IN THIS ISSUE:

12

Introduction & Differences in Charterparty

Liabilities

Issue 2013/17

5 Conclusion & Contact Details

Written by Mr. Valentins Abasins, Senior Claims Executive andMr. Max Korndoerfer, Claims Handler

Liability in Time and Voyage Charterparty

Introduction

BE&O P&I has recently experienced a number of requests from our Assureds regarding the burden of liability in time and voyage charterparty. In many instances the relevant parties are unaware of the extent of their liabilities following a maritime accident; whether it is personal injury, collision, damage to or loss of cargo, or any other unfortunate event.

Under English law, the terms and conditions of any given charterparty are subject to the freedom of contract principle, i.e. the parties may agree on almost everything and any legal terms they like. In both voyage and time chartering the relevant parties, shipowner and charterer, are free to allocate their responsibilities and liabilities as they find appropriate and commercially necessary.

It is imperative, however, for the parties to understand their burden of liability in case of an accident in order to avoid double insurance or having no insurance at all. This article aims to highlight charterers’ and shipowners’ as well as P&I clubs’ role in this context and contains basic differences between time and voyage charterparties, including the respective allocation of liabilities.

1. Differences Between Time and Voyage Charterparties

A charterparty is a contract between two parties for either hiring the service of a ship for an agreed period of time to carry a number of cargoes, or for a single voyage to carry a number of cargoes from port A to port B. The two parties to the charterparty are the owner of the vessel and the charterer. The owner may be the actual registered owner of the vessel or he may be the “demise” owner, having hired the vessel from the real owner on a long-term basis (this is also called a demise or bareboat charterparty). The charterer may use the vessel to carry his own cargoes or to carry cargo on behalf of others. In the following, the main differences between a voyage and a time charterparty will be described.

A time charterparty is a contract to hire the service of a vessel for an agreed period of time. The charterer’s payment to the owner for that service is called hire and entitles him to issue voyage orders to that vessel. During the period of a time charter, the charterer is responsible for all operational costs including bunkers, port expenses, pilotage and stevedoring costs. While the owner retains possession of the ship he is still responsible for the non-operational costs including crew, supplies and insurance premiums.

In return to the charterer’s obligation to pay the hire to fulfil the requirements of a time charterparty, the shipowner is obliged to deliver the agreed vessel at the pre-arranged geographical position and in a good seaworthy condition. The vessel has to comply with her description in the charterparty. Should the vessel not match that description, the charterer will be able to claim damages. The charterer also has a possibility to cancel the charterparty if the actual condition of the vessel differs significantly from the vessel’s description in the charterparty, because the main element of the charterparty has been compromised.

A voyage charterparty, compared to the time charterparty, is an agreement where the owner performs a designated voyage in return for the payment of freight. All operational and non-operational costs remain with the shipowner. Usually the charterer is responsible and pays for cargo handling.

Besides the charterer’s obligation to pay freight for the service of shipment to perform a voyage charterparty, he is also obliged to actually provide the cargo. The consequences of the charterer’s failure to provide the cargo are either damages for detention or demurrage. Should the charterer be unable to provide a full and complete cargo, the shipowner is entitled to demand a “deadfreight”.

Comparing both types of charterparties, it is important to notice that there is a difference in the allocation of risks. Under a voyage charterparty, payment of freight is calculated in accordance with the amount, usually expressed in metric tonnes, of cargo loaded on board. All delays during a voyage charterparty lower the value of the received freight. Therefore, the risk of delay falls on the owners. An exception is the time during loading and discharging operation. To the contrary, under a time charter, the risk of delay falls on the charterer. The received payment of hire is calculated in accordance with time in which the charterer has the right to issue voyage orders.

2. Charterer´s and Shipowner´s Liability

In most time and voyage charterparties, the charterer is obliged to indemnify the shipowner against third party liability claims if such claims result from charterer’s breach of the charterparty, or originate from charterer’s activities and responsibilities when chartering the vessel.

In fact, when engaged in time and voyage chartering, a charterer will need to have a standard P&I cover for almost the same risks that are usually insured under owner’s standard P&I cover. This is because the charterer may be directly liable to third parties either in contract or in tort.

Sometimes a charterer will want to relieve himself from liability by means of shipowner’s P&I cover if it is stated in the charterparty that the charterer can benefit from shipowner’s P&I cover. It should be noted that such clauses are not enforceable because P&I insurer is not a party to this contract and will not be bound by its terms. Hence, the charterer will be left without any P&I cover.

