Ships, boats and other recreational vessels are owned by a large number of individuals who often purchase them as assets. They do not use these vessels for shipping goods or for ferrying passengers.
Instead, they often lend them out to third party organizations who use them for a variety of purposes. In maritime legal terms, this lending process is known as chartering. Chartering is an important concept of the global maritime trade sector, and is of different types.
This article will delve into the differences between two specific categories of charters – the voyage charter and the time charter.
What is a Charter?
A charter is an agreement between two or more groups known as charter parties, regarding the leasing of a vessel for a fixed set of conditions. The terms and conditions stipulated in the charter are binding on all the parties in the agreement and covers a wide variety of clauses and possible scenarios that may arise. It is considered to be an official document in legal aspects and is required by Admiralty Law to be drawn up in case of any form of vessel hiring or leasing.
A shipowner is the first party in the charter agreement who owns the vessel under consideration. The charterer is an individual or organization who is in need of a ship.
The charterer may have cargo that he wishes to transport, or may further lease out the vessel to third parties.
The shipbroker is a link between ship owners and charterers, and aids in finalizing the terms of the agreement. The terms of the agreement include the duration of leasing, fees, payment instalments, regulations on usage, and detailed surveyor reports on the condition of the ship.
Payment is termed as a freight rate and is remitted to the shipowner at fixed intervals decided in the agreement.
Surveyor reports are important in chartering, as they ensure that the vessel is seaworthy prior to being chartered. Similarly, on completion of a charter agreement, and before final payment formalities, another survey report is conducted to ensure that the vessel has sustained no damage during the lease period.
The charter agreement lays down the responsibilities of each group and stipulates the condition in which the vessel is to be maintained.
There are three main types of charters – voyage charter, time charter, and demise charter.
The demise charter is often known as a bareboat charter, and grants ownership or possession of the vessel to the charterer subject to certain time-bound conditions.
Terms and Features of a Voyage Charter
A voyage charter is a type of charter in which a vessel is leased out for a particular voyage. The charter agreement lists the ports of call, destination, and restrictions on cargo, if any.
Most voyage charters are undertaken by charterers who have cargo that needs to be shipped. For this, they contact ship owners through brokers and arrange a ship for a particular voyage.
Payment of voyage charters can be done in two methods – on a per-ton basis, or on a lump-sum basis.
The per-ton basis involves paying the owner for every ton of cargo or freight transported on the vessel. This is preferred when the cargo tonnage is considerably lower than the gross maximum cargo tonnage of the vessel.
On the other hand, when a higher weight of the cargo is carried, it is advisable to pay on a lump-sum basis. The shipowner must ensure that the tonnage carried on board the vessel is within the acceptable limits of the ship. This includes checking the tonnage of on-deck cargo, and the various load lines of the vessel.
There are some important terms used in a contract agreement, that lays out the time-based rules to be followed for the duration of the contract.
Laytime refers to the time that a charterer is allowed to complete the loading and unloading process at a port of call. Since the owner pays duties and berthing charges at the port, they expect the charterer to hasten the process.
In case the charterer exceeds the laytime laid out in the contract, he is obliged to pay a penalty known as demurrage. This covers the extra costs incurred by the shipowner owing to the delay by the charterer.
On the other hand, if the ship is able to complete the loading and unloading operations before the stipulated time, the charterer can claim payment of a despatch from the owner. This is often seen as an incentive for charterers to complete the port operations as soon as possible.
In voyage chartering, the shipowner undertakes payment of fuel, operation, and employment-related costs. It is their responsibility to hire the officers and other crew members for the voyage either from a pool of individuals working for them, or using brokers as middlemen to source mariners and seafarers.
In addition, the owner must also pay costs such as berthing and loading operations. Any equipment used must also be paid for by the owners.
To recoup these costs, the owners charge a higher rate from the charterer. In general, charterers transporting a one-off consignment prefer voyage charters despite the high cost. This is because they are not tied down to the contract for a long period of time.
Simply put, a voyage charter involves a charterer hiring a vessel for the purpose of a single voyage, in which the route and ports have been pre-determined. The responsibility of duty and other payments along with recruitment is handled completely by the shipowner, while the cargo is the sole responsibility of the charterer.
Terms and Features of a Time Charter
A time charter is a time-bound agreement, as opposed to a voyage charter. The shipowner leases a vessel to a charterer for a fixed period of time, and they are free to sail to any port and transport any cargo, subject to legal regulations.
Although the charterer controls the ship, the maintenance of the vessel still falls under the purview of the owner. They are responsible for ensuring that the vessel meets internationally accepted maritime standards, throughout the course of the agreement. They regularly employ marine surveyors to prepare reports on the seaworthiness of the vessel and make repairs as and when required. The owner will face legal action in case the vessel is found to have some major problem.
