Time charter

Time charter. A time charterparty contains the terms and conditions mutually agreed upon between shipowners who have let and charterers who have hired a vessel for a stated period, e.g. one year, or she may be let on time charter for one or mire consecutive voyages between certain ports or ranges of ports.

In general, time charters can and do pose many problems for shipowners BIMCO frequently warns its owner members that they should enter into contracts only with charterers of good repute. BIMCO also has to intervene frequently on behalf of its members, pursuing claims against time charterers, and sometimes finds that the charterer hides behind a “bogus” company reduced to no more than a Post Office Box number in some strange country. Shipowners should use BIMCO’s “Reference Register” before fixing their ships on time charter because the Register contains records of those parties who regularly default on payments, especially for time-charter hire.

Some areas of dispute on which BIMCO can and does advise, on request, are: uncertain duration of hire, “Trading limits”, places of delivery and redelivery, bunkers on delivery and redelivery and arrest of vessels for time charterers’ unpaid debts.

Time charter durations can vary from a single voyage on time charter terms (as opposed to a voyage charter terms) to long periods of, say, five to ten years. The time charter to perform a single voyage (the “trip time charter” or, simply, “trip charter”) is used where a charterer can evaluate risks of loss of time (and possible demurrage) more precisely than an owner because the former is in a particular trade.

The period charter or, simply, “time charter”, is for a specific period. The period can be a “flat period ” for example,” twelve months” without a “margin”, or with a margin, for example, “minimum 11 maximum 12 months”. The actual duration is important to the shipowner who may want redelivery by a certain date, perhaps for drydocking. Unless the margin is reasonable, it can be difficult to predict where the ship will be at the end of the agreed period. The margin, if any, should be in terms of “days” rather than “months” as the former is easier to determine, for example, “20 days more or less . . .”.

The charter hire per calendar month can be based on the vessel’s total deadweight carrying capacity. This is the deadweight capacity on the vessel’s summer loadline, irrespective whether the ship may be loaded down to her winter or summer loadline at the time of fixture on time charter. The quantity of cargo earned has no bearing whatever upon the charter hire. It is entirely up to the charterers to provide for a full cargo in order to utilise the vessel’s cargo carrying capacity to a maximum extent. Hire can also be paid at a fixed sum per day of hire. This is more common today.

Time charter hire is payable in advance, either monthly or half monthly.

Time charter hire runs continuously unless the vessel is “off hire”.

Owners, who have fixed a ship on time charter, are bound to deliver the vessel at the port agreed upon in such a condition that the vessel is “in every way fitted” and equipped for the employment contemplated under the time charter.

Time charterparties usually stipulate that the owners shall provide and pay for all provisions, subsistence, wages, bonuses and all other expenses appertaining to the master, officers and crew, all insurance on the vessel and crew, owners’ agencies, all the cabin, deck, engine room and other necessary stores, including galley fuel and water (except water far boilers), and all other charges or expenses relating to the vessel except those, which under the terms of the charter, are expressly payable by the charterers. The owners shall exercise due diligence to maintain the vessel in a seaworthy condition as well as keep her in a thoroughly efficient state as regards hull, machinery and equipment during the period of the charterparty.

While the vessel is on hire, the charterer’s usually provide and pay for all fuel (except galley fuel), water for boilers, port charges, pilotage (whether compulsory or not), canal pilots, launch hire (unless incurred in connection with owner’s business), lights, tug assistance (“towage”), consular charges (except those concerning the master, officers and crew or the vessel’s flag of registry), canal, dock and other dues and ‘charges, including any foreign general municipality or state taxes, other than those of the nation of vessel’s registry, also all dock, harbour and tonnage dues at the ports of delivery and redelivery (unless incurred through cargo carried before delivery or after redelivery), agencies and commissions incurred on charterers’ business, including passage fares, costs for security or other watchmen required by order or request of any government, overtime paid to officers and crew, expenses of fumigation, including deratisation and extermination of vermin, and quarantine if occasioned by the nature of the cargo carried or ports visited whilst employed under the charter, and cleaning of holds.

