Whenever a company needs to move cargo by sea, the process often begins with the execution of a charter party agreement. In the world of maritime trade, chartering a ship is how companies get their goods from point A to point B.

Consider this scenario: a Spanish company needs to ship a large cargo of grain to Brazil. To accomplish this, they require a large dry cargo vessel for transportation.

In such situations, relying on intermediary parties for shipping can be inefficient, especially if the shipper has enough cargo to fill an entire vessel. Additionally, parties wishing to operate as Non-Vessel Operating Common Carriers (NVOCC) might not afford to purchase a vessel.

Similarly, many shippers and carriers prefer hiring a vessel rather than investing in one themselves.

This is where the charter party agreement becomes essential. It provides a legal structure that covers every aspect of the arrangement, from freight rates to laytime and demurrage, ensuring all parties involved are aligned and protected under clearly defined terms.

Let us delve into the fundamentals.

What is Chartering?

The process of vessel chartering involves the leasing of an entire vessel or a significant portion thereof from a shipowner.

Chartering is recommended in the following situations:

• When transporting large quantities that occupy a significant part or the entirety of a vessel, for instance, grain, minerals, or oil.
• When the destination or route is not regularly covered by commercial shipping lines, for example, remote or less-frequented ports small like island nations or isolated coastal regions.
• For specific projects, such as infrastructure construction in remote locations, requiring tailored logistics.
• When flexible scheduling is needed, not aligning with the fixed schedules of commercial shipping lines.
• When special transportation conditions are required, such as refrigerated vessels for perishable goods or specialized equipment for oversized cargo.

What is the Charter Party?

The chartering process is considered the primary function of maritime traffic, and its commercial contract forms the legal foundation for all other maritime transportation activities.

For vessel chartering, there should be an agreement between the parties to charter the vessel, defining the rights and obligations of both parties. A charter party, also known as a charter party contract or agreement, is the most significant (and oldest) type of contract in maritime cargo transportation.

While the term “charter party agreement” refers to a specific contract that outlines a particular arrangement, “charter parties” is a broader term that encompasses various types of charter contracts within the maritime industry.

In legal terms, the ultimate purpose or final destination of a voyage significantly influences the classification of different forms or modes of vessel utilization.

When determining the nature of a charter party agreement, it is essential to consider the underlying purpose of the vessel’s employment. Historically, the maritime industry has primarily focused on the transport of people and goods, as well as fishing—activities that remain prevalent today. Over time, however, the scope of maritime activities has expanded to include salvage operations, towing, scientific research, recreational voyages, and more. While traditional doctrine may consider these activities as complementary or analogous to transportation contracts, the reality is far more complex and diverse.

Today, ships are no longer used solely for transporting goods or passengers. Specialized vessels are employed for a wide array of tasks, such as oceanographic research, laying submarine cables, environmental protection, port cleaning, and even serving as fixed hotel installations. These activities, which are distinct from traditional transportation, highlight the evolving nature of maritime contracts. In this context, it is clear that the exploitation and utilization of vessels are central to maritime law, and understanding the various contractual frameworks is essential.

Charter parties, therefore, serve as the legal foundation that governs these diverse contracts.

The vessel itself, being the central object of these contracts, plays a pivotal role in shaping the legal theories surrounding vessel utilization. The shipowner’s use of the vessel forms the basis for a comprehensive understanding of maritime contracts, encompassing everything from freight rates to the responsibilities associated with different types of charters.

Types of Charter Contracts

The type of charter party determines the degree of control and responsibility that the owner retains over the vessel.

According to the legal doctrines and systems of Italy, France, and Portugal—pioneers in this field—the general theory of vessel utilization contracts includes the following primary types:

Bareboat Charter

It is a lease agreement for a specified period in which the lessee or charterer has full control of the vessel, including the right to appoint the captain and crew. It is used whenever one wishes to operate a vessel.

The lessor or shipowner’s only right is to receive regular payments as rent. They will also have no responsibility for the goods or transactions of the vessel during the contract period.

For instance, a vessel chartered to transport crude oil from the Middle East to Europe would be subject to a voyage charter.

Time Charter

The vessel is chartered for a specific period, during which the charterer manages the commercial operation of the vessel while the shipowner remains responsible for the vessel’s maintenance and crewing.

According to Article III Rule 1 of the Hague-Visby Rules (HVR), the shipowner is required to ensure that the vessel is seaworthy, properly manned, equipped, and supplied. This responsibility remains with the shipowner even under a time charter, though the day-to-day operation is under the charterer’s control.

