Pc Lecture 1 Notes

8/12/2019 Pc Lecture 1 Notes

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PRACTICAL CHARTERING Lecture 1: The Charter Market and Role of the Charterparty

1. Ship Chartering & its Role in World Trade What does it mean to “charter” to ship? A standard dictionary definition for the verb “to charter” is“to hire, rent or lease (something) for usually exclusive and temporary use.” When the term isapplied to ships, it basically refers to the hiring, rental or lease of a ship for a period of time and / ora particular voyage. Generally speaking, the party making his or her ship available for hire is theshipowner, while the party hiring the ship is the charterer.

The practice of ship chartering is an important instrument in facilitating world trade. For theshipowner, who has invested millions of dollars worth of capital in the construction, manning,maintenance and operation of his ship(s), the ability to charter those ships helps to ensure that theyare gainfully employed in the carriage of goods by sea, thereby enabling the owner to earn a returnon 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 transportingtheir products to distant markets for sale to consumers, without requiring them to invest in theconstruction and operation of vessels themselves. The practice of ship chartering also allows theworld’s traders, through the mechanism of the worldwide charter market, to match the supply ofcargo‐carrying vessels with the demand for cargoes to be carried, by chartering in from those whoown or control vessels and by chartering out to those who need transportation.

2. Bulk Cargo Chartering Chartering is at its most prevalent in the bulk shipping industry, where the basic – although notalways 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 commercialarrangement he wishes to enter into. The shipper’s choices range anywhere from owning his ownvessels, to handing over the whole operation to a specialist bulk shipper. If the shipper is a largemultinational company that ships a substantial amount of cargo, it may well have its own shippingfleet to handle a proportion of its transportation requirements. For example, U.S. Gypsum owns itsown fleet of self unloaders to carry the gypsum that it mines in Nova Scotia to various destinationsin the eastern U.S. Similarly, British Steel owns a fleet of bulk carriers that are used, in part, tocarry shipments of iron ore that are mined at Port Cartier and Sept. Isles.

Such arrangements also used to be quite common in the oil industry, where up until the mid 1970s,as much as 40 percent of the tanker fleet was owned by the major oil companies, and a further 55percent 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 thatcaused by the TORREY CANYON grounding off the coast of France in 1967 and the EXXON VALDEZgrounding in Prince William Sound, Alaska, in 1989, led many countries, particularly the U.S., toimplement regimes that greatly increased vessel owners’ financial liability for the consequences ofoil pollution. As a result, the major oil companies progressively withdrew from the business ofshipowning, choosing instead to charter their vessels on a long term basis.

The types of charters used in such cases could range anywhere from ten to fifteen years in duration,in order to provide the oil companies (or indeed, any shipper with a long term requirement for bulk



transport) with a base of shipping capacity to cover long‐term material supply contracts. Chartersof such long durations are generally agreed upon before the vessel is actually built, while shorter‐term time charters, anywhere from five to twelve years, would be obtained on the charter market.

However, many shippers have only a single consignment of cargo to transport. Agricultural tradessuch as grain and sugar, which are subject to vagaries such as the weather and a volatile market, are

cargoes that fall under this category. Their characteristics make it difficult to plan shippingrequirements in advance. In such cases, bulk cargo is chartered for a single voyage via a marketsuch as the Baltic Exchange, in which the shipper can hire a vessel for a negotiated freight rate.

3. The Charter Market The charter market is a key element in the functioning of the shipping industry. The charter marketis the place (whether physical or electronic) in which ships and cargoes come together, oftenthrough the efforts of a shipbroker, who serves as an intermediary between the shipowner and theshipper. The shipowner places his vessel in the market (or offers it “for hire”), free of cargo, andindicates its speed, cargo capacity, dimensions and cargo handling gear. The vessel’s availability for

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 nextcharter. For his part, the shipper or charterer, who has a particular volume of cargo to transportfrom one location to another, will enter his cargo in the market in order to have it transported. Theamount, physical characteristics and time constraints of the cargo will determine the type ofshipping contract that is required. The broker serves as the intermediary in bringing the ship andthe cargo together (with time and location being key conditions for sealing a deal), and if theshipowner and shipper agree on the terms and conditions, a charter party is drawn up and the shipis “fixed.’