Although many standard-form charterparties exist and are constantly updated, parties normally agree to amend certain clauses to serve their commercial needs. It is also common in the industry to insert so-called “rider clauses” that are additional typewritten clauses drafted by the parties. These amendments as well as “rider clauses” could lead to ambiguities and inevitable disputes. Thus, parties should be very careful in amending any standard-form charterparty’s clauses.

Generally, when performing voyage charterparties, allocation of liability differs between charterer and shipowner. While the risk for commercial operation of the ship is borne by the shipowner, decisions and responsibilities concerning how, when and where the cargo is loaded are shared between both parties. During loading and

discharging operations, the charterer is normally responsible for the quantity and quality of the cargo.

This part of the article will outline different types of liabilities that shipowners and charterers may face in case of various types of accidents. This analysis will come under the P&I’s umbrella.

2.1. Time Charterparty and Bills of Lading

There is an important relationship between time charterparty and Bills of Lading (B/L). Under most time charterparty forms B/L will be issued by the shipowner, charterer or by their agents to the shipper. If the charterer is not the cargo owner, then two contracts of carriage may exist at the same time. Consequently, the charterparty will be the contract of carriage between the charterer and the shipowner; whereas the contract of carriage between the shipper (or cargo owner) and the carrier (shipowner, but could be the charterer), is evidenced by the B/L. All of the above could lead to legal complexities and result in disputes and prolonged litigation. It is usual for a time charterer to issue B/L on behalf of the Master, thus making those B/L the shipowner’s B/L, despite being issued by the charterer. It should be noted that under the B/L the shipowner may be exposed to greater liabilities than under time charterparty, where parties may agree on different clauses and exclusions limiting their liabilities. The charterer may insist that the Master shall issue clean B/L and the charterer, in turn, promises to indemnify the shipowner in case of a loss, arising from complying with this order (e.g. BIMCO Uniform Time Charter 1939 (BALTIME 1939), Clause 9 for dry cargo; Shell Time Charter Party (SHELLTIME 4), clause 13, for tanker trade). However, the Master is not obliged to do so if he knows that the information provided by the charterer or shipper in the B/L is incorrect, as to apparent order and condition of the cargo loaded.

It was clearly stated in Brown Jenkinson v. Percy Dalton1 that knowingly issuing clean B/L when a claused B/L should have been issued will amount to fraud and any indemnity provided by the charterer or shipper will not be enforced. Such information is misleading as well as deceiving to innocent cargo receivers as well as creditors under respective letters of credit who rely on the B/L for the description, condition and quantity of the cargo being

purchased. It will also prejudice the respective party’s P&I cover.

Last but not least, under some charterparties the shipowner might be obliged to deliver cargo without presentation of the original B/L and at a port other than that stated in the respective B/L. It should be emphasized that the shipowner does it at his own peril and prejudices P&I Cover under BE&O P&I Rule 11.8.3. iv.

2.2. Damage to Cargo and Personal Injury

There are a number of situations when the charterer, instead of the shipowner, may be held liable for damaged or lost cargo.

First, if the charterer is named as the carrier under his own B/L (in some jurisdictions the charterer may be the carrier under a shipowner’s B/L) he may be directly liable to the cargo owner if cargo is damaged or lost during voyage.

Second, under BALTIME 1939, clause 9, the shipowner will not be responsible for shortage, mixtures, marks, nor for number of pieces or packages, nor for damage to or claims on cargo caused by bad stowage or otherwise. Similar wording is found in New York Produce Exchange (NYPE 1946) and NYPE 1993, where clause 8 (a) states that it is the time charterer who is responsible for all cargo handling such as loading, stowing, trimming, [etc.] of the cargo. In this case the charterer bears the burden of loss.

In view of voyage charterparties and the often used FIOS terms (free in and out, stowed and trimmed), the charterer is responsible for the whole loading and discharging operation. The referred FIOS clause is described in clause no. 5 of the widely used voyage charterparty GENCON (BIMCO Uniform General Charter as Revised 1922, 1976 and 1994).

GENCON clause no. 5

Loading / Discharging (a) Costs / Risks.The cargo shall be brought into the holds, loaded, stowed and / or trimmed, tallied, lashed and / or secured and taken from the holds and discharged by the Charterers, free of any risk, liability and expense whatsoever to the Owners. The Charterers shall provide and lay all dunnage material as required for the proper stowage and protection of the cargo on board, the Owners allowing the use of all dunnage available on board. The Charterers shall be responsible for and pay the cost of removing their dunnage after discharge of the cargo under this Charter Party and time to count until dunnage has been removed.

