Shipping 101: Practical guide to shipping contracts and documents

Shipping moves International Trade and the Global Economy. The events post 2020 saw how critical shipping was to trade and the daily life of consumers and business worldwide. Shortages of French fries at McDonald’s, the disruption of international trade when the large container ship, Ever Given, got stuck in the Suez Canal, a major and busy route. This article proposes to provide a primer to the various contracts and documents used in shipping and international trade.

Contracts and shipping documents

Shipowners rely on commercial employment of their ships. They charter their ships to parties who have use of them. The type of charter depends on the nature and use required. These contracts are charterparties.

A shipowner who is an investor who charter/lease their ship fully does so on Bareboat terms. An example of this is the cruise ships which are run by operators who charter the cruise ships on Bareboat, which is also known as Demise Charters. The ship is chartered out on a bare basis and the charterer will maintain and operate the ship as well as employ the crew.

The charterer who requires the ship for a period of time will charter the ship on a Time Charter. During this charter period the ship will be at the disposal and employment of the charterer. 

When the ship is required for certain or several voyages, then Voyage Charters will be used.

The earnings of the ship are called freight. When the voyage is completed and freight earned, the shipowner can lien the cargo as security for the freight payment. When the charter provides for a minimum quantity of cargo, then the shipowner can charge for the shortfall of that quantity as deadfreight.

These are commercial contracts and charters and often the parties using these charters will use standard forms of charters. BIMCO charters are commonly used with customized amendments.

The method of chartering can be fairly simple by having fixtures setting out the key terms and referring to the commonly used BIMCO forms of charter. These forms of charter carry out incidental duties. 

For instance, a shipowner chartering his ship on a Voyage Charter will want to see that charter performed and completed promptly so that the ship can be freed for the next charter. That is why the charterer is allocated limited time to load and discharge called laytime. 

Beyond this time, the charterer will be charged demurrage. Demurrage claims can be expensive and form the most common type of disputes in maritime arbitration.

Bills of lading are used when the cargo owners require shipment of smaller quantities. Often the chartered ships will carry cargoes of large volumes and bills of lading are issued for the different cargo owners. 

Sometimes the documents used are seawaybills, the difference is that the seawaybills are not negotiable. The original bills of lading will have to be surrendered to collect the cargo at destination while the seawaybills do not. 

In fact, the process has one more step when the original bill of lading is surrendered to obtain a deliver order and the deliver order is used to collect the goods. This process is commonly by forwarders on behalf of the cargo owners. A new development is that these documents have now electronic versions.

The exporters who ship will often employ intermediaries called forwarders and forwarding agents to ship. These forwarders will contract with the carriers on their behalf. Sometimes the forwarders will issue their own bills of lading and when they do, they will act as NVOCCs (Non-Vessel Operating Common Carriers) and the bills of lading issued are called House Bills of Lading and those issued by the ocean carrier are called Master Bills of Lading.

There are incidents of maritime adventure which have no land equivalent. When a ship encounters a situation affecting the ship, cargo and freight, there will be a situation of general average i.e., stranding without the fault of the shipowner. Expenses incurred to rescue ship, cargo and freight will be shared and the parties involved will need to give security for general average, otherwise the shipowner can exercise a lien.

Cargo owners wishing to insure the cargo will obtain marine cargo insurance, which benefits are transmissible in the course of international sales. The shipowner can insure the ship by obtaining a Hull and Machinery Insurance. To protect against liability and operational risks, the shipowner will obtain a protection and indemnity cover from a Protection and Indemnity Club.

Photo credit: iStock/ AmnajKhetsamtip

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