Duties of the Charterer Towards the Ship Owner

Compare and contrast the duties, responsibilities and liabilities of the charterer towards the ship owner under both time and voyage charter parties.

Introduction

The ironic aspect of the regulation of Carriage of Goods by Sea is the striking similarity between the complexity and unpredictability of the physical shipping world and the identically complex metaphysical legal framework that regulates it. Issues surrounding charterparties^[1] reach to the core of the framework not only because it is the document that regulates the contractual relationship between charterer and ship-owner^[2] but the variety in form in which it appears can constitute a fundamental difference in the physical relationship between ship-owner and charterer however the metaphysical legal framework surrounding charterparties is far from clear. Most scholars of the area will be familiar with the division between what is varyingly called demise or bareboat charterparties whereby ‘The charterer takes full control of the vessel along with the legal and financial responsibility for it. The demise shifts the control and possession of the vessel’^[3], such a charterparty is fundamental to the legal relationship between a charterer and ship-owner and for nearly all purposes the charterer is deemed to be responsible as the ship-owner, the intra-contractual relationship is merely one of hire of the boat and thus an obligation of seaworthiness However there are other forms of charterparties which constitute different such relationships, in most of the literature these two are lumped together but this essay will investigate the distinct nature of two generic types; Voyage and Time Charterparties.

Definitions

In this section we will briefly mention the real-life differences between voyage and time charterparties but what must be remembered is that it is the metaphysical legal differences that are the main thrust of this work.

The main distinction between the two would appear to be superficial; a voyage charterparty is a contract between charterer and ship-owner to hire a boat for a specified voyage whereas a time charterparty is for a specific length of time. However there is a more fundamental difference than this because commercial reality imposes on the legal framework:

‘Under a voyage charter the owner … is using the vessel to trade for his own account. He decides and controls how he will exploit the earning capacity of the vessel, what trades he will compete in, what cargoes he will carry. He bears the full commercial risk and expense and enjoys the full benefit of the earnings of the vessel. A time charter is different. The owner still has to bear the expense of maintaining the ship and the crew. He still carries the risk of marine accidents and has to insure his interest in the vessel appropriately. But, in return for the payment of hire, he transfers the right to exploit the earning capacity of the vessel to the time charterer. The time charterer also agrees to provide and pay for the fuel consumed and to bear the disbursements which arise from the trading of the vessel’^[4]

The distinction is a subtle one but in judging the state of the law as regards the two it is as well to be aware of the commercial difference. The Voyage Charterparty is for one individual voyage this gives the ship-owner a great deal of liberality in what individual voyage he takes and how he minimises whereas the Time Charterparty moves more towards the Demise Charterparty because the charterer takes on certain burdens associated with ownership such as fuel expenses, ports of call and control of ships movements during the time. We can find a similar dichotomy in general employment contract law between a contract of service and a contract for services which delineates those who are employed or self-employed. The Time Charter is akin to employment whereas the Voyage charter is akin to the self-employed. The differences in reality and the power of charterer over the boats movements can vary greatly.

We will now consider how this distinction plays out in the legal sphere and compare and contrast the operation of tortious and contractual obligations between the two parties.

Legal Aspects of The Charterparties

English Law supports no definition of ‘Charterparties’^[5] the borders of what is included within the definition can be particularly hazy which makes any attempt to define the potential obligations arising from the contract difficult. However whilst there may be no legal definition for a charterparty the BMLA argue that the desire for commercial certainty in the maritime world has driven the market to produce ‘standard form contracts which are available on the market and in respect of which legal advice and insurance is widely available and taken’^[6]. Particularly the Insurance industry has driven the use of model contracts and has forged the distinction between voyage and time charterparty.

It is wise to build a holistic view of the legal framework in which we are operating and therefore we need to understand where in general charterparties fit into the legal framework in the UK. The legal position is to ignore charterparties and to concentrate on documents that evidence the contract of carriage such as a bill of lading or a sea waybill^[7], this is the position in the Carriage of Goods by Sea Act 1992 (c.50) and 1971 which incorporates the Hague-Visby Rules into national law, the Hamburg Rules also take a similar stance in that rather than placing emphasis on the contract of carriage they emphasise the documents that evidence carriage by sea. The advantages are argued to be stability and predictability however it is rigid and doesn’t allow for differing interpretations a situation that occurs between the UK and US who consider sea waybills and bills of lading to be the same whereas UK and International law distinguish the two^[8]. Voyage and Time Charters are both contracts of carriage under which many will issue Bills of Lading and Sea Waybills and thus attract the liability regime that is included in the legislation but they do not do so as of right. Charterparties are not a homogenous group of contracts that necessarily want to incur liabilities, the BMLA definition of Charterparty is wide enough to include a very large swathe of purposes and documents:

