Charter Party

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by Tjard-Niklas Trümper

1. Notion, types of charter parties and historical development

A charter party (Chartervertrag, contrat d’affrètement, contratto di utilizzazione della nave, contrato de fletamento, bevrachtingsovereenkomst, befraktning) denominates all types of contracts whereby the respective parties agree that the one party, referred to as the ‘owner’ (Eigner or Verfrachter, fréteur, locatore/armatore/noleggiante, fletante, vervrachter, bortfraktare), lets its ship wholly or partly to the other party, referred to as the ‘charterer’ (Charterer or Befrachter, affréteur, conduttore/noleggiatore, fletador, bevrachter, avlastare). Together with contracts for the carriage of goods by sea (maritime transport (contract of carriage of goods)), charter parties form the category of contracts of affreightment (Frachtvertrag, contrats d’affrètement, contratto di trasporto, contrato de explotación del buque, scheepsexploitatie, Sjöfraktavtal). The legal term charter party has developed from the fact that those contracts which are nowadays, inter alia, referred to as charter parties were historically displayed in a document which itself was named a charter party (Chartepartie (see § 557 German Commercial Code), polizza di carico, póliza de fletamento, charterpartij, befraktningsavtal/certepartier). The name charter party derives from the mediaeval commercial custom to duplicate the terms of the agreement on a single sheet and to separate the sheet afterwards with a toothed line (indenture) in order to protect the marine trade against forgeries. Thereafter each party would retain its half of the separated document, the carta partita.

Notwithstanding that some types of charter parties only developed quite recently during the 20th century, charter parties in their original form actually represent the seminal contract pertaining to the carriage of goods by sea and they have, in particular, a longer tradition than contracts for the carriage of goods by bill of lading. For instance, charter parties were already known and mentioned in Byzantine Rhodian sea law between the 6th and 8th centuries, viz lease of a vessel and voyage charter party.

In practice, charter parties are usually negotiated and concluded on the basis of standard forms. Charter parties serve various different types of commercial purposes, in particular, all those which are not covered by contracts for the carriage of goods by sea (Gütertransportvertrag, contrat de transport de marchandises, trasporto di cose determinate, transporte marítimo de mercancías, styckegodstransport). Against this background it is impossible to make statements as to the legal nature of charter parties in general. Thus, the term charter party might be validly considered as an enigmatic one. However, and notwithstanding that the terms of some types of charter parties differ considerably, the common and distinguishing feature of each and every charter party remains the fact that the respective contract contains the owner’s undertaking to transfer the right to make use of its ship wholly or partly to the charterer. It is this element of a lease and employment of a vessel that distinguishes charter parties from contracts for the carriage of goods by sea, according to which a carrier undertakes—by bill of lading or on the basis of a sea waybill—to transport a specified cargo. While in the latter type of contract the main focus is on the cargo, charter parties are primarily concerned with the vessel as such. In spite of the aforementioned theoretical distinction, the differences between charter parties and contracts for the carriage of goods by sea are practically in a state of flux since both types of contracts may in some cases serve the same commercial purpose.

There exist, in principle, three main types of charter parties: voyage charter parties, time charter parties and bareboat charter parties. The distinction between these different types of charter parties is on the one hand drawn upon the extent to which the control over the vessel is transferred from owner to charterer, and on the other hand upon the fact of whether the vessel is let with or without a crew.

In a voyage charter party, the owner lets its vessel to the charterer—fully equipped and manned—for a predefined voyage from port of loading to port of discharge in consideration of freight to be paid by the charterer.

By contrast, under a time charter party the owner lets its vessel—fully equipped and manned—to the charterer for a specific amount of time. In this charter period the master of the vessel is under the charterer’s orders and directions with regard to the employment of the vessel.