The time charter agreement can span anywhere from a few days to a few years. This is a long-term agreement that works on a single rate of payment known as the freight rate.
Payment is to be remitted every quarter and does not fluctuate under ordinary circumstances.
In time chartering, the charterer is responsible for selecting a crew, paying charges that arise during the voyages, and arranging for provisions to ensure smooth operations at every port of call. They must intimate the planned route to the owners in advance. The payment is calculated on a per-day basis, with penalties added at a later time. The cost of fuel, provisions etc. are to be covered by the charterer, while the owner will handle all maintenance-related costs.
The charterer often does not sail on the vessel and provide instructions to the master of the vessel in their stead. This includes permissible cargo, route and ports, required charter speed etc.
Unlike voyage charters that use a rigid payment calculation, there are several provisions for unforeseen delays in time charters.
Since payment is on a daily basis, the charterer may be delayed for a certain reason, and these are covered in the agreement.
Time not included in the final payment is known as off-hire hours. For instance, if a vessel is slowed down because of poor weather that could not have been predicted, the extra time spent is not included in the final time count.
Similarly, if some form of damage occurs and repairs need to be carried out, the duration is considered to be off-hire. Certain clauses can be inserted in the agreement, that allows for a fixed number of off-hire hours. Beyond this, the charterer is charged for delays.
Briefly put, a time charter involves leasing a vessel for a fixed period, on a per-day rate, where the charterer is free to use the vessel. The owner only looks after maintenance-related cost.
Clauses are inserted to protect the charterer from having to pay for hours that were spent due to events that could not have been foreseen.
How to Choose a Charter Type
Voyage and time charters are very different, in their intended use and service conditions. Knowing when to choose each type of charter can go a long way in meeting expectations of the charterer and shipowner.
A voyage charter is preferred in cases where the charterer only needs the vessel for specific voyages that may arise for different reasons. This could be the case when there is an occasional cargo to transfer.
An occasional cargo commonly springs up during sudden surges in demand, when the supply services are down. Thus, companies that may deal in other commodities may enter the cargo industry for that period of time, in order to make a profit.
This can also happen when the charterer has already pressed into service their own fleet of vessels, which forces them to hire a ship from a third party so that they may undertake a single voyage.
Voyage chartering can be tricky for inexperienced charterers, since the matter of the crew and equipment must be handled correctly.
Most owners make arrangements to look after these requirements, but it is mostly based on goodwill. Having a shipbroker negotiate the terms can be very helpful in ensuring that the occasional charterer is not inconvenienced by having a ship without a crew to man it.
A time charter is more commonly used by more experienced chartering firms when there is a long-term requirement for a vessel. Instead of having to specify the ports and routes undertaken by the vessel in the charter agreement, the charterer simply hires the boat for a fixed period of time and takes complete control over the vessel in all but name.
As they are free to sail to any destination with any group of crew and officers, it is beneficial to companies that already deal in shipping. For instance, if a ship is decommissioned or is sent in for repairs, the company needs to be able to procure a vessel for the duration of that period.
Instead of having to book a ship every time they wish to undertake a voyage, they use time charters. Thus, for the duration of the agreement, they will have possession of the vessel and are free to use it, within the purview of the law. This is especially useful since such a charterer will often already have a crew ready to take over the hired vessel.
Another major factor that sways the decision to pick either a voyage or time charter is the finances of the shipping industry. Voyage chartering is considered to be a volatile market since there is no assurance of leasing a boat on completion of an existing contract. Since it is only applicable for a single voyage, the overall volatility of the voyage charter is high.
However, charterers prefer voyage charters for the reason that they can always get a more competent rate from other ship owners. In other words, the owners are at the mercy of the chartering sector.
So, most ship owners prefer time charters, as it guarantees financial returns for a fixed period of time, at a fixed rate. This offers some protection against rapid fluctuation of the chartering rates. However, charterers do not prefer this contract, as it ties them down at a single rate for an extended period.
A one-off charterer always goes for a voyage charter, while a regular charterer prefers time charters. Shipowners are often directly approached by charterers, instead of having marine brokers. Thus, one must have an overall look at various factors influencing the shipping sector, prior to choosing between a voyage and time charter.
Table of responsibilities.
|SERVICE PROVIDED||VOYAGE CHARTER||TIME CHARTER|
|Crew hire and payment||Owner||Owner|
|Fuel and supply costs||Owner||Charterer|
|Cost of cargo operations||Owner||Charterer|
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Disclaimer: The authors’ views expressed in this article do not necessarily reflect the views of Marine Insight. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Marine Insight do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader.
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Ajay Menon is a graduate of the Indian Institute of Technology, Kharagpur, with an integrated major in Ocean Engineering and Naval Architecture. Besides writing, he balances chess and works out tunes on his keyboard during his free time.