Lecture IV. Charters contractual obligations, rights and remedies

1. Rights and obligation of a charterer in respect of a vessel

2. Charterer redelivery obligation

3. Liability clause

4. Charterers relation with a ship master

5. Lawful directions and orders

1. Rights and obligations of charterers in respect of the vessel. The time charter is by its nature a private contract. The rights and obligations of the time charterer under such a contract are derived from the contract itself. Under a time charter, the charterer employs the ship and exploits its earning capacity for profit. While ownership and possession of the ship remain with the owner, the use of it is granted to the charterer. It is placed by the owner at the disposal of the charterer for a period of time in return of payment of hire. Under a standard time charter, the charterer pays a daily or monthly hire for the ship usage and also pays for the costs of all fuel consumed by the ship, all Port Charges, Pilotages, Agencies, Commissions, Consular Charges. Additionally, the time charterer pays all cargo loading and unloading charges, but the charterer usually is not responsible for supervising or controlling any of these activities.

Also the NYPE form time charter requires the charterers to «provide and pay for» all the fuel while the vessel is on hire. Charterers take over and pay for all fuel on board on delivery into the charter and owners take over and pay for all fuel on board on redelivery.

Among the other rights that gives the time charter to a charterer is: charterer is entitled to give contractual order to the master, he determines the voyages to be performed; he choose cargoes and the bill of lading terms; he is entitled to sub-contract and in that case he will be acting as a "disponent" owner. Also if the charterer will be dissatisfied with the act of the captain, other officers or engineers of the owner, he could change them in appointments

Also if the charterer will be dissatisfied with the conduct of the captain, other officers or engineers, he can make changes in the appointments.

So under a time charter, the Owner only takes care of the technical and nautical operation of the vessel, while the Charterer takes care of the commercial operation of the vessel. The commercial operations are, however, attached to some conditions; See for instance the GENTIME, Clause 2, Trading Areas and the BALTIME, Clause 3, Trade.

- Geographical limits, excluded ports and places. These are the so-called “Institute Warranty Limits” i.e. regions or areas which are excluded by the “Underwriters” to prevent damage to the vessel or even its loss.

If the vessel sails outside the allowed limits, the master must immediately inform the Owner, who will then contact the Charterer in order to arrive to an agreement such as the payment of an extra insurance premium.

If the Charterer obliges the master to go to a harbour which lays in an excluded area, then he must refuse this categorically. If the Charterer insists, then the master must inform the Owner at once and wait for his instructions. It is possible that the Owner and the Charterer entered into a new agreement without the master’s knowledge.

The master may, under no circumstance, refuse to load the vessel and after completion to leave the harbour and sail to the (so-called) excepted harbour, because the Charterer may than put forward that the vessel has been unnecessary held up under the pretence that he was negotiating to indicate

another (allowed) port of discharge. The days during which the master may have refused to load or during which he remained in the harbour will be considered as “off-hire” by the Charterer and the Owner will not receive any hire money for these days.

- The vessel must be used for lawful trades.

- The vessel may only carry lawful merchandise. The vessel may e.g. not carry

weapons or drugs.

- The vessel may not carry excluded commodities. Every time charter agreement has a clause (and usually also an additional clause) showing a list of “cargo exclusions” e.g. livestock, explosives, scrap, sulphur, pitch-in-bulk. It is the Owner who specifies these “excluded cargoes” and the Charterer must apply this to the letter because excluded commodities may cause a lot of damage to the vessel which will have to be paid by the Charterer.

- The vessel may only call at safe ports. The vessel must always remain afloat except if “naabsa”-ports are allowed. Harbours where there’s an epidemic or which are unreachable due to ice are also excluded. - In normal circumstances the vessel has to sail at the usual cruising speed without damaging the engines.

