMERCIAL CERTAINTY

In commercial contracts it is important that the parties (or their legal advisers) should be able to know immediately and unequivocally what their rights are in the event of a breach by the other party and to make their decisions accordingly. In certain types of commercial contract, certain conditions will be essential if the business contract is to function properly. This is especially true of commercial contracts in which one party depends on the next party in a chain of events. If the term broken is a condition, then the innocent party knows with certainty that the breach entitles him to terminate the contract immediately. The innocent party is then free to continue the business transaction with another partner.

The Mihalis Angelos [1971] 1QB 64 (CA)

A contract for the charter of a ship stated that she should be ready to load on 1st July at Haiphong, North Vietnam. The charterers tried to cancel the contract because their cargo was not available due to American bombing of the railway line to Haiphong. Cancellation was not allowed under the terms of the contract. However, unknown to the charterers, the owners had no reason to believe that the ship would be ready on the date stated.

The court held that ready to load was a condition. The charterers were therefore entitled to treat the contract as repudiated, irrespective of the consequences of the breach.

Knowing that a term will be a condition gives the advantage of commercial certainty. This is balanced by the need to be fair and just in individual cases. Any breach of a condition gives the right to terminate even if it is trivial and little or no loss has been suffered in consequence. This makes the doctrine rigid and means that the legal remedy of repudiation may be too harsh and out of proportion to the true consequences of the situation.

1.9 INNOMINATE / INTERMEDIATE TERM

The rules concerning conditions and warranties are extremely rigid and this can lead to remedies out of all proportion to the original fault. For example, in one case, a buyer was entitled to reject barrel staves, which were only one sixteenth of an inch narrower than they should have been, even though they were still perfectly suitable for the purpose for



which they were intended, i.e. for making barrels (Arcos Ltd v E A Ronaasen & Son [1933] AC 470).This seems to have disturbed the courts; they have therefore introduced a more flexible solution, the innominate term. This is neither a condition nor a warranty. Innominate means without a name. They are sometimes also called intermediate terms, i.e, terms somewhere between warranties and conditions.

We can also say that this is only of any relevance when parties want to dispute the terms of a contract, so that even if both parties agree that there has been a fundamental breach of a condition but that both are prepared to continue to uphold the contract in a commercially friendly manner, then they could easily agree that this breach has been of an innominate term which they now jointly interpret to be breach of a warranty.In the case of innominate terms, the remedy made available depends on the seriousness of the consequences of the breach of the term in each particular case. This gives the courts far more discretion and manoeuvrability.

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd 1962 (CA)

A ship was chartered for two years. Clause 1 of the contract described her as being in every way fitted for ordinary cargo service. However, the engines were old and the ship became unseaworthy after the first month of service under this charter. On the first voyage under charter, she needed repairs for 18 weeks before she was rendered seaworthy. The charterers were not obliged to pay hire for any period greater than 24 hours when the ship was out of action due to repairs. They were also entitled to have the time lost by repairs added to the charter at the end of the two years if they so chose.

Did the breach entitle the charterers to treat the contract as repudiated or did it only entitle them to damages? The courts considered the nature of the term unseaworthy and decided that it was itself a very flexible term. It could be breached in a very trivial manner, e.g. by the lack of a nail in a wooden boat, by shortages in the medical supplies or by not having two anchors on board, or it could be breached in a serious manner, thereby making the ship unsailable. This made it very difficult to categorise the term as either a condition or a warranty.

There are, however, many contractual undertakings of a more complex character that cannot be categorised as being conditions or warranties. All that can be predicted is that some breaches will give rise to an event which will deprive the party who is not in default of substantially the whole benefit which was intended to be obtained from the contract, whereas other breaches will not do so. The legal consequences of the breach of such an undertaking depend on the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a condition or warranty, per Diplock LJ (Lord Justice Diplock).The court was still using the basic test of whether the breach deprived the innocent party of substantially the whole benefit of the contract very similar to the test that was originally used to determine which terms were conditions. The court held that the seaworthiness clause was an innominate term and that the charterers had no right to terminate in this particular case. For the sake of clarity, if the vessel had been



chartered for a much shorter period than 2 years, her unavailability for 18 weeks would have gone to the root of the contract and the charterers would then have been entitled to have considered the contract as being at an end, i.e. as having been repudiated by her general and undisputed unseaworthiness for a substantial period of the charter. However, since her unseaworthiness was for 4.5 months during a 24 months period, the court held that this was not of sufficient proportion to permit the charterers to terminate the contract and they were therefore obliged to continue to pay hire for the vessel for the entire 24 months period minus the 4.5 months when she was off hire.

Cehave NV v Bremer Handelsgesellschaft mbH The Hansa Nord 1975

In this case, the principle of the innominate term was challenged. It was argued that as the SGA (Sale of Goods Act 1979) classified all terms in sales contracts as either conditions or warranties, the common law must follow the statute and could not classify terms in sales contracts as innominate terms.

The case concerns two contracts each for 6,000 tons of citrus pulp pellets on the standard terms of GAFTA (Grain and Feed Trade Association). Clause 7 of those standard terms provided that the shipment was to be made in good condition. The buyers paid for the cargo and were given the shipping documents but, on delivery at Rotterdam, part of the cargo was damaged by overheating. The buyers rejected the whole shipment but the sellers refused to refund the money.

The court at Rotterdam ordered the whole shipment to be sold. It was bought at roughly a third of the original price by a third party who resold it to the original buyers at that same price. The buyers then used it for its original purpose cattle feed.

The GAFTA board held that the buyers were entitled to reject the shipment on the grounds that

1. the goods, though merchantable, were not merchantable under the Sale of Goods Act;

2. the goods were not shipped in good condition.

Note that the Sale of Goods Act no longer refers to merchantable quality. It has since been amended to satisfactory quality by the Sale and Supply of Goods Act 1994 (see 14).It was held in the Court of Appeal that the goods were merchantable, as they were still fit for the purpose for which such goods are commonly sold, i.e. making cattle feed, even if they were only saleable at a reduced price. Therefore, there was no breach of a condition implied into the contract by the Sale of Goods Act.

The buyers right to reject the goods depended on the seriousness of the consequences of breach. The consequences of the breach here were not serious the goods were still useable for their original purpose. On the facts of the case, rejection of the goods was not justified. The Court of Appeal rejected the argument that the Sale of Goods Act created a statutory dichotomy which divided all terms in sale of goods contracts into conditions or warranties.



