PRACTICAL CHARTERING Lecture 3 – Negotiating Charterparties

A chartering negotiation is normally initiated when a charterer (usually a shipper) enters the market to find a suitable ship to move his product, or when an owner (usually acting through a charterer) enters the market to find employment (i.e. a suitable cargo) for his ship. Within this framework, the key elements that set the entire process for negotiating a charter into motion (and which determine the parameters of the agreement that is ultimately concluded) are the quantity and characteristics of the cargo that will be shipped, its location at the time the charterer enters the market, and its destination. In practical terms, the process that ensues can be divided into two distinct stages (investigation and negotiation, each of which is governed by its own procedures and terminology.

1. Investigation

a) The Charterer Places an Order:

The first stage of the negotiating process, called the period of investigation, begins when a charterer (either a shipper or an owner) enters the market with an order (either directly or through a broker). Before doing so, however, the charterer must decide whether he is ready to immediately engage in firm freight negotiations (provided he finds a suitable counterpart), or whether his main objective at this stage is collect information regarding potential shipping opportunities, with a view to beginning negotiations at a later date, and only after he has analyzed and evaluated all of the information he has gathered. In principle, any order that is circulated on the market by a reputable charterer and broker will normally be regarded as FIRM if the order does not contain any indication to the contrary. Nevertheless, the charterer may decide to make his intentions even clearer by using terminology such as FIRM OFFERS INVITED or PLEASE OFFER FIRM. In cases where the business has been concluded (i.e. the cargo has been purchased) but the charterer does not want to enter into firm negotiations immediately, he may mark his order FIRM or DEFINITE, while at the same time adding terminology such as INDICATIONS ONLY or PLEASE INDICATE or PLEASE PROPOSE. The expression FIRM WITH XX DAYS’ NOTICE indicates that the cargo is ready to be negotiated but loading can take place only XX days after the fixture has been concluded. On the other hand, if negotiations for purchasing the cargo have not yet been concluded, but the charterer nevertheless requires a freight quotation or estimate, the order may open with wording such as PROSPECTIVE ORDER or ORDER EXPECTED TO BECOME DEFINITE or ORDER NOT YET DEFINITE, or similar. If the charterers have not concluded any specific business and only wish to make a general investigation of shipping possibilities, this may be indicated through the use of terminology such as POSSIBILITY ONLY or CHARTERERS HAVE A POSSIBILITY TO WORK UP FOLLOWING BUSINESS. At this stage in the process, the contents of the charterer’s order will be limited to the minimum amount of information that the shipowner needs to determine whether he has a potential interest in the business. In the case of a voyage charter, such information will include the charterer’s name and domicile, cargo quantity and description, loading and discharging ports, period within which the vessel is to be presented for loading (lay/can), any restrictions or preferences regarding type or size

of ship, charterparty form on which the charterer wishes to base the terms and conditions, commissions to be paid by the owner In addition to these items, the charterer may also mention the approximate freight level at which he wishes to begin discussion or negotiation (the charterer’s “freight idea”), although such information is often omitted from the original order to allow for negotiating maneuverability. An order concerning a time charter arrangement is presented on the market in largely the same way as for voyage chartering, except that rather than providing details on cargo, ports, and loading / discharging rates and terms, the charterer provides details about the intended trade, the duration of the required time charter period, and places for delivery and redelivery of the vessel.

b) The Shipowner Reacts:

There are a number of ways in which an owner can express his interest in order. If the order was presented as being FIRM AND READY TO TRADE, the owner may choose to submit a firm offer right away. This can be done when the trade is well known, the freight level is more or less established, and the ship’s size and position are in accordance with the conditions given in the order. A firm offer may also be desirable when the owner expects to encounter strong competition in the market. What occurs more often, however, is that the owner presents his ship and his abilities to meet the conditions of the order and submits a “freight indication.” Such an indication will provide the charterer with an idea of the owner’s starting point for a possible negotiation, without committing the owner to any specific terms or figures. Because it does not commit the parties, an indication is often given without any time limit. Still, if the owner does submit a firm offer later on, he is supposed to present freight and terms that are no worse for the charterer than those indicated earlier. Alternatively, the owner can provide the charterer with a “freight idea” indicating a freight rate that the owner would use as the basis for further negotiations, with the understanding that the proposed rate could be adjusted either upwards or downwards when the owner is ready to make an eventual offer. A proposal, a freight idea, or an indication all form part of the negotiation stage and provide a basis for the charterer’s calculations and evaluations of chartering possibilities. The charterer may go on discussing proposals, ideas and indications with a number of owners until he finds a suitable counterpart for negotiations. The charterer will then revert to that owner asking for a firm offer on the basis of the conditions given in the order or in accordance with previous discussions. The charterer may then reply to the owner’s indication with a firm offer.

2. Negotiation

The actual negotiation stage can be divided into two parts: the negotiation of the main terms, followed by the negotiation of details and wording of clauses that were not covered during the negotiation of the main terms. Since the parties begin by negotiating the main terms and save the details for a later stage, it is important that every offer or counter offer submitted during the main stage is accompanied by the words SUBJECT TO DETAILS (or SUB DETAILS).

a) The First Offer:

In voyage chartering, the first offer that starts the firm negotiations will contain the following details:

• shipowner’s name • ship’s name and particulars • cargo quantity and description of commodity • loading and discharging ports and berths • laydays / cancelling day • loading and discharging rates and terms • demurrage and despatch rates • freight amount and conditions for payment of freight • clauses covering time counting, Ice clause, War Risk clause, applicable law and place of

arbitration, Bunker clause, clauses covering extra insurance premiums, taxes and dues, etc. which the owner considers to be of prime importance

