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Charter Party A contract whereby a shipowner agrees to place his ship, or part of it at a disposal of a person ( the charterer) for the carriage of goods from one port to another on being paid freight Baltic and International Maritime Conference (BIMCO) is the recognized global authority on chartering and related documents on the chartering business 3

Types of Charter Party 4

Types of CP  Demise (bareboat) CP - Charterer provides the cargo and crew - Shipowner provides the ship - The charterer takes total responsibility to operate and manages the ship - Is for a period of time varying from a few weeks to several years 5

Types of CP… CONT  Non-Demise CP - Shipowner provides the ship and crew - Charterer supplies the cargo. - Maybe a voyage charter for a particular voyage between specific ports for pre-arrange freight - Shipowner manages and operates the vessel - Charterer pays port charges and fuel costs 6

There are basically two types of charter parties: 1) demise, and 2) non-demise. A demise or ‘bareboat’ charter party arises when the charterer is responsible for providing the cargo and crew, whilst the shipowner merely provides the vessel. In consequence, the charterer appoints the crew, thus taking over full responsibility for the operation of the vessel, and pays all expenses incurred. A demise charter party is for a period of time which may vary from a few weeks to several years. 7

A non-demise charter arises when the shipowner provides the vessel and its crew, whilst the charterer merely supplies the cargo. It may be a voyage charter for a particular voyage, in which the shipowner agrees to carry cargo between specified ports for a prearranged freight The majority of tramp cargo shipments are made on a voyage charter basis. Alternatively, it may be a time charter for a stated period or voyage for a remuneration known as hire money or charter hire. 8

The shipowner continues to manage his own vessel, both under non-demise voyage or time charter parties under the charterer’s instructions. With a time charter, it is usual for the charterer to pay port dues and fuel cost There are several types of non-demise voyage charters as given below: 1) Gross terms form of charter. This is probably the most common form of charter used by tramp ships today. In this form, the shipowner pays all the expenses incurred in loading and discharging and also all port charges plus voyage costs 9

2) FIO charter. Under this charter, the charterer pays for the cost of loading and discharging the cargo, hence the expression of FIO (meaning ‘free in and out’). The shipowner is still responsible for the payment of all port charges. 3) Lump sum charter. The charterer pays a lump sum of money for the use of the ship and the shipowner guarantees that a certain amount of space (i.e. cubic metres) will be available for cargo, along with the maximum weight of cargo that the vessel will be able to carry. 10

A significant proportion of the charters are negotiated through a shipbroker on the Baltic Exchange, London The following items would be included when formulating a remit to chartering agents to obtain a general cargo vessel on charter (a) vessel capacity (b) vessel speed; (c) actual trade/ports of call including cargo specification and volume; (d) duration of charter; (e) type of charter, i.e. demise or non-demise, voyage or time; (f) date of charter commencement and duration – the latter with any options for extensions; 11

(g) overall dimensions of vessel, draught, length and beam; (h) any constraints likely to be imposed, e.g. carriage of dangerous cargo; (i) classification of vessel and any trading limits; (j) possible band of fixture rate likely to be viable; (k) any shipboard cargo-handling equipment needs. The Baltic Exchange conducts a very large proportion of the chartering global market. Other exchanges exist in New York, Hong Kong,Tokyo and Frankfurt 12

Given below are the desirable essential clauses found in a voyage charter party : 1. The preamble. The contracting parties; description of the vessel; position of vessel and expected readiness date to load. 2. Description of the cargo. The quantity of cargo is usually stated as a full and complete cargo, with a minimum and a maximum quantity. 3. Loading date and cancelling date. This is the period of time (anything from a few days to a few weeks) given in the charter during which the vessel may present herself for loading, 13

4. Loading port or place. The loading port or place is always stated in a voyage charter. Sometimes it is just a single named port, or one out of a range of picked ports. 5. Discharging port or place. The above remarks apply to the discharging port. As soon as a discharging port is ordered (out of, say, a range of ports) then that port becomes the contract terminus of the voyage. 7. Payment of freight. Unless there is a condition to the contrary (e.g. special terms of contract as to ‘advance freight’ etc.) freight is construed in the ordinary commercial meaning, i.e. the reward payable to the carrier on arrival of the goods, ready to be delivered to the consignee. 14