1.10 STIPULATIONS AS TO TIME

Bunge Corporation v Tradax Export SA [1981] 1 WLR 7111In a contract for the sale of soya bean meal, the sellers were required to load goods on board ship at a single US Gulf port to be named by them by 30 June 1975. The buyers were to give the sellers at least fifteen consecutive days notice of the probable readiness of vessels and of the approximate quantity required to be loaded. The buyers only gave notice on 17 June. This meant that less than 15 days of loading time remained. The sellers declared the buyers in default and claimed damages for repudiation of the contract on the ground that the term 15 days notice was a condition.

The House of Lords held that the term was a condition by implication so that any breach entitled the sellers to treat themselves as discharged from their obligations under the contract. They stated that, in general, time is of the essence in mercantile contracts, in particular in this case, where the sellers needed the information to know which port they should nominate so that the goods would be available for loading on the ships arrival at port. The Lords rejected the test of whether the innocent party has been deprived of substantially the whole benefit of the contract, in favour of the existence of a condition which then entitles the innocent party to repudiate. They held that this was too stringent and that it could always be argued that there was the possibility of minor breaches.

Declaring such a term to be innominate would expose the parties to arguing whether the supplier could cope with a delay of one, two, three, seven or however many days. This would be too uncertain in a commercial environment, especially where other parties might be reliant on terms being fulfilled properly.

A very recent case concerning a time-barred claim is WATERFRONT SHIPPING COMPANY LTD v TRAFIGURA AG (THE SABREWING) [2007] EWHC 2482.The vessel SABREWING was chartered on a Beepeevoy 3 form to carry a cargo of unleaded gasoline from New York to Vancouver. The charterparty included a clause which also provided that a claim by the owners would be time-barred unless a claim in writing has been presented to Charterers together with supporting documentation substantiating each . . . constituent part of the claim (including signed pumping logs) within 90 days of the completion of discharge of the cargo carried hereunder.

The owners presented a claim for demurrage in the sum of US$114,887.40 together with various supporting documents within the 90-day period provided by clause 23. However, the supporting documents were not described on their face as pumping logs and were not signed. The charterers refused to pay and the owners brought proceedings to recover the demurrage. The charterers said that the claim was time-barred because the owners were obliged to provide within the 90-day period.

(a) pumping logs signed by a responsible officer of the vessel and by a terminal or charterers representative; or

(b) in the absence of a signature from a terminal or charterers representative, pumping logs signed by a responsible officer of the vessel and a note of protest as to the lack of countersignature on such pumping logs from a terminal or charterers representa-tive.



Demurrage time-bar clauses had to be complied with carefully and strictly. Importance was also attached to requirements for signed documents. The commercial purpose of such clauses was to achieve finality.

The owners failure to provide signed pumping logs by 14 November 2005 (being the 90th day) was not de minimis (i.e. was not of minimal importance). There was a real commercial purpose and importance in requiring a signed pumping log to support a claim for additional pumping time in excess of 24 hours, namely to prove that the owners had maintained the required average pressure throughout the discharge and that the fault lay with the terminal. The signature of a responsible officer of the vessel was important to show that such a person was prepared to put his name to the document to confirm its accuracy, to authenticate it and to prove its provenance.

The owners had failed to provide such precise documents within the time limit of 90 days (or even at all).Held by QBD (Comm Ct) (GLOSTER J) that summary judgment would be given in favour of the charterers.

However, this SABREWING judgment was much criticised by shipping practitioners and maritime lawyers as being contrary to commercial practice. Fortunately, Steel J gave a completely opposite judgment just six months later in the case ETERNITY.

Much of the recent case law and most disputes concerning time bars focus on whether the necessary and correctly issued supporting documents were submitted with the claim. While not expressly decided until recently, it is implicit from earlier judgments that provided the claim was divisible into its constituent parts, which can be identified and quantified, a failure to provide documents which are relevant to only a part of a claim does not mean that the entire claim is time barred. This was the approach adopted in Transoceanic Co. Limited v. Newton Shipping Limited [2001]. The Transoceanic case was consistent with the overall the judicial approach to the commercial construction of time bar clauses of resolving issues in such a way as not to prevent an otherwise legitimate claim from being pursued.

This approach has, however, not been followed in Waterfront Shipping Co Ltd v. Trafigura AG [2007]. The issue was whether the totality of the demurrage claim was time barred or whether (in the absence of signed pumping logs) only the excess pumping time should be deducted from the claim, leaving a substantial balance of demurrage due and owing.

The court ruled that the entire claim was time barred, justified by an overtly legalistic approach to construction of the clause and the issue. The apparent conflict between the decisions can, perhaps, be legally justified by the fact that they reflect the diversity of the wording of time bar clauses in use and each case is decided on the interpretation and construction of a particular clause.



However, it is at the expense of a commercially sensible approach taken by the industry reflected in a number of other legal authorities. Waterfront Shipping Co Ltd v. Trafigura AG stands out as being against this line of authority and industry practice. The clause by clause approach to the construction of time bar clauses prevents useful commercial principles of construction, developed over time, from operating for the benefit of the industry.

The law as it stands is now in conflict and this has created uncertainty by allowing demurrage analysts to take advantage of this uncertainty by adopting an approach to the analysis of the supporting documents provided which best suits them at the time. As far as compliance is concerned, the processing of demurrage claims needs to be done with an awareness of this diversity of case law and by careful reference to the time bar clause in the contract under which the claim arises and the vigour with which these requirements can be applied. Advice to the industry is that, in order to avoid disputes, one should put a system in place to ensure that the documents comply exactly with the requirements of the demurrage time bar provisions and support all the amounts claimed.

We now have a very different judgment on a similar set of facts in the case of The Petroleum Oil and Gas Corporation of South Africa (PTY) Ltd. v. FR8 Singapore Ltd. (2008) 755 LMLN 1. However, the owners demurrage claim was a secondary issue. The main dispute was the charterers claim for approximately USD 8.3 million for contamination of the gasoline and gas oil parcels carried on the M/T ETERNITY from India and the UAE to South Africa. The court upheld the claim on the grounds that the contamination resulted from the owners failure to separate the vapour phases of the two cargoes from the common inert gas line. This was due either to the unsatisfactory state of the separation valves or to their incorrect operation. The owners liability arose primarily from a failure to care for the cargo.

