Some Common Clauses in Chartering
A charter party is a contract of employment between the ship owner and the charterer that reflects the negotiated agreement between the two parties to the contract, for the employment of the vessel. Most charter parties are standard documents and have several clauses. These clauses have one or more of the following roles:
- To highlight the roles and responsibilities of the charterer and the ship owner in the contract.
- To protect both parties from liability for loss caused by circumstances that are beyond their control.
- To solve disputes that could arise in the contract.
Charter parties, whether used for time, bareboat or voyage contracts, have several clauses, some of which are quite similar. We will now look at some clauses that are contained in most charter parties. Similarly there a number of terms used in different Charter party and Click here
to see these terms
These are as discussed below:
1 – The PreambleWritten contracts usually start with a preamble.
In a time charter, the preamble presents the main contents of the agreement and will include the name of the owner, the description of the vessel, the name of the charterers, the duration of the charter, sublet and delivery terms, cargo exclusions, and trading limits.
In a voyage charter, the preamble will contain the names of the charterer and the ship owner, the particulars of the subject of the contract (the vessel), the load and discharge ports and the description of the cargo to be loaded, among others.
It is implied in most voyage contracts that the ship owner must exercise due diligence in ensuring that the vessel is seaworthy at the beginning of the voyage.
2 – The Identity of the Parties to the Contract The contact details of the owners, charterers, shippers and receivers are normally stated in the contract. This helps one party establish an opinion of the other party before signing the agreement, and could lead to a contract not being signed if one party establishes that the other may not be of good reputation or is insolvent.
This clause is important as listed contact details are used to give notices etc.
3 – Substitution of the Owner or the ChartererThis is a standard clause in long term contracts, as it allows the owner to sell his vessel during the tenure of a time contract. It is a protective clause for the owner, as without this clause the owner could be liable if he sells during the tenure of the contract.
The wording in this clause sometimes may allow the charterer to sublet the vessel to another charterer when the market is facing a downturn. However the contract still remains between the original charterer and the ship owner, and in this regard the charterer must fulfill all his obligations as per the negotiated contract. The sublet wording may be as follows: ‘The Charterers shall have the right to sub-let all or part of the vessel whilst remaining responsible to the Owners for the performance of this CharterParty’.
4 – Nomination, Identity and Substitution of the VesselThe vessel is central to the agreement in most charter agreements. The vessel therefore must be nominated at an early stage of the contract. At times in voyage contracts the charter party will be signed without the vessel being identified. However in this case the vessel, when nominated, must be according to the specifications as agreed to in the negotiated contract. In voyage contracts the vessel nominated must be suitable for the intended cargo, ports, etc.
If, however, the vessel has been identified when the contract is signed, the contract will be void, if the vessel identified is lost or declared a total loss.
Some contracts state that the owner is to provide a vessel named (for e.g.) MV “Neptune Garnet” or “similar”. This allows the owner to substitute the “Neptune Garnet” with a similar vessel if “Neptune Garnet” cannot make the contract. This clause is common in voyage charters.
5 – The Vessel’s Trading LimitsInstitute warranty limits are the geographical limits of areas in which a vessel can freely trade. These are drawn up and imposed by underwriters of the vessel’s insurance policy. Some areas are always accepted while others are always excluded (such as Arctic areas and other areas that ice up in the winter months). If owners want to trade their vessel outside her institute warranty limits, they will be required to pay additional insurance premiums after getting permission from their underwriters.
Trading rules of an underwriter’s insurance policy are governed by ice and weather conditions and do not normally change.
Areas could be restricted for trading because of an ongoing war between two states. In such cases, trading in a war zone will incur additional premiums.
6 – The Concept of SeaworthinessIt is implied in all ship employment contracts that a vessel is to be kept in a seaworthy condition.
There are three aspects to seaworthiness. These are:
- Technical – the vessel must be staunch, fit and strong, evidenced by certification of her machinery & hull. She must have adequate stability at all times.
- Cargoworthiness – the vessel’s holds must be ready to receive the intended cargo, i.e. the cargo should not be damaged because of poor reception facilities on board the vessel during the voyage.
- For the intended voyage – the vessel must be fully equipped for the voyage: she should have enough stores, fuel, fresh water, crew, equipment, etc.
It must be remembered that the degree of seaworthiness will vary depending upon the voyage and a vessel that is deemed seaworthy for a river passage may not be seaworthy for a sea passage.