Time charters are often used in industries where the charterer needs regular and reliable access to a vessel but does not want to assume the responsibilities of owning one. For instance, a vessel hired for marine research in the Arctic would likely fall under a time charter, which emphasizes the vessel’s capacity for long-term deployment in challenging environments.

Voyage Charter

The peculiarity of this contract is that the charterer makes the cargo space of the ship available to the charterer during a specific voyage. The shipowner undertakes to transport these goods and maintains responsibility for the management of the ship. The charterer can deliver his own cargo or subcontract this space to third parties. It is a charter widely used for the transport of bulk goods.

This contract includes the bill of lading with all its characteristics in writing, such as the name and registration of the ship, origin and destination, class of merchandise and value of the charter.

The conditions of these contracts are often negotiated with the intermediation of freight brokers. However, among the obligations of the charterer is the possession of a ship suitable for the cargo to be transported, the choice of the most appropriate route and the guarantee of delivery of the cargo at the end of the voyage. The charterer undertakes to load only what has been agreed.

The Spanish legal system, under the Spanish Maritime Law (LNM), adopts a similar classification but with a unique emphasis. It recognizes bareboat charters, time charters, and voyage charters. However, the LNM goes further by acknowledging specialized contracts for vessels used in non-transport activities, such as oceanographic research or cable laying. The LNM also introduces specific provisions for these non-traditional uses, reflecting the modern complexities of maritime operations.

Parties involved in the Charter Party Agreement

The parties which are involved in a charter party agreement are the Shipowner, the person or entity who owns the vessel, leases it to the charterer, and receives the freight, and the Charterer, the person or entity who hires the vessel for transporting goods, passengers, or other purposes as specified in the agreement and must pay the freight.

However, the shipowner’s role can vary:

• A shipowner may charter a ship on a bareboat charter, voyage charter, or time charter basis to a disponent owner, whose primary interest is the operation of the ship.
• If the person chartering the ship is not the actual owner, they are referred to as the Disponent Owner, Operator, Chartered Owner, or Time Chartered Owner.
• When the commercial management of the ship is entrusted to a company or organization, that entity is called the Managing Owner or Operator. The term “Operator” is also used in this context.

The charterer is responsible for paying the freight. The charterer can be:

• The owner of the goods being transported.
• An importer, exporter, or freight forwarder acting on behalf of the goods’ owner.

Furthermore, the shipbroker is the person or entity who acts as an intermediary facilitating the charter party agreement between the shipowner and the charterer. Shipbrokers are responsible for negotiating terms, finding suitable ships for charterers, and ensuring that both parties’ needs and expectations are met. They can represent either the shipowner, the charterer, or act as independent intermediaries.

Terms and Information included in the Charter Party Agreement

The terms under which vessels are chartered are contained in the charter party agreement.

Apart from the clauses agreed upon by the parties, the basic information that the contract must include is:

• Class, name, and tonnage of the vessel.
• Flag and port of registry of the vessel.
• Personal details (name, surname, and address) of the Captain.
• Personal or company details of the shipowner (in case the shipowner has contracted the charter).
• Personal or company details of the charterer and, if acting on commission, the same details of the person on whose behalf the contract is made.
• Loading and discharge ports.
• Capacity, number of tons, or quantity of weight or measure that the parties respectively agree to load and transport.
• Freight to be paid.
• Percentage of the freight to be paid to the Captain.
• Dates for loading and unloading.
• Laytime and demurrage that will be counted and the amount to be paid for each.
• Date of the contract.

Typical clauses on Charter Parties Agreements

Freight rates and payment terms

The primary financial obligation of the charterer is the payment of freight, which is the fee for the transportation service provided by the shipowner. The rate and method of calculation are usually specified in detail.

Laytime and demurrage

These terms govern the time allowed for loading and unloading cargo. If the process exceeds the allocated laytime, demurrage charges may apply as a penalty for the delay.

Bunkers and fuel consumption

Charter Party Agreements often specify who is responsible for the cost of bunkers (fuel) and may include clauses that warrant the vessel’s performance in terms of fuel consumption and speed. The agreement might also define ‘Good Weather Periods’ for measuring the vessel’s performance.

Cargo details

This includes a description of the cargo, its type, quantity, and packaging requirements. The agreement ensures that both parties are aware of the cargo specifics to avoid disputes.

