PRACTICALCHARTERING

Lecture1:TheCharterMarketandRoleoftheCharterparty

1.ShipChartering&itsRoleinWorldTrade

Whatdoesitmeantochartertoship?Astandarddictionarydefinitionfortheverbtocharteris
to hire, rent or lease (something) for usually exclusive and temporary use. When the term is
appliedtoships,itbasicallyreferstothehiring,rentalorleaseofashipforaperiodoftimeand/or
a particular voyage. Generally speaking, the party making his or her ship available for hire is the
shipowner,whilethepartyhiringtheshipisthecharterer.

The practice of ship chartering is an important instrument in facilitating world trade. For the
shipowner, who has invested millions of dollars worth of capital in the construction, manning,
maintenanceandoperationofhisship(s),theabilitytocharterthoseshipshelpstoensurethatthey
aregainfullyemployedinthecarriageofgoodsbysea,therebyenablingtheownertoearnareturn
on his investment. On the other side of the equation, chartering provides the producers of raw
materials, agricultural products or manufactured goods with the physical means of transporting
their products to distant markets for sale to consumers, without requiring them to invest in the
construction and operation of vessels themselves. The practice of ship chartering also allows the
worlds traders, through the mechanism of the worldwide charter market, to match the supply of
cargocarryingvesselswiththedemandforcargoestobecarried,bycharteringinfromthosewho
ownorcontrolvesselsandbycharteringouttothosewhoneedtransportation.

2.BulkCargoChartering

Chartering is at its most prevalent in the bulk shipping industry, where the basic although not
always exclusive rule is one cargo, one ship. A shipper who needs to transport a specific bulk
cargo can do so in several ways, depending on the cargo itself and on the type of commercial
arrangementhewishestoenterinto.Theshipperschoicesrangeanywherefromowninghisown
vessels, to handing over the whole operation to a specialist bulk shipper. If the shipper is a large
multinationalcompanythatshipsasubstantialamountofcargo,itmaywellhaveitsownshipping
fleettohandleaproportionofitstransportationrequirements.Forexample,U.S.Gypsumownsits
ownfleetofselfunloaderstocarrythegypsumthatitminesinNovaScotiatovariousdestinations
in the eastern U.S. Similarly, British Steel owns a fleet of bulk carriers that are used, in part, to
carryshipmentsofironorethatareminedatPortCartierandSept.Isles.

Sucharrangementsalsousedtobequitecommonintheoilindustry,whereupuntilthemid1970s,
asmuchas40percentofthetankerfleetwasownedbythemajoroilcompanies,andafurther55
percent was on long term charter to them, leaving only 5 percent in the hands of independents.
However, public concerns about environmental damage resulting from oil pollution, such as that
causedbytheTORREYCANYONgroundingoffthecoastofFrancein1967andtheEXXONVALDEZ
grounding in Prince William Sound, Alaska, in 1989, led many countries, particularly the U.S., to
implementregimesthatgreatlyincreasedvesselownersfinancialliabilityfortheconsequencesof
oil pollution. As a result, the major oil companies progressively withdrew from the business of
shipowning,choosinginsteadtochartertheirvesselsonalongtermbasis.

Thetypesofchartersusedinsuchcasescouldrangeanywherefromtentofifteenyearsinduration,
inordertoprovidetheoilcompanies(orindeed,anyshipperwithalongtermrequirementforbulk
transport)withabaseofshippingcapacitytocoverlongtermmaterialsupplycontracts.Charters
of such long durations are generally agreed upon before the vessel is actually built, while shorter
termtimecharters,anywherefromfivetotwelveyears,wouldbeobtainedonthechartermarket.

However,manyshippershaveonlyasingleconsignmentofcargototransport.Agriculturaltrades
suchasgrainandsugar,whicharesubjecttovagariessuchastheweatherandavolatilemarket,are
cargoes that fall under this category. Their characteristics make it difficult to plan shipping
requirements in advance. In such cases, bulk cargo is chartered for a single voyage via a market
suchastheBalticExchange,inwhichtheshippercanhireavesselforanegotiatedfreightrate.