7 – Lay/CanIn all voyage charters, the vessel is given a window of dates within which to present itself at the loading port at the beginning of the charter. This window is called the ‘lay/can’ dates. ‘Lay’ stands for laytime not to commence before, while ‘Can’ is the cancelling date. This window of days is called the ‘laydays’. This is an example of a role and responsibility clause in a charter party. In the event that the ship owner misses the ‘Can’ date, the charterer has the option to cancel the contract.
In a time charter the ‘lay/can’ clause indicates the window of days that are given to the ship owner for delivery of the vessel to the charterer at the place of delivery as negotiated.
8 – The War clausesIn times of war, the vessel and her crew will be exposed to greater risks. These risks include delays to the vessel and injury to crew. To cover these risks the vessel will have to take additional insurance.
Therefore most war clauses are designed to protect the ship owner and/or the charterer from exposure to these risks.
There are two types of war clauses: the War cancellation clause and the War risks clause.
8.1 – The War Cancellation ClauseThe purpose of this clause is to give both parties in the contract an opportunity to cancel the contract in case a war zone is declared in a vessel’s sailing route. The clause gives the ship owner the right to prevent the vessel from sailing into a war zone.
Sometimes in the event of war the freight market in a war zone may change substantially, and a ship owner may want to re-negotiate the contract after cancelling the initial contract.
The War Cancellation clause is found in long term contracts, and is in fact standard in both time contracts and in COAs.
8.2 – The War Risks ClauseThe war risk clause is relevant to all types of charters. This clause defines a war risk, and it serves to establish the rights and obligations of both parties in a ship employment contract when a vessel, her crew and cargo are exposed to the war risks defined in the clause.
Some examples of war risks are as below:
- Acts of war
- Civil war
- Acts of Piracy
- Civil commotion
- Blockades
Several questions arise when vessels trade in a war risk area:
- Who pays the extra insurance premium that may be required when trading in these areas?
- Can a charterer or the owner refuse to permit the vessel go into a war risk area to load and/or discharge cargo?
- Can a charterer divert a vessel to another port to take cargo if the original load and/or discharge ports are declared to be in a war risk zone?
- Who pays for loading and/or discharging delays in these areas?
- Can the charterer and/or owner cancel the contract without compensation and liability?
The clause will protect both the ship owner and the charterer and provide workable solutions to the questions listed above.
The clause will also provide solutions to foreseeable disputes that could occur between a charterer and a ship owner when the vessel is operating in a war risk area.
9 – Cost Variation ClausesThese are clauses put into the contract to help protect the parties in case of substantial changes in the economic situation. Such changes could lead to a loss to one of the parties to a contract; some contracts therefore have clauses designed to compensate a party to the contract for loss. Reasons for compensations could be due to:
- Changes in currency exchange rates
- Increases in the operating cost of a vessel
9.1 – Currency ClausesCurrency clauses are used by the ship owner to adjust freight rates in a voyage contract when there are large currency exchange rate fluctuations. The clause is put in when the ship owner requires protection against these exchange rate fluctuations.
This could happen when the charterer calculates voyage returns using an estimated exchange rate at the time of signing the contract, but there is a large difference between the estimated exchange rate and the actual exchange rate at the time of receiving payment.
The clause will apply if inserted into the charter party, and addresses the following:
- When it will apply (this would mean, for example, that the clause will apply only when the exchange rate between the applicable currencies has changed by more than 10%).
- Whether it applies to both parties.
9.2 – The Escalation clauseThis clause allows freight or hire terms to be adjusted upwards because of an increase in vessel operating costs during the contract period. The clause can be applied as follows:
- A fixed increase of, for e.g.,10% every year, applicable to long term contracts.
- Using an index with a base value, and then allowing for increases in costs as the index changes, or using actual cost increases to increase freight or hire terms.
9.3 – Other Clauses Dealing with Increases in CostsSome contracts have a bunker clause inserted to provide for the increase in bunker prices. This is because bunker prices are volatile, so there could well be a change in the bunker price from the time when the contract was signed to the time of commencement of the voyage.
Ship owners normally base freight rates on bunker figures at the time of signing the contract. But the operating costs of a vessel will increase when bunker prices go up. Therefore, because of the volatility of bunker prices, a prudent ship owner will protect himself by inserting this clause in a charter party to increase freight in the event of a considerable increase in bunker prices at the time of the commencement of the voyage.
