Charter parties are the contracts that govern the hire of a vessel between a shipowner and a charterer. The two most common forms are the time charter and the voyage charter. Although both involve the use of a vessel, they operate on fundamentally different commercial and legal bases, and the disputes that arise from each type are quite different in character.
The Voyage Charter
Under a voyage charter, the shipowner agrees to carry a specific cargo between specified ports for a lump sum freight. The shipowner provides the vessel, the crew, and pays for the vessel's running costs, fuel, and port expenses. The charterer's obligation is to provide the cargo and to pay the agreed freight.
The key financial risk in a voyage charter is laytime and demurrage. Laytime is the period allowed in the charter party for loading and discharging the cargo. If the charterer uses more than the allowed laytime, they must pay demurrage to the shipowner at the agreed daily rate. If loading or discharging is completed faster than the allowed laytime, the shipowner may owe despatch money to the charterer.
Most voyage charter disputes in India relate to the calculation of laytime and the payment of demurrage. The charterparty documents and the Notice of Readiness tendered by the master at the load and discharge ports are central to these disputes.
The Time Charter
Under a time charter, the shipowner places the vessel at the disposal of the charterer for a period of time. The shipowner provides the vessel and crew and pays for crew costs and vessel maintenance, but the charterer pays for fuel and port costs and directs where the vessel goes and what cargo it carries. The charterer pays hire at an agreed daily rate for the duration of the charter period.
The charterer operates the vessel commercially during the charter period, making all decisions about employment, routing, and cargo. The shipowner retains control of the navigation and management of the vessel through the master and crew.
The distinction between the charterer's right to give orders about the commercial employment of the vessel and the shipowner's right to control navigation is one of the most litigated areas in time charter law. When the master refuses to follow a charterer's orders on the grounds of safety, or when a charterer gives orders that expose the vessel to sanctions or legal risk, disputes about the respective rights and obligations of the parties arise quickly.
Off-Hire Under Time Charters
Under a time charter, the charterer is obliged to pay hire continuously throughout the charter period. However, most time charters contain off-hire clauses that suspend the obligation to pay hire when the vessel is not in full working order due to causes within the shipowner's sphere — typically breakdown of machinery, drydocking, or shortage of crew.
Off-hire disputes are among the most common and most contentious in time charter practice. The charterer argues that hire should be suspended for a given period because the vessel was off-hire. The shipowner argues that the vessel was on-hire throughout. The financial stakes can be significant given that daily hire rates for large vessels run into tens of thousands of dollars.
Sub-Chartering
A time charterer typically has the right to sub-charter the vessel to a third party. This creates a chain of contracts: shipowner to head charterer, head charterer to sub-charterer. When cargo is damaged or when disputes arise about the voyage, working out which contract governs the claim, and which party bears the liability, requires careful analysis of the chain of charterparties and bills of lading.
Dispute Resolution in Charter Party Disputes
Most international charter parties, particularly those on standard forms such as NYPE for time charters or Gencon for voyage charters, contain London arbitration clauses providing for disputes to be resolved under the rules of the London Maritime Arbitrators Association. This means that most charter party disputes involving Indian parties are resolved in London arbitration rather than in Indian courts.
Indian parties who want their charter party disputes resolved in India should consider negotiating for Indian arbitration under the rules of an Indian arbitration institution when entering into charter party agreements. A charter party dispute resolved in London arbitration will eventually need to be enforced in India if the losing party is Indian, which is a separate process.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. It does not create a lawyer-client relationship. For advice specific to your situation, please consult a qualified legal professional. LawCite Advocates is a law firm registered in India.