3.TheCharterMarket

Thechartermarketisakeyelementinthefunctioningoftheshippingindustry.Thechartermarket
is the place (whether physical or electronic) in which ships and cargoes come together, often
throughtheeffortsofashipbroker,whoservesasanintermediarybetweentheshipownerandthe
shipper. The shipowner places his vessel in the market (or offers it for hire), free of cargo, and
indicatesitsspeed,cargocapacity,dimensionsandcargohandlinggear.Thevesselsavailabilityfor
its next voyage will likely be dependent on when it completes its existing chartering arrangement
(or fixture), which will determine the time and date at which it will become available for its next
charter. For his part, the shipper or charterer, who has a particular volume of cargo to transport
fromonelocationtoanother,willenterhiscargointhemarketinordertohaveittransported.The
amount, physical characteristics and time constraints of the cargo will determine the type of
shippingcontractthatisrequired.Thebrokerservesastheintermediaryinbringingtheshipand
the cargo together (with time and location being key conditions for sealing a deal), and if the
shipownerandshipperagreeonthetermsandconditions,acharterpartyisdrawnupandtheship
isfixed.

Oncetheshiphasbeenfixed,afixturereportsummarizingthedetailsofthecharterisissued.Fora
voyagechartercarryingacargoofgrain,thefixturereportmightread:

USEastCosttoItaly
SeaPrincess,36,000t,heavygrains
$12.50,4days/1,000t,Jan.1519(ImportexInc.)

In laymans terms, the vessel Sea Princess has been chartered to load grain in the U.S. East Coast
andtransportittoItaly.Thecargoconsistsof36,000tonsofheavygrainsatafreightrateof$12.50
perton.Fourdaysareallowedforloadingand1,000tonsperdayratefordischarging.Thevessel
must present itself ready to load between January 15 and January 19. The charterer is Importex
Inc.

Naturally, a shipowner will wish toobtain the highest rate possible for the use of his vessel, while
thechartererwillseekavesseltocarryhiscargoatthelowestratepossiblewhilestillensuringthe
cargos safe arrival at its destination. Indeed, the amount of income earned by a vessel charter is
thekeyfactorintheprofitabilityofshipsandtransactions,andindeterminingwhetheramaritime
transportdealwillbestruckinthefirstplace.Althoughtheidealmeansoffindingrelevantfreight
rates and / or hire levels is to actually enter the charter market and seek vessels or cargoes, it is
possibletoobtainsomeideaofcurrentlevelsbyexaminingreportedfixturesofcargoesandships.
Many shipping publications contain fixture lists and market summaries (particularly for large
markets such as the dry bulk and tanker trades), as do private circulation lists distributed by
brokinghouses.Marketinformationisalsodistributedinlessformalwaysbyemail,fax,orword
ofmouthamongindividualsand/orcompaniesinterestedincertainsectorsofactivity.

TheBalticExchangeinLondonpublishestheBalticindices,whichareanassessmentoftheprice
ofmovingtheworldsmajorrawmaterialsbysea.Theindicesarebasedonestimatesofthecostof
transporting various bulk cargoes on a per tonne and daily hire basis, which are made by leading
shipbrokinghouseslocatedaroundtheworld.Theestimatescoverbothwetcargoes(suchascrude
oilandoilproducts)anddrycargoes(suchasgrainandcoal).Thedrycargoindexiscenteredona
basketofthirteenfrequentlyfixedandsettledworldwidevoyagesthatareindividuallyweighted
to provide a balance of relative importance. The tanker index is based on a basket of nine trade
routes for mediumsized tankers which are also weighted so as to provide balance of relative
importance. Both indices are based on an arbitrary figure of 1000, which should increase during
good freight levels and fall below that figure in time of lower market freight rates. These indices
are closely followed by charterers and shipowners (as well as the brokers that they employ) as
charterpartiesareoftenconcludedonthebasisofthefloatingratesdeterminedbythem.