2. Charterer redelivery obligation. The length of the charter period is fixed in the charterparty. The charterer is obliged to, at the place and time of the agreed redelivery; once again place the ship at the shipowner’s disposal. When the ship has been redelivered the charterparty expires and the commercial control over the ship passes back, from the time charterer to the shipowner. The parties mutual obligations is suspended and the hire ceases to be payable. Thus, the charterer’s authority to command the master ceases as well. The legal state is, after the redelivery, clear.

So under a time charterparty a charterer is obliged to redeliver a vessel:

in time or pay damages;

in like good order and condition, ordinary wear and tear excepted;

at the port or place named in the charter.

Let us look through all mentioned items and see what does they mean

Good order and condition.

The charterer is required to return the vessel in good order, the owner is not entitled to refuse redelivery until any defect has been remedied.

Ordinary wear and tear.

Ordinary wear and tear is a question of fact and account must be taken of the use for which the vessel was chartered. But it is arguable that if a vessel is chartered to engage in a particular trade and is so employed without negligence, then any resulting damage must be at tributable to fair wear and tear.

Port or place named in the charter.

In the event of redelivery elsewhere, the owner has a contractual right to have the vessel kept in employment at the charter rate of hire until the service is complete. This does not happen until the vessel reaches the redelivery range and the voyage to that range forms part of the chartered service. Damages will be based on the net profit to be made from a notional voyage to the agreed delivery point, less the net profit derived from any alternative employment during the period required to complete the notional voyage.

Damages.

Charterer is liable in damages if failure to redeliver in time results from a breach of any of his obligations; the damages extend to cover any damage to the vessel for which the charterer is responsible under the employment and indemnity clause.

Nowadays there are two alternative ways of assessing damages for late redelivery, commonly known as: The Peonia rule, which is damages on the basis of the overrun period, (namely, the market I rate (if higher than the c/p rate) for the period between the contractual delivery date and the actual one); and The Achilleas rule, based on I of profit on a subsequent fixture.

However the owner has to prove a causative link between compliance with the order and the loss; no need to prove fault of the charterer. Causation is a mixed question of law and facts. Owner must prove that the proximate cause of the loss was the order given by the charterer with which the master had to comply.

3. Liability. The parties to the charterparty agree how the risks arising from the adventure will be allocated between themselves. In the event of no express agreement, the court will determine - from a true construction of the contract - how the parties intended to deal with certain risks or what risks each party agreed to bear.

Usually, experienced owners and charterers should know their legal position, rights and potential liabilities.

As a general rule, liability usually arises from a breach committed by one person which causes loss to another. Examples:

Breach of contractual terms, conditions, warranties, duty of care under contract. The remedy for breach is provided either in the contract or by law;

In the tort of negligence there must be a breach of the common law duty of care owed by one person to another causing loss. The recoverable damages must not be too remote, in other words, they must have been reasonably foreseeable by the defendant at the time of the breach;

Under statutes, or conventions, there must be a breach of a provi­sion. Such provision may or may not require fault, but the statute, or convention, may create strict liability (e.g. certain provisions of the Pollution legislation, the Health and Safety legislation). The remedy is provided by the statute or convention.

Liability under the employment. An unlawful, or un-contractual, order by the charterer will be a breach of contract because he is not entitled to give it under the contract; For example, an order to proceed to an unsafe port; an order to sign a bill of lading the terms of which are not consistent with the terms of the c/p; an order to deliver cargo without presentation of bill of lading.

The remedy for loss caused to the owner is dealt with either by an express or implied indemnity. Damages for breach are an alternative rem­edy. Under this concept, the owner's right to indemnity may also arise when the order is contractual but, nevertheless, causes loss to the owner by reason of compliance with the charterer's order.

4. Charters relationship with the waster. There are, initially, two parties to the time charter, the shipowner and the charterer. They are the ones that agree to the contract. However, once a ship was delivered and the hire begins to run, a third party, the master, appears. The master’s position can be described as unique and ambivalent. He is forced to divide his loyalty between the shipowner, who employs him and the charterer, whose orders he is obliged to obey. To this comes that the master, as the highest authority on the ship, is responsible for the security of the ship, her crew and cargo. The master will, because of his position, often face uncertain situations and must, even though he usually have some discretion, act prudent.

