Lecture III. Owners’ contractual obligations, rights and remedies

1. Provision of substitute vessel

2. Seaworthiness

3. Maintaining the vessel

4. Obligation in relation to loading, discharging and carriage

5. Lien clauses.

6. Indemnity clauses.

1. Provision of substitute vessel. Under a time charterparty a ship owner must provide the agreed vessel as indicated in the charterparty. The ship owner cannot replace the agreed vessel by another vessel unless the name of the vessel is followed by the terms “or substitute”. In that case the other vessel must have the same characteristics and class as the agreed ship.

So, some charterparties can contain a clause called “substitution clause”, which gives a possibility to the ship owner to provide another vessel than the agreed one and it must fully answers to the named before characteristics.

2. Seaworthiness. Standard time charterparties invariably contain provisions that bind the ship owner’s to deliver a vessel in a seaworthy condition.

The term “seaworthy” is used to describe a ship which is considered fit for the conditions which it may encounter while underway. At a minimum, a craft is seaworthy if it won't sink, but seaworthiness can get very complex and it can depend on a number of factors.

The term «seaworthiness» is a very broad one, as it does not only include the physical state of the vessel but also extends to other aspects.

Seaworthiness encompasses the obvious physical condition of a ship and its fittings, along with the number of crew on board and the loading of the cargo. A ship can be in excellent physical condition with working equipment and still be unseaworthy because it is overladen, or because the crew is not big enough or experienced enough. Physical design is also an issue, as some configurations are more seaworthy than others.

One of the standards which is often used to determine if a ship is seaworthy is considering whether or not the owner of the ship would allows she to sail as-is. If the owner would express doubts or a desire to remedy certain issues on board, the ship is not seaworthy. Insurance companies, which do not want to rely on the owner alone, may send out an assessor to establish seaworthiness before providing insurance to the ship's owner or the company which has a contract for use of the ship.

In addition the term is also sometimes applied to members of the crew. People who are not fully trained for their positions are not seaworthy and the same holds true for injured, sick, or severely disabled sailors who are not capable of doing their jobs. For this reason, many seamen are required to receive medical examinations and certificates indicating that they can safely do their jobs. The same requirement is made of pilots, with the goal of ensuring the safety of craft, cargo and passengers.

The charterparty will usually state that the owner will keep the vessel in a seaworthy condition. However, even when no such clause is included, the owner will still have an obligation, usually by law of an “implied warranty,” to keep the vessel in seaworthy condition. Although there is no comprehensive judicial definition of seaworthiness, the term generally means that in order to be “seaworthy,” the vessel must in all respects be in a condition as to withstand the dangers that can reasonably arise as possibilities during the voyage in question. Seaworthiness includes (but is not limited to) crewing, documentation, fitness for the intended cargo, bunkering and storing. Seaworthiness is a relative rather than an absolute term; it is specific to the intended voyage and the intended cargo. The standard required will vary with the voyage in question, at least insofar as seasonal, climatic and other variable factors are concerned. Although the vessel does not necessarily have to be fitted with the latest state-of-the-art equipment and machinery, this does not mean that a lower standard can be applied to an older ship than to a newer one. A good test for establishing seaworthiness is to ask whether a prudent shipowner, knowing everything there is to know about that ship, would have required a defect to be rectified before commencing the voyage.

It is generally not necessary for the ship to be seaworthy at the outset for the entire voyage, but only for the particular stage to be undertaken (e.g. if the vessel is supposed to take bunkers at an intermediate port, it will be seaworthy in this respect if it departs from the original port with sufficient fuel to reach that intermediate port). An important aspect of making a ship seaworthy, in terms of its being fit for receiving cargo, is cleaning. Although this applies to all vessel types, the extent of cleaning involved depends on the trade. For example, a grain cargo cannot be loaded after certain types of cargo without very careful cleaning. A tanker regularly lifting crude oil (dirty cargo) cannot carry a clean cargo without a considerable amount of cleaning.

The Owner must deliver the ship to the charterer in a perfect condition of seaworthiness. To the charterer it is not enough that the ship is seaworthy at her delivery but that she remains seaworthy during the whole chartering period.

This clause must be very specific in case of a long term charter agreement and the necessary details about the seaworthiness of the vessel must eventually be given in a additional clause. In this respect, reference must also be made to other clauses which deal with the liability in case of damage to the vessel and possible

responsibilities and exceptions.

In any case, the seaworthiness of the vessel is one of the “warranties” on which the Owner cannot withdrawn from unless the charterparty states to the contrary.