10 – The Arbitration ClauseThe arbitration clause is included in charter parties to settle disputes that may arise during the charter tenure. The clause will indicate how the dispute is to be settled in relation to the law applicable, the place where the dispute is to be heard, and the number of persons to be appointed to help settle the dispute.
Personnel who are appointed will be proficient in marine matters. Normally each party will appoint a person to argue on their behalf, with a neutral overseer.11 – Time LimitsThis clause ensures that monies due are settled within a specific period of time. Limits for payment in charter parties are negotiable but should not be less than a year. However under English law it is 6 years; France has a one year limit while in Spain it is six months.12 – Exception ClausesThese clauses protect the owner and/or charterer from liability for damage to cargo and/or vessel that are caused by events beyond their control. An example of this regard would be damage to a vessel caused by a tsunami. 13 – The Maritime Lien This clause allows the ship owner to have a lien on the goods for freight due, while the cargo owner has a lien on the ship for monies due to him.14 – The General Average and New Jason ClausesThe principle of general average states that: that which has been sacrificed for the benefit of all shall be made good by the contribution of all.
‘All’ refers to the parties to the maritime adventure and includes the ship owner, the consignee, the time charterer (if any), the recipient of the freight and anyone else who may have an interest in the voyage.
To claim general average the ship owner must be able to show that there was a general average act,
The essential elements of which are as follows:
- There must be a sacrifice or expenditure.
- The sacrifice or expenditure must be extraordinary.
- The sacrifice must be intentionally made or incurred.
- The sacrifice or expenditure must be reasonably made or incurred.
- The sacrifice or expenditure must be made for the common safety.
- The sacrifice or expenditure must be made to preserve the property from peril.
An examples of sacrifice is jettisoning cargo to refloat a grounded vessel, while an example of expenditure is costs of salvage including the salvor’s award – the sacrifice or expenditure must be intentionally made, reasonable, for the common safety, and must be made to preserve the property from peril.
In these cases the expenditure has to be apportioned. The method of apportionment of expenditure is contained in common rules – these are the York Antwerp Rules which are incorporated in the charter party as the General Average Clause. In the US, general average apportionment is regulated by the Harter Act. The Harter Act does not allow the ship owner to claim apportionment of general average from the cargo owner, when the act of general average was required to save the vessel and/or cargo because there was an error in navigation and/or in vessel management.
Most ship owners and charterers want a uniform method of apportionment of general average. The New Jason clause, if included in a charter party, ensures that general average is apportioned as per the York Antwerp Rules in US waters as it overrides the Harter Act.
15 – The Both to Blame Collision ClauseThe Both to Blame Collision Clause gives a ship owner the same protection as afforded by the 1910 Collision Convention. The 1910 Collision Convention apportions blame for a ship collision according to the degree of fault. As the US has not ratified this convention, blame for a ship collision in US waters is apportioned on a 50 – 50 basis.
The clause is not enforceable in the US, but can be invoked under certain circumstances outside the US for a collision in US waters.
16 – Clauses Dealing with Towage and SalvageTowage and Salvage clauses are inserted in charter parties to decide on how to apportion salvage awards, and to decide on methods of payment in towage contracts.
16.1 – The Towage ClauseWhen ocean-going vessels get assistance from tugs they have to sign a towage contract. This contract is normally between the tug company and the owner of the ‘tow’. Most towage contracts are on a ‘no cure, no pay’ basis for stricken vessels.
Other towage contracts could be on a daily hire basis or on a lump sum basis. Brokerage for these contracts is paid for by the tug owner. 16.2 – The Salvage ClauseIn order to save life and/or property at sea, Masters and ship owners are obliged to deviate from their trade route, in accordance with international conventions. It is not unlawful to deviate under these circumstances, and if as a result of this deviation there is cargo damage, the ship owner cannot be held liable by the cargo owner.
In the case of salvage an award is payable and most chartering contracts will have a clause to indicate how the award is to be apportioned if the salvage is successful. In voyage contracts the award is normally split between the ship owner and crew while in time contracts it is split between the charterer and the ship owner.
It is important to note that the salvage award is only payable if the salvage is successful.
Costs for bunkers and for delays incurred during the salvage operation are to the ship owner’s account as are damage and other extra costs to the vessel. This must be mentioned in a ‘salvage clause’ to avoid disputes if the salvage is unsuccessful.
17 – The International Safety Management (ISM) ClauseThis clause is inserted in charter parties to ensure that the vessel and the company comply with the requirements of the ISM code during the currency of the charter.