8. Laydays. This is the rate of discharge per weather working day. Laydays are the number of days permitted in a charter party for loading and discharging the vessel. 9. Demurrage and despatch. If a ship loads and/or discharges in less than the prescribed time, the owners pay a despatch money as a reward for time saved; if, on the other hand, the prescribed time is exceeded, then demurrage is payable at an agreed rate to the owner as compensation for delay of the ship. 10. Cessor or limitation of liability clause. 11. Lien clause. This gives the shipowners the right to hold cargo against payment of freight or hire 15

12. Loading and discharging expenses. 13. Appointment of agents and stevedores. 14. Deviation and salvage clause. 15. Bills of lading clause. 16. Exemptions from liability clause. 17. General average. 18. Arbitration. 16

21. Strikes and stoppages. 22. Overtime 23. Sailing telegram. 24. Sub-letting. This gives or refuses to allow permission of the ship to be sub-let, or sub-chartered under the charter party. 25. Address commission. A percentage of commission sometimes specified due to charterers based on the amount of freight. 26. Brokerage. Indicates the rate of brokerage that shall be paid. 27. Penalty for non-performance. 28. War clause. 17

A time charter, is defined as a contract of affreightment under which a charterer agrees to hire, and the shipowner agrees to let, his vessel for a mutually agreed period of time or a specified voyage, the remuneration being known as hire. There are certain advantages and disadvantages both to the shipowner and the charterer in placing a vessel on time charter as compared with ordinary voyage charter trading. From the shipowner’s standpoint, the ship is employed for a definite period of time, with a regular income to the shipowner and the minimum of risk. 18

Time charter provides the shipowner with a ‘good cover’ against a decline in freight rates. The shipowner does not have to worry about the day-to-day trading of the vessel so far as bunkers, port charges and cargo expenses are concerned; moreover the vessel will remain on hire even if delayed through port labour troubles. The disadvantages to the shipowner are that to a certain extent he loses control of his vessel, although he still appoints the Master and crew, but subject to the charter limitations he does not control the cargo loaded in the vessel or the voyage. If the freight market should rise the shipowner is unable to take advantage of it, and the charterer gets the benefit instead. 19

In contrast, from the charterer’s viewpoint being able to trade the vessel almost as if it were his own, subject only to the charter party limitations. He can hire the vessel on a long – or short-term basis (generally the longer the period the cheaper the rate at which he can secure tonnage), and it provides him with a good cover if the freight markets show any signs of rising. The liner companies can take tonnage on time charter and so supplement their own sailing if the volume of trade is such as to warrant additional tonnage. The disadvantages to the charterer are that he is committed to the payment of hire over a period of time and, should trade diminish, he may have to face a loss. The charterer, by the terms of the charter, may be limited in his range of trading, but this is a point he should take into consideration when negotiating the charter. The charterer is responsible for the ship’s bunker supply, port charges and cargo-handling expenses. 20

A voyage charter is the chartering of a vessel and crew for a voyage between a load port and a discharge port. The charterer pays the vessel owner on a per-ton or lump sum basis. The owner pays the port costs (excluding stevedoring), fuel costs and crew costs. The payment for the use of the vessel is known as freight. A voyage charter specifies a period, known as laytime, for unloading the cargo. If laytime is exceeded, the charterer must pay demurrage. If laytime is saved, the charter party may require the shipowner to pay despatch to the charterer 21

If a ship loads and/or discharges in less than the prescribed time, the owners pay a despatch money as a reward for time saved; if, on the other hand, the prescribed time is exceeded, then demurrage is payable at an agreed rate to the owner as compensation for delay of the ship. The standard time sheet records time taken/used during discharging, and compared with time allowed. Sample/Exercise/practise in the class 22

Shipping Currency Exchange 23

It is important that the currency of payment is closely evaluated, with particular consideration of exchange rate fluctuations and measures available to counter them; if the freight rate payment and the currency in the country of the recipient are different; and/or if freight is not directly payable to his bank at the place of domicile but is collected by an agent. 24

To avoid exposure it is advisable to have a USD Account Not only used for freight payment but also for loan repayment and interest payment dominated in USD. Otherwise, the exposure be it gain/or loss in exchange will have to be amortized over a period of the loan In Malaysia, an approval needed from the Central Bank to open a USD Account 25

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