What is ship chartering: definition, contracts, and obligations of the parties (2024)

Transportation by sea is rightly considered the most advantageous way of delivery, especially in the international transportation of bulky cargo. Time and cost savings, convenience, and reliability are just some of the pros of maritime logistics. The concept of freight is inextricably linked with this type of shipping. In fact, it is a charge for the place that the goods occupy on a particular ship. But to see the full picture and understand what chartering a ship is, you must know about all the processes preceding renting a place on board and delivering goods.

Chartering and rental: difference

It is important to note that chartering can be called rental only notional because of the similarity of both processes. However, chartering also has the characteristics of a contract of carriage. The essence of both actions is the economic benefit of transporting goods to a certain destination.

Among the differences between the charter agreement and the ordinary cargo transportation and rental:

• irregular sea flights;
• possibility to transport passengers;
• the shipowner is not responsible for the cargo during transportation;
• chartering is not possible for all types of shipping;
• the charterer is responsible for the late delivery of the goods and other faults until the end of loading;
• bill of lading is issued by the shipowner.

Thus, the rental, shipping, and chartering cannot be equated. Chartering combines the features of these two services.

Components of successful chartering

For the successful chartering of a vessel, it is necessary to:

• find the right board;
• agree on the terms of the lease;
• calculate in advance the estimated freight rate;
• determine possible downtime;
• prepare appropriate documentation.

Each of these steps requires careful analysis and professionalism. Only experienced specialists in maritime law and logistics know how to charter ships efficiently and profitably, carrying out the customer’s tasks. Experts study the specifics of the cargo and assess its volume, parameters, and route before offering the client a profitable charter plan. Compiling a package of documents can only be done with knowledge of certain countries’ transport charters and codes.

Arrangements for ship entry and exit, cargo unloading and loading, customs formalities, and dispatch are not part of the chartering service. As a rule, these paragraphs are included in a separate transport-forwarding contract.

Charter contract: definition and essential terms

A sea charter contract is an agreement between the owners of a ship and goods to lease a place on board for a specified period for transportation. In some cases, charterers prefer to lease the vessel entirely. For example, if an unpopular route is chosen and no other charterers wish to send the cargo in the same direction.

According to the contract, the owner of the sea transport undertakes to provide space for the goods but is not fully responsible for the transportation and escort itself. This nuance is important to understand to distinguish freight from ordinary shipping. Basically, ship chartering is a rental but with a precise indication of its purpose – merchant shipping.

The main point of each contract is the freight rate, that is, the rent. The total cost depends heavily on the price of loading and unloading the goods in the ports. The overload is denoted by the abbreviation THC (terminal handling charges) and includes all processing services from stacking to unloading.

Among the most essential terms required to understand freight documentation are:

• FIOS (Free in/out) – the tenant pays for the unloading and loading;
• FILO (Free in/Liner out) – the liner operator covers the costs of unloading; the freight forwarder pays the loading fee;
• LIFO (Liner in/Free out) – costs are distributed according to the principle: the customer is obliged to pay for the unloading, but the operator pays for the loading;
• LILO (Liner in/out) – the liner operator bears full responsibility for the cost of moving the container at the port.

Sometimes, the contract also takes into account the cost of paperwork in ports. All these points should be studied before drawing up and signing the papers. If you are not sure of the correctness and benefits of the proposed terms, seek help from professionals. This step will minimize risks and help to control all the agreement’s technical, legal, and commercial nuances.

Chartering classification

The main criteria of the chartering classification are the time and specificity of the ship operation. There are ships chartering on time and voyage chartering. Each of these groups, in turn, has several subtypes.

So, the voyage type can be a charter for one or several sea flights. There is also a contractual option where the contract specifies the amount of the goods and the specific period for which they need to be transported from point A to point B. A voyage charter contract is most often executed when one of the parties coincides with the addressee (for example, the buyer and the charterer are the same person). The second circ*mstance is that all or part of a vessel’s area is required to transport goods.