‘Any agreement in writing executed by or on behalf of two or

more parties whereby on party agrees to charter from another one or more ships [or any part of proportion of one or more ships] whether on a voyage, time or bareboat basis, whether the ship or ships are named in the agreement or are to be nominated subsequently and whether for the carriage of one cargo or for the carriage of a series of cargoes’

Therefore a Charterparty for maritime legal purposes is only of concern in a statutory sense when it is incorporated by use of a ‘charterparty’ bill of lading^[9], by use of some form of Paramount Clause that incorporates the Hague-Visby Rules^[10] or in the rare case where the bill of lading is in the hands of a third-party and impliedly invokes the Rules^[11]. In this sense both Time and Voyage Charterparties are identical, in that both are denied effect unless incorporated into a bill of lading, this would mean that statutory obligations such as make the ship seaworthy, man and crew the ship, make storage areas ‘fit and safe’^[12] for carriage of goods and various other standard liabilities that are placed on the ‘carrier’ which for most purposes will be the ship-owner.

A model of the typical basic situation will perhaps see how this operates, a seller concludes a contract of sale for Good A with the buyer, under general contract principles the seller is liable for delivery of the goods and therefore makes a charterparty with a ship-owner to deliver Goods A to Port B. Therefore for statutory purposes the seller also becomes the charterer^[13] and the shipper^[14] and incurs certain liabilities and is able to limit those liabilities within the statutory relationship.

In the above senses there is no sensible distinction between Voyage and Time Charterparties but it is as well to understand the place charterparties occupy in the legal and commercial spheres. However it is also important in a more subtle manner, International documents such as the Hague-Visby rules define very fundamental rights and duties which can mean big commercial liabilities and duties. This can include duties such as safely loading the goods, which protects a charterer from potential damage. The failure to incorporate such statutory schemes when contracting a charterparty can have dire consequences. The rules can override certain clauses such as non-responsibility clauses and notice of suit clauses that are in standard charterparties, whether time or voyage.

As Contracts therefore how do Voyage and Time Charterparties alter the duties, responsibilities and liabilities of ship-owners and charterers? It is important to remember that whilst not officially part of the statutory regime they are still covered by general contract law^[15] and have binding effect as such. Therefore the very terms of the contract create personal rights and duties as between the ship-owner and charterer which will be at variance from each other. It is fundamental to understand also that the statutory scheme mentioned above applies to Carriers and Shippers who maybe but are not necessarily either the charterer or the ship-owner. This distinction is sometimes hard to grasp, the relationship between the charterer and ship-owner is only regulated by the private contract of a charterparty^[16] and thus at an abstract level their obligations towards each other will only be those enumerated within the contract below we have tried to highlight the main differences although some are quite detailed.

This very much refers to the fact that under standard time charterparties the rights and duties will be more evenly distributed between the parties including right of control over route and timing, payment of fuel expenses and other sundry expenses that will be caused by the running of the ship in the course of the charter. In a voyage charterparty the charterer will generally only require to pay a sum of money for the boat hire for that individual journey. It ought to be noted at this stage that the search for substantive distinctions between the duties a charterer owes towards a ship-owner in either a voyage or a time charter descends into significant detail because in reality that issue changes very little it is more the liability as relates to third parties that may place the charterer as liable in the ship-owners stead that the distinction makes a substantive difference. In the end the duties a charterer owes a ship-owner will be different in kind in that one is for hire of vessels so the actual goods need not be supplied and the control passes to the charterer whereas in a voyage the ship-owner will require timeous presenting of the goods in a specified warehouse and payment.

The most common difference in the rights and responsibilities of the charterer vis-à-vis the ship owner occurs in relation to clauses relating to wasted time and demurrage. The so called ‘Utmost Dispatch Clause’ is prominent in Time Voyage Charterparties and has been the subject of numerous legal cases^[17]. This issue was thoroughly discussed in Whistler^[18] and is worthwhile summarizing here. The court made an interesting observation about the distinction between time and voyage charterparties:

‘A time charter…is not a contract of carriage but a contract for the provision of the services of a crewed vessel’^[19]

This means there is a difference in the construction the courts take to the charterparty, in relation to issues of demurrage. Under a voyage charterparty a ship ought only to take the ‘usual route’, this makes no specific requirements of speed whereas under a time-charter the contract will usually require the utmost-dispatch and Lord Hobhouse made clear that the distinction was substantive. The master of the vessels has less autonomy under a time-charterer and therefore it appears that decisions of commercial significance must have the authorisation of the time-charterer. This means as between the ship-owner and the charterer the issue of speed will vary as to who has the responsibility. In real-life this will be undertaken normally by the Master as the Ship-Owner’s agent but the responsibility shifts.