Once the ship has been fixed, a fixture report summarizing the details of the charter is issued. For avoyage charter carrying a cargo of grain, the fixture report might read:

US East Cost to Italy Sea Princess, 36,000 t, heavy grains

$12.50, 4 days/1,000 t, Jan. 15 – 19 (Importex Inc.)

In layman’s terms, the vessel Sea Princess has been chartered to load grain in the U.S. East Coastand transport it to Italy. The cargo consists of 36,000 tons of heavy grains at a freight rate of $12.50per ton. Four days are allowed for loading and 1,000 tons per day rate for discharging. The vessel

must present itself ready to load between January 15 and January 19. The charterer is ImportexInc.

Naturally, a shipowner will wish to obtain the highest rate possible for the use of his vessel, whilethe charterer will seek a vessel to carry his cargo at the lowest rate possible while still ensuring thecargo’s safe arrival at its destination. Indeed, the amount of income earned by a vessel charter isthe key factor in the profitability of ships and transactions, and in determining whether a maritimetransport deal will be struck in the first place. Although the ideal means of finding relevant freight



rates and / or hire levels is to actually enter the charter market and seek vessels or cargoes, it ispossible to obtain some idea of current levels by examining reported fixtures of cargoes and ships.Many shipping publications contain fixture lists and market summaries (particularly for largemarkets such as the dry bulk and tanker trades), as do private circulation lists distributed bybroking houses. Market information is also distributed in less formal ways by e‐mail, fax, or wordof mouth among individuals and / or companies interested in certain sectors of activity.

The Baltic Exchange in London publishes the “Baltic indices,” which are an assessment of the priceof moving the world’s major raw materials by sea. The indices are based on estimates of the cost oftransporting various bulk cargoes on a per tonne and daily hire basis, which are made by leadingshipbroking houses located around the world. The estimates cover both wet cargoes (such as crudeoil and oil products) and dry cargoes (such as grain and coal). The dry cargo index is centered on a“basket” of thirteen frequently fixed and settled worldwide voyages that are individually weightedto provide a balance of relative importance. The tanker index is based on a “basket” of nine traderoutes for medium‐sized tankers which are also weighted so as to provide balance of relativeimportance. Both indices are based on an arbitrary figure of 1000, which should increase duringgood freight levels and fall below that figure in time of lower market freight rates. These indicesare closely followed by charterers and shipowners (as well as the brokers that they employ) ascharterparties are often concluded on the basis of the floating rates determined by them.

However, it is important to remember that there are a variety of other factors that can affect freightand hire rates. On the ship side, such factors can include the age of a vessel (since older vesselsrequire a higher insurance premium on their cargo); vessel speeds and rates of bunkerconsumption, special equipment and cargo‐handling gear, and cubic and tonnage capacities. On thecargo side, such factors are often based on a cargo’s physical characteristics and their potential tocause damage to the ship (e.g. sulphur can have a corrosive effect on the steel in a cargo hold, orheavy scrap metal can cause damage to a ship’s structure). Still other factors that can affect ratedetermination are the speed of loading or discharge, the amount of commissions payable and thearea in which the trade will occur (e.g. a war risk region).

Given all of these variables, a great deal of skill, expertise and knowledge are required to effectivelyevaluate fixtures and to bring together appropriate cargoes with appropriate ships. That is why theemployment of a broker, whose job it is to keep his principle informed of relevant fixtures and toprovide an analysis of the freight market, can be extremely useful. Generally speaking, majorshipping companies that are owners and / or charerters will employ their own staff (who aresometimes assisted by an external broker) to track and assess market information that is relevantto their specific needs, while smaller owners and charterers will often attempt to become familiarwith the market through their own analyses and contacts.

4. The Role of the Charterparty Once the owner of a particular ship and the shipper of a particular cargo have been broughttogether, the specific terms and conditions of the commercial transaction they intend to undertakewill be incorporated into a charterparty. In legal terms, a charterparty can be defined as a lease of aship in whole or in part for a long or short period of time for a particular voyage. A charterparty ispart contract of hire (affreightment) and part contract of transport (carriage). Affreightment isbasically placing a ship at the disposal of another party, while transport is essentially the carriertaking charge of the goods. The proportion of “affreightment” decreases as one moves from ademise charter, to a time charter, and then to a voyage charter, while the proportion of carriageincreases 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 undervoyage charterparties and bills of lading (more on the particularities of time and voyage charters,and the difference and similarities between the two, in the next lecture).

