[INFOGRAPHIC] 5 Questions and Answers on Maritime Chartering

  • 31/03/2020
  • 17 minutes

Maritime chartering is a topic that can raise doubts even among professionals already used to certain foreign trade routines. After all, what are the main doubts of the contracting parties? Are there details that could be better explained? Are there frequent misunderstandings related to this issue?

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In order to answer and resolve these and other recurring questions, we interviewed Daniel Boechat and Henrique Mello from Boechat & Santos — a Brazilian company specialized in international trade. Follow the content to the end to take advantage of the information.

1. When is the right time to hire maritime chartering?

According to Henrique, “the right moment can vary and will initially depend on the results of negotiations between the seller and the buyer”. These negotiations and their terms will be defined through the Incoterms of the operation that will specify the demand for contracting the maritime service in question.

In short, Incoterms, or International Commercial Terms, are a set of regulations designed to make importing and exporting more transparent. The current version has in force since 2011 and was created by the International Chamber of Commerce (ICC).

It is worth remembering that they do not represent a contract itself — they only serve as guides to determine which of the parties involved in a negotiation will be responsible for contracting specific services, such as shipping agents, dispatchers and the like. It should be noted that there may be numerous contracts in the production chain. That is why, in some cases, it is desirable that the intermediary agents know the Incoterms used as a reference.

Most Used Terms in Maritime Chartering

2. What are the main doubts of the contracting parties in relation to maritime chartering?

“Fundamentally”, explains Daniel, “the main doubts are associated with the lack of knowledge about the complexity surrounding the offer of maritime transport services”. In other words, contracting parties do not always know which alternatives are best suited to their needs.

The training of agents, importers, exporters and consultants, according to the experts, is still not enough for them to be fully qualified to understand how the planning for contracting such services works. As they are fundamental actors for the process as a whole, this factor does not contribute to enlighten the contracting parties in relation to several aspects.

In this sense, it is opportune to explain essential differences between some of these figures in order to solve recurring questions. Shipping agent and freight forwarder, for example, are often mixed up, although they play very different roles.

The shipping agent deals with ship owners and operators. It is up to him to monitor the trip closely and find out how the situation is on board — he is an agent and not a legal representative. In practice, agents have much less autonomy when compared to representatives. Also, if an agent goes beyond the established functions, he can be punished.

The freight forwarder, in turn, takes care of the cargo itself, rather than the ship, facilitating negotiations at different levels. That is because he can negotiate on behalf of customers, getting better rates and conditions.

The charterer is the professional who understands the necessary steps to hire a ship. Among his responsibilities are:

  • define the type of contract;
  • act in the negotiation;
  • recognize opportunities;
  • follow the international market.

3. What are the biggest doubts regarding this market?

“The complexity of ship chartering and the context of chartering in general end up causing countless doubts. For this reason, everything that is involved in contracting and resolving related conflicts as well as the rights and obligations of the parties can cause various embroilments”, Henrique points out.

To start hiring a freight for Project Cargo, for example, one must take into account the actors involved in the process and not only the contracted carrier — the logistics chain and its relevance must be observed, as well as road transport, port operations, customs terminals etc. This is because all of these points can optimize or impair certain logistics planning and even impact on cargo security, from the origin to its destination.

4. What points in relation to taxation must be highlighted?

It is necessary to consider that maritime transport is the main modal in the movement of exported and imported products in Brazil. “Its importance is linked to the strengthening of the national market’s logistics sector and, consequently, to the increase in the competitiveness of the national product in foreign trade”, explains Daniel.

In this scenario, tax incentives for maritime transport are provided for in the Brazilian legal system and are almost always unknown by contracting parties.

“The tax incentives contained in the legislation, the taxation, the deductions, the immunities and the special taxation regimes that contribute to the development of the sector in the country require basic qualification of the contracting parties — agents, importers and exporters”, Henrique comments.

For this, specific training, professionalization and the basis for improving performance in negotiations for contracting ocean freight are essential for the market to continue growing.

5. What constitutes a Charter Party?

Here we will try to dissect and, at the same time, summarize a very complex matter that is the Charter Party. In remote times, shipping companies were involved in all operations related to the ship, including the commercial aspect. The ship owner — natural person or legal entity — took care of the equipment, crew management, technical operation, etc. In some cases, the ship owner himself was the ship’s commanding officer.

As time went by, shipping companies gradually modified this structure in order to become more agile. The carrier, while considered an entrepreneur, started to have specific functions and, in many cases, managed by third parties: financial management; technical management (spare, fuel, breakdowns, etc.); operational management (daily ship and personnel routines, etc.), and commercial management (ship employment, etc.).