Vessel specifications

The agreement will detail the specifications of the vessel, including its size, capacity, and equipment. This ensures that the vessel is suitable for the intended voyage and cargo.

The Applicable Legislation: Interpreting Charter Parties Agreements and the Rules

The interpretation of these agreements is often influenced by a complex framework of international conventions, rules, and national laws.

The legislation applicable to any maritime charter party agreement includes:

• Hague and Hague/Visby Rules
• Hamburg Rules
• Rotterdam Rules
• BIMCO Clauses and Contracts
• UNCITRAL Model Law on International Commercial Arbitration
• SOLAS (Safety of Life at Sea)
• MARPOL (International Convention for the Prevention of Pollution from Ships)
• ISM Code (International Safety Management Code)
• UNCLOS (United Nations Convention on the Law of the Sea – CONVEMAR)
• National Laws and Codes, in Spain, the Law 14/2014 of July 24 on Maritime Navigation, Código de Comercio (Commercial Code), and Código Civil (Civil Code). In the case of the United Kingdom, the Merchant Shipping Act 1995, and the Carriage of Goods by Sea Act 1971.

Claims and Dispute resolution in maritime charter party agreements

Disputes and claims may arise from various aspects of the contract, such as delays, breaches of terms, cargo damage, or disagreements over laytime and demurrage.

Common Types of Claims

1. Freight and hire disputes: Disagreements often occur over the calculation and payment of freight or hire, particularly if there are discrepancies in the cargo quantity or delays in payment.
2. Laytime and demurrage claims: Laytime refers to the time allowed for loading and unloading cargo. If these activities take longer than agreed, demurrage charges may be incurred. Disputes often arise regarding the interpretation of laytime clauses or the amount of demurrage due.
3. Cargo claims: Damage or loss of cargo during transportation can lead to claims under the charter party agreement. The responsible party (whether the shipowner or charterer) is typically determined by the terms of the contract, the type of charter, and relevant legal frameworks.
4. Breach of contract claims: If either party fails to fulfill their contractual obligations, such as providing a seaworthy vessel or delivering the cargo on time, a breach of contract claim may be filed.

Dispute Resolution Mechanisms

When disputes arise, parties typically turn to one of the following mechanisms to resolve them:

1. Arbitration: Arbitration is a preferred method of dispute resolution in maritime contracts due to its confidentiality, speed, and the expertise of arbitrators. Charter party agreements often include arbitration clauses specifying the governing arbitration body, such as the London Maritime Arbitrators Association (LMAA) or the Singapore Chamber of Maritime Arbitration (SCMA). Marlin Blue offers robust representation in arbitration proceedings, ensuring that disputes are resolved fairly and efficiently.
2. Litigation: In some cases, parties may choose to resolve disputes through litigation in national courts. This is more common in jurisdictions where arbitration agreements are not enforceable or where court intervention is necessary. However, litigation can be more time-consuming and costly compared to arbitration.
3. Mediation: Mediation involves a neutral third party facilitating negotiations between the disputing parties to reach a mutually acceptable settlement. While not binding, mediation can be a cost-effective and amicable way to resolve disputes without resorting to arbitration or litigation.
4. Expert Determination: For highly technical disputes, the parties may agree to appoint an independent expert to determine the outcome. This method is particularly useful for resolving issues related to vessel performance, fuel consumption, or cargo damage.

Conclusion

Marlin Blue is one of the only law firms in the South of Europe that focuses on both the transactional side and the litigation side of charter party agreements. With our deep understanding of maritime law, we provide legal support tailored to the unique needs of shipowners, charterers, freight forwarders, shipbrokers, and insurers.

FAQs

Q1: How can Marlin Blue assist with charter party disputes?

A1: Marlin Blue provides specialized legal representation in charter party disputes, including arbitration and litigation. We work closely with our clients to resolve conflicts efficiently, ensuring that their rights and interests are protected throughout the process.

Q2: Does Marlin Blue provide assistance in preparing and drafting Charter Party Agreements?

A2: Yes, we offer comprehensive services in the drafting and negotiation of charter party agreements, ensuring that all contractual terms are clear, precise, and legally sound to prevent future disputes.

Q3: What should be considered when a Bill of Lading is issued under a Charter Party?

A3: When a Bill of Lading is issued under a Charter Party, it is crucial to ensure consistency between the two documents, especially regarding terms of carriage, liability clauses, and the description of the cargo.