Charter parties are generally formed in two stages. First, the most important “main” terms arenegotiated through brokers. These terms usually include the name of the charterer, the name of the

owner, ship and its characteristics, time and place of delivery, duration of the charter, place ofredelivery, hire rate, printed form upon which the contract is based and any other terms that aparty deems important. These are considered the essential elements of the contract, and once theyhave been agree upon, these essential elements are entitled a “fixture.”

After a fixture has been reached, the parties continue to negotiate “details” amending the standardcontract 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 vessel’s speed, the condition of theship’s holds, the exact time of the ship’s delivery to the charterer, brokerage, breakdown,bunkering, options to extend the charter, cargo capacity, demurrage and anything else that theparties may deem to be of “minor” importance.

Although it is easy to get caught up in particularities of charter parties and their various clauses, itis important to keep sight of the fact that charter parties are really no different from any other sortof commercial contract. In other words, they are subject to the same rules of interpretation andconstruction as any other commercial contract.

5. What is a Contract? The existence of a binding contract essentially depends on three basic elements:

1. an agreement on terms (consisting of an offer made by Party A and the acceptance of thatoffer by Party B)

2. the existence of consideration (the payment of a price by Party B for the promise made byParty A).3. an intention by Party A and Party B to enter into binding contractual relations

Provided that these three elements are present, it is not generally necessary for a contract to be inwriting. Indeed, most categories of agreement can be concluded by telephone, e‐mail or fax. Incases where an agreement is reached orally, difficulties are likely to be related more to matters ofevidence than of legal principle, since disputes can arise as to what was actually agreed.

Step 1 – Offer and acceptance: The first step in determining whether the parties havereached agreement is to ask whether an offer has been made by one party and accepted bythe other. An offer is an indication by one person that he is willing to contract on specified

terms, made with the intention that the offer will become contractually binding if it isaccepted by the person to whom it is addressed. Such an offer must be sufficiently clear anddetailed to be capable of acceptance by the other party. An offer may be withdrawn bygiving notice to that effect at any time before it is accepted.

A contract will not be concluded until the offer which has been made is accepted by theother party, and that party has communicated such acceptance to the party making theoffer. Such acceptance must be both final and unqualified, and it must correspond preciselyto the terms of the offer. If the reply attempts to vary the terms of the offer or to introduce



new terms, it will not be treated as an acceptance but as a counter offer, which may itselfthen be accepted or rejected by the original party making the offer.

Step 2 – Consideration: The next step in making an agreement binding is consideration;the basic rule being that the person to whom a promise is being made (the promisee) mustgive something of value (i.e. a price) for that promise if he wants to make sure he will have

recourse to legal remedies in order to ensure that the person making the promise (thepromisor) keeps his promise.

Step 3 – Intention to create legal relations: Once the parties have reached agreement onterms, it is important to determine whether they actually intended to be contractuallybound. In commercial or business situations, if both parties consider that the negotiationshave been successfully concluded, they are likely to consider themselves legally committed.In other words, the courts will place great emphasis on what the parties themselves believethey have achieved, and how they have communicated that belief to each other.

6. Additional Considerations in Determining Whether a Contract Exists Incompleteness of Terms: Even if an agreement appears to have been reached, it may not

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 tofurther negotiation, a court will likely declare that there is no binding contract. Similarly, ifthe language used by the parties is too vague or ambiguous, and the ambiguity cannot beresolved, a court may find that there is no enforceable contract. On the other hand, if theparties themselves believe that a binding contract has been made, then the court willgenerally strive to uphold that belief. This is particularly true in commercial dealings in atrade with which both parties are familiar, and where the gaps can be filled by reference toprevious dealing by the parties, or to generally accepted practice within the trade, or insome other manner.

Express provision for terms to be agreed at a later date: Parties to an agreementsometimes try to introduce an element of flexibility by agreeing expressly that certainmatters are to be agreed later, or from time to time. In this situation, the question ofwhether the resulting agreement is a binding contract will again depend upon the intentionof the parties. In determining this intention, the courts will consider both the importance ofthe terms left over and the extent to which the parties have acted on the agreement.

Agreements “subject to details”: Charterparty fixtures and ship sale and purchasecontracts are often negotiated subject to details. This will generally be regarded as anindication that the parties do not intend to be bound, and no contract will be concludeduntil those details have been agreed.

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Pc Lecture 1 Notes