In a bareboat charter party the owner lets its vessel without crew or equipment to the charterer for a specified period of time so that a bareboat charter party is, in essence, the lease of a particular vessel. Thus the distinguishing feature of a bareboat charter party, in comparison to voyage and time charter parties, is the fact that the owner does not render any (marine) services to the charterer. The same commercial purpose is achieved by a so-called demise charter party, whereupon the owner still employs the vessel’s crew but thereafter transfers the rights and obligations under the contracts of employment to the charterer so that master and crew are working for the charterer’s account and are fully under the latter’s orders and directions.

2. Common features of all types of charter parties

First, it is important to note that there are no mandatory rules of uniform law or national law restricting the freedom of contract of the parties to charter party contracts which is, for instance, particularly emphasized by the French Art 1 of Loi no 66-420 of 18 June 1966 and the Swedish Sjölag 1994:1009 Art 14 § 4. Since most other contracts of carriage and, in particular, contracts for the carriage of goods by sea are subject to mandatory uniform law, this is quite remarkable and thus the parties of charter parties are, in principle, only subject to the conditions of supply and demand (see recital 13 of Regulation 1419/2006). In practice, most charter parties are negotiated on the basis of standard forms that are adapted and published by associations of stakeholders such as the Baltic and International Maritime Council (BIMCO). These standard forms are typically designed for specific market needs such as the shipment of bulk commodities on voyage charter party terms (eg GRAINCON) or time chartering of offshore supply vessels (SUPPLYTIME 2005). Prominent forms are, in particular, Gencon, Asbatankvoy, NYPE 93, Baltime, Boxtime and Barecon. Although there exists a multitude of standard forms, the number is quite low compared to the huge amount of charter parties being concluded on a day-to-day basis in the different trades. Thus, the principles contained in the standard forms have to be considered as trade usage and commercial custom.

All types of charter parties share some common terms and provisions which can be divided into four main categories: description of the vessel, terms as to the element of time or the timing of contractual obligations, terms as to operating costs and maintenance of the vessel and terms as to the avoidance of risks for the vessel.

Since every charter party is at its centre a contract concerning a particular vessel or, at least, a particular type of vessel, every charter party has to contain a description of this vessel or type of vessel. This description serves not only the purpose of individualizing the vessel in terms of its name, registered owner and flag, but also the purpose of describing the characteristics and physical condition of the vessel in which its charterer is particularly interested, such as its loading capacity, cargo handling gear, year of construction, class, speed, consumption, etc. As the charterer is mainly uninterested in a particular ship but instead in a ship with particular characteristics, it is quite common that the charter party provides the owner with the possibility to substitute the vessel with another vessel of the same type that shares the same characteristics as the vessel named in the charter party (see for France Art 5(1), 18(1)Loi no 66-1078 of 31 December 1966 and for Sweden Sjölag 1994:1009 Art 14 § 3(1); see also S.A. Maritime et Commerciale of Geneva v Anglo-Iranian Oil Co [1954] 1 Lloyd’s Rep 1 CA). Among the contractual terms with regard to the characteristics of the vessel, the owner’s obligation to provide a seaworthy ship is of special importance. Seaworthiness is to be understood as the ship’s ability to endure the perils of the sea while loaded with the contractual cargo or the cargo for the carriage of which it is designed. Thus the term of seaworthiness is a twofold one and does not only refer to the vessel’s physical state but also to its state in respect of being fit to receive and carry cargo (cargoworthiness; see in general Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 2 QB 26 per Lord Diplock (seaworthiness); § 559 para 1 German Commercial Code (See- und Ladungstüchtigkeit); for France see Art 6(1), 19(1), 25(1)Loi no 66-1078 of 31 December 1966 (bon état de navigabilité); for Italy Art 379 codice della navigazione (stato di navigabilità); for Sweden Sjölag 1994:1009 Art 14 § 7 (sjövärdigt); for Spain Art 612.4, 676 (estado de navegabilidad); see also Gencon Part II clause 2, Baltime Part II clause 3, Barecon Part II clause 3(a)). Besides the general and broad undertaking to provide a seaworthy vessel, it is not uncommon that some charter parties refer to the vessel’s class and classification status and thus contain an undertaking to maintain the vessel’s class (see NYPE 93 clause 6; Barecon Part II clause 3(b)).