2. Maintenance clause. Each form of charterparty contains a so-called “maintenance clause” which provides, that the ship owners shall pay the running expenses of the ship and "maintain" her class and keep the vessel in a thoroughly efficient state in hull, machinery and equipment for and during the service”. This provision appears to be con­strued differently under American and English law. Under American law, the maintenance clause is regarded as supplementing the express warranty of seaworthiness at the beginning of the charter and as imposing upon the ship owner an obligation to make the vessel seaworthy at the beginning of each voyage performed during the charter period.

On the other hand, the English Law have construed maintenance clauses as supplementing, but not imposing any voyage by voyage warranty of seaworthiness on the ship owners.

And that is a collision of two law system that have absolutely different vision of the “maintenance clause” and you must take it in to consideration.

Expenses falling on owner. The owner shall pay for all provisions, wages and consular shipping and discharging fees of the captain, officers, engineers, firemen and crew; shall pay for the insurance on the vessel, also for all the cabin, deck engine-room and other necessary stores.

The general scheme of a time charter is that the owner provides a fully equipped ship to the charterer and operates the ship for the charterer's benefit, being compensated by the monthly hire. So the owner pays the ordinary running expenses of the vessel and the charterer such of the expenses as are specially incident to the trade in which he employs her. Thus the owner pays the crew's wages and supplies their food and also pays for the engine-room stores, keeps the vessel repaired and pays for the insurance.

3. Responsibility for loading, stowing and discharging cargo. In the absence of express terms, the operation of loading and stowing cargo are the responsibility of the shipowners. But under almost all time charterparties, these responsibilities are transferred to the time charterers. The Baltime, in Clause 4, provides that the charterers are to arrange and pay for loading, trimming, stowing and unloading the cargo. According to Clause 9, the owners are not responsible «for damage to or claims on cargo caused by bad stowage or otherwise)). And Clause 13 exempts the owners from liability for any loss caused by a personal act or omission or default of the owners or their managers.

While the wording in the Baltime charter is quite clear in transferring all responsibilities with regard to loading, stowing and unloading operations to the charterers, the NYPE contains a somewhat ambiguous provision.

In the case of the NYPE, Clause 8 of that form provides that «charters are to load, stow and trim the cargo at their expense under the supervision of the captain». «This provision is by no means clearly drafted. It is not clear at first sight whether the responsibility for stowage lies upon the charterers or, because of the words «supervision of the captain», upon the owners.

4. Lien clauses. The shipowner is given a possessory lien either by the common law or by express on the cargo earned. The common law gives the owner a lien for freight, general average contributions and expenses incurred by the master or owner in protecting and preserving the cargo (for example, for salvage services).

Such a clause could state:

"The Owners shall have a lien on the cargo for freight, deadfreight, demurrage and average contributions due to them under this Charterparty . . ."

The charterparty may give a contractual lien on cargo owned by the charterer but possibly not on cargo owned by the consignee, unless the consignee is also the charterer. A lien may be enjoyed by a shipowner only if the bill of lading covering the cargo gives him one. In The Fort Kip, 1985, difficulties were experienced on exercising liens on cargo owned by the charterers. The cargo of oil was carried on a voyage charter. Freight was payable immediately after completion of discharge.

The charterparty contained a lien clause. The owner stopped the discharge into a barge and retained some cargo on board as exercise of the lien. After a delay the balance cargo was discharged into another barge. The court held that the owners could not exercise their lien on the cargo while it remained on board the Fort Kip but could exercise their lien on the cargo discharged into the second barge. The charterers' obligation to pay freight arose only on completion of discharge and the charterparty did not provide for freight to be paid in instalments. Once the cargo was fully discharged, the owners could exercise lien on it before it was delivered to the charterers.

This means that the owners must find suitable storage space for the discharged cargo. Liening cargo on board, even if freight is not due after discharge, may be impracticable. However, exercising a lien on discharged and warehoused cargo can also present problems, especially if the consignees fail to claim it. The shipowners may be liable to pay for storage and insurance costs and the cargo may be deteriorating. The practical solution is to apply to a court for an order to sell the cargo after a reasonable time has passed.

In a time charter the owner may also be given a lien on sub-freights. This may be a useful practical remedy for a shipowner to collect outstanding payments from a time-charterer. Under a period charter (a medium to long-term time charter) the owners may be able to withdraw the vessel for non-payment of hire and any other amounts. However, under a trip-charter (a voyage charter on time-charter terms), withdrawing a vessel may not be a suitable remedy, especially when the vessel has cargo on board under bills of lading and which must be delivered at the destination on presentation of good hills of lading. The local laws at the port of destination may also not help the shipowner, especially if the cargo is for government-linked consignees. Exercising a lien on cargoes may be impracticable.