The question of fuel, and galley fuel in particular, came before the courts in 1987 in the case of The Sounion. There, the vessel was on a time charter on the New York Produce Exchange form, cl. 20 of which stated:

“Fuel used by the vessel while off hire, also for cooking, condensing water, or for – grates and stoves to be agreed as to quantity, and the cost of replacing same to be allowed by owners.”

The charterers claimed for US$70,437.50 under this clause for the cost of diesel oil used for domestic consumption. The owners agreed to only US$7,899.57, which they alleged was the cost of only the diesel oil used for cooking galley consumption. The diesel oil had also been used for heating the accommodation but the owners denied this came under cl. 20. The English Court of Appeal decided that the owners were obliged to provide and pay for the crew and the charterers were obliged to pay for the fuel except that used while off hire and that used for the crew’s domestic purposes. Clause 20 was intended to extend the owner’s liability to all fuel used for crew’s domestic purposes, whether that was for lighting, heating or cooking. Accordingly, the charterers were able to claim the entire amount of diesel oil used by the ship for purposes which were not connected with the charter.

The bunkers provided by the charterer must be suitable for use in the engines of the ship. The charterparty will usually contain a clause specifying the type of fuel to be supplied. If, for example, the ship is to be provided with “IF 180 cst.” (“Industrial fuel of viscosity 180 centistokes”), only the viscosity (ability to flaw) of the oil supplied is insufficient to relieve the charterer’s obligation. The bunkers should be of reasonable, general quality. If charterers supply oil that causes damage to the ship’s engine components, they will become liable to the owners far any loss and damage sustained.

The charterers shall also provide all necessary dunnage and extra fittings required for a special trade or unusual cargo, but shall have the use of any dunnage and shifting boards already on board the vessel, making good any damage thereto

In times of a serious depression in world freight markets as experienced, for instance, during the shipping recession between the mid 1970s to mid 1980s, there is a risk that charterers who have taken up tramp tonnage for long periods on time charter basis at high rates may fail to carry out their long term commitments involving them in freight losses as a result of the great difference between the current rates and the agreed rates of hire they are bound to pay. In some cases, rearrangements of charters or cash settlements may be agreed between the contracting parties. Obviously it is very important to check on the reliability of unknown or little known charterers before entering into long term commitments.

It may be argued that if hire is not paid in time in case of a voyage charter, shipowners can protect their interests by exercising a lien on the cargo or the vessel can be withdrawn in the case of a time charter. However, it should be borne in mind that a difficult situation may arise if the master of a timechartered vessel, after completion of loading, has signed prepaid bills of lading, as requested in the Employment clause. Such a procedure enables the time charterers to negotiate the prepaid bills of lading and collect the freight for the cargo. It has happened that after payment of one month’s hire in advance, in accordance with the charterparty, the charterers have failed to make further payments of hire. However, the consignees of the cargo are holding prepaid bills of lading, which the shipowner must honour. Consequently, the shipowner may be obliged to carry out a long voyage, discharge and deliver the cargo for payment of a small part of the charter hire.

BIMCO has warned its members repeatedly against unscrupulous charterers. In fact, the Conference has suggested to its members that in cases where the time charterers are not known to the owners as being first class and financially sound, they should insist upon the first month’s hire to be paid on signing the charterparty and subsequent instalments to be paid for 30-day periods two or three months in advance, depending upon the estimated duration of the voyage. If the time charterers fail to settle the hire in accordance with such a stipulation, the owners have a better chance to withdraw the vessel before any cargo has been loaded. Another solution may be for owners to insist upon an irrevocable letter of credit signed by a first-class bank. Such a clause could be worded as follows:

“It is agreed that the charterers will put the sum of . . . days’ hire in deposit with owners’ bankers in . . . and that the said amount will become due to owners in case of non-fulfilment of payment of charter hire by the charterers.” 

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