Extrapolating from the dicta in Whistler it would appear that because a time-charterer is commercially distinct from a voyage –charterer then under the former any decision that would normally lie with the ship-owner as regards the commercial exploitation of the vessel will transfer, unless specifically reserved, to the charterer. This explanation scratches the surface of the distinction between the two relationships which lies in the legal significance of the distinction between a contract for carriage of goods and a contract for hire of a vessel and crew. In the former the charterer doesn’t have the right of direction the ship-owner has this, this means as regards the rights and responsibilities the charterer owes the ship-owner which are few and far between it includes the duty to return the goods as hired in an in tact condition, he is furthermore liable for the administrative running of the ship that a shipowner would commonly undertake in a voyage charter these can include paying port duties, dock charges, canal charges, commissions, arranging stevedores, making sure the stacking and tonnage of the cargo is correct and other such duties. A further duty that changes between the charterer and ship-owner between the two is in relation to payment under a time charterparty the charterer pays a larger ‘hire’ price whereas the voyage charterparty pay what is known as a ‘freight’ charge^[20]

Whilst many of these are not responsibilities and duties towards the Ship-owners they nonetheless imply that the ship-owner is not responsible for such things under a time charter.

By virtue of Article 3 (8) of the Hague-Visby Rules the rules may be enforced where the charterparty takes on some or all of the rights and responsibilities in Article 3 of the Rules. An example would be where a time-charterer sublets to another person and makes assurances such as seaworthiness or other such duties^[21]. The time-charterer is always more likely to do this than a voyage charterer given that he has more control over the ship and that his quasi-owner status means that he may make representations about the ship to third parties. However this wouldn’t seem possible as between the ship owner and a charterer under a time charter-party.

However possibly the most fundamental importance in determining the difference between voyage and time-charter parties and the importance of the form on the legal consequences is part of a wider debate on the status of ‘Carriers’, the potential tortious and statutory liability that flow from the status as ‘Carrier’ has huge potential impacts on the liability of charterers towards third parties that suffer damage or loss^[22]. We will consider here briefly the legal issues surrounding the identification of the carrier and then move onto show how this is of large relevance to the liabilities between a charterer and a ship-owner. We touched on the issue above in relation to which charterparties fell under the legal framework and the issues are closely related but in this case we are discussing charterparties that might not specifically incorporate the rules and designate themselves as carriers.

A carrier is defined unhelpfully by the Hague-Visby Rules as including ‘the owner or the charterer who enters into a contract of carriage with a shipper’^[23]. The seminal discussion of this issue was in Samuel v. West Hartlepool^[24] where the court made the distinction between a demise charterparty which clearly made the charterer ‘Carrier’ and a very basic voyage charterparty where the only obligations of the charterer are to provide the full goods; pay the agreed fee for carriage and the relationship would effectively end there. In the latter the charterer would not be considered a ‘Carrier’. However Walton, J specifically argued that there were a myriad of grey areas in between those two examples, more recent commentators have argued that the time charterparty is one such example whereby the charterer becomes the Carrier. This has come about through numerous cases where the courts have taken the approach to look at the nature of the contract and the real-life operation of who had control^[25], the case law in the area is highly unpredictable and we don’t have the space to fully discuss the case law however it would appear that the court tries to make an equitable decisions on the facts without trying to put too much emphasis on the wording of the contractual documents.

Canada has a lot of jurisprudence on this exact issue and given the international nature of much of maritime law the authorities make a compelling argument that time charterers are most likely considered carriers for most purposes. The string of cases in the mid to late 1980’s in Canada^[26] seemed to suggest that time charterers that were named prominently on bill of lading, that were signed on the behalf of by the Master, that received payment of freight and other such indicators meant that time-charterers were held to be liable as a Carrier.

What seems clear from the sources and case-law is that there is support although not direct authority for the proposition that a voyage charterer would not be considered a carrier and a time charterer would, this is concurrent with reality and common legal sense despite the flourish of demise clauses in time charterparties that specifically designate the owners as carriers. The effect this has on the intra-contractual relationship is significant and impacts on the insolvency, bailment and lien claims of the respective parties.

