Charter party contracts are a fundamental part of marine commerce that sometimes can be the source of significant disagreements. A charter agreement is essentially the lease of all or a portion of a vessel. The terms of a charter party vary widely depending on the parties’ needs but often touch upon numerous details that are important to the parties entering the agreement.
Who is Involved in Charter Agreements?
They key players to a charter agreement are the ship owner and charterer. Sometimes other parties such as a ship broker, shipping agent, and ship manager can be involved in the formation of the agreement or the execution of the agreement.
A ship broker is essentially a middleman who links charterers with ship owners. A shipping agent takes care of the essential in-port details and the ship manager takes care of operating and crewing the vessel on behalf of the owner for a fee.
The term charter party refers to the contract entered into by the parties – not to the parties entering into the contract. The charter party defines the rate, duration, and terms agreed between the ship owner and the charterer.
Types of Charter Agreements
A time charter involves the lease of a vessel for a specific duration. The amount paid by the charterer is normally referred to as “hire.” There is a division of responsibilities between the charterer and ship owner. The charterer is responsible for the fuel and port charges, whereas the shipowner is responsible for most other items including crew wages, provisions, insurance, and vessel maintenance and repairs.
When a vessel is subject to a time charter, the charterer takes commercial control over the vessel and instructs the master and crew where to sail and what to carry. The charterer also is entitled to sublet the vessel to sub-charterers.
A time charter is like any other agreement – it can be modified to fit the needs of the parties. However, the essence of a time charter is to allow the charterer dominion and control over the vessel.
Some common limitations on a time charter include geographic boundaries, cargo limitations, and more.
Disputes sometimes arise when a vessel cannot be used for its intended purpose due to mechanical problems, accidents, strikes, staffing shortages, and more. These periods of time are often referred to as “off hire” and normally the charterer is not responsible to pay the shipowner until the vessel can be returned to commerce.
A demise charter agreement, also known as a bareboat charter agreement, is a type of charter arrangement in the shipping industry. In a demise charter, the shipowner leases the vessel to the charterer without crew, stores, or any other provisions. The charterer gains almost complete control and possession of the vessel for a specified period, essentially acting as the owner for the duration of the charter. Here are some key characteristics of a demise charter agreement:
- Exclusive Possession and Control: The charterer has exclusive possession and control of the vessel during the charter period. This includes the right to appoint the master and crew, determine the ship’s route, and make operational decisions.
- Responsibility for Operation and Maintenance: The charterer is responsible for the day-to-day operation and maintenance of the vessel. This includes crew wages, fuel costs, port expenses, and other operational expenses.
- No Crew or Provisions Provided by Owner: In a demise charter, the shipowner does not provide crew, supplies, or any other provisions. The charterer is responsible for arranging and covering the costs of these aspects.
- Transfer of Risk and Liability: The charterer assumes both the operational and financial risks associated with the vessel during the charter period. This includes risks related to damage, loss, or liability for third-party claims.
- Lease Payment: The charterer pays a lease or charter fee to the shipowner for the use of the vessel. This fee is usually negotiated and agreed upon in advance, and it covers the vessel’s depreciation and the owner’s capital costs.
- Temporary Nature: Demise charters are typically for a specified period, after which the vessel is redelivered to the shipowner. The duration of the charter is agreed upon in the charter party contract.
- Redelivery Condition: The charterer is obligated to return the vessel to the owner in a condition similar to that at the beginning of the charter, subject to ordinary wear and tear.
- Registration and Flag: The vessel may be registered in the name of the charterer during the charter period. However, the legal ownership remains with the shipowner.
Demise charter agreements provide flexibility for charterers who may need a vessel for a specific project or period without the long-term commitment of ownership.
A voyage charter agreement is a type of charter arrangement in the shipping industry where the shipowner provides the vessel, crew, and other necessary provisions to transport goods for a specific voyage. Here are some key characteristics of a voyage charter agreement:
- Single Voyage Basis: Unlike time charters or bareboat charters, a voyage charter is focused on a single voyage. The shipowner agrees to transport a specific cargo from one port to another, and the charter is terminated upon completion of that voyage.
- Shipowner’s Responsibility for Crew and Maintenance: Unlike a bareboat charter, the shipowner retains responsibility for providing and paying the crew, as well as covering the costs associated with the vessel’s maintenance, repairs, and operational expenses.
- Charterer’s Responsibility for Cargo Handling: The charterer is responsible for loading and unloading the cargo, as well as any associated costs related to cargo handling, port charges, and other expenses incurred at the loading and discharge ports.
- Freight Payment: The charterer pays freight to the shipowner for the transportation of the cargo. The freight can be a lump sum or calculated based on the quantity or weight of the cargo (e.g., per ton or per cubic meter).
