Lecture VI. Freight and Hire

3. Freight

1. Deadfreight

2. Payment of Freight

4. Hire

1. Payment of Hire

2. Deductions from Hire

3. The Off-Hire Clause

1. Freight. Freight refers to the amount of money paid to the shipowner or shipping line for the carriage of cargo and is thus normally applicable to time chartering (while hire – which is covered later in this lecture - refers to money paid to the shipowner or charterer for the hire of a ship over a given period and is thus applicable to time chartering). Freight can be fixed in several different ways. For example, it can be based on the quantity of cargo carried (as in $x per metric ton or $x per cargo ton), or it can be based on a certain amount that is independent of the cargo quantity (in which case it is called “lump sum freight”). A variation on lump sum freight is to base the freight on the size of the vessel (e.g. $X per deadweight ton), which is often used for quantity contracts where the voyages are performed by different ships that are not necessarily known when the contract is fixed.

When is the Freight earned and payable?

As a general principle and unless otherwise specified in the contract of carriage, freight is earned when the owners have fulfilled their obligation to carry the cargo and are ready to deliver it to the receiver. This means that if the owners cannot deliver the cargo, they are not entitled to freight. Thus, the freight risk (i.e. the risk that the owners fail to fulfill their obligation to carry the cargo and thereby lose their right to collect freight) lies with the owner. So, should the vessel sink and the cargo be totally lost, the owner would not be entitled to freight even if the vessel had almost reached her destination (although the owner might, under some legal systems, be entitled to “distance freight” proportionate to the distance actually carried as compared to the distance originally agreed). Similarly, should only part of the cargo be delivered at the port of destination, the owner would be entitled only to proportionate freight for the cargo actually delivered; and should the cargo reach the port or place of destination in a damaged condition, the owner would be entitled to freight only if the cargo is in a “merchantable condition”. In cases where a lump sum freight has been agreed upon, the owner would be entitled to full freight if some part of the cargo reaches the port or place of destination (and he would not be entitled to any freight if all the cargo is lost).

However, all of the foregoing rules about when freight is earned and payable are often modified in charter agreements. Quite frequently, the owner will seek to protect himself against losses such as those described above by negotiating, when fixing the business, for freight to be “deemed earned upon loading” (or words to that effect), regardless of when the freight is actually due to be handed over in accordance with the terms of the contract. Thus, even if freight is to be paid “”seven days after signing and releasing bills of lading,” or “upon arrival discharge port,” some carriers will put the issue of whether freight has actually been earned beyond any doubt by adding the words “freight deemed earned upon loading, discountless and non-returnable, cargo and / or vessel lost or not lost.” This latter phrase means that not only are the owners entitled to freight at the loading port, but that such freight is not repayable (or refundable) even if the all of cargo, part of the cargo or the vessel fail to reach their destination. In cases where the charterparty terms do not protect the owner against freight risk, the owner can take out special freight risk insurance which covers situations in which the cargo is lost during transportation.

Some charterparties, such as the Gencon (Box 13), allow the parties to select whether freight is payable on the delivered quantity of cargo or the intake quantity. However, it is important to remember that there are two distinct reasons why delivered and intake quantities may differ; the first being factors such as changes in moisture, temperature, etc., which can cause a cargo to lose or gain weight (or volume) and the second being loss or destruction during the voyage, which can cause a cargo to be washed overboard, stolen or similarly compromised. It is up to the parties to make different stipulations with regard to each of these two matters and some charters provide that for the purpose of calculating freight, the goods shall be measured on shipment but that freight shall not be payable on goods which are lost during the voyage. However, the freight calculation provisions of the Gencon charter do not explicitly state whether they are referring to the place of measurement of the cargo or the cargoes on which freight is payable, or both. Thus, while it is clear that, in the absence of agreement to the contrary, freight is not payable on goods which are lost during the voyage and not delivered, the common law rule with regard to goods which alter in weight or volume during the voyage is unclear.