A time charterparty grants the charterer an extensive of control over the ship and its crew. This extensive control tends to make it hard to determine the exact scope of the charterer’s general authority to use the ship and, in the end, his right to give orders to the master.

To this comes the master whose position complicates the relationship further. The master is obliged to obey the legal orders that the charterer gives, i.e. such orders which the charterer has authority to give. It can be problematic to determine whether an order is legal or not since there are a number of factors that limits the charterer’s authority which must be accounted for. There is not always a straightforward and clear-cut answer to the question whether an order is legal or not. To this comes that the charterer may not always require that a given order shall be carried out immediately. In certain situations the master is granted some time for consideration and consultation with the shipowner.

The different types of orders

In a time charter the charterer may give a wide range of orders to the master. Since the ship is under the complete commercial control of the charterer it is necessary for him to be able to issue orders covering all situations that arise during the commercial use of the ship. Gaskell has divided the types of orders which the charterer may give into six groups. Those groups are the following:

1. The nomination of ports. Both loading and discharge ports.

2. The conduct of the voyage itself.

3. The loading and discharge itself. The order can relate to both the method and the time for the process.

4. The signing of bills of lading.

5. The delivery of cargo to a third party.

6. The time and place of the ship’s redelivery (all other orders have attitude to this item)

Point 1 and 2 are connected to each other. They both concerns orders which states how the voyage as such is conducted. For example, to which ports and to which areas may the charterer order the ship? What limitations exist implicitly and explicitly? To what detail may the charterer control the conduct of the voyage itself? Under point 3 all questions which concerns the loading and discharge process are gathered. The first question is if and to what extent, the master is obliged to participate in these operations. The second question is to what extent the charterer may dispose of the ship. What types of cargo may he order the master to load and transport on the ship? Point 4 and 5 are also connected with each other. The problem under both points originates in the bill of lading. The special nature of the document and the mandatory rules which apply affects the charterer’s authority to give orders concerning a bill. Point 6 concerns the so called last voyage order.

Also we need to understand what will happened in case when the master will accept the order or will refuse to obey

1. The master excepts and obeys. It does not matter if the order is accepted immediately or if it is accepted after an initial refusal, the same legal consequences arises.

a. The order is correct. There are no problems.

b. The order is incorrect. The charterer issued an illegal order. There are, in principal, four possible outcomes of such an order that may give rise to a legal responsibility for the charterer. First, the vessel could be damaged. Second, a delay could arise. Third, there could be a cargo loss. Fourth, a liability to a third party could arise. The charterer may be held legally responsible for these occurrences.

2. The master refuses the order.

a. The order is correct. A number of different legal consequences could arise for the shipowner. The charterer may, for example, terminate the charterparty, claim damages or claim that the ship went off-hire.

b. The order is incorrect. Since the order was illegal the master was entitled to refuse to obey it. In this case, the shipowner may hold the charterer legally responsible for the illegal order. He may claim indemnity for damages that arose because of the order or he may, in some cases, terminate the charterparty.

3. The master initially refuses the orders, waits and seeks new orders.

a. It was the correct choice to wait. There are two situations where such action is correct. First, if the initial order was an incorrect one. The master is under no obligation to obey such an order. Second, if the master had a well-founded, legitimate cause to seek confirmation from the charterer or the shipowner. This could, for example, be the case if the order itself was unclear or if it was unclear whether the person giving the order had the authority to do so. The master is, in certain situations, considered to have a certain room for delay (see 4.5.).

b. It was the incorrect choice to wait since the initial order was correct. The charterer then has a number of choices. First, he could terminate the charter and claim indemnity for the damages that arose due to this. Second, he could declare the ship to be off-hire until the order is complied with. Finally, he has the alternative to change his orders, even though his initial order was correctly issued. If he does this the master, again, have the initial four choices of response. Despite that the charterer changes his orders he may still claim damages which arose due to the delay.