What is Charter Party - Marine Transport Terms (for the learner)

Prologue : There have been some Questions on contract of carriage which quite often confuses the ordinary.  This is an attempt to educate those of us who are not conversant with the Laws, the ways goods are carried and et al.

Marine is transport of goods and Marine insurance is insuring those goods in transit from one place to another.  The transportation would be through various modes such as : Land, air and Sea.

A contract for the carriage of goods by sea is called ‘contract of affreightment’.

Ordinarily a carrier by sea is a common carrier – liable absolutely, for the loss of the goods subject ofcourse to many exceptions that the relevant Statutes would provide for, further limited by the Conventions in vogue and the fine prints of terms to which such contract is subjected to.  

The carriage most often is in one of the two forms – Charter Party or a Bill of Lading.  For the common man, Charterparty is hiring of the entire ship.  In every such contract there are certain undertakings on the part of the Carrier which are implied. They generally are : Sea worthiness of the ship, reasonable dispatch i.e., there would be no unreasonable delay in commencing voyage, no deviation (following agreed or customary route, obligation to take reasonable care of cargo entrusted, and not to load goods liable to cause danger or delay to ship.

Booking of a ship to the exclusive use of One shipper for a particular voyage or voyages or for a certain time is known as “Charter Party”

There are many variants – there can be demise or bareboat where the charterer has to engage the crew also i.e., the maintenance and running also is in the hands of the charterer.

Just like we have Time and Voyage policies in Marine Insurance – going by the term, Charter Parties are divided into : Voyage and Time Charters.  These being agreement between two or more parties, are better drafted properly.  There are standard forms of charter parties which are recognized officially by International Organisations such as BIMCO, Chamber of Shipping, though many variants would well be in use.  There are agreed and adopted formats of charter parties.

To go by a legal definition, here is something as from lectlaw.com : 

A written contract between the owner of a vessel and the one (the charterer) desiring to empty the vessel setting forth the terms of the arrangement, i.e., freight rate and ports involved in the contemplated trip.

A contract of affreightment in writing by which the owner of a ship or other vessel lets the whole, or a part of her, to a merchant or other person for the conveyance of goods on a particular voyage in consideration of the payment of freight. This term is derived from the fact that the contract which bears this name was formerly written on a card and afterwards the card was cut into two parts from top to bottom, and one part was delivered to each of the parties, which was produced when required, and by this means counterfeits were prevented.

This instrument ought to contain, 1. the name and tonnage of the vessel; 2. the name of the captain; 3. the names of the letter to freight and the freighter; 4. the place and time agreed upon for the loading and discharge; 5. the price of the freight; 6. the demurrage or indemnity in case of delay; 7. such other conditions as the parties may agree upon.

When a ship is chartered this instrument serves to authenticate many of the facts on which the proof of her neutrality must rest and should therefore be always found on board chartered ships. When the goods of several merchants unconnected with each other, are laden on board without may particular contract of affreightment with any individual for the entire ship; the vessel is called a general ship, because it is open to all merchauts, but where one or more merchants contract for the ship exclusively it is said to be a chartered ship.

Though this Charter Party article is intended to be associated with Ship, for easier understanding, we can equate with the analogy of  hiring of a truck for a single transit  as against contracting it out for a period,  say 6 months.

Voyage Charter  :  Under a Voyage Charter, vessel is taken on hire / let out for a specific voyage.  The ship owner gets freight which would take care of costs, fuel, crew maintenance as also profit.  There is something known as ‘laytime’ provided for loading and discharging operations.  The entire operation is expected to commence and conclude within a specified time.  When these are not so, the ship is put to use for a longer time or in otherwords, the ship owner is not in a position to subject the vessel to useful employment and for the delay so caused, he needs to be compensated.  This is generally known as demurrage charges and the rates would also be prescribed in the charter.

The preliminary or the principal payment to the Ship owner is the freight which can be fixed price for a specific voyage carrying a particular cargo.  It can be agreed on lumpsum or on quantitative basis.   The freight generally is earned at the end of the voyage upon delivery.  However depending on demand and supply, in most cases, this is paid in advance or soon after the cargo is loaded on.

When the Ship owner is not paid, they have a lien on cargo – that is legal right to detain cargo pending payment.  In case where there is sub-contracting, a right to intercept subfreights due to the charterer from the sub-charterers (a lien on freight)

Time Charter :  This will not be a definitive geographical voyage but a period of time.  Here the payment cannot be freight but the hire charges calculated for a period of time.

The hire would be from the time when vessel is ready and delivered at a specified place and would terminate when redelivered or made available for re-possession. Depending upon the arrangement, the fuel costs, operational costs, maintenance etc., will be borne by the Charterer or the Ship owner.

Here there may not be concept of demurrage and the charterer would be more affected by any slow handling or delays in Ports or other delays affecting the movement of vessel from one place to another.

If the Charterer fails to pay the hire on time or in full, there will be a breach of charter.  Only exceptional breaches will justify the termination of the CP agreement.  Notice as specified will have to be given, otherwise the charter will continue to be in force.

In both the forms of Charter, the ownership is not transferred and a Charterer does not obtain any proprietary interest in the vessel so chartered.

The contracting terms of the CP will determine how the vessel can be used during the period of charter.  Generally the charterer will have great freedom on the use of vessel in a time or period charter as in a voyage charter, even the cargo could get predefined.

Epilogue :  This is meant to be a simple explanation for the uninformed.  Where you find that explanations are incorrect, please do correct

Regards – S. Sampathkumar.