1.1.Deadfreight. When the charterers fail to deliver the agreed quantity of cargo to the vessel, the owners will normally be entitled to compensation for their loss of freight. This is called “deadfreight” and it is calculated by deducting what is saved in costs from the freight that should be paid for that part of the cargo which has not been delivered. In order to secure payment for the deadfreight claim, the owner (or the master) must obtain a declaration from the charterer that no further cargo will be delivered to the vessel. It is not sufficient to obtain this declaration from the shipper only, since the charterer may later say that he could have arranged additional cargo he had been notified before the vessel sailed. It is also necessary to determine – before discharging of the cargo begins - the vessel’s additional capacity, both in cubic or in deadweight (this is often by an independent surveyor). Finally, in order to safeguard the possibility of exercising a lien over the cargo against the receiver, a remark noting the short shipment should be inserted into the bills of lading, thereby establishing the owner’s claim for deadfreight.

1.2. Payment of Freight. It is worth noting that the payment of freight may not necessarily take place at the same stage as when the freight is considered earned. It is thus possible and not unusual that the voyage charterparty contains a clause stating “freight earned upon shipment …..” in combination with “freight payable before commencement of discharging” (or “before breaking bulk”). Sometimes the charterers and the shippers wish to have the bills of lading marked “freight prepaid,” in which case the owner must see to it that the freight is payable and that they get the freight before the bills of lading are issued and delivered to the shippers. The procedure for payment should also be specified in the charterparty, with currency, mode and place of payment, name of bank, number of bank account, etc. usually stated in the payment clause. The costs of transferring freight should also be allocated in the charterparty, as they can sometimes be quite large.

If a broker has been involved and is entitled to a commission, this is usually calculated as a certain percentage of the freight. Brokers are not entitled to commission on demurrage and damage for detention unless this is expressly stated in the charterparty or otherwise agreed.

The owners usually have a legal and / or a contractual lien over the cargo as security for the payment of freight. With regard to such claims and freights that are due for payment but not paid before the bills of lading are issued, the owners and the master must ensure that a remark concerning a claim for non-paid freight is made in the bills of lading. Without such a remark, the owners have no possibility of exercising a lien over the cargo as security for claims and payments accruing or due for payment before issuing the bills of lading.

The Worldwide Tanker Nominal Freight Scale (Worldscale)

Instead of agreeing to a rate of freight per ton or a lump sum freight as for dry cargoes, freight in the tanker trade is expressed by means of the Worldscale rate schedule, which basically provides a set of rates for worldwide fixtures published by an expert committee of brokers. The idea is to create a schedule of rates which yield roughly the same rate of return to owners for each voyage their ship may perform. To do so, the system sets out comparable rates for all port combinations (there being a finite number of such combinations in the tanker trade) at an arbitrarily chosen market level. For each individual fixture, the agreed freight level is expressed as a figure of so many percentage points of Worldscale (W). 100 percent of the rate shown in the published schedule - W 100 – is the so-called flat rate.; W 200 is twice the flat rate; W 75 is three quarters the flat rate and so on. The Worldscale rate schedule is amended annually and circulars are published more frequently as interim measures to correct new anomalies arising in particular trades.

This system saves an enormous amount of work in establishing fixtures with wide port or range options, making it unnecessary to calculate an agreed rate for every possible combination of ports. In Worldscale, this calculation is done for a chosen standard vessel using the same performance factors for each rate calculation. The actual income for any individual vessel fixed on a Worldscale rate will depend on its size, performance and type and the differences in size and type will be reflected in the percentage of Worldscale at which the fixture is made.

Unless otherwise agreed, a reference to Worldscale will normally refer to the rates that are in force on the date of the contract. Shellvoy and some other charters expressly apply Worldscale as in force at the date loading commences. The basic rate of freight in Worldscale has a number of additions, called differentials (e.g. extra port calls). Some differentials vary with the percentage, while others, such as that for passing through the Suez, are fixed to their costs as assessed from time to time or by reference to vessel size. The scale system also contains demurrage rates and other terms. The latter are often expressly incorporated into charters, with particular relevance to the incidence of dues and charges and regarding the treatment of port and terminal combinations for freight and laytime purposes.