Although the owners demurrage claim for USD 796,357 was a secondary issue, the judgment is of particular interest to all the demurrage analysts who have been puzzling over the outcome of the Sabrewing case.

The charterers had contested the demurrage claim on the grounds that the entire claim was time barred as the owners had failed to provide an appropriately signed copy of the ships pumping log, both at the discharge terminal and for the subsequent ship-to-ship (STS) operation for the discharge of the balance of the cargo. The owners had accepted that their failure to prove a pumping log signed by the terminal representative prevented them from claiming for excess pumping time at the terminal, but disagreed that the log was required for the STS discharge or that the failure to provide a pumping log was sufficient to time bar their entire demurrage claim under the terms of cl. 20 of the BPVOY4 charter party.



The judge, Mr. Justice Steel, agreed with the owners. The pumping clause 19 of BPVOY4 applied to discharge at the terminal but not to the STS operation. He said, As a matter of language it is wholly inappropriate to describe an STS operation as involving a terminal. Furthermore, only the excess pumping time at the terminal would be barred by the owners failure to provide a correctly signed pumping log.

The charterers had relied on the judgment in the Sabrewing case to support their argument that the entire demurrage claim should be barred. However, the judge rejected this very robustly: I confess that I find the proposition that a claim put in on time but in respect of part of which the accompanying documents are non contractual gives rise to a bar to the entire claim is a commercially surprising construction.

He went on to add I am not persuaded that the clause requires the Owners to submit only one composite claim (even though they would usually do so and in fact they did so). In my judgment it was open to the Owners to present a number of separate claims if so advised and in those circumstances the lack of documentation for one or more parts of the claim would not constitute a bar to the balance. In my judgment it cannot have been the intention of the parties that the choice to present a composite claim would give rise to a different outcome.

So, until there is a similar case which proceeds to the Court of Appeal, we have two deliberately conflicting judgments covering this important contentious part of commerce and maritime law.

# ~ # ~ # ~ # ~ #


International chartering started with the Phoenicians in Carthage, when merchants chartered vessels for Mediterranean and North European trading. In Ancient Rome there was a vessel-chartering market of sorts dealing in Egyptian grain prices on arrival at Ostia (Romes seaport). In other words, chartering ships is not a new concept.The main difference compared to today is that, until the late 19th century, some masters (i.e. captains) of vessels often had complete authority to fix cargoes and maximise earnings for the owners in return for a profit-share agreement. Sometimes the masters owned the vessels (as they still do on some coasters and Rhine barges today).However, the master would conduct his own negotiations in person in whatever port his ship was moored, draw up a contract with a merchant and tore it in half (one half for the merchant, one for the master). This is the origin of the term charterparty an anglicised version of the Latin words 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 shippers half of the document, thus proving that he was the rightful owner of the goods.

The enormous growth of world trade in the 19th and 20th centuries led to faster steamships, followed historically by ships powered by fuel and diesel. Ships were on increasingly longer voyages away from their home ports and the ships masters were no longer able to conduct their own negotiations. So the shipowners used shipbrokers to find the next cargoes and negotiate the contracts for their carriage.

In any freight market there are essentially three potential market practitioners.

In simple terms, they are:

SHIPOWNER (also known as owner) Note that often owner is spelt in the plural as owners even when only one owner is specified, i.e. many C/P clauses state, for example, that owners are to arrange for bunker survey or owners are to appoint agents at load port, etc. Usually in C/Ps the plural form is used.

The Shipowner owns the ships just like you might be described as owning a house or a car. In other words, the Shipowner may own a ship outright with no mortgage (in which case the vessel is paid off) or have a mortgage via a bank or government loan.CHARTERER (also in C/Ps usually named in plural form as charterers) is the person who, for the purposes of the C/P, controls the cargo. In the case of coal, he may own the mine (eg BHP Billiton), or have bought the cargo from the mine owner under a spot contract or long-term sales contract (eg Glencore.) In grain, it could be Bunge (who sometimes ship grain from their own estates) or Cargill (who often buy grain from third parties). All you need to remember is that, in simple terms, the charterer controls and provides the cargo under the C/P.

2. WHAT IS A CHARTERPARTY?

What Is A Charterparty? Module 1


In any sale of a commodity there is a seller and a buyer. There are effectively two ways of selling any cargo by sea:

(a) FOB (Free on board) the owner of the cargo brings the cargo to the quay and loads it on to the vessel at his expense. When the cargo is on board (ie over the ships rail but in practical terms loaded in the hold), the title (ownership) of the goods transfers to the buyer. In this case, the FOB seller will be free of any liability or risk after he has placed the goods on board, so he will not be responsible for chartering the carrying vessel the buyer will be the charterer at his risk.

(b) CFR (Cost and Freight) or CIF (Cost, Insurance and Freight) the owner of the cargo not only brings the cargo to the quay and loads it onto the vessel at his expense but will also charter the carrying vessel and pay for the freight. He may also pay for the premium for insurance of the cargo at sea and the insurance of the sea freight. In other words, the owner (seller) of the cargo will charge his buyer the cost of cargo, the amount of the insurance premium to cover an insurance policy for damage to or loss of that cargo during its carriage and the cost of that carriage, payment of which is known as Freight.

In this case, the seller of the cargo will perform the chartering at his risk.

OPERATOR (can also be used in plural as operators) This name rarely appears in a C/P except sometimes as a signatory. In a C/P, one can only have an owner(s) or charterer(s). An operator is someone who is speculating on the direction of the freight market. In shipowning terms, he will charter in tonnage at what he hopes are cheap levels before the market rises and/or he will take in cargoes under the form of a C.O.A. (Contract of Affreightment) at hopefully higher equivalent levels. In theory, the ships should always have contracts to go in ballast (i.e. empty) to a port of loading and then carry that loaded (we call this laden) cargo. In practice, vessels go out of position and expected dates of cargo readiness change. So, depending on the size of operator (i.e. the number of ships on time charter and number of cargoes under control), the operator may come into the freight market either

1. looking for a vessel from the market that will carry a spare cargo. In this case, if a vessel is chartered in, then under that relevant C/P the operator will become charterer(s) and the true owners of the chartered vessel will be the actual (or head or beneficial) owners;

or

2. looking for employment from the market for a spare vessel within his chartered fleet. In any resulting C/P, the operator who has the vessel on period T/C (as charterers) becomes the owner(s) for the re-let voyage or T/C trip. For the sake of clarity, the operators who have become owners are sometimes called Disponent or Time Charter owners and the original owners, who still own the ship and pay for its upkeep and for the crew, are called Head Owners or Beneficial Owners.