• charterparty form • commissions

If the charter is for a tanker voyage, loading and discharging rates will not be provided separately, but as a number of total days for loading and discharge (laytime allowance all purposes), and the freight rate will be provided by reference to Worldscale In time chartering, the offer will contain the following details

• The shipowner’s name • The ship’s name and particulars • Description of the time charter arrangement • Place of delivery and redelivery • Laydays / cancelling for the delivery • Intended trade with geographical limits and other trading limits; cargo exclusions from the

owner’s side • Quantity and price for bunkers on board on delivery and redelivery • Hire and conditions for hire payment

When the main terms of the charter are being negotiated, the required vessel details are quite extensive and comprise not only the vessel’s name, year of construction and flag, but also its deadwight, grain and bale capacities of cargo spaces, number of hatches and holds, cargo gear, speed, bunker consumption and other details of importance for the intended cargo and trade. Since it is not always possible to give these particulars with exact precision, the description of the ship is customarily followed by the words ALL DETAILS ABOUT (which literally means ALL DETAILS GIVEN WITHOUT GUARANTEE BUT GIVEN IN GOOD FAITH AND BELIEVED TO BE CORRECT). b) The Owners’ First Offer & the Charterers’ Reply

:

The negotiations officially commence when the owners relay a message to the charterer indicating OWNERS’ OFFER FIRM and provide a time limit for reply. This commits the owners to adhere to the terms offered either until the stated time limit has passed, or until the charterers have provided a reply which differs from the owner’s offer. Normally, the charterer’s reply to the owner’s first offer

will be one of the following (the charterer’s reply will also indicate a time limit within which the owner must reply):

• CHARTERERS ACCEPT OWNERS’ OFFER, EXCEPT (which means that some parts of

the owners’ offer is acceptable but other terms are subject to further negotiations) – In this case, the charterers’ offer is called a “counter” because the parties have already agreed on a number of terms

• CHARTERERS DECLINE OWNERS’ OFFER AND OFFER FIRM AS FOLLOWS (which means that the charterers will make a full firm offer of their own rather than negotiating terms that they find unacceptable) – In this case, the charterer’s offer is called a “counter offer” because the parties have not yet technically agreed on any point

• CHARTERERS DECLINE OWNERS’ OFFER WITHOUT COUNTER (which means that the charterers find the owners’ offer to be completely unacceptable and wish to end negotiations) – In this case, the negotiations will be terminated.

The charterers’ can also make provisions or “subjects” in their counters or counter-offers:

• SUBJECT TO CHARTERES’ BOD” APPROVAL (subject to approval by the Board of

Directors)

• SUBJECT TO RECEIVERS’ APPROVAL (subject to approval by the receiver of the cargo, who may have an interest in the terms under which his cargo will be transported)

• SUBJECT TO STEM (subject to confirmation from the shippers or suppliers of the cargo that the negotiated quantities will be ready for loading at the time agreed to by the owners and charterers during the negotiations)

• SUBJECT TO CHARTERERS’ APPROVAL OF PLAN AND SUBJECT TO INSPECTION (subject to the charterers’ satisfaction that the vessel is technically suitable for the intended trade - this is particularly applicable to time charters)

c) The Negotiations Continue….

The owner can now offer a variety of replies, such as ACCEPT….EXCEPT (whereby the owner would list the exceptions he is requesting), or OWNER COUNTERS BY REPEATING HIS LAST, EXCEPT (whereby the owner reverts back to his previous offer with only a few modifications), or with an indication that he turns down the counter and wishes to end the negotiations. The negotiations will continue in this way until the parties have reached an agreement regarding terms that are acceptable to both of them. The resulting agreement on main terms, which is always SUBJECT TO

DETAILS, will be concluded by a “confirm.” On the owners’ side, the last reply would be expressed as OWNER ACCEPTS CHARTERERS’ LAST IN FULL AND CONFIRMS HEREBY THE FIXTURE SUBJECT TO DETAILS. The charterers’ final reply would then be CHARTERERS’ CONFIRM THE FIXTURE SUBJECT TO DETAILS AND SUBJECT TO STEM. At this point, the charterers will immediately compile a full summary of all the terms and details agreed upon so far and forward same to the owners, with a view to having both parties meticulously check and confirm the summary as soon as possible. d) Negotiation of Details:

The parties now enter the second stage of negotiations, in which they finalize the details and wording of clauses that were not covered during the negotiation of the main terms. At this stage, the charterers have to present all suggestions and preferences on amendments, deletions and additions to the printed text (i.e. the agreed upon charterparty form) relative to the business in question. If the amendments are numerous, it may be necessary to send the full suggested wording by fax or e-mail, as a result of which the owners will receive an indication of AMENDMENTS TO PRINTED FORM OR PRO-FORMA. This process is usually viewed as a discussion, as opposed to a regular negotiation with offers and counter-offers. As a result, there are not time limits involved and the parties use phrases such as CHARTERERS SUGGEST THE FOLLOWING AMENDMENTS TO ………, with discussions continuing until both parties are in full agreement. Once the parties have agreed on every detail, a confirmation of the deal will ensue indicating HEREBY CONFIRM / RECONFIRM THE FIXTURE. If at the same time all the reservations are removed (the points being waived) a clean fixture has been obtained. The date of the charterparty will be the last date on which the parties reached a clean fixtures, which means the date on which the last remaining subject was waived.

Source for this lecture:

• Shipbroking and Chartering Practice, Sixth edition (Lars Gorton, Patrick Hillenius, Rolf Ihre, Arne Sandevarn), LLP, London (Chapter 9, Chartering Routines)