2. Hire. Hire is the financial payment that the owner receives for leasing a manned and equipped vessel to a time charterer. The basic rule is that hire shall be paid from the moment that the ship is delivered to the charterer until she is again redelivered to the owner at the termination of the charter period. Under some circumstances – mainly defined in the off-hire (or suspension of hire) clauses – the time charterer can be relieved from his obligation to pay hire to the owner.

Hire can be expressed in various way, for instance $X per 30 days; $X per day; $X per 30 days and deadweight ton, etc. The choice depends mainly on the type of vessel and the trade. Hire “per month” should be generally avoided because the number of days in a given month varies from 28 to 31 days, which means that the hire per day will be different from month to month, which may cause difficulties when offhire is calculated. It is therefore preferable to express hire in a way that allows the daily hire to be the same throughout the charter period and it is common that the hire is calculated and payable “per month of 30 days” (although payment periods of 15 days are also quite common, especially in short time charters).

2.1. Payment of Hire. The Gentime charterparty deals with the payment of hire as follows (Clause 8b): Payment of hire shall be made in advance in full without discount every 15 days to the Owner’s bank account designated in Box 25 or to such other account as the Owners may from time to time designate in writing in funds available to the Owners on the due date.

The fact that in hire is paid in advance in time chartering is quite different from voyage chartering, which operates under the general principle that the owner obtains his payment – and freight – when the sea voyage has terminated and the owner is ready to deliver the cargo at the port of destination. The main reason that owners in time chartering are paid in advance is that they do not have the same possibility as in voyage chartering of securing their payment by exercising a lien over the cargo.

If the charterers are in default with payment by paying either too late or too little, the owners are entitled, under English law and under most time charterparty forms, to cancel the charter agreement. This is dealt with in Clause 6 of the Baltime form as follows:

In default of payment the Owners to have the right of withdrawing the Vessel from the service of the Charterers without noting any protest and without interference by any court or any other formality whatsoever and without prejudice to any claim the Owners may otherwise have on the Charterers under the Charter.).

In theory, this clause (as well as similar clauses in other charterparty forms) gives the owners the right to cancel the whole agreement even for a small default in payment (the rationale being that the right to cancel is one of the few options the owner has to protect himself against insolvent charterers and charterers who are not willing to pay). In practice, however, these clauses do not always give the owner the protection intended, especially when cargo has been taken on board. This is due to the fact that as soon as a bill of lading has been issued, the owner will have a duty to the bill of lading holder to perform the transport. Unless the owner can obtain a lien over the freight payable to the time charterer under the sub-charter, he may have to deliver the cargo at the bill of lading destination without getting anything from the time charterer.

Based on precedents arising from previous disputes about the owners’ right to cancel on the grounds of default in payment of hire (especially in cases involving small defaults), the owners may lose the right to cancel if they have previously accepted late payment without protest and if the charterers have previously made correct payments. These precedents show that it is important for owners to always protest when the hire payment is late or when the charterers have made unauthorized deductions from the hire, because failure to protest may result in such action becoming an accepted procedure for future payments.

Given that the hire payment is considered as having come into effect only when the money reaches the owner’s bank, it is not unusual to incorporate a “non-technicality clause” or “anti-technicality clause” into the time charterparty in order to prevent the owner from cancelling due to technical delays in payment. Such a clause should contain an undertaking by the owners to notify the charterers if and when the payment is late (or if the owners, for other reasons, do not accept the amount). It should also allow the charterers some additional time before the owners are entitled to cancel the charter agreement. The NYPE 93 charterparty form deals with this matter as follows:

(b) Grace Period

Where there is failure to make punctual and regular payment of hire to oversight, negligence, errors or omissions on the part of the Charterers or their bankers, the Carterers shall be given by the Owners ……. Clear banking days (as recognized at the agreed place of payment) written notice to rectify the failure and when so rectified within those …….. days following the Owners’ notice, the payment shall stand as regular and punctual.

Failure by the Charterers to pay the hire within …………. Days of their receiving the Owners’ notice as provided herein, shall entitle the Owners to withdraw as set forth in Sub-clause 11(a) above.

This clause places important responsibilities on both charterers and owners. Charterers must see to it that hire payments are made well in advance before the hire is due, as there is always a risk that the owners will take the opportunity to cancel the charter agreement if they can get better terms from another time charterer. At the same time, the owner must act very cautiously before cancelling on the ground of default of payment, as an unjustified cancellation may entitle the charterers to damages from the owners.