Here, it is convenient to make a brief differentiation between ship owner and carrier, figures that are confused, but are different with regard to civil liability. While the ship owner is the one to whom the ship belongs, for being registered in his name in the competent bodies, the carrier (who may eventually be the same owner) is the one who equips the ship, that is, presents the ship providing everything necessary for the ship to be in seaworthy condition.

In countries that use civil law, such as Brazil, the term charter refers only to contracts for the use of the ship or the ship’s services. In common law countries (e.g. England) the use of the term is ambiguous and is used both to refer to contracts for the use of the ship or the ship’s services and for those for the transportation of goods.

We will address, here, such types of contracts. There are two types of Charter Party: Bareboat or Demise Charter Party and Time Charter Party.

Bareboat or Demise Charter Party

Bareboat or demise charter parties are those that are characterized by the use (lease) of the ship, for a specified time, in which the owner makes his ship available to the bareboat charterer, who takes possession and control, by means of a hire fee, payable at specified intervals during the contract period. It is a contract for the use of the ship.

Time Charter Party

Time Charter Party is characterized by the use (lease) of the ship, for a specific time, in which the owner or carrier places the ship fully equipped and in seaworthy condition, at the charterer’s disposal per time (time charterer), which assumes possession and control of it (nautical and commercial management) through a fee – hire – payable at specified intervals during the period of the contract. It is a contract to use the ship’s services.

It differs from the Bareboat or Demise Charter Party on the following points:

in the Bareboat or Demise Charter Party, the commander and crew are employed by the bareboat charterer, while in the Time Charter Party, they are employed by the owner or shipowner;

in the Bareboat or Demise Charter Party, expenses for fuel oil, diesel, lubricants, water, food (grub), payments (crew salaries) are the responsibility of the bareboat charterer. In the Time Charter Party, only expenses with fuel oil, diesel, and in some cases lubricants are the responsibility of the time charterer;

in the Bareboat or Demise Charter Party, all port expenses related to the ship and its crew are the responsibility of the bareboat charterer. In the Time Charter Party, the port expenses related to the ship are the responsibility of the time charterer, remaining those related to the crew members under the responsibility of the owner or carrier;

in bareboat charter contracts, the salvage reward goes to the bareboat charterer. In the Time Charter Party, the salvage reward goes to the owner or carrier;

in the bareboat charter contracts, the carrier cannot put the ship “off hire” (out of contract), because there will be no breach of contractual clause by the owner, since his only obligation is the delivery of the ship. The owner, however, can only put the ship “off hire” for lack of payment of the “hire” (charter price). In the Time Charter Party, the charterer may put the ship “off hire” in any event that affects the navigability or operationality of the ship (equipment or propulsion deficiency, etc.).

in the Bareboat or Demise Charter Party, the owner will never be held responsible for any damage to the cargo before the shipper or consignee, as the carrier will always be the one to carry out the transport.

We can also emphasize the following clauses, common in Charter Parties: description of the ship; charter period; route and usage limits; sub-charter authorization; delivery of the ship; cancellation clause (Laycan); hire payment (compensation for the use of the ship’s services); “off hire” (out of contract); (pecuniary) deduction of the hire; withdrawal (termination) of the ship for non-payment of “hire”; employment of the ship and appointment of agents; signature of “bills of lading”; re-delivery of the ship.

Concluding this brief summary on the Charter Party, we will address the Transport Contract, which by definition “is the one in which a person or company undertakes, for compensation, to transport, from one place to another, people or things animated or inanimate — goods”. Its main legal characteristic is bilaterality, it is governed by the principles common to all transport contracts and by some special rules.

Types of Transport Contract

Voyage Charter Party: The term “voyage” does not have a restrictive meaning, that is, it does not determine that the contract should be for only one trip. The term only demonstrates that the contract is for the transport of goods, in accordance with the 1980 Rome Convention on Contractual Obligations. See:

generally, in voyage charter party contracts there are two persons, natural or legal, who are the carrier and the charterer;

the carrier is the one who provides the space on board his ship, while the charterer (who can also be the shipper) is the one who takes the space of the ship, upon payment of a counterpart — the freight — to transport his goods;

in these contracts, the transporter’s civil liability is objective, that is, it is independent of fault.

Contract of Affreightment (COA) — Contracts of Quantities or Tonnage: The “contract of affreightment” — charter contracts or contracts of quantities or tonnage. In this form of contract, one party (carrier) agrees with another party (charterer, in the strict sense of the term) to carry a certain amount of cargo over a period of time. The ships are appointed, by the carrier, with some advance of the loading date of each shipment. It can be seen, therefore, that while one party is responsible for providing ships for transportation, the other is responsible for supplying the goods (in addition to paying the freight).

You see? It is undeniable that maritime chartering has its particularities and requires specific technical competence on the part of everyone involved in the process.

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