If a charter becomes insolvent, as was the case in Samuel above, both the shipowner and the receivers have a claim and the status of carrier can have a bearing on the outcome. The carrier is liable in tort for bailment and claims of lien by third parties, whilst not strictly dealing with the duties and liabilities as between a charterer and ship-owner the issue is of particular importance in insolvency and also in a wider sense it highlights the distinction between voyage and time-charterparties.

Conclusion

The above has looked at both the legal and physical framework surrounding voyager and time-charter parties. The distinction between these two is of more importance in relation to third parties rather than between the parties. The substantive difference in provisions reflects that one is a contract of hire of vessel and crew and the other is contract for carriage of goods, beyond the substantive differences in the clauses of the charterparty as far as the intra-contractual relationship between the charterer and the ship-owner is concerned there is no great difference in regulation, both can be incorporated into the statutory framework but are not so by necessity and both are considered homogenous by national UK statute law such as in UCTA 1977, therefore the difference is merely a difference in contractual terms. The area surrounding the status of charter-parties as a whole is an are which could do with some sustained treatment at both academic and policy levels, as I stated at the beginning the morass that is maritime law shows contractual principles being stretched to their limit and I believe a study of the particular issues within this work has shown that the status of the two is far from clear and direct sources on the issue are scarce.

Bibliography

Books

Institute of Maritime LawLimitation of Shipowners’ Liability: Sweet & Maxwell /

The New Law1986

Tetley, WilliamMarine Cargo Claims4^th ed. / Due Pub. 2008 / Copies at http://www.mcgill.ca/maritimelaw/mcc4th/

Articles

AustralianIncome tax: the royalty withholding TR2003 / 2

Taxation Officetax implications of ship chartering

arrangements

British MaritimeUnfair Terms in Contracts: the Maritime 2003 / BMLA

Law Assoc.Perspective

Schelin, JohanFreedom of Contract and Carriage UNCITRAL /

of GoodsLondon Seminar 2004

Schelin, Johan &The Charterer’s Right to Order the Master2002HT

Alstergren, Peterwww.juridicum.su.se

Internet Resources

www.marlaw.com

www.bailii.org

www.westlaw.com

www.lexisnexis.com

www.lawbore.net

www.megalaw.com/top/admiralty.php

http://www.hmso.gov.uk/legislation/uk.htm

www.google.com

www.bimco.dk (Standard Charterparty Models)

www.bmla.org.uk

www.comitemaritime.org

www.admiraltylaw.com

Footnotes

^[1] The ambiguous legal status of charter parties will be examined below e.g. Schelin (2004) p.3

^[2] The sources are full of reflections that this is a simplified version of reality however as a construct we are forced by constraints of size and time to limit it to this somewhat basic model which can be used as extrapolation.

^[3] Definition on www.marlegal.com

^[4] Lord Hobhouse in Whistler International Limited v. Kawasaki Kisen Kaisha Limited

^[5] BMLA Response to the Law Commission Report No 166 on Unfair Terms in Contracts (2003)

^[6] Ibid.

^[7] See s.1(1) of CGSA 1992 as well as Schelin (2004) pp.3-4

^[8] Ibid.

^[9] www.brookes _&_co.co.uk

^[10] See Tetley (2008) Ch2

^[11] Ibid.

^[12] Article 3 (1) (c) of the Hague-Visby Rules

^[13] A term used by Article 1 (2) of the Convention on Limitation of Liability for Marine Claims incorporated into UK law via s.185 of the Merchant Shipping Act 1995

^[14] This is the general term used in the Hague-Visby Rules, CGSA 1992 and Hamburg Rules.

^[15] There are a number of exceptions such as the one under Schedule 1 Paragraph 2 (b) Unfair Contract Terms Act 1977 which excludes them from the remit of the act.

^[16] ATO Taxation Ruling 2003

^[17] e.g. Suzuki & Co. Ltd. v J. Benyon & Co. Ltd. (1926) 42 TLR 269 and Whistler N4

^[18] N4

^[19] Lord Hobhouse Ibid.

^[20] ATO Tax Ruling 2003 (in reference to Australia but practice is same under UK.

^[21] See Tetley (2008) Ch.10 p.15

^[22] For an Article on this issue in Canada see Giaschi (1994), Tetley (2008) also talks about this issue in Ch.10

^[23] Art 1 (a)

^[24] 1906 11 Com. Cas. 115

^[25] e.g. Elder Dempster v. Paterson Zochonis 1922 12 Lloyd’s Rep. 69

^[26] Cormorant Bulk Carriers Inc. v Canficorp (1984) 54 NR 66 & CN Marine Inc. v Carling O’Keefe Breweries [1990] 1 F.C. 483