2.2. Deductions from Hire. When advance payment of hire is to be made, the charterers often wish to make deductions for off-hire during previous periods, for cash paid by agents to the master, for disbursement to the owners’ account, for planned off-hire (e.g. for drydocking) and for other monetary claims that the charterers may have against the owners. As default in payment may give the owners a right to cancel the charter, it is important for the charterers to either have recourse to a charterparty clause giving them the right to make such deductions, or to obtain the owners’ approval before such deductions are made. This is important because it is not always clear to what extent the charterers are allowed to make deductions without permission from owners and without clauses in the charterparty to such effect.

Payment of Last Installment of Hire:

As the last period of hire in most cases is not as long as the full hire period and as the charterers will usually have a claim against the owners in connection with the redelivery for bunkers remaining on board, the time charterparty forms frequently contains a “last hire payment clause, such as Clause 7 of the Linertime charterparty: Should the Vessel be on her voyage towards port of redelivery at time a payment of hire is due, said payment to be made for such length of time as the Owners or their Agents and the Charterers and their Agents may agree upon as estimated time necessary to complete the voyage, taking into account bunkers to be taken over by the Vessel and estimated disbursements for the Owners’ account before redelivery and when the Vessel is redelivered any difference to be refunded by the Owners or paid by the Charterers, as the case may require.

2.3. The Off-Hire Clause. The principal rule is that the charterers must pay hire from the moment the vessel is delivered until the moment she is redelivered to the owners at the end of the agreed charter period. The financial risk for delay of the vessel due to bad weather, strikes of pilots or stevedores, etc., during the charter period normally rests with the charterers. However, under certain conditions agreed to in the charterparty (and usually attributable to the crew and other conditions connected with the vessel), the charterers may be entitled to compensation in accordance with the off-hire clause.

Review questions:

1. What does the term "freight" mean?

2. What does the term "deadfreight" mean?

3. When is the Freight earned and payable?

4. What does the term "hire" mean?

5. Explain the meaning of a the "off-hire clause"

PRACTICAL SESSION PROGRAMME

Verification tests

Test № 1

1. Is it a code-name of time charter’s pro-forma:

1.1. “Baltime 39”.

1.2. “Barecon 89”.

1.3. “NYPE 46”.

1.4. “BP time”

2. Who will agree to let a vessel under time charterparty:

1. Owner.

2. Charterer.

3. Broker.

4. The said Vessel.

3. Who will agree to hire a vessel under time charterparty:

1.1. Owner.

1.2. Charterer.

1.3. Broker.

1.4. The said Vessel.

4. Charter period commences:

1. From the delivery of a vessel

2. From the time of signing a contract

3. During the negotiations about chartering a vessel

4. After a gentleman's agreement

5. Canceling date is:

1. A day of contract signing

2. A day from which a charter period commences

3. A date of the redelivery of a vessel

4. A last date agreed in the charter when a vessel must be delivered to a charterer

6. The last voyage is:

1. A final voyage of a captain before he retired

2. The final voyage before a charterer returns the vessel to the owner

3. A final voyage of a vessel before its recycling

4. The voyage in which a vessel was drowned

7. Who is obliged to deliver a vessel under a time charterparty:

1. A charterer

2. An owner

3. A ship broker

4. A master

8. Who is the ship's highest responsible officer:

1. Deck cadet

2. Boatswain

3. Chief officer

4. Master

9. Bill of lading is a document issued by:

1. An owner of a vessel

2. A carrier of goods, or its agent

3. A ship broker

4. A stevedores

10. The delivery of a ship is concerned to be complete:

1. when the ship and her crew are placed at the disposal of the charterer

2. when charterer shows his money to the owner of a ship

3. when the owner equipped a vessel with the fuel

4. when the charterparty is signed

Test № 2

1.Payment of hire to be made:

1.1. In cash.

1.2. Semi-monthly.

1.3. In New York.

1.4. For the balance day by day.

2. The Charterers shall pay for:

2.1. Port Charges.

2.2. Pilotages.

2.3. Agencies.

2.4. Tug Boats.

3. The Owners shall pay for:

3.1. Wages of the Crew.

3.2. Consular fees of the Crew.

3.3. Shipping fees of the Crew.

3.4. Discharging fees of the Crew.

4. The Charterers shall pay for:

4.1. Cabin stores.

4.2. Deck stores.

4.3. Engine-room stores.

4.4. Boiler water.

5. Who shall take over and pay for all fuel remaining on board the Vessel:

5.1. Owners.

5.2. Charterers.

5.3. Crew.

5.4. Ship’s Agent.

6. The Charterers shall pay:

6.1. For the use of the Vessel.

6.2. For the hire of the Vessel.

6.3. Per ton on Vessel’s total deadweight carrying capacity.

6.4. Per Calendar Month.

7. The fumigations to be for account of:

7.1. Owners.

7.2. Charterers.

7.3. Crew.

7.4. Broker.

8. Shall the Charteres have a lien:

8.1. Upon all cargoes.

8.2. Upon amounts due under this Charter.

8.3. Upon General Average contributions.

8.4. Upon the Vessel.

9. By whom the overtime work done by the Crew of the Ship to be paid:

9.1. By the Owners.

9.2. By the Charterers.

9.3. By the Shipbroker

9.4. By the no one

10. Shipbroker is a specialist intermediator /negotiator between:

10.1. Shipowner and charterer

10.2. Charterer and sub-charterer

10.3. Captain and shipowner

10.4. Stevedores and captain

Test № 3

1. Types of indemnity:

1.1. Express.

1.2. Imply.

1.3. Charterers.

1.4. Owners.

2. An order of the charterer to deliver goods without production of the bill of Lading is:

2.1. A lawful order.

2.2. Unlawful order.

2.3. An order concerning employment.

2.4. An order concerning navigation.

3. The master is:

3.1. Under the charterers orders.

3.2. Under the owners orders.

3.3. Under brokers orders.

3.4. Not under the orders at all.

4. Substitution clause means the possibility of the shipowner to provide:

4.1. Another vessel than the agreed one.

4.2. Another day of the delivery.

4.3. Another crew.

4.4. Another place of the delivery.

5. Seaworthiness includes:

5.1. Physical readiness.

5.2. Documentary readiness.

5.3. Crew readiness.

5.4. Broker readiness.

6. The shipowner shall have a lien:

6.1. For all monies paid in advance and not earned hire.

6.2. For any overpaid.

6.3. For any excess deposit to be returned at once.

6.4. Upon all sub-freights.

7. A cargo lien clause gives the shipowner the right to:

7.1. Detain the cargo.

7.2. Buy the cargo.

7.3. Put on sail the cargo.

7.4. Destroy the cargo.

8. A clause about the obligation of the owner to keep the vessel in a thoroughly efficient state in hull, machinery and equipment for and during the service is called:

8.1. Cancelling clause.

8.2. Lien clause.

8.3. Paramount clause.

8.4. Maintenance clause.

9. If the vessel is not delivered to a charterer by the date stipulated in the charterparty, the charterer has a right to apply a:

9.1. Cancelling clause.

9.2. Paramount clause.

9.3. Maintenance clause

9.4. Lien clause.

10. Under a time charterparty a sub-let clause gives the rights to sub-let the vessel for a:

10.1. Shipowner

10.2. Broker

10.3. Charterer

10.4. Sub-charterer

INTERACTIVE SEMINAR PROGRAMME

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Shipping Practice: Successfully Negotiating and practical application of Time Charterparties

1. The Owner’s maintaining the vessel obligations

• Case study

[Case 1, Case 2; Case 6, Case 7; Case 10; Case 14]

• Questions & Discussion.

2. The vessel's description: conformity with contractual terms

1. Case study

[Case 7, Case 8; Case 4, Case 9; Case 3, Case 5; Case 15; Case 16; Case 17; Case 18; Case 19; Case 20]

2. Questions & Discussion.

3. The Owner’s delivery obligations

1. Case study

[Case 11; Case 12, Case 13; Case 14]

2. Questions & Discussion.

Case № 1