In time charterparty forms, the owners are given an additional lien to a lien on cargo that they would have under a voyage charter. For example, the New York Produce Exchange form states:

“ . . . the owners shall have a lien upon . . . all sub-freights for any amounts due under this charter, including general average contributions . . ."

The BALTIME form states:

"The owners to have a lien upon all . . . sub-freights belonging to the time charterers and any bill of lading freight for any claims under the charter . . ."

The BALTTME form seems to give less protection to the owner than the NYPE form. In the BALTIME the lien is on sub-freights belonging to the charterers. If the vessel is sub-sub-chartered, the amounts due under the sub-sub-charter would not belong to the head charterers and may not be limed.

The lien on sub-freights is not as simple to exercise as, perhaps, a lien on cargo where the cargo can be retained in the carrier's possession until the amounts due are paid. Sub-freights are not physical goods, which the shipowners actually possess. Therefore a "lien" on sub-freights cannot be a possessory lien. The owners giving notice to the sub-charters or shippers requiring the latter to pay subcharter hire or freight to the owner directly exercise the lien on sub-freights. This right was considered in The Cebu, 1983. The charterers owed large sums of money to the shipowners. The owners gave notice to the sub-sub-charterers. The latter paid their hire into court. The owners' claim to the amounts paid into court was resisted by the sub-charterers. The sub-charterers argued that the NYPE form gave the owners a lien on "sub-freight", not on "hire". Furthermore, they argued, the owners could claim amounts due as subhire payable to the defaulting head charterers and not sub-sub-hire payable to the sub-charterers who were not in default.

The court held that "sub-hire" was the same as "sub-freight" and the lien extended to "sub-sub-hire". Under NYPE, the lien was an equitable transfer of all freights or hire as and when they became due under the head charterparty. (Under the BALTIME, there is a restriction on freights belonging to the head Charterer; see above.) Therefore, the lien transferred all rights of the sub-Charterer also. (The transfer of rights is called an "assignment".) This lien is of considerable use to a shipowner in a bad market or during a shipping recession, as was experienced from the late 1970s to the mid-1980s when many charterers in a chain of time charters defaulted.

It may be interesting to note that The Cebu came before a different court in 1989 for other sums of hire due under the same charterparty. On this occasion, a different judge refused to accept the lien on subfreights extended to sub-hire or even to sub-sub-hire. The owners were not permitted to exercise their lien on sub-hire.

One obvious solution to a possible conflict because of terminology would be for the time charterparty to be claused accordingly to specify that the lien was on all sub-freights and also on all hire and sub-hire due.

5. Indemnity clauses. Indemnity is con­cerned with compensation for all loss flowing from compliance with the orders given by the charterer and the loss must directly arise from the charterer's instructions; the loss must be one which the owner must not be taken to have accepted (The Island Archon); the owners' compliance with the order does not break the chain of causation but it is the essential link in the chain of causation (The Batis). A claim for indemnity is not subject to the rule of remoteness but there must be an unbroken chain of causation (The Eurus).

Types of indemnity:

1. Express: as provided by the terms of the charterparty e.g. clause 9 BALTIME C/P Form: «charterer shall indemnify owner against all consequences or liabilities arising from master... complying with such orders The owner does not have to prove breach by the charterer but just compliance with the order which caused the loss, as the contract expressly provides.

2 Implied: NYPE Form c/p, clause 8: «the captain (although appointed by the owners) shall be under the orders and directions of the charterer as regards employment and agency». The clause does not expressly provide for an indemnity but it is implied by law. It is also justified by business efficacy in the sense that if the charterer requires to have the vessel at his disposal and to be free to choose voyages and cargoes, then the owner must be expected to grant such freedom only if he is entitled to be indemnified against loss and liability resulting from.

So, in pursuance of the Lien clause the Ship Owner has a lien on the cargo and on all sub-freights payable in respect of the cargo for freight, deadfreight, demurrage, claims for damages and for all other amounts due under this charterparty including cost of recovering same.

Review questions:

1. What does the "substitution clause" mean?

2. Explain the term "Seaworthiness"

3. What does the “maintenance clause” mean?

4. Under a time charterparty what kind of expenses are falling on owner of the ship?

5. What does the “Lien clauses” mean?

6. What types of indemnity do you know?