Normally, it is then the charterer who appoints the stevedores and he is therefore to be held liable should any damage to the cargo have occurred due to bad stowage, defect lashings or securing. In this respect, clause no. 2 can be interpreted as a conjunction to clause no. 5 in reference to the risks and liabilities.

GENCON clause no. 2

Owners’ responsibility clauseThe Owners are to be responsible for loss of or damage to the goods or for delay in delivery of the goods only in case the loss, damage or delay has been caused by personal want of due diligence on the part of the Owners or their Manager to make the Vessel in all respects seaworthy and to secure that she is properly manned, equipped and supplied, or by the personal act or default of the Owners or their Manager. And the Owners are not responsible for loss, damage or delay arising from any other cause whatsoever, even from the neglect or default of the Master or crew or some other person employed by the Owners on board or ashore for whose acts they would, but for this clause, be responsible, or from unseaworthiness of the Vessel on loading or commencement of the voyage or at anytime whatsoever.

It is seen in the tanker trade that allocation of risks and liabilities concerning cargo damage during loading and discharging operation is more balanced between owner and charterer. The popular and versatile used charterparty ASBATANKVOY (Association of Ship Brokers & Agents Tanker Voyage Charter Party) for all kind of tanker vessels imposes a clear regime of responsibility for cargo.

Asbatankvoy clause no. 10

Pumping in and outThe cargo shall be pumped into the Vessel at the expense, risk and peril of the Charterer, and shall be pumped out of the Vessel at the expense of the Vessel, but at the risk and peril of the Vessel only so far as the Vessel’s permanent hose connections, where delivery of the cargo shall be taken by the Charterer or its consignee.

Both the owner and the charterer share the risk for loading and discharging operation as well as the respective costs, presuming the vessel’s permanent hose connection were used during the discharging operation.

Despite the above described allocation of liabilities between owners and charterers with regards to voyage charterparties, it is important to note that in case of a cargo claim the claimant will most likely try to hold the owner responsible for the damage, as the charterer might not have any assets that the claimant would accept as security. Therefore, it is common practice that the claimant will try to arrest the ship. After the settling of the claim, the owner could be entitled to a FD&D claim against the charterer due to the contractual liabilities between owners and charterers.

When carrying oil or LPG/LNG cargoes, the charterer should pay particular attention to loading procedures since incorrect loading

may change cargo’s substance, - thus making it unfit for the ultimate receiver (e.g. too low or too high temperatures may change cargo’s specification). Consequently, failure to observe proper loading procedures may lead to substantial cargo claims and may result in the vessel’s arrest or detention.

It should be noted that bad stowage, loading or wrongful declaration of cargo (in case of dangerous goods e.g. explosives) could lead to other claims such as damage to the hull, personal injury of crew or stevedores, property damage, pollution damage (in case of carriage of oil, LPG/LNG cargo) and even wreck removal. These standard form charterparties specify that the charterer will be responsible to indemnify the shipowner for such damage or injury. Even though it is the shipowner who takes care of the crew’s injuries and will be ultimately reimbursed by the P&I Club, the shipowner will definitely have a right of recourse against the charterer in this type of claim.

2.3. Pollution

Under the International Convention on Civil Liability for Oil Pollution Damage and the International Convention on Civil Liability for Bunker Oil Pollution Damage, it is the owner of the vessel who is ultimately responsible for an oil or bunker spill. When pollution occurs, port authorities will most likely blame the owner of the vessel in the first instance. However, both conventions explicitly state that nothing in these conventions shall prejudice any right of recourse of the shipowner against third parties.

In certain types of situations it is the charterer who might be responsible for oil or bunker pollution and the shipowner will most likely be successful in exercising his right of recourse. For example, in BALTIME 1939 clause 4 and NYPE 1993 clause 7, it is stated that the charterer shall provide and pay for fuel oil. However, off-specification fuel may cause damage to the vessel’s main and auxiliary engines, which can lead to many problems and potential accidents including, but not limited to, fire, explosion (and subsequent bunker and oil pollution), personal injury, finding place to discharge off-specification bunkers, losses from slow speeding and so on.

Allocation of liabilities with regards to pollution claims under a voyage charterparty is mainly on the side of the shipowner. However, the charterer may face liabilities for pollution claims when these are directly caused by loading or discharging operations. In tanker trade this might become the case. Furthermore, it is very likely that similar to cargo claims, as the charterer might not have any assets to secure the claim, the claimant will try to blame the owner for the occurred damage and try to arrest the ship.