These terms are often used in shipping conversations/correspondence and it can become confusing, so it is important to be precise which type of owners are meant.

Good examples of operators are Cobelfret, Bocimar or Kleimar.

Module 1 What Is A Charterparty?


NB: Operators can sometimes have limited financial strength, since effectively they are performing a balancing act between chartering in and out. They may be less financially secure than an owner who owns ships or a charterer who owns a coal or an ore mine. Many operators, however, are very substantial. Some even move into buying vessels (eg Bocimar) in such a case such operators are sometimes called Owner Operators.All this may sound rather confusing. What you need to remember is that, in any negotiation, the person who controls the vessel and charters her out to charterers is the owner for the purposes of that C/P. The person who controls the cargo and charters in a vessel is the charterer. The maintenance of the vessel and payment of the crew remain the responsibility of the Head Owner under both voyage and time charters, regardless of the number of times the vessel is subsequently re-let in a chain. In other words, if a grain house charters a vessel and then re-lets her, that grain house will become the nominal (Disponent) owner for the re-letting (i.e. the second C/P), even though their basic trade is as a Grain House.


In order to meet the varying needs of the trader and shipowner, a number of different methods of chartering a ship have evolved. The shipper of the goods is able to decide which of the following methods is most appropriate to his needs at any given time.

3.1 VOYAGE CHARTERING

With a voyage or spot charterparty, the ship is employed on a single voyage, i.e. from a certain load port or ports to a discharge port or ports in an agreed area.

The shipowner is responsible for all the expenses of running the ship and also the additional voyage expenses, such as port charges and bunkers, apart from the cargo-handling costs, which in dry bulk trades are usually paid for by the charterer. There are, however, clauses in some of the charter parties regarding overtime costs when loading or discharging the cargo, including who should benefit from overtime pay ~ the crew are the responsibility of the owners, whilst the charterers are responsible for paying the stevedores, at least as regards the charterparty contract.

With tankers, the problem of cost does not really arise because the shore pumps the cargo into the ship and, therefore, the costs are effectively paid by the shipper. The ship uses her own pumps to discharge the cargo, which is therefore a cost for the shipowner.

The freight is paid, either per tonne of cargo or as a lump sum, which is normally payable either after the cargo is delivered (tankers) or on signing the bills of lading (dry cargo) or a combination of both, eg 80% payable after signing the bills of lading and 20% payable after (or upon right and true) delivery. With tankers, the use of Worldscale for freight calculations means that the freight is not known until the discharge port is nominated.

The amount of cargo to be loaded is agreed in advance, the usual method is for the charterer to provide a full cargo but, because the owner does not know at this stage exactly how much cargo the ship can lift, it is usually described as a given tonnage with a fixed percentage (5%) more or less in owners option (MOLOO) or in charterers option (MOLCHOP or sometimes MOLCHOPT). To use the abbreviation MOLCO is considered dangerous, because the handwritten version looks too similar to its opposite, MOLOO, hence the use of MOLCHOP, so that there can be no confusion with MOLOO.

For example, 50,000 tonnes 5% MOLOO means that the owner can lift up to 50,000 tonnes plus 2,500 tonnes (5%) = 52,500 tonnes or can lift as little as 50,000 tonnes minus 2,500 tonnes (5%) = 47,500 tonnes. On arrival at the loading port, the master will declare how much cargo the ship is able to load. If the charterer cannot provide this quantity of cargo, he will be expected to compensate the owner for the loss of revenue resulting from the lack of cargo. This money is known as dead freight and calculated in such a way as to ensure that the owner is in the same position as he would have been if a full cargo had been loaded.

When the charterer is not certain whether there will be enough cargo to fill the ship, the freight may be paid as a lump sum, which means that the charterer can load as much or as little cargo as he wants. In this case, there is no contractual obligation to provide a full cargo, so the question of dead freight will not arise.

3. THE MAIN TYPES OF CHARTERPARTY

Module 1 The Main Types of Charterparty


Dates are fixed; the charterparty will state, for example, lay/can 25/30th April. The abbreviation lay/can means that the laydays start 25th April, cancelling date 30th April. This means that the ship must arrive on or after 25th April and before 30th April. The charterer can refuse to load if the ship arrives before the first date, in fact the cargo may not be available. If the ship arrives after the cancelling date (or often after 16:00 on the cancelling date), the charterer is at liberty to cancel the ship and find another vessel to carry his cargo. This would prove to be a useful option if the freight rates had fallen since the charter was fixed and if the charterer were therefore able to obtain a cheaper ship; however, the converse is not necessarily the case: if a ship is late arriving and rates have risen in the interim and if the charterer confirms that the ship is still wanted, then the owner must proceed with the charter.

The owner calculates the cost of the proposed voyage by means of the voyage estimate and compares it to the anticipated freight to decide whether the voyage will be profitable. It is important that the owner knows how long the intended voyage will take, as the calculations are based on income per day, hence a delay may make the difference between a profitable or a loss-making voyage.

The amount of time the ship is expected to be in port, mainly for loading and discharging the cargo, is agreed upon, and this is known as laytime. Should the ship be delayed in port due to lack of cargo or other causes that could reasonably be said to be the charterers responsibility, then the shipowner may be entitled to claim compensation in the form of demurrage, which is payable by the charterer, who is in breach of the charterparty terms and is therefore under an obligation to compensate the owner. Demurrage is the payment of liquidated (pre-arranged) damages for keeping the ship in port for loading or discharging purposes for a longer period than the agreed time. Demurrage rates are based on the vessels Daily Running Cost or the Time Charter Equivalent. If the ship finishes earlier than expected, the shipowner pays Despatch to the charterer at a daily rate which is usually half the equivalent daily rate for demurrage but this only applies in dry cargo chartering. Note that there is no Despatch in tanker chartering.

The owner always remains the carrier and when the master signs the bills of lading, they are signed on behalf of the owner. This means that in the event of any claims for shortages or other discrepancies in the cargo, the owner is responsible and not the charterer. The exception to this is when the bill of lading states that certain cargoes are carried, for example, on deck at charterers risk or at shippers risk or at merchants risk.

3.2 CONSECUTIVE VOYAGES

It is possible for a charterer to fix a ship for a series of round voyages. In such a case, each voyage is considered a separate entity as far as freight and demurrage are concerned. Clauses are available to protect the owner should fuel prices or other costs, e.g. war risks, change during the contract.

