What Is Chartering

Introduction

Trade through sea using ships is one of the oldest business to carry out the trade. Shipping is the most cost-effective mode of transport on earth. Unlike roads which require frequent maintenance, Earth is covered almost 71% with water does not require much of maintenance. Again unlike roads there is not fixed route to a destination for a ship, she can sail in any direction. The main purpose of a ship is to carry cargo, cargo can be anything, it can be crude oil, other oil products, minerals, grains, cars, containers loaded with products etc. Shipping itself is a complex supply chain model involving many different parties. So how the trade through the ship occurs. Whenever you hear any shipping related business one word is often heard that is ship chartering.

What is chartering?

When you ask Google the above question the top answer you get is like this. Chartering is an activity within the shipping industry. Chartering in shipping is the hiring of a ship and crew for a voyage between a load port and a discharge port. Wikipedia says something like this Chartering is an activity within the shipping industry whereby a shipowner hires out the use of his/her vessel to a charterer. All the above statements state the same. All this is gibberish to a layman. But since you are reading this article I assume you are a seafarer and have heard that name a lot of times but yet find it confusing to understand. This is my attempt to simplify it for you.

By now the whole world is aware of a certain cab company UBER or OLA if you are an Indian. Now Suppose I have to travel from my home to a theatre nearby, so I rent a cab through either UBER or OLA whichever is cheaper, of course, complete my ride and pay the driver. Now, in this case, the Cab is the Ship, I am the Cargo and in this case, the Cargo owner, UBER or OLA is the charterer and the cab driver assuming is the owner of the cab is like the Ship Owner. So chartering is an activity where the Cargo owner has a buyer for his cargo somewhere in the world but has no direct means to send his cargo to the buyer. He is in search of a Ship Owner who can ship his cargo to the nearest destination of the buyer. The Cargo Owner may or may not be aware of which ship is suitable for his need, so it is difficult for him to contact the right Ship Owner and get the right ship for his cargo. The Charterer or a broker is an agent who is aware of Ship Owners and their type of ships and the current location of their ships and their normal trade routes.

So now the Cargo Owner will approach the Charterer the common point of contact for the Ship and Ship Owner. The Charterer will suggest the desired Ship and Ship Owner. Then the Cargo Owner will negotiate the deal with the Ship Owner and rent his Ship for a particular voyage that will deliver his Cargo to his Buyer. The Charterer will charge a commission for introducing the Cargo Owner to the Ship Owner. This whole process is chartering. In shipping sometimes cargo owner can also be a charterer himself or a shipowner  can be a charterer

Cargo→Charterer→ShipOwner→Ship→Voyage→Buyer

Summary

• Simply, engaging for service under a contract. It is a type of hiring.
• Charter is the hiring a ship and charterer is who hires ships on behalf of Cargo Owner

There are different types of chartering in shipping, they are

• Time Chartering
• Voyage Charter
• Demise or Bareboat charter

Let me ellaborate the above in detail further

Time Chartering

I explained what is chartering and how it works. In this article, I will try to cover one type of chartering, time chartering. Well the name itself is self-explanatory, hiring a ship for a specific amount of time. Assume you received a promotion and with promotion a transfer to a new location. Since travelling back and forth is not an option you search for a house on rent in a near-by your new location. Well, this is a perfect example of the time chartering. In this case, you get in touch with the house owner to strike a deal on monthly rent. You may approach the owner through a real estate agent. Once you and the house owner both agree to specific terms, you prepare a contract stating the duration of engagement and the negotiated price. The contract between you and the house owner strictly defines each other’s responsibilities and liabilities. The time charter is similar but a complex business.

The Charterers in time chartering hire the ship from a shipowner for a specific duration of time. The shipowner has to make sure that the vessel given on time charter is fully manned and well equipped. Now let’s understand the responsibilities of the Charterer and the Ship Owner.

Owners Responsibilities and Liabilities:

• Ship on time charterer must be fully manned and properly equipped.
• The ship must be seaworthy all the times during the contract of engagement.
• Competent crew must man the ship.
• Vessel repairs and spare management is the owner’s responsibility.
• Ship’s insurance and instalment dues.

Charterers Responsibilities and Liabilities:

• Competent crew of the ship takes voyage orders from the charterers.
• Bunker required for the voyage is charterers responsibilities.
• Voyage expenses of cargo handling are borne by charterers.
• Charterer insurers the cargo.

From above its clear that shipowners give time charterer a huge control over the commercial operation of the vessel while the owner is restricted only towards the navigational and technical operational. Time chartering can be for a specific duration(normally in years) or it can even be for specific voyages. In time charter the vessel can have several voyages or a single voyage. Sometimes ship can be hired for only a short time duration in such cases it can also be called Trip Time Charter.

Voyage Chartering

So far we have covered what is chartering what is time chartering today lets talk about voyage chartering. The name itself is self-explanatory, hiring for a specific voyage. Suppose you have just signed off from the ship and reached your nearest airport, but your house is far from the airport and you need a ride to your house. Most major airports have taxi service where you can book a cab and get a ride to your home. So you approach one of the cab services to compare the rates for a journey to your place. You now have a cab booked and ready to get you to your home. This, in short, is a voyage chartering. Now during your ride back home, you come across a few tolls, refuel stops, and more, the cab driver includes all that to your bill. In case of a remote place, the cab driver may even charge you for the return fare as he may not get one to return back to his place. Unlike time chartering here you have control only, over the route to be taken to your place.

The Ship Owner makes a fully equipped ship available to the charterer, charterer has cargo to ship to a specific location in exchange for freight charges. In voyage chartering the shipowner, responsibilities are increased. The owner bears most of the cost for the voyage and its associated risks. The voyage charterer provides the cargo that is suitable for the ship and voyage to destinations which are safe for the ship. Charterers are responsible to load and discharge cargo in a specified time in case of failure to do so charterers have to pay demurrage (compensation). The voyage charter party clauses are in a manner that it limits the liabilities of the involved parties in the case of involvement of third parties.

There are different possibilities:

1. The whole ship is put at the disposal of the charterer, for the transport of a full cargo, and this:

• • for a determined voyage
  • for a voyage back and forth
  • for a series of determined voyages
  • for a tour between various ports, with the right for the charterer to load and unload cargo.

2. A part of the vessel is put at the disposal of the charterer, for the transport of a determined parcel of cargo.

Bareboat Charter

I have covered what is chartering, what is time chartering and voyage chartering in short, today lets cover bareboat chartering in short. Suppose you own 2 cars of which 1 you use regularly and another is just lying around without any use. When a car is standing still and not in operation it draws more expenditure than a running car. You know a guy who wants to start his own taxi business but getting a car is a big investment for him. He approaches you and asks for the car for which he will pay you a monthly rent. Normally it’s very hard to trust a person with your own car as your car is very dear to you. Now you know this person and trust him and in this case, the guy will take good care of your car as if it is his own car.

Bareboat or demise charter acts almost as an owner of the ship while paying hire to the owner. In a bareboat charter, the charterer equips the vessel and takes full responsibility of ships navigational and management operations. The charterer acts as the owner of the vessel for the hired period without actual ownership of the vessel. In some cases of foreclosures, the bank or the financial institution ends up owning the ship, but these institutions do not have the expertise to manage the ship. The ship’s management and operations are with the charterer while the ownership title remains with the financial institutions.

The bareboat charter party commonly used is the standard Barecon charter party. The important features are:

• Description of the vessel, such as size, speed, fuel consumption, loading capacity, etc. on which its performance will depend.
• A survey is carried out on delivery and re-delivery.
• Inventories of stores, during delivery and re-delivery.
• The charter period usually a provision is included giving the charterer the option of extending the validity of the charter by a specified period.
• The rate of charter hire and mode of payment. This is usually calculated based on the deadweight tonnage of the vessel and is payable every month in advance.
• Maintenance and operation during the period of the charter. The vessel has to be at the disposal and under the complete control of the charterer, who will be responsible for the supply of crew, officers, stores provisions, bunkers, etc. and for all other items of operational costs including insurance.