All charter parties invariably contain (explicit or implied) contractual terms as to the element of time or the timing of contractual obligations under the charter party. Few of these terms refer to the physical characteristics of the chartered vessel like statements as to the vessel’s speed and, as a general rule, these contractual terms refer to the parties’ or their servants’ behaviour. Most of them stipulate that the parties have to execute certain obligations under the charter party by or within a specified time. As in shipping, time is usually of the essence, these contractual terms serve the purpose of providing the parties of the charter party with legal certainty as to its timely execution. In particular, charter parties regularly require the owner to perform the respective voyage with utmost or, at least, reasonable dispatch (see Baltime Part II clause 9, NYPE 93 clause 8(a), Asbatankvoy Part II clause 1, see also Pantland Hick v Raymond & Reid [1893] AC 22 (HL)) and prohibit unjustified deviations from the vessel’s route (see NYPE 93 clauses 17 and 22, Baltime Part II clause 20(H), Asbatankvoy Part II clause 20, Gencon Part II clause 3, see also Reardon Smith Line v Black Sea and Baltic General Insurance [1939] AC 562 (HL)). The underlying rationale of the aforementioned obligations is to avoid unnecessary delays and to accelerate the execution of the contract.

Since every voyage requires considerable operating costs (eg fuel oil, port and pilot charges, tug-assistance, canal and dock dues, taxes, agencies, commissions, stevedoring, crew wages and provisions) as well as maintenance costs (repairs, classification fees, etc), every charter party stipulates whether these costs are to be borne by owner or charterer.

As every vessel sailing the seas is also exposed to various risks and marine perils, many charter parties contain provisions with the aim of eliminating or minimizing these risks and provisions stipulating which party has to bear them. The aforementioned risks are especially prevalent when transporting dangerous goods (see Baltime Part II clause 2, NYPE 93 clause 4, Barecon Part II clause 6; Effort Shipping Co Ltd v Linden Management [1998] AC 605 (HL)), there are risks of war (Gencon Part II clause 17, NYPE 93 clause 31(e), 32, Baltime Part II clause 20, Barecon Part II clause 26) and when the particular area in which the vessel is sailing is unsafe (Gencon Part II clause 18, NYPE 93 clause 5, Baltime Part II clause 2, Barecon Part II clause 6; see also Brostrom & Son v Dreyfus & Co (1932) 44 Ll L Rep 136 KBD).

Finally, it can be observed that in practice most owners considerably limit their contractual liabilities under charter parties (maritime transport (global limitation of liability)). Typically, owners limit or exclude their liability for damages caused by cargo handling (see NYPE 93 clause 8(a), Gencon Part II clause 5(a)) and, moreover, limit their general liability by either referring to the (limited) liabilities under Hague/Visby Rules (maritime transport (contracts of carriage of goods)) by means of a so-called ‘clause paramount’ (see NYPE 93 clause 31(a)), or by introducing other, general exclusion clauses (see Baltime Part II clause 12, Gencon Part II clause 2). Similarly, in bareboat charter parties the charterer’s rights as to the vessel’s condition are waived if the charterer accepts delivery and takes over the vessel (see Barecon Part II clause 3(c)).

3. Voyage charter parties

As mentioned above, a voyage charter (Reisecharter, affrètement au voyage, contratto di noleggio, contrato de fletamento por viaje, reisbevrachting, resebefraktning) is the hiring of a vessel or part thereof and its crew for a particular voyage between a port of loading and a port of discharge. The charterer undertakes to pay the owner freight (Fracht, fret, nolo, flete, vracht, frakt), which is either stipulated as a lump sum or calculated upon the quantity (tonnes) of cargo loaded on board of the chartered vessel, and to pay certain other costs, in particular the costs of cargo handling (loading, discharge, stowing, etc). Moreover, in most boilerplate voyage charter parties, not only the costs but also the risks of cargo handling are to be borne by the charterer (eg Gencon Part II clause 5(b)) while otherwise the owner would have to bear these risks (see Petersen v Freebody [1895] 2 QB 294; see also §§ 561 and 593 German Commercial Code). The owner, on the other hand, wholly remains in control and possession of the vessel and, accordingly, bears the regular operating and maintenance costs in respect of the vessel.