3.3 PART CHARTERS

When one charterer is not able to provide a complete cargo, it is possible for the owner to arrange a number of charters, and there will be a separate charterparty for each of the different parcels which are carried. This type of charter is common in the parcel tanker trade, most usually with liquid chemicals and vegoils. It is important, therefore, that these charter parties are drawn up so that there is no conflict between the various interests

The Main Types of Charterparty Module 1


involved. The calculation of demurrage and distribution of the payments between the different charterers can be a complex problem with this type of agreement.

A variation of this in dry cargo chartering is known as a parcelling service. A charterer will charter a ship for a particular voyage and then let out the space in the ship to a number of different shippers.

3.4 TIME CHARTERS

There are two main types of time charter: (i) the period time charter, which, as its name implies, is for a period of time, usually several months or years and (ii) the trip time charter, which is for a single voyage only but under time charter conditions.

The time or period charter is where the charterer takes over the ship for a certain period of time it could be as short as one month or as long as 20 years, although the latter is not very common. The shipowner still operates the ship but, instead of earning freight per ton carried, he is paid hire at an agreed amount either every calendar month or, much more usually, every 15 days in advance, either as a lump sum or occasionally an amount per deadweight ton per month.

The trip charter is usually for a single voyage; however, the division of responsibilities is the same as those for a time charter and the usual time charter forms are used. These charters may be used by shipowners where port delays are expected or during periods of uncertainty over fuel prices and fuel availability.

The advantage of a trip charter as far as the charterer is concerned is the greater freedom which this allows, because details of the voyage are kept off the market and therefore trader competitors will not know the charterers load or discharge ports. The charterer is able to select ports or indeed a trading area without having to agree to the details with the owner, who is indifferent to any additional costs which may result from the charterers choice of ports, as these costs will be met by the charterer.

The division of responsibilities is spelt out clearly in the different charterparty documents as it forms the basis of the contract between the owner and charterer.

Examples of how the hire is calculated are taken from the BPTime and the NYPE forms.

3.4.1 BPTime 3

12. Subject as herein provided charterers shall pay for the use and hire of the vessel at the rate of . . . per ton . . . on vessels total deadweight on . . . summer freeboard as assigned at the date of delivery hereunder, per calendar month, commencing at and from the time and date of its delivery hereunder, per calendar month, and continuing until the time and date of its re-delivery to owners.

3.4.2 BPTime 3

8.1 Charterers shall pay hire per day or pro rata for part of a day from the time the vessel is delivered to charterers until its re-delivery to owners in the currency and at the rate stated in Part 1, Section h. All calculation of hire shall be by reference to Universal Time Coordinated (UTC). [This means Greenwich Mean Time.]



8.2 The first payment of hire shall be made on or about the date of delivery, paying the hire in advance up to, but not including, the first day of the succeeding month. All subsequent payment of hire shall be made monthly in advance on the first day of each calendar month to the account stipulated in Part 1, Section i in funds available to owners on the due date. If, however, in a given month the due date is a non-banking day in the United States (if hire is to be paid in US Dollars) or in the country stated in Part 1, Section i, then the subject months hire shall be paid on the next banking day.

3.4.3 New York Produce Exchange Form (NYPE)

Clause 4: The charterers shall pay for the use and hire of the said vessel at the rate of . . . daily or . . . US Currency per ton on vessels total deadweight carrying capacity, including bunkers and stores on . . . summer freeboard, per calendar month commencing on and from the day of its delivery, as aforesaid, and at and after the same rate for any part of a month; hire shall continue until the hour of the day of its re-delivery in like good order and condition, ordinary wear and tear excepted, to the owners (unless vessel is lost) at . . . unless otherwise mutually agreed. Charterers shall give owners not less than . . . days notice of vessels expected date of re-delivery and probable port.

The charterer is responsible for employing the ship, finding the cargo and paying port, canal, cargo handling, tank/hold cleaning and fuel costs. The management of the ship, however, remains the responsibility of the owner.

A charterer may sublet the ship, i.e. operate her on the voyage market. In this case, he becomes the disponent owner; this means that, although he does not own the ship, he is entitled to the benefits that are obtained from trading her during the period of the charter. The charterer is the carrier and the master signs the bills of lading on his behalf. Thus any claims for cargo damage or shortage must first be met by the charterer, although the charterer may subsequently claim reimbursement from the beneficial ( actual) owner. Regardless of the number of sub-charters, the head or first charterer is always responsible to the owner for the employment of the ship.

Examples of dry cargo time charter forms are the New York Produce Exchange form (NYPE) and the BALTIME. The former is produced by the Association of Shipbrokers and Agents, New York (ASBA) and considered to favour the charterer, while the latter is produced by BIMCO and is considered to be more biased in favour of owners.

The newer GENTIME and LINERTIME Charter Parties are used less often.

Tanker forms include Shelltime 4 and BPTime 2 and 3.

3.5 BAREBOAT OR DEMISE CHARTERS

With this type of charter, the charterer both manages and operates the ship. The shipowner, possibly a financial institution, virtually gives up control for a fixed period of time. The charterer is the disponent owner responsible for both crewing and managing, as well as employing, the ship.

The owner will receive the fixed rate of hire at regular intervals during the period of the charter. There will also be agreements regarding drydocking and surveys in order for the owner to ensure that the ship is being properly maintained.

The Main Types of Charterparty Module 1


Bareboat or demise chartering is frequently used in ship finance where it may suit a bank to own the ship, frequently because of tax advantages, but they do not want to get involved in running her. They may also have re-possessed a ship, but in any case, because they do not have the necessary knowledge or experience, they need to find an owner to run the ship. At the same time, the disponent owner can manage the ship profitably but the current market rates will not repay the full capital costs of the ship within the period of a bank loan, so by bareboat chartering it may well be possible for both the bank and the disponent owner to make a profit from the ship. There is frequently an option to purchase at the end of the demise charter. Bareboat charters are often used within a shipowning group for fiscal purposes. Charter parties used for this type of charter are BARECON A (short-term 38 years) and BARECON B (longer term 815 or 20 years). These are bareboat charter parties produced by BIMCO and are still used today, despite BIMCOs revised version BARECON 2001.