- Demurrage and Laytime: The charter party specifies the allowed time for loading and unloading the cargo, known as laytime. If the time is exceeded, demurrage charges may apply, compensating the shipowner for delays beyond the agreed-upon laytime.
- Applicable Routes and Ports: The charter party defines the specific route and ports for the voyage, including any agreed deviations. The shipowner is obligated to follow the agreed-upon itinerary.
- Risk and Insurance: The shipowner typically retains responsibility for the seaworthiness of the vessel, but the charterer is responsible for insuring the cargo. The charter party specifies the allocation of risks and insurance obligations.
- Redelivery After Voyage Completion: Upon completion of the voyage, the vessel is redelivered to the shipowner. The charterer is not responsible for the vessel’s operational aspects beyond the agreed-upon voyage.
- Charterer’s Commercial Use: The charterer may use the vessel for its own commercial purposes during the voyage, subject to the terms outlined in the charter party.
Voyage charter agreements are commonly used for one-off shipments or when the charterer does not require a vessel for an extended period. They provide flexibility for both parties and allow for the efficient transportation of specific cargoes.
A slot charter agreement is a specific type of charter arrangement in the shipping industry where a shipping line or vessel operator leases container slots on a vessel to another party. Here are the key characteristics of a slot charter agreement:
- Leasing of Container Slots: In a slot charter, the charterer leases a specific number of container slots on a vessel rather than chartering the entire vessel. Each container slot corresponds to space on the vessel for one standard shipping container.
- Flexibility in Cargo Volume: Slot charters provide flexibility for the charterer in terms of cargo volume. The charterer can lease the number of container slots needed for their cargo, making it suitable for shipments of varying sizes.
- Shared Vessel Space: The vessel remains owned and operated by the shipping line or vessel operator. The charterer only has rights to the contracted container slots on the vessel, and the remaining slots are available to other shippers or parties.
- Fixed or Floating Agreement: Slot charter agreements can be fixed or floating. In a fixed slot charter, specific container slots are reserved for the charterer on a particular voyage or a series of voyages. In a floating slot charter, the charterer has the right to use slots on vessels that operate on a particular route during a specified period.
- Pricing Structure: The pricing for slot charters is typically based on a per-slot basis. The charterer pays a predetermined rate for each container slot leased. The pricing may also include additional charges for services such as loading and unloading.
- Responsibility for Cargo Handling: The charterer is responsible for the loading and unloading of their containers, including any associated costs and fees at the ports of origin and destination.
- Duration of Agreement: Slot charter agreements can be short-term or long-term, depending on the needs of the parties involved. They may cover a single voyage or extend over a series of voyages.
- Booking and Reservation Process: The charterer typically books and reserves the container slots in advance, securing space on the vessel for their cargo. This process allows for better planning and coordination of shipments.
Slot charter agreements are commonly used in containerized shipping and are beneficial for shippers who do not have enough cargo to justify chartering an entire vessel. It allows for cost-effective and flexible transportation of goods.
Common Reasons for Charter Disputes
There are numerous reasons why charter disputes arise between the owner and charterer. Some of the more common types of disputes include:
- Mishandling cargo.
- Negligence of crew.
- The ship is not seaworthy for the task or voyage contemplated in the agreement.
- The ship has mechanical breakdowns or there are vessel-related delays.
- Determining the party responsible for damage to a vessel.
- Failure to furnish or return vessel in accordance with the agreement.
- Failure to resolve ship liens.
- Failure to pay full amount of hire.
- Failure to comply with contractual obligations.
The financial implications of a breached charter agreement can be immense. The parties and their insurance companies are often left determining who will ultimately be responsible for payment of the damages. For commercial vessels, a breached agreement can result in substantial consequential damages. Sometimes when a contract is breached it creates a terrible chain reaction that causes harm to many people and businesses.
One of the reasons why disputes occur (or are not promptly resolved) is because the charter agreement is silent on key terms and provisions. For parties seeking to avoid disputes, it is important to consider the critical purpose of the charter and ensure that the agreement addresses all important terms. While it is impossible for a contract to address all potential problems, a well-crafted agreement should minimize potential disputes or, at a minimum, make legal obligations clear.
However, if you are involved in a charter party dispute, you should contact us to discuss your options. The Johns Law Group is comprised of attorneys with a substantial amount of experience and training in the field of maritime law. Our primary office is located in Fort Lauderdale, Florida. However, we are licensed to practice in over ten states and are capable of handling any maritime case throughout the United States. We offer free consultations and invite you to call to discuss your issue. For some commercial disputes, we may handle the case on contingency.