In order to fulfil its obligations as to loading and discharge, the charterer will have to rely to some extent on the owner and his servants on board the vessel. At any rate, the charterer will have to be informed by the owner as to the time of arrival of the vessel at the port of loading or discharge. Therefore, voyage charter parties require the owner to tender a notice of readiness to the charterer (see Stanton v Austin (1871–72) LR 7 CPD 65; § 567(1) German Commercial Code). Conversely, the owner is substantially interested that the cargo operations are executed as quickly as possible once the vessel has berthed in the port of loading or discharge, so that the vessel can trade most effectively. As a consequence, voyage charter parties generally stipulate that after notice of readiness has been tendered the charterer is required to load or discharge the vessel within a specified period of time; this period is referred to as laytime (see William Alexander & Sons v Aktieselskabet Dampskibet Hansa [1920] AC 28 (HL); Gencon Part II clause 6; see also §§ 567–570 German Commercial Code (Liegezeit); for France Art 9( 2) Loi no 66-1078 of 31 December 1966 (jours de planche)). In the case that the charterer exceeds the prescribed laytime, voyage charter parties generally require the charterer to pay special charges to the owner for the excessive use of the vessel, so-called demurrage (see Trading Society Kwik Hoo Tong v Royal Commission on Sugar Supply (1924) 19 Ll L Rep 343 KBD; §§ 569 and 572 German Commercial Code; for France (surestaries) Art 11 Loi no 66-1078 of 31 December 1966).

4. Time charter parties

Under a time charter party (Zeitchartervertrag (formerly also Mietcharter), affrètement au temps, contratto di noleggio a tempo, contrato de fletamento por tiempo, tijdbevrachting, tidsbefraktning), the owner lets its vessel to the charterer so that the latter can use the vessel for the transport of goods. In this respect there is no difference between a time and a voyage charter party. However, a time charter party does not relate to a specific and pre-defined voyage but instead refers to a certain amount of time for which the vessel is hired. Within this charter period the owner still manages the vessel and, in principle, remains in possession and control of the vessel, particularly with respect to maintenance and navigation (eg NYPE 93 clause 26). Notwithstanding, the vessel and its master will be under the orders and directions of the charterer in respect of employment and agency (so-called employment clause, see NYPE 93 clause 8, Baltime Part II clause 9). That is to say that, under a time charter party, it is the charterer who decides on the vessel’s itinerary and what type of cargo will be taken over.

Commensurate with the foregoing, the costs generated by the vessel or by its trading activities are divided among owner and charterer: all consumables (fuel, lubricants, etc) and costs of loading, discharge and cargo handling are, in addition to the undertaking to pay charter hire, generally the charterer’s responsibility (NYPE 93 clause 7, Baltime Part II clause 4); the owner bears all the remaining costs in respect of the vessel, in particular insurances, P&I cover, crew wages, maintenance and all other costs that are not exclusively caused by the charterer’s trading activities with the vessel (see NYPE 93 clause 6, Baltime Part II clause 3).

Time charter parties typically contain specific rules (eg NYPE 93 clause 17, Baltime Part II clause 11) as to the parties’ rights and obligations in the event that any measures become necessary to maintain the efficiency or class of the vessel which prevent it from operating or if the vessel cannot be operated due to other reasons such as damage, malfunction or lack of maintenance of the vessel, deficiency of the master, officers or crew, detention, arrest, etc. Most importantly, the charterer’s obligation to pay the owner is suspended in such a case—the vessel is thus said to be ‘off-hire’. However, the off-hire period usually leads to an extension of the time charter party and does not bring the charter party to an immediate end.