3.6 CONTRACTS OF AFFREIGHTMENT (COA)

These are used when a shipowner or operator agrees to transport a given quantity over a fixed period of time. Unlike other charter parties, no specific ship is named in the charterparty. It is up to the owner or operator to provide ships as needed for the project. With tankers, due to the sensitivity of port states regarding oil pollution, it is likely that the contract will include specific requirements regarding the ships employed, which would probably extend to the owner having to provide the charterer with a list of ships likely to be employed in the contract. This type of contract gives the owner considerable freedom to manage his fleet to the best advantage, even to the extent of chartering in ships if his own fleet is engaged in more profitable employment elsewhere. This type of contract is common with owners of small coasters employed in short voyages, as it saves having to charter a ship for each movement. It is also used by government charterers for inter-nation trades.

There are several standard documents for this purpose, one of which is the Volcoa basically for dry cargo and the Intercoa. These forms are designed to be used in conjunction with voyage charter forms for each voyage which is undertaken under the COA.

3.7 THE DECISION WHETHER TO TIME CHARTER OR VOYAGE CHARTER A SHIP

Different circumstances influence the selection of a particular type of charter by either an owner or charterer.

The voyage charter is favoured by the trader with the one off cargo or by the utility company or steel company who need to supplement a fleet of owned or time- chartered ships. Voyage chartering is also used by traders who ship speculative cargoes; these are cargoes where the final destination has not been fixed. The trader loads a cargo for a port or range of ports. When the cargo has been loaded and the ship has left the loading port, the trader sells the cargo; under this system, a cargo may change hands several times during a voyage. It is important therefore that all the terms agreed upon during the chartering fixture are clearly spelt out so that the eventual buyers of the cargo, who were not involved in the original negotiations, will understand their responsibilities under both the charterparty and the bill of lading.



With a voyage charter, the owner undertakes to carry a cargo for a single voyage. At the end of the voyage, the ship is available to carry other cargoes and the owner has no assurance of further employment. The expectation is that the extra risk of the voyage charter will produce higher rewards, although it does not always happen in practice. The consequence of these expectations and the owners and charterers behaviour is that the freight rates on the voyage charter markets are extremely volatile and the earnings per day for a ship can double or halve within a short period, frequently within less than six months.

To avoid this volatility, traders may use period time charters as a means of controlling costs, as they are protected from the freight rate fluctuations which are a feature of spot market trading.

The shipowner may also prefer period time charters for the greater security, which comes from knowing that the ship has secure and profitable employment for a known period of time which may be as long as several years.

Time charters may be used as part of the security for bank loans when financing a ship. The second-hand price of a ship varies according to the freight rates, so she is not considered sufficient security for the loan. Bankers like the secure earnings that a period time charter with a reputable charterer provides when advancing loans to finance a ship, even if the time charter does not extend for the full period of the loan. It is possible to design a ship financing package to bridge the gap between current freight rates and the high capital costs of new ships using both time and demise charters.

The decision on how to charter a ship is also based on the market perception of future freight rates. When rates are low and likely to rise, owners will be looking for short-term contracts in order to leave their ships free in order to obtain more profitable employment when the rates have risen. In this situation, owners will therefore not accept time charters other than trip charters, unless they are above the current spot market rate, something which the charterers are not likely to concede. Conversely, when rates are high and the perception is that they are likely to fall, owners will seek period time charters, to retain the higher earnings for as long as possible, while the charterers want to keep their contracts as short as possible. Thus period time charters are only seen when the market is in a relatively stable position and both parties are willing to enter into long-term contracts.


4.1 INTRODUCTION

Chartering forms the most important method of employing a ship and there is a world-wide network of brokers involved in chartering vessels. Traditionally, these brokers may work as owners brokers, charterers agents or as competitive brokers. In London, this distinction is not so clear, as most charterers put their business out through several brokers, so a large charterer may employ a number of brokers. Owners frequently have the brokering function in-house, hence the term house broker.

4.1.1 Broking Ethics

The motto of both the Baltic Exchange and the Institute of Chartered Shipbrokers is Our Word Our Bond, which embodies a very strong code of ethics. The need for a code of ethics comes from the fact that much of the business is based on word of mouth and is only followed up later by written confirmation. The spoken word legally binds both principals to each other via the broker or brokers this is a very powerful negotiating tool and is only useable by approximately 5,500 brokers world-wide, comprising 2,000 members of the Baltic Exchange and 3,500 Members and Fellows of the Institute of Chartered Shipbrokers. The value of this code is that it makes it possible to transact business from a position of trust, without which it would be very difficult to fix (i.e. contract) ships.BIMCO also recommend to their members various principles of chartering.

There are three types of shipbroking activity:

1. Dry Cargo2. Tanker

3. Sale & Purchase.

Exclusive brokers have a luxury in this respect, as nobody can bypass them theoretically.

A shipbroker should never forget to add his or her own commission before submitting any buyers or owners offer and likewise deducting own commission when passing back any counter-offer to the buyers or owners.

All vessels have to be registered with a Classification Society in order to trade. The records held there show how a vessel is being maintained according to the required survey cycles and any recurring problems will be evident. Also, if a vessel has a record of changing from one Classification Society to another quite frequently during its life, this could indicate that the maintenance may be poor.

4. A SHIPBROKERS ROLE IN NEGOTIATING AND FIXING CHARTERPARTIES

Module 1 A Shipbrokers Role in Negotiating and Fixing Charterparties


The inspection of the Class (classification) records gives the inspector of the actual vessel some guidelines for any areas that may need to be especially considered when the physical inspection of the vessel takes place.

The inspection of the vessels Class records and a physical inspection of the vessel would normally be carried out by the buyers own technical staff but sometimes independent surveyors are used.

It is most important for a broker to build up a network with other brokers who will give support when dealing with clients. This is very much a people business and good contacts (whom you know) are often more important than what you know.Brokers should try not to rely on screen trading: make those phone calls and, whenever possible, meet your contacts.

4.1.2 Duties of a Broker

Brokers are still (wrongly) considered by some principals as parasites. Yet they form an essential part of negotiating and their skills are far more wide-ranging than simply having the right contacts. The majority of brokers should be neither abused nor ignored by the trading and legal professions; of course there are always some rotten apples to be avoided. Conversely, many brokers would be well advised to take a good look at their principals.

The broker is the owners/charterers link with the market, so it is up to the broker to keep their principals (i.e. the owners or charterers) informed about developments in the market, even though the principal may not be planning any market operations at the moment. It is this information that makes it possible for both parties to plan ahead.

