Understanding Charter Party in Shipping
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Charter parties are fundamental contracts in the shipping industry, governing the relationship between shipowners and charterers. These agreements define how a vessel will be used, who bears the responsibilities, and how costs are allocated.
Types of Charter Party
Typically, there are three types of charter parties: bareboat, time, and voyage charters. A bareboat charter is akin to a long-term rental where the charterer assumes full control of the vessel, including crewing and maintenance. The charterer acts as the temporary owner, responsible for all operational aspects, which provides maximum operational flexibility.
In a time charter, the charterer hires the vessel for a specified period. While the shipowner manages the crew and maintenance, the charterer covers the costs of fuel and port charges. This arrangement allows the charterer to direct the vessel's route and schedule without the burdens of ownership, focusing only on operational expenses.
A voyage charter, in contrast, is centred around a specific journey between designated ports. In this agreement, the shipowner oversees the ship, operation while the charterer pays a freight rate for transporting the cargo. This type requires less involvement from the charterer, who is mainly concerned with the shipment from point A to B.
Charter Party under Indonesian Legal Framework
- The Indonesian Commercial Code (Kitab Undang-Undang Hukum Dagang or “KUHD”) initially recognized Charter Party as being limited only to Time Charter and Voyage Charter (Article 453 and Article 460). However, the KUHD has acknowledged the charterer’s right to instruct a surveyor to conduct an inspection of the ship before the charter begins (Article 459 paragraph 1 KUHD).
- Law No. 17 of 2008 regarding Shipping, as lastly amended by Law No. 66 of 2024 on the Third Amendment to the Shipping Law (“Shipping Law”), does not extensively regulate charter parties or their limitations as it practically considered as form of agreement under the Indonesian private law. The Shipping Law primarily focuses on the implementation of the cabotage principle, the classification of shipping business sectors, and their respective compliance.
- However, regarding the implementing regulations of the Shipping Law, i.e., Ministry of Transportation regulation, are generally focusing on the compliance by sea transportation business license holders or shipowners. In that regard, shipowners are required to report the condition of ships under the operation and control of other parties, which may arises from a charter party.
Parties’ General Rights and Obligations under Charter Party
In a charter party agreement, both shipowners and charterers have specific rights and obligations that they must uphold to ensure smooth operation of the chartered vessel.Shipowners are primarily responsible for ensuring that the vessel is seaworthy, which means it must be fit for its intended use, free of defects, and equipped with all necessary documentation and certifications to prevent any danger to the vessel or its cargo. They must maintain the vessel in good working condition throughout the charter period, which includes conducting regular maintenance and repairs as needed. In addition to these responsibilities, shipowners must comply with the terms specific to the charter type. For example, in a time charter, they must provide a properly manned and maintained ship for the designated period, whereas in a voyage charter, they manage the operational aspects of the ship for the agreed journey. Shipowners also retain certain rights over the vessel's operations, particularly in time and voyage charters, where they oversee the crew and ensure the vessel’s compliance with international shipping regulations and safety standards. This oversight allows them to maintain control over many operational conditions unless the charter specifies otherwise.
Charterers, on the other hand, are responsible for using the vessel in accordance with the charter agreement, ensuring their use aligns with the contract terms, which typically dictate where and how the ship will be used and any specific instructions that must be followed during the charter period. They are obligated to promptly pay the hire or freight fee as specified in the charter party, as timely payments are crucial for maintaining a positive relationship between the parties and ensuring the vessel's continued operation. Additionally, charterers must provide the necessary instructions for the vessel's voyage or operations within the boundaries of the charter agreement; this involves directing routes, ports of call, and loading and unloading details, particularly in time charters. However, these instructions must adhere to the agreed terms and must not interfere with the shipowner's rights or operational responsibilities.
Charterparty Forms
Standardized charterparty forms play a crucial role in these agreements. Baltic and International Maritime Council (“BIMCO”) are widely used because they provide comprehensive and consistent terms that facilitate smoother negotiations and reduce potential disputes. In Asia, Nippon forms are common, offering clauses that align with regional practices and legal requirements.
Charter parties thus serve as the foundation for effective maritime operations, balancing the interests and responsibilities of shipowners and charterers. Understanding these contracts is crucial for anyone involved in shipping, as they provide the framework for managing the complex logistics and legalities of maritime transport.
What are the clauses to consider in Charterparty?
- Period of Hire: In a lease agreement between parties (including charter party), the hire period is crucial. The Period of Hire in a charter party is typically supplemented by additional provisions, particularly regarding the potential for extension of the hire/charter.
- On Hire – Off Hire: "On hire" and "off hire" are terms used to indicate the operational availability of a vessel and the corresponding payment obligations. Hence, clauses related to on hire and off hire will have technical implications on the rights and obligations of the parties, as well as the payment obligation.
- Payment: Payment in a charter party is a comprehensive clause within a lease/charter agreement. The parties may regulate matters such as deposit/schedule, interest and damages, final payment of hire, non-payment of hire, etc.
- Manning Obligation: This clause is important for the operation of the vessel. Certainty regarding who employs the captain and crew of the vessel is critical for the vessel's operation and commercial shipping.
- Bunkering: This clause provides certainty regarding the party responsible for procuring bunkering. The clause also regulates payment or reimbursement of the remaining on board bunker (ROB).
- Area of Operation/Trading Limits: Essentially, this provision ensures that the vessel avoids conflict zones and complies with the enforcement of trade sanctions, particularly regarding the vessel and the cargo being transported, preventing the vessel from becoming subject to sanctions or seizure.
- Delivery and Redelivery: This clause is vital for vessel charters as it pertains to the handover before the vessel's operation and the return of the vessel once the hire period has ended. This clause typically specifies the port location and the time of delivery. The parties may also stipulate that representatives from both sides will be dispatched during delivery and redelivery.
- General Compliance Provision: This clause covers the parties' guarantees of compliance with applicable jurisdictional laws and other legal obligations, such as compliance with vessel flag requirements, ship classification, insurance, or language compliance in the charter party.
- Termination: This clause regulates the termination and cancellation of a charter party. The parties are free to determine the terms of this provision, by referring also to the Cancelling Date clause. Additionally, the waiver of Articles 1266 and 1267 of the Indonesian Civil Code may also be applied, for termination of charter party can be conducted by mutual consent without a court decision.
- Dispute Resolution: This clause grants the parties the authority to decide whether disputes will be resolved in court or through arbitration. If arbitration is chosen, it is recommended to use sectoral arbitration in the maritime field, considering the expertise of maritime arbitrators and the relatively faster resolution timeframe.
Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.
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