2.2 The risk of delays under voyage charterparties
2.2.1 Basic features of a voyage charterparty
Chartering, in particular voyage chartering, is the most ancient way of employment of commercial ships. A voyage charterparty is a contract whereby the owner of a vessel provides a charterer with the services of a vessel (and crew) for the performance of a single voyage or a number of consecutive voyages, between designated places of loading and discharging.
Under a voyage charter, the owner undertakes payment of fuel and supply costs, the costs of operation and maintenance of the vessel, port and stevedoring charges (if the contract is on f.i.o. terms), and employment-related costs for the crew. In return, the charterer furnishes the agreed cargo and pays the stipulated freight.
Freight is generally calculated as a lump-sum or as a function of the weight, quantity, or volume of cargo. What is remarkable when investigating the risk allocation is that the owner is paid an agreed freight for the single voyage or for consecutive voyages regardless of the time it takes to perform them. This feature hints that, in principle, time is not a concern for the charterer in a voyage charterparty. Rather, it is the shipowner who bears the commercial risk of delays occurring during the voyage.
In the event of delays, the owner will receive the same amount of freight for the specific voyage while being prevented from using the vessel for ensuing voyages. For this reason, the owner wants to ensure that he only bears the risk for the average amount of time spent in transport, which is under his control. He does, however, not want the risk of the charterer being slow in completing cargo operations, when the latter are the charterer’s responsibility, or the port being overcrowded. Allocating the risk of delays in port is thus of essence in voyage charterparties.
2.2.2 The allocation of risk during the four stages of a voyage charter
The allocation of risk for delay may be elucidated starting by identifying four essential stages of a voyage charter party, as Lord Diplock pointed out in Johanna Oldendorff:(1) [1974] A.C. 479 at 556.
the loading voyage, viz. the voyage of the chartered vessel from whenever she is at the date of the charter party to the place specified in it as the place of loading.
the loading operation, viz. the delivery of the cargo to the vessel at the place of loading and its stowage on board.
the carrying voyage, viz. the voyage of the vessel to the place specified in the charterparty as the place of delivery.
the discharging operation, viz. the delivery of the cargo from the vessel at the place specified in the charterparty as the place of discharge and its receipt there by the charterer or other consignee.
The conclusion of each of these stages determines the moment in which the risk is transferred from the owner to the charterer and vice versa.
Delays at sea, i.e., during the loading and carrying voyage (stages 1 and 3), are in essence a risk of the shipowner. The voyage is under the shipowners’ control, and he will therefore generally bear the risk of any delay occurring during these voyages.
Unlike the loading and carrying voyages, loading and discharging operations (stages 2 and 4) will generally require cooperation from the charterer. Delays in port may be caused for instance by the charterer’s failure to find an available berth or to provide the necessary documentation due, for instance, to documents getting caught in the banking chain. To avoid that such risks are completely allocated to the owner, the charterparty will normally contain a laytime-demurrage mechanism.(2) See the definitions of “laytime” and “demurrage” in the Introduction.
Once laytime starts running, the risk of delay is shifted to the charterer. Further, if laytime is exceeded, demurrage intervenes and places on the charterer the risk of any delay beyond the stipulated lay days.
To encourage charterers to bring cargo operations to an end as quickly as possible, many charterparties establish that if cargo operations take less than agreed, the charterers are entitled to “despatch”, i.e., a payment by the owner, usually set at half of the daily demurrage rate.
2.2.3 Comparison with time charterparties
The allocation of risk for delay is significantly different in time charterparties. In a time charter, the shipowner places his vessel at the charterer’s disposal for the stipulated charter time. The charterer, thus, leases the vessel for a period of time and pays hire on an ongoing basis to the shipowner in return for the use of the vessel. The owner retains the technical management of the ship, while the commercial management of the vessel lies in the hands of the charterer.
The cost allocation between the owner and the charterer is different and somehow more balanced here – the owner pays for capital costs and operating expenses such as employment and insurance costs of the ship, while the charterer undertakes costs for bunkers, and usually port, canal dues and stevedoring, as well as other expenses connected with the operation of the vessel.(3) For a more detailed description on how costs are divided between owner and charterer under voyage- and time charterparties, see Stopford, M., p. 182. The reason for this different allocation of costs relies on the fact that the vessel is completely at the charterer’s disposal.
In principle, the risk of delay (both at sea and in port) is thus clearly allocated to the charterer in a time charterparty. A delay in cargo operations will cause the charterer to enjoy a less efficient use of the vessel and to suffer increased operational costs (voyage costs, port fees, bunkers, etc.). Therefore, and once again to mitigate the allocation of risk which naturally follows from the structure of the contractual relationship, a time charterparty will normally contain an off-hire clause. When one of the events listed in off-hire clauses materialises, typically preventing the efficient and full working of the vessel, the charterer will be exempted from his obligation to pay hire. The risk of these events is thus shifted to the owner.
Protecting themselves against risks connected to delays is crucial for shipowners and charterers under voyage and time charters respectively. Since the parties enjoy freedom of contract, they may freely allocate the risk of delay between themselves. The objective of balancing or overcoming the risk of delay may be achieved through a demurrage clause in the voyage charterparty or with off-hire clauses in time charterparties.