There are several elements of a Time Charter. There are the actual vessel that is chartered, the vessel-owner, the charter party, the vessel operator, and the port facilities. All of the elements listed are wrangled into a charter contract. There are many forms of chartering that we can engage in, here we provide an essential guide to a Time Charter.
In a Time Charter, the shipowner lends its vessels to the charter party, with specific parameters set in the contract. The contract can be in the form of a “Period” charter, which means that the duration of the charter is fixed beforehand. Or, the contract can be in the form of a “Trip” charter, which means that the chartered vessel is bound to only undertake a certain voyage or a number of specific trips.
This article will never justifiably cover all the intricacies of a time charter arrangement. Moreover, the scale of a vessel charter is also something that is not readily accessible for every exporter or importer.
But, as all humans do, we aspire to achieve something bigger, better and greater. What better to symbolize scale other than aiming to operate a business that is able to charter a VLCC capable of 60,000 DWT. In this article, we hope to perhaps shed some light to the details of a Time Charter.
Features of a Time Charter
You Don’t Actually Lease the Vessel
A Time Charter is not actually a lease.
In other words, once the Time Charter is finalized, the charterer does not have possession of the vessel, the charterer cannot change a vessel’s course, nor can they change the crew members hired, or any other aspects of the charter.
The charterer only has the right to ‘use’ the vessel as stated in the Time Charter.
This important distinction implicates that if any damages arising from any negligence, the shipowner is accountable for the negligence as charterer has no ownership interest or possession rights of the vessel.
Responsibility of Ship Owner
Though the responsibilities of the Shipowner under a time charter are, to a certain extent malleable, some responsibilities are expressed or implied in a time charter.
Responsibility to Provide Accurate Description
With regards to the description of the vessel, the owner is responsible for providing an accurate description of the vessel, descriptions that may as well be deciding factors on whether the vessel is fit to transport the charterer’s cargo.
The vessel chartered have to be seaworthy, and the ship owners will diligently maintain the vessel’s seaworthiness.
Example Vessel details: –
- Vessel Flag
- Vessel location
- IMO Number
- Call Signs
- Vessel Dimensions
- Vessel Capacity
- Vessel seaworthiness
Responsibility to Comply with Charter Agreement
Once the vessel has been delivered to the location agreed upon, the owners undertake that the ship will comply with the charterer’s orders and execution.
Bar from the actual pilotage of the vessel, one major aspect that the shipowner operates is the loading and unloading of cargos. The shipowners have to cooperate fully with the charterer to ensure the smooth operations of cargo loading and unloading.
Responsibility to Dutifully Operate Vessels
The shipowner also endeavors to keep the ship properly crewed and officered during the period of the time charter. All supplies except for bunkers are provided by the shipowners. Naturally, the shipowners will have the best understanding of the leased vessel.
Responsibility of the Charterer
Vessel Charterers are essentially the shipowner’s customers. So, the responsibility of the charterer is ultimately to honor the terms of the time charter.
The charterer is responsible to not misrepresent the cargo transported by the vessel. Any misrepresentation of the cargo may jeopardize the vessel operation and endangers the crew onboard.
Also, the charterer is responsible to cooperate with the shipowner with the loading and unloading of cargoes.
Delivery of Time Charter
Effectively speaking, the time charter starts when the ship is “delivered”. A delivery implies that the ship is staged and available at the disposal of the charterer.
However, to deliver a vessel, at a safe wharf, and ready to set sail, many conditions have to be perfect to meet the delivery deadline.
We are talking about delivering a 75,000 deadweight ton vessel, that’s equivalent to navigating a vehicle the weight of 10 Eiffel Towers. Hence, there are several contingencies in place in a Time Charter arrangement.
In most of the time charter arrangements, there is a canceling clause set in the agreement, providing the charterers the option to cancel the charter if the delivery date or period is not met.
There is usually a grace period before the charterer can execute the cancellation clause. Though the charterer has the right to exercise its rights with the canceling clause, the charterer has no obligation to do so.
This means if the delivery is delayed within reasonable reason and within manageable circumstances, the charterer can choose not to cancel the charter.
The shipowners are exposed to significant risks if the charter is canceled. One thing is that the shipowner will be liable in damages due to a breach in contract, another is that the shipowner risk monetary losses from carrying its duty to deliver the vessel.
Notice of Readiness (NOR)
Prior to the delivery of a ship, the shipowner has to prepare a Notice of Readiness (NOR) to the charterer.
If the shipowner failed to produce the NOR before the canceling date, the charterer has every right to cancel the charter.
What is Laycan?
A wordplay where “Layday” and “Cancelling” put together.