The transportation process itself includes:

• voyage to the loading port;
• acceptance of goods;
• sea flight to the port of unloading;
• cargo delivery.

Chartering a ship on time can also be different. If the cargo owner temporarily receives the ship with the crew and pays for all the transport work himself, this type of cooperation will be called a time charter. Most often, this type of contract implies a particular area of navigation of the vehicle.

If the charterer pays for everything, including crew services, it is a demise charter. It happens that the ship is chartered without a team, and one hires people independently. In this case, the form of the chartering will be called a bareboat charter.

Whatever the type of contract, it should contain information on:

• the names of both sides and the ship;
• types of cargo;
• freight rates;
• loading and destination names;
• route;
• duration of the arrangements;
• freight rate.

Additional data are included in the document by the charterer and shipowner’s request.

Freight benefits

Ship chartering is a great way to protect the interests of legal persons. The charterer has the right to require the vessel’s owner to specify the area, the parameters of the vehicle, the defined location within, etc. Due to the contract, no changes to the specified conditions are possible, and therefore, the parties’ interests are protected.

As a charterer, you are allowed to approve the route and timing of transportation and choose suitable ports and places of loading. The lessee may also be sure they will not carry other goods on board without their knowledge. Otherwise, the shipowner will breach the contract and will be punished appropriately.

The shipowner also receives all necessary guarantees. Thus, throughout the contract period, the charterer undertakes to notify the owner of the ship of the change of address. The parties thus avoid all possible communication problems. If the charterer ignores this obligation, the messages are still deemed to have been delivered, with all the attendant consequences.

Another essential insurance for the shipowner is the mandatory determination of the solvency of a potential customer. In case of the impossibility of advance payment, the law provides other methods of guaranteeing for the shipowner. For example, the payment of collateral, guarantee from the bank, etc., may be requested.

Finally, both parties to the charter party should be entitled to sign the document. To represent a particular organization, it is necessary to have authority confirmed by a notarized power of attorney. Without a power of attorney, this right is generally vested in only one authorized person in the enterprise.

Market realities: mixed forms of contracts

In total, more than 200 standard forms are used for chartering. However, modern freight brokers often approach the work creatively and apply proformas, which are not generally peculiar to the parties in the classical representation. For example, a time charter scheme may be used to charter ships for one voyage. This variation is more profitable from a commercial point of view. However, assessing the possible legal consequences is prudent before resorting to such changes.

However, some aspects of the modern freight market are pretty conservative. The critical role is always played by the reputation of the charterer (lessee). Do not be surprised if the shipowner asks you for the last three fixations, that is, recommendations from previous freighters, before agreeing to cooperate.

Opportunities to challenge contracts and penalties

If you are going to charter a ship but lack knowledge and experience, it is necessary to seek expert assistance from specialists. Because if the letter of the law is not respected, the contract can be challenged. The reason is the absence of a ship owner’s license or consent to a contract of competent authorities, limitation of the parties’ rights by regulations, violation of laws, etc. All this may lead to the invalidation of the agreement. In this case, the owner of the ship incurs huge losses because the charterer has the right not to pay for the service, even if the shipowner has fulfilled all obligations. Shipowners should, therefore, be particularly careful and scrutinize all points of the contract and documents.

To avoid problems with calculations and payments, the contract should specify not only the freight rate but also the payment schedule, methods, and payment details. Additionally, It is recommended to write information on possible penalties in the document, indicating the amounts and conditions. In some cases, the charterer is entitled to a portion of the freight amount. The shipowner, in turn, may deposit the cargo. However, all these circ*mstances must be stated in the document in advance.

Conclusion

The concept of chartering combines the features of rental and transportation services. To successfully charter a ship, it is not enough to know what ship chartering is. Proficiency, experience, and thoroughness are required to make a cost-effective plan, check all legal nuances, and make no mistakes in the preparation of documents. Charter ships can be on time or voyage. Each of these groups, in turn, has several subtypes. Subject to the correct choice and execution of the contract, the interests of both parties will be well protected.