To assist with this, most of the large brokers maintain a computer database giving the current position and status of all ships in which they specialise. The charterers are therefore able to check on the tonnage that is available before they enter the market. This helps them to ensure that they can get a good rate, since there may be several owners interested in their business.

It is the job of the owners broker to ensure that all charterers who may have a cargo from an area where his ship could load know the position and the details of his vessel. This entails contacting not only the charterers agents but the competitive brokers as well. The function of the charterers broker is to ensure that all possible owners are aware of his need for a ship in order to enable him to obtain the best possible rate.

In addition to the chartering function, brokers also have:

(a) Post-fixture departments: These departments are staffed with experts in the different aspects of chartering. Their function is to resolve disputes between owners and charterers and, if possible, eliminate the need to resort to arbitration or the courts.

(b) Research departments: In order to provide the sort of information needed by both owners and charterers, many brokers operate research departments to keep up to date with the latest developments in world trade. Many of these departments have a world-wide reputation for their publications.

A Shipbrokers Role in Negotiating and Fixing Charterparties Module 1


4.1.3 Brokers Usually Work in One of Three Categories:

1. Exclusive Brokers to Owners

2. Exclusive Brokers to Charterers

3. Competitive Brokers.

4.2 OWNERS BROKERS

They work exclusively for one or possibly several tramp shipowners. Their duty is to locate the best possible cargo at the best possible freight rate for their owners vessels from a port as near as possible to the load ports, where those vessels are scheduled to discharge their previous cargoes. They work these vessels on either a voyage charter or a time charter basis, whichever is more advantageous for their owners within the constraints of the charterers requirements. Many brokers work as direct brokers for several owners and use broking skills in their local geographic area and time zone to cover their local market. Many owners have several direct brokers spread across the globe, each of whom reports directly to the owner and each of them covers a different region and market.

4.3 CHARTERERS BROKERS

They will often work exclusively for (and sometimes even be owned by) one charterer, often a large trading house or one of the oil majors, although these brokers will not necessarily bear the same name as their parent company. They could well be independent brokers who specialise in working for a number of charterers, in which case these charterers might retain them on an exclusive basis. Some brokers also look after all the post-fixture work for their charterers, thereby sometimes earning a retainer fee as well as the usual brokers commission, which is 1.25% of the value of the total freight.

This exclusivity may perhaps apply only to the trading centre (i.e. city or country) where the broker is situated eg exclusive for the UK or he may be totally exclusive on a world-wide basis. Such a totally exclusive broker will not have to share his exclusivity/work with any other broker but an exclusivity which is restricted to one country or region may well mean that a number of semi- exclusive brokers may be called upon by the trader to find a suitable vessel. Some brokers who work in this way call themselves direct brokers, thereby distinguishing themselves from those other brokers whom they approach in the course of trying to locate the right vessel for their principals. Such brokers report directly to the charterers rather than via a competitive intermediary.

BEWARE: They are also known as Charterers Agents: this name sometimes causes confusion, since it also refers to those port agents who have been nominated by charterers.

4.4 COMPETITIVE BROKERS

They work as independent brokers, trying to match many different cargoes with vessels from many different tramp owners fleets. The majority of brokers work in this independent way, because they feel that it does not restrict them to only one or a very few principals. They used to be known as cabling brokers, which harks back to the days when brokers in London, New York and the US West Coast would pass trade on to each other by cable at



the close of each centres business working day. Their function was to compare the freight markets of the two countries on a daily/overnight basis. Thus they reported on the cargoes and vessels available, as well as on the fixtures reported done that day. Their work is highly competitive and nowadays often involves working from home long after close of normal business hours. A modern broker is no longer restricted by the days final cable.

Several of the larger broking houses in the main chartering centres in the world (London, New York, Singapore, Hong Kong) in fact perform all three functions, having departments within each office, which deal with owners or charterers on an exclusive or semi-exclusive basis and also deal with the wider market on a purely competitive basis.

Other large broking houses have departments which specialise in particular fields, such as certain geographical areas, or certain types of vessel, or servicing certain industries (such as the oil offshore industry) or only handling trade which pertains to one particular commodity. They feel that their specialisation sets them apart from the broker who is more bound to one principal and that they do not have to fight as hard as the competitive broker to attract custom.

However, in the climate of trade nowadays, very few brokers feel that they can rely on any one principal or commodity or vessel type to make a living; thus many brokers spread their net and may have a few semi-exclusive accounts, as well as some specialisations and as much competitive work as they can muster. Brokers are wholly dependent on the volume of trade in their market which of course is true of brokers in any field. Shipping, as principally a service industry, is of course totally subject to the cyclical, political and seasonal vagaries of the markets it serves. Baltic Exchange brokers in London are no longer literally walking the Floor, as the Trading Floor no longer exists and has been replaced by yet another wine bar or should that be whine bar?

International shipbroking markets are in three geographic areas:

(i) the Americas represented by New York, with assistance from branch offices in San Francisco and Vancouver;

(ii) Asia Tokyo, Seoul, Shanghai, Hong Kong, Singapore, Sydney and Melbourne; and

(iii) Europe Piraeus, Oslo, Hamburg and Copenhagen for owners, Paris for charterers (especially traders of soft commodities) and London, which is still the main centre of international shipbroking, covering approximately 45% of all world shipping trades. Whilst this is a reduction from the domination of handling 75% of world shipping until 1992, London still covers more than most minor chartering broking centres combined.

4.5 DUTIES OF BROKERS TOWARDS THEIR PRINCIPALS AND VICE VERSA

Brokers must be aware of the necessary application of basic agency law. Above all, they must always work within their warranty of authority as defined by their principal shipowner or charterer. Even if brokers take on the mantle of an agent of necessity, they should always ensure that their principal ratifies their actions within time, otherwise the brokers might find that they have become a principal, which will have several potentially devastating effects:



(i) they will almost certainly not be able to afford to become that principal by providing a vessel or a cargo;

(ii) they might be accused of misrepresentation;(iii) they might not be able to defend their error;(iv) their action might invite an expensive law suit;(v) the result of such action could ruin the brokers financially;(vi) irrespective of any legal action, the brokers reputation would probably never

recover.

Awareness of rights and obligations of a broker:

A principal can ruin a brokers market by over-quoting his own ship or cargo, thereby forcing the market against him by giving the impression of being desperate. A principal who changes his mind mid-negotiation by back-trading will damage both his own reputation and also his brokers future credibility.

