[INFOGRAPHIC] Ship chartering: understand how to produce the contract

Do you know what are the essential elements of a charter party for vessels? Are there clauses that require more attention? And what are the main mistakes made in elaborating it?

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Thinking about the immense relevance of this subject, we prepared this special post. Throughout the article, you will understand how to produce this type of document and why it’s so important. Keep reading until the end to learn more!

What cannot be lacking in a good charter party for vessels?

To elaborate this article, we talked to specialist Vitor Cardoso, who is a shipbroker and partner at Brazilship/Scanbrasil — an organization that has been acting as a broker since 1974, with participation in several different segments and projects, such as Tank, Chemical, Gas, Grain Ships, Offshore (encompassing Maritime Support Vessels, Underwater Construction, and Drilling Rigs) and projects such as Regasifier vessels, for example. The company, which has offices in Rio de Janeiro, Houston (USA), and Singapore, also has experience in chartering, buying and selling, and foreign vessel registration for the Brazilian Special Registry (REB).

For him, “a good charter party is the one that contemplates balance in the terms and conditions established between the charterer and the shipowner”. Within the oil and gas industry, for example, where he operates, the document needs to clearly define the role and scope of each of the parties involved. This is especially true for maritime support or subsea construction vessels and drilling units.

“As this sector has unique characteristics and requirements when compared to international cargo transport,” says Cardoso, “a balanced charter contract translates into competitive values, lower costs, and reduced risk for both parties”.

Thus, to draw up an efficient charter party, one can resort to the use of standardized contracts, something that is very common in the maritime sector. Starting from models that are known to everyone, with aspects generally accepted by the industry, helps in closing negotiations.

Nevertheless, the parties should always be careful to adapt such models to the reality of the operation that will actually be performed. Otherwise, the document may escape reality and not properly perform its role in resolving any doubts and disputes — and, as we’ve seen so far, this is one of its main functions.

What are the biggest mistakes made in these contracts?

First of all, the parties need to gather operational and technical knowledge about the operation in question, regardless of whether it is short, medium or long term. In this regard, dialogue is very important — the greater the communication between the parties, the more risks will be mitigated.

Cardoso says that, in several cases in Maritime Support in Brazil, it is essential to have a good procedure of prior analysis of the scope and of vessels, in order to identify the most appropriate ship that will be hired for chartering.

“This is where an experienced shipbroker can make a lot of difference, as he or she should be aware of the market situation and knowledgeable about the technicalities, logistics, current legislation, availability of ships, trends in market prices etc.”, he explains.

In short-term contracts, it’s possible to mitigate several risks based on this experience. This requires the parties to perform a good pre-inspection procedure of the applicant vessel for hiring with an independent agent and subsequently for monitoring the issuance of On-hire and Off-hire certificates, for example.

In this sense, broker support is crucial, as the experience in discussing and analyzing different contracts brings win-win benefits to everyone in the negotiation phase. Thus, it is possible to prevent any negative outcomes or complications before and after the charter.

“It is necessary to analyze the local legislation and requirements to enable a quick and efficient way to mobilize vessels, which is also useful to avoid delays to the charterer“, warns Cardoso.

What information needs more attention?

It should be borne in mind that the contract is, first and foremost, a compromise between parties: “It sets out the terms of mobilizing a means to accomplish a specific task,” conceptualizes the expert on the matter.

We believe that when there is effective dialogue between the parties and cooperation between the Charterer and the Shipowner, an excellent alignment of expectations can be achieved between them. We see that it is very important to understand the timing of the Market to help define the mobilization schedule, delivery and re-delivery deadlines, and logistics issues so that everything goes according to plan and on schedule.

What anti-corruption clauses does the industry practice?

The ethics and anti-corruption clause — one of the most relevant ones — is already part of the daily life of the oil and gas industry, but still needs attention. Today, it is already contemplated in bidding processes and RFPs (Request for Proposal) of oil companies and is already included in the policy practiced by the main players in the market.

Other good examples of this type of clause can be noted in legislations written around the world that serve as reference and are adopted in contracts, such as:

• the Foreign Corrupt Practices Act (FCPA), created in 1977 in the United States;
• the United Kingdom Bribery Act, created in 2010;
• the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;
• the 1999 Council of Europe Civil Law Convention on Corruption;
• the Brazilian Penal Code, in its articles 332, 333, and 337-B.

Since contracts are based on models developed and adapted over the years in the international market, there can also be noted a growing concern about protection against cybersecurity fraud — this is worth taking care of, and we are prepared to support our clients accordingly.

Deadlines

In general, in international cargo transport, there are different models such as Voyage from port “A” to “B”, by Time (Time Charter) or a COA (Contract of Affreightment): it is possible to have several trips that can last for days, months, or years to load a volume of “X”. In the oil and gas industry specifically, charter parties tend to be classified in relation to time:

• short-term (up to 30 days);
• medium-term (up to 180 to 360 days);
• long-term (from 360 days to 10 years, for example).

How can a legal advice agency collaborate?

A legal advice agency is important to transcribe what has been agreed between the parties to the law governing the contract. In relation to this point, it is important to understand that the entire contract will be read and interpreted in accordance with a governing law.

Thus, it is essential that the agreed terms and conditions are drafted in such a way as to have the parties’ intended and accurate interpretation and that there are no surprises with regard to clauses that are not applicable or, also, that omissions of the contract are fulfilled by forecasts of the governing law that were not known to the parties.

The legal advice agency can also help mitigate labor and environmental risk, or even issues such as financial imbalances, adjustments, compensation, insurance, etc. It is always important that the legal guardian of each company submits the contract and its final version for legal review prior to signing.

Finally, a major challenge is related to the fact that, in Brazil, we use different vessel charter party structures — this makes it difficult to standardize the execution of procedures within the operational structure —, anyway, the national market is prepared to adapt to the new models.

If you enjoyed the content, check out the 6 main mistakes made in chartering ships and how to avoid them!