Perhaps it’s best to describe Laycan not as a date but as a window period.
Laycan is the period before the Notice of Readiness has to be prepared, and the period when the vessel is docked and ready for unloading.
Laycan is expressed with two dates, for example.
Layday = 15th October
Cancelling = 22nd October
Other Reasons for Cancellation
Similar to any other contract laws, the terms and conditions set in the charter is open to interpretation.
Although both the shipowner and the charterer are bounded by the cancellation clause, the circumstances leading to the cancellation may be scrutinized to determine if it is rightful.
Assessments such as seaworthiness of cargo, condition of delivery, reasons for the delay have to be taken into consideration when assessing the rightful use of a cancellation clause.
Re-Delivery of Time Charter
When the Time Charter comes to an end, and the final voyage has completed, the charterer will then “redeliver” or return the vessel to the shipowner.
The Time Charter will only be considered complete once the vessel is “redelivered” after the minimum charter period.
The shipowner can refuse a redelivery of a ship if the vessel: –
- Is delivered before the minimum charter period
- Is delivered exceeding the maximum charter period
- Is delivered in the same order and condition (except wear and tear)
- Is delivered at the agreed place
The charterer is required to serve notice of their intention to redeliver the vessel in a form of a Notice of Redelivery.
Parties involved in Time Charters
In practice, the Charterer may not know the shipowner, and vice versa.
A large percentage of charters are arranged by charter brokers and shipbrokers, where both can act as intermediaries for the charterer and the shipowners respectively.
To further complicate matters, charter brokers may act as the principal on behalf of the charterer, and shipbrokers can act as principal on behalf of the shipowners as well.
Similar to a bill of lading, therefore the parties involved in the time charter are indicated by the principal contract owners. Whichever entity has signed the charter or the agreement, that entity is identified as the principal party of the time charter.
The more interesting arrangement is where the shipbrokers are signing on the time charter “on behalf of” the principal shipowner. In this case, the shipowner has to be disclosed in the charter or agreement. If otherwise, the reasonable conclusion to draw is that the shipbroker is acting as the principal.
But what happens if the charterer and the shipowner chose to remain undisclosed?
Should there be such a circumstance, both the shipowner or the charterer has to empower its brokers, by providing ‘actual authority’ to its broker.
‘Actual Authority’ refers to: –
- The authority to conclude the contract of behalf of its principal
- The authority to dictate terms of the charter
A Time Charter can be engineered to allow the charterer to sub-charter or sub-let part of the vessel to other charterers.
But since there is no contractual relationship between the shipowner and the sublet charterers, does that mean that any damage or claims have to be brought to the head charterer only?
To answer that we look at who is authorized to sign the master bill of lading, and the parties in the bill of lading are indicative of a contract of affreightment.
The relationship can be between: –
- The head charterer and the sub-charterer
- The owner and the sub-charterer
So yes, the shipowner has to perform its contractual obligations to the sub-charterers, to the extent detailed in the bill of lading.
On the flip side, the shipowner has a lien over the cargo for the freight due to the shipowner. In extreme circumstances such as a general average, the shipowner can also hold all cargos owned by the sub-charterers as collateral to receive payment in kind.
Duration of Charter
In a fixed period time charter, it is common that a time charter will span a duration of months to years. Alternatively, a time charter can be arranged as a series of voyages completed within a set time too.
As we mentioned before, the time charter commences once the delivery of the vessel is performed; And the Time Charter ends when the vessel is redelivered at a given time and location.
Regardless of whether the charterer has utilized the vessel, the contract is in effect. On the other hand, when the chartered vessel is under the employ of the charterer, the shipowner must avail the vessel and perform its obligations dutifully.
To point out, a fixed period of time charterer is rarely “fixed”. Due to the complexity of delivering a contracted vessel, the period charter will always be approximate. For example: –
- Period of 3 to 6 months
- Period of 3 months, 20 days more or less
Where a ship is “Off Hire”, the time spent off-hire is not added to the period of the charter. There are circumstances where shipowners will suspend the charter. It could be for ship inspection, maintenance, or equipment malfunction.
The duration of charter, though vaguely defined, has to be strictly adhered to. There can’t be any early redelivery, late redelivery, early delivery, or late delivery.
Every delivery or redelivery has to be done within the stipulated range of date. Unless of course, there are unpreventable circumstances that arise such as war or force majeure.
We barely scratched the surface. We did not touch on the applicable laws of a time charter, and the practical knowledge of engaging in a time charter.
Well, though this topic is a niche and not everyone will have the opportunity to charter a vessel of this scale. Perhaps one day, if you do, at least you know what to look out for.