Time Charters. Types Gross and net charters

The respective rights and obligations of the two parties to this time charterparty must depend upon its written terms, for there is no special law applicable to the particular form of contract known as a time charterparty. A time charterparty is, in fact, a document which is of a very misleading nature, because the real nature of what is undertaken by the shipowner is disguised by the use of language dating from a century or more ago-language which was then appropriate to a contract of a totally different character
Per Mackinnon LJ in Re An Arbitration between Sea and Land Securities Ltd and William Dickinson & Co Ltd (The Alresford) [1942] 1 All ER 503 at p.504

Concept of time charter is fundamentally different from one of voyage charter; it is not a contract of carriage of the goods by sea between certain geographical locations but a contract for services rendered by the owners’ vessel during a certain period of time for agreed pay. Basically, a time charter is a contract of lease of the vessel when the owners are paid irrespective whether their vessel employed during the time of lease or not, therefore apart from trip charter neither departure port nor the port of destination is of any importance for the owners.

There are two types of time charter, sometimes called "net" time charter and "gross" time charter. "Net" time charter is more commonly known as a bareboat or charter by demise.

Net or demise time charter

Net charter or charter by demise operates as a lease of the ship itself, usually without master and crew, therefore often also called bareboat charter. The charterer becomes for the time the owner of the vessel, employs the master and crew and through them the possession of the ship is in him. Net time charter unlike Gross time charter has no off-hire clause, i.e. hire is payable "come Hell or High Water".

Thus distinctive feature of demise charter is a transfer of possession, as it was noted by Lord Hobhouse of Wood-borough in BP Exploration Operating Co Ltd v Chevron Transport (Scotland)(The Chevron North America) [2001] UKHL 50 at para 79:

A bareboat demise charter differs from the common kinds of charterparty, such as time charters and voyage charters. They involve no transfer of the possession of the vessel to the charterer; they are simply contracts for services to be provided by the ‘owner’ (who may or may not be the actual owner and frequently is just another charterer higher up the line) to the charterer.

Gross or ordinary time charter

A gross time charter, unlike that one by demise, gives the charterer no right of property in or to possession of the vessel. The owner receive his monthly payments by means of ‘hire’, calculated daily, but usually payable in advance. Hire will start to run when the vessel is ‘delivered’ and will cease when she is ‘redelivered’, the charter specifying where and when these operations are to take place. For information about demise or bareboat charter click here.

Fuel consumed during the charter period will be paid for separately by the charterers. Hire, unlike freight, is subject to the usual rules of common law and equitable set off.

Delay is also treated differently under a time charter. There is no direct equivalent to laytime and demurrage. Instead, hire will run from the commencement of the charter, ‘delivery’, to its termination, ‘redelivery’. However, its running may be interrupted by the operation of an ‘off-hire’ clause, which provides for the temporary cessation of hire brought about by the operation of any one of a number of specified causes.

Comparing with the position under a voyage charter, the charterer will also be more directly affected by any slow steaming on the voyages performed under the time charter in that this will restrict the total number of voyages it will be able to perform within the charter period. To deal with this problem, most time charters contain an express clause, such as that contained in cl 8 of the NYPE form which obliges the shipowner to prosecute voyages with the utmost dispatch. In addition, the charterparty will generally contain a warranty as to the speed at which the vessel will be able to proceed. In the light of such express clauses, there will generally be no need for a charterer to argue in favour of an implied term that voyages be prosecuted with reasonable dispatch. It shall be noted, however, that sufficiently wide drawn exception clause may protect the shipowner from consequences of a breach of this obligation.

Time charters do not usually envisage any contractual transfer of liability such as voyage charters achieve with ‘charterparty bills of lading’ and ‘cesser’ clauses. The norm is for bills of lading to be issued which do not contain any such words of incorporation. Such bills are frequently marked ‘freight prepaid’. This wording will prevent the shipowner from being able to exercise a lien on cargo. The cargo will not usually be owned by the time charterers and the bills of lading will contain no reference back to the terms of the time charter. The lien on subfreights is likely to be of more use. Time charters usually provide for a further remedy, which is not to be found with voyage charters. This is the right of ‘withdrawal’. This amounts to an option to terminate the charter if hire is not paid punctually in full.

Trip time charter

An important difference between voyage and time charters that the latter is not in nature an undertaking by the owner to carry goods, but an undertaking by the owner to make available to the charterer a vessel and crew for the latter to employ in transporting goods makes it possible