However,itisimportanttorememberthatthereareavarietyofotherfactorsthatcanaffectfreight
and hire rates. On the ship side, such factors can include the age of a vessel (since older vessels
require a higher insurance premium on their cargo); vessel speeds and rates of bunker
consumption,specialequipmentandcargohandlinggear,andcubicandtonnagecapacities.Onthe
cargoside,suchfactorsareoftenbasedonacargosphysicalcharacteristicsandtheirpotentialto
cause damage to the ship (e.g. sulphur can have a corrosive effect on the steel in a cargo hold, or
heavy scrap metal can cause damage to a ships structure). Still other factors that can affect rate
determination are the speed of loading or discharge, the amount of commissions payable and the
areainwhichthetradewilloccur(e.g.awarriskregion).

Givenallofthesevariables,agreatdealofskill,expertiseandknowledgearerequiredtoeffectively
evaluatefixturesandtobringtogetherappropriatecargoeswithappropriateships.Thatiswhythe
employmentofa broker,whosejobitistokeep hisprincipleinformed ofrelevant fixturesand to
provide an analysis of the freight market, can be extremely useful. Generally speaking, major
shipping companies that are owners and / or charerters will employ their own staff (who are
sometimes assistedbyanexternalbroker)totrackand assessmarketinformationthatisrelevant
to their specific needs, while smaller owners and charterers will often attempt to become familiar
withthemarketthroughtheirownanalysesandcontacts.

4.TheRoleoftheCharterparty

Once the owner of a particular ship and the shipper of a particular cargo have been brought
together,thespecifictermsandconditionsofthecommercialtransactiontheyintendtoundertake
willbeincorporatedintoacharterparty.Inlegalterms,acharterpartycanbedefinedasaleaseofa
shipinwholeorinpartforalongorshortperiodoftimeforaparticularvoyage.Acharterpartyis
part contract of hire (affreightment) and part contract of transport (carriage). Affreightment is
basically placing a ship at the disposal of another party, while transport is essentially the carrier
taking charge of the goods. The proportion of affreightment decreases as one moves from a
demise charter, to a time charter, and then to a voyage charter, while the proportion of carriage
increases from a demise charter through a time charter to a voyage charter. Hire is the
consideration paid under demise and time charterparties; freight is the consideration paid under
voyage charterparties and bills of lading (more on the particularities of time and voyage charters,
andthedifferenceandsimilaritiesbetweenthetwo,inthenextlecture).

Charter parties are generally formed in two stages. First, the most important main terms are
negotiatedthroughbrokers.Thesetermsusuallyincludethenameofthecharterer,thenameofthe
owner, ship and its characteristics, time and place of delivery, duration of the charter, place of
redelivery, hire rate, printed form upon which the contract is based and any other terms that a
partydeemsimportant.Theseareconsideredtheessentialelementsofthecontract,andoncethey
havebeenagreeupon,theseessentialelementsareentitledafixture.

Afterafixturehasbeenreached,thepartiescontinuetonegotiatedetailsamendingthestandard
contract specified in the fixture. These details, which flesh out the original agreement or fixture,
can include a wide variety of matters, such as fuel used, the vessels speed, the condition of the
ships holds, the exact time of the ships delivery to the charterer, brokerage, breakdown,
bunkering, options to extend the charter, cargo capacity, demurrage and anything else that the
partiesmaydeemtobeofminorimportance.

Althoughitiseasytogetcaughtupinparticularitiesofcharterpartiesandtheirvariousclauses,it
isimportanttokeepsightofthefactthatcharterpartiesarereallynodifferentfromanyothersort
of commercial contract. In other words, they are subject to the same rules of interpretation and
constructionasanyothercommercialcontract.

5.WhatisaContract?