2.4. Safe Port or Safe Berth

Safe port or safe berth provision is the clause seen in most time charterparties. For example, SHELLTIME 4, clause 4 (c), obliges the charterer to exercise due diligence in ensuring that the vessel is only employed between and at safe places. NYPE 1993 clause 4, in turn, provides that the vessel shall be employed in such lawful trades between safe ports and safe places.

If the vessel, its cargo and/or crew have suffered damage because of the charterer sending the vessel to an unsafe port or berth in contravention of this clause, the charterer will most likely be liable for all the direct and consequential losses.

2.5. Penalties and Fines

Time charterer may be held liable for pollution damage resulting in penalties and fines imposed by authorities owing to bunkering operations if the spill occurred because of the vessel that was supposed to deliver bunkers as contracted by the charterer.

Furthermore, both time and voyage charterer may find themselves liable for fines levied for breach of immigration laws and regulations (e.g., stowaways, especially in container trade); for shortage or for over delivery of cargo (e.g., “paper” shortage) since it is the charterer who is responsible for the cargo; for fines imposed in relation to violations of MARPOL Annex VI on sulphur oxide and nitrogen oxide emissions from vessels by virtue of supplying off-specification bunkers.

2.6 General Average, Salvage and Special Charges

According to the York-Antwerp Rules 1994 (revised 2004), all parties to a sea venture proportionally share any extraordinary losses and expenditures resulting from a voluntary sacrifice of a part of the ship or cargo to save the whole adventure in an emergency. The term “all parties”, normally contains the shipowner and the cargo-owner. However, also the time-charterer who put his own bunkers on board the vessel may be faced to contribute to the general average expenses. Therefore, the shipowner, the time-charterer as well as the voyage charterer (presumed he is also the cargo owner) may have to pay general average costs.

Conclusion

Both shipowners and charterers should be aware of their exposure and liabilities in case of a maritime accident. As can be seen from the above, great care must be taken when amending any standard form time or voyage charterparty. Different standard charterparty forms impose different obligations, exclusions and limitation clauses. Sound legal and practical advice is an absolute necessity in cases of amending or complementing standard form charterparties.

In many instances the shipowner will be the first one to blame, because the vessel (usually) is a valuable asset which can be arrested. Arrest of the vessel, which in some jurisdictions is a rather simplified process, can lead to great losses and tremendous financial exposure. Absence of P&I cover for either of the parties involved could be detrimental to the company’s financial and market standing.

BE&O P&I Standard P&I Cover for Shipowners and Charterers

BE&O P&I Standard P&I Cover is available for shipowners, charterers, operators and managers of the vessel. The Standard Cover provides intensive support for the loss prevention, claim defence and claim reduction. This guarantees the highest financial security when a claim arises as well as at preliminary loss prevention stage.

BE&O P&I Claims Handling Department consists of master mariners, surveyors, logistics experts, qualified lawyers, naval architects and insurance specialists. They provide expert service in international claims handling, consulting and loss adjusting and are available for BE&O P&I clients.

For more information on BE&O P&I Standard P&I Cover please visit www.beo-pandi.com

Should you have any queries or require any further information on the above, please contact:

Capt. Andreas EfthimiadesDirector of ClaimsEmail: andreas@dgsmarine.comOffice: +357 (0) 253 491 00Mob: +357 (0) 99 478 854

Capt. Nigel MonizDivisional DirectorEmail: moniz@dgsmarine.comOffice: +44 (0) 20 7283 4230Mob: +44 (0) 794 410 8174

Mr. Nicolas A. SkinnerDivisional DirectorEmail: n.skinner@dgsmarine.comOffice: +45 (0) 55 77 59 19Mob: +45 (0) 25 77 98 40Office: +44 (0) 207 929 0939Mob: +44 (0) 796 127 4386

Ms. Tina Liisa OhlhaberDirector & Company SecretaryEmail: tina@dgsmarine.comOffice: +49 (0) 40 70 299 820Mob: +49 (0) 170 22 84 764

Ms. Sanndhya PillaiDirectorEmail: pillai@dgsmarine.comOffice: +91 (0) 226 759 7400Mob: +91 (0) 98 2088 3074

Capt. Sirpreet KahlonGeneral Manager, DubaiEmail: sirpreet@dgsmarine.comOffice: +971 (0) 44 56 59 09Mob: +971 (0) 50 141 88 68

Ms. Anna HienGeneral Manager, VietnamEmail: anna-hien@dgsmarine.comMob: +84 (0) 907 13 41 79

1 Brown Jenkinson & Co., Ltd. v. Percy Dalton (London), Ltd., [1957] 2 Lloyd’s Law Reports 2.

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