There is a fine line between a broker giving advice and being perceived as interfering with his principals business. This balancing act depends on experience and the trust and needs of the principal.

It is wise for both brokers and principals to vet each other, if possible well in advance of needing to work with each other.

Shipbrokers and their commission are nowadays protected by the Contracts (Rights of Third Parties) Act 1999 under English law, which governs most charterparties.

There is a benefit with being associated with a professional institution such as the Baltic Exchange or the Institute of Chartered Shipbrokers.

Unlike in the insurance market, in which initial full disclosure of all facts is a legal duty, shipbrokers know that ethically it is vital to establish trust and to maintain a good reputation in the market place.

Disclosure of too many facts too early could be abused by a principal, in which case that principal could be shunned by the broking fraternity, if necessary world-wide. Eventually news will spread to future charterers or owners.

4.6 THE ROLE OF BROKERS

Along the transportation chain, agents and brokers each have three main functions:

(i) Provide information (of current, developing and projected markets);(ii) Be an effective and efficient intermediary (between two principals);(iii) Co-ordinate the negotiations to conclude a fixture.



BROKERS can either act for one or for both principals, often working to bring them together to their mutual agreement, whereas AGENTS usually only act for one principal. Brokers tend to have no formal contract with their Principals but can rely on a contract which is implied by their conduct. Agents, especially when they are brokers who work exclusively for charterers or owners, do usually have a formal contract with their Principal.

4.7 THE ROLE OF THE BROKER UNDER AGENCY LAW

A broker (or agent) must always only work strictly within the specified authority given by the principal, who may have very good financial reasons for not wanting to go beyond those limits; or the principal may simply want to manipulate the market, either for this fixture or for the next few fixtures . . .

A broker may be able to act beyond the principals authority but only if there is already a very well-established relationship between principal and broker, who could then be acting under the rules of Agency of Necessity.

A broker (who may also be known as an owners or a charterers agent) may work so closely with the principal that he/she will be permitted to sign the contract (COA or C/P) on behalf of that principal. However, great care must be exercised here, otherwise the broker is in danger of committing himself/herself and thereby becoming a principal to the contract. Therefore a careful broker will always sign for and on behalf of [name of principal owner or charterer] as agent only and ideally will add by written authority.

This exposes the dangers of undisclosed agency:

The legal aspect

The practical aspect

Possibility of inviting lawsuits

Probability of an eventual claim being large enough to close a (small) broking house.

4.8 SHIPBROKERS REMUNERATION: BROKERAGE/COMMISSION

Each shipbroking company traditionally earns brokerage or commission at the long-established rate of 1.25% of the value of the freight, dead freight, demurrage, damages for detention, hire and ballast bonus. (Commission on demurrage is not always paid by US major oil companies.) This usual percentage rate of 1.25% may be altered by mutual consent of all three groups of parties involved in the commercial transaction, i.e. the owners, the charterers and all the brokers. Commission is payable to each broker. An owner may give all his business to one exclusive broker in return for a smaller commission (1%).The only usual exception is brokers involved in the coastal trades, who generally do as much work as a deepsea broker but, because the traffic is in much smaller vessels, the value of the freight is correspondingly smaller, so these brokers usually earn 2.5% of the value of the freight.



Address commission is paid to the time charterer to cover the cost of managing the ship while she is on charter. Traditionally, address commission (adcom) is taken by the trader charterers on a voyage charter in order to cover the cost of their shipping departments, which are frequently at a different physical address from the trading office, hence the name. Such a commission is often hidden within the charterparty commission clause as (e.g.) 5% commission to Joe Bloggs, Shipbrokers, for division with others. One of those others might be the charterers, so for example, the division could be 1.25% to Joe Bloggs (shipbrokers), 1.25% to Mary Smith (shipbrokers) and 2.5% address commission to the charterers. The key point here is that the charterers do not want the buyers of their commodities to know that they are taking additional profit this way, so it is also called a hidden commission.

In deepsea tanker chartering, address commission is not always requested and depends on the nature of the trade some traders want 4%, others 1% or 1.25%, or 2.5%. This commission is usually deducted directly from the freight or hire, rather than the charterers paying the full freight or hire to the beneficial owners and then waiting for those owners to remit the commission back to the charterers.

The only party benefitting from such a protracted transaction would be the banks involved, because they take a slice of the monies transacted as their fee.

Sale and Purchase (S&P) brokers traditionally earn 1% of the sale value of the vessel, which might seem excessively generous until it is realised that this large amount must cover (often many) months of broking work, including a lot of high telecommunication costs, lawyers fees, surveys and possible travel expenses, as well as the time spent on all those deals which never materialised. Of course, this last item is relevant to all brokers, whose efforts are unrewarded unless there is a fixture or sale at the end of negotiations. Sometimes brokers will agree to cut their own commissions in order to effect a sale (or a charter), particularly in difficult markets.

4.8.1 Risk of Fraud

Some charterers may not want their identity to be revealed to the owner until the negotiations have been completed. This may be for commercial reasons i.e. not allowing a competitor to know that they are buying a cargo. This situation can cause difficulties for an owner and in this situation the broker will refer to his principal as a first class charterer. The use of this term can have implications as far as the broker is concerned should the charterer prove to be less than first class. It is therefore important that the broker is careful when making such statements.

One of the items in the Baltic Exchanges code of ethics (The Baltic Code) is that a broker will inform the owner in writing if he has no specific or reliable knowledge of the charterer. In this situation, the owner would be advised to fix subject to owners approval of charterer. The broker would also advise the owner in writing to insist on freight BBB (Before Breaking Bulk); this means that the owners can retain a lien on the cargo in the event of the freight not being paid. The owner should also refuse a letter of indemnity unless provided with a bank guarantee. BIMCO and the IMB (International Maritime Bureau) maintain registers of good and bad charterers and shipowners.

One of the sanctions that the Baltic Exchange can have on owners, brokers or charterers who disregard the code of ethics is to be posted on the Baltic. The name of the guilty party



and the offence is put on the notice board in the Baltic Exchange as a warning for anyone (i.e. any member) contemplating conducting any business with them.

4.8.2 Contracts (Rights of Third Parties) Act 1999

Until this recent Act came into force on 11 May 2000, brokers were at the mercy of the party who usually pays all brokers, i.e. the shipowner. This is so even if the broke

certificate in chartering

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