Theexistenceofabindingcontractessentiallydependsonthreebasicelements:

1. anagreementonterms(consistingofanoffermadebyPartyAandtheacceptanceofthat
offerbyPartyB)
2. theexistenceofconsideration(thepaymentofapricebyPartyBforthepromisemadeby
PartyA).
3. anintentionbyPartyAandPartyBtoenterintobindingcontractualrelations

Providedthatthesethreeelementsarepresent,itisnotgenerallynecessaryforacontracttobein
writing. Indeed, most categories of agreement can be concluded by telephone, email or fax. In
cases where an agreement is reached orally, difficulties are likely to be related more to matters of
evidencethanoflegalprinciple,sincedisputescanariseastowhatwasactuallyagreed.

Step 1 Offer and acceptance: The first step in determining whether the parties have
reachedagreementistoaskwhetheranofferhasbeenmadebyonepartyandacceptedby
theother.Anofferisanindicationbyonepersonthatheiswillingtocontractonspecified
terms, made with the intention that the offer will become contractually binding if it is
acceptedbythepersontowhomitisaddressed.Suchanoffermustbesufficientlyclearand
detailed to be capable of acceptance by the other party. An offer may be withdrawn by
givingnoticetothateffectatanytimebeforeitisaccepted.

A contract will not be concluded until the offer which has been made is accepted by the
other party, and that party has communicated such acceptance to the party making the
offer.Suchacceptancemustbebothfinalandunqualified,anditmustcorrespondprecisely
tothetermsoftheoffer.Ifthereplyattemptstovarythetermsoftheofferortointroduce
new terms, it will not be treated as an acceptance but as a counter offer, which may itself
thenbeacceptedorrejectedbytheoriginalpartymakingtheoffer.

Step 2 Consideration: The next step in making an agreement binding is consideration;

thebasicrulebeingthatthepersontowhomapromiseisbeingmade(thepromisee)must
givesomethingofvalue(i.e.aprice)forthatpromiseifhewantstomakesurehewillhave
recourse to legal remedies in order to ensure that the person making the promise (the
promisor)keepshispromise.

Step3Intentiontocreatelegalrelations:Oncethepartieshavereachedagreementon
terms, it is important to determine whether they actually intended to be contractually
bound.Incommercialorbusinesssituations,ifbothpartiesconsiderthat thenegotiations
havebeensuccessfullyconcluded,theyarelikelytoconsiderthemselveslegallycommitted.
Inotherwords,thecourtswillplacegreatemphasisonwhatthepartiesthemselvesbelieve
theyhaveachieved,andhowtheyhavecommunicatedthatbelieftoeachother.

6.AdditionalConsiderationsinDeterminingWhetheraContractExists

IncompletenessofTerms:Evenifanagreementappearstohavebeenreached,itmaynot
give rise to a binding contract if it is still significantly incomplete or insufficiently certain.
For example, if the parties leave a key part of the agreement undetermined or subject to
furthernegotiation,acourtwilllikelydeclarethatthereisnobindingcontract.Similarly,if
the language used by the parties is too vague or ambiguous, and the ambiguity cannot be
resolved, a court may find that there is no enforceable contract. On the other hand, if the
parties themselves believe that a binding contract has been made, then the court will
generally strive to uphold that belief. This is particularly true in commercial dealings in a
tradewithwhichbothpartiesarefamiliar,andwherethegapscanbefilledbyreferenceto
previous dealing by the parties, or to generally accepted practice within the trade, or in
someothermanner.

Express provision for terms to be agreed at a later date: Parties to an agreement

sometimes try to introduce an element of flexibility by agreeing expressly that certain
matters are to be agreed later, or from time to time. In this situation, the question of
whethertheresultingagreementisabindingcontractwillagaindependupontheintention
oftheparties.Indeterminingthisintention,thecourtswillconsiderboththeimportanceof
thetermsleftoverandtheextenttowhichthepartieshaveactedontheagreement.

Agreements subject to details: Charterparty fixtures and ship sale and purchase
contracts are often negotiated subject to details. This will generally be regarded as an
indication that the parties do not intend to be bound, and no contract will be concluded
untilthosedetailshavebeenagreed.