It is important to note that in those civil law countries that lack specific statutory provisions for time charter parties, its legal nature has been traditionally disputed. This dispute is not merely academic but rather of considerable importance. Nonetheless, it seems preferable to consider a time charter party as a hybrid contract with elements of a contract of carriage and of a lease.

5. Bareboat charter parties

A bareboat charter party (similar demise charter, Bareboatchartervertrag, affrètement coque-nue, contratto di locazione, contrato de arrendamiento de buque, rompbevrachting, bareboatbefraktning) is the most straightforward type of a charter party since it is, in principle, nothing but a lease of a vessel (cf, from the perspective of comparative law, the Principles of European Law: Lease of Goods (PEL LG)). That is to say that the owner fully transfers possession and commercial control over the vessel to the charterer and only maintains its ownership (see Barecon Part II clause 10(a)(i): ‘full possession … at the absolute disposal for all purposes [and] complete control in every respect’). Consequently, with a bareboat charter party the charterer becomes responsible for the vessel’s manning (see Barecon Part II clause 10(b), 13), trading, navigation, administration and technical maintenance in accordance with the rules and regulations of the vessel’s classification society (see Barecon Part II clause 10(a)(i)). Thus the charterer has to bear all operating expenses for, inter alia, fuel, lubricants and other consumables, crewing, port expenses, hull and machinery insurance and P&I cover.

For the above-mentioned reasons, the physical condition of the vessel at delivery and redelivery is of vital importance for the charterer and owner, respectively. Therefore, bareboat charter parties usually require, first, that the vessel’s condition is subject to an expert survey upon delivery and redelivery (so-called ‘on-hire’ and ‘off-hire’ surveys, see Barecon Part II clause 7) and, secondly, that the charterer redelivers the vessel in the same or as good as condition as it was on delivery, with the permissible exception being normal wear and tear not affecting the vessel’s class (see Barecon Part II clause 15).

6. Hybrid forms

Besides voyage, time and bareboat charters, there also exist some hybrid forms of charter parties such as the so-called ‘contract of affreightment’ (COA, which is also known as a quantity contract or tonnage agreement), the ‘cross-’ or ‘slot charter party’ and the ‘trip charter party’. But these types of agreements all represent hybrid forms or variations of the three main types of charter parties.

7. Uniform law

There exists no uniform law regulating the law of charter parties. Since charter parties are typically negotiated and concluded in highly competitive markets with parties of equal bargaining power, there has never been a real need for regulatory intervention, particularly not at the international level. Any regulatory intervention or restriction of the freedom of contract would most certainly cause nothing but legal uncertainty in the market.

Literature

Jürgen Basedow, Der Transportvertrag (1987) 110; Hans-Jürgen Puttfarken, Seehandelsrecht (1997) 131; Rolf Herber, Seehandelsrecht: Systematische Darstellung (1999) 237 and 347; Christopher Hill, Maritime Law (6th edn, 2003) 168; José Luis Gabaldón García and José María Ruiz Soroa, Manual de Derecho de la Navegación Marítima (3rd edn, 2006) 449; Stephen Girvin, Carriage of Goods by Sea (2007) 415; Stewart Boyd and others, Scrutton on Charterparties and Bills of Lading (21st edn, 2008); John F Wilson, Carriage of Goods by Sea (7th edn, 2010) 9; Pierre Bonassies and Christian Scapel, Droit Maritime (2nd edn, 2010) 499; Thor Falkanger, Hans Jacob Bull and Lasse Brautaset, Scandinavian Maritime Law: The Norwegian Perspective (3rd edn, 2011) 366; Sergio M Carbone, Pierangelo Celle and Marco Lopez de Gonzalo, Il Diritto Marittimo (4th edn, 2011).

Retrieved from Charter Party – Max-EuP 2012 on 24 June 2022.

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