Time Charter or Voyage Charter: Which way oh ship owner? (1)
By Foluke Akinmoladun
A ship engaged may be operated in two main ways, by voyage charter or by time charter. Under a voyage charter, the ship will still be operated by the owner and the charterer will be responsible for cargo handling and where delivery of the cargo is to be made. Here the freight is negotiated and paid per unit of cargo(tonne), based on an agreed (minimum) quantity, or as a lump sum irrespective of the quantity loaded.
Under a voyage charter, the ship-owner pays all the operating costs of the ship which includes crew wages and travel; management fees; hull and machinery and P&I (protection and indemnity-third party claims) insurance premiums; stores; lubricants; spare parts; maintenance and repairs; survey and certification; and dry-docking. This essentially puts the risks of operations on the ship owner. For this, the charterer pays more in terms of the cost of the fright per tonne. There will also be provisions for demurrage, despatch and load time for which the charterer is responsible to the ship owner for the loading times and dispatch times in the voyage.
The terms and conditions of the contract are set down in the voyage charter-party agreement. There are various standard forms for voyage charter parties that are modified as needed and negotiated between the ship owner or owners as the case maybe and the charterer or charters through their respective agents. Payment is determined under a voyage charterer on the basis of rate of freight per tonne. Some common forms of voyage charter agreements are the Gencon, an all-purpose charter made by the Baltic and International Maritime Council (BIMCO).
Where the hire of the ship is however over a period of time as against the cargo or quantity of cargo to be carried, then the hire is for what is known as a time charter. Here the charterer has more flexibility on where the ship should go and what voyages it should undertake. However, because the charterer is the one that handles most of the operation costs, the costs for freight is less as the ship owner has less risk to manage. Here payment is made on the basis of rate of hire per day.
There are various factors that a ship owner and a charterer have to consider in deciding on whether to use a time charter or a voyage charter. Some of the most important is profit making (taking into consideration total cost and total revenue), sustainable revenue, timing in terms of cargo loading and discharge, operational costs, maintenance costs, ship management costs, the type of trade that the ship will be engaged in and the capacity of the ship. These factors are by no means exhaustive but are the main factors to be considered.
Where there is a single commodity with limited discharge points and the rate of loading and discharging are well established, a voyage charter is preferable. There are different elements involved in loading a cargo, making it safe and discharging it depending on the particular commodity, what these are and who pays are the subject of agreement between the parties. In cases where the charterer has regular shipments from and/or to the same port, perhaps even owning terminal facilities, it is usual for him to control and pay for cargo handling. In such cases, a charterer will look more into the option of a voyage charterer. Where on the other hand, there are many commodities involved, many discharge ports involved, a time charter will be preferable.
Of all these considerations, time is one very crucial element and is an essential element to be considered when a ship-owner is approaching the market. Timing starts from the formation of the contract and how an inchoate or delayed fixture can affect the economical interests of a ship-owner. When the contract is said to have commenced is the first timing issue. Under the United Kingdom legal framework, contracts are not concluded until all details are concluded. In the United States, once an offer is accepted, the contract is said to be concluded with the parties left to handle negations on the details. Thus, in these different jurisdictions, whether a time charter or a voyage charter will be used depends on the cost implications of having a contract ready or when the contract is said to have come into existence in time for the ship to be engaged.
Foluke Akinmoladun is the Managing Solicitor of Trizon Law Chambers Nigeria. She is a lawyer, accountant, mediator and arbitrator. She is also a Chartered Secretary and Business Rescue & Insolvency Practitioner.
She belongs to the panel of neutrals of numerous arbitral institutions.She was a onetime Director General of the African Ship owners Association of Nigeria and is a member of the Presidential National Action Committee on Nigeria’s Implementation of the African Continental Free Trade Agreement (AfCFTA) (Transportation stream). She is the secretary of the Lagos Chamber of Commerce (LCCI) Maritime Sector. She can be reached at: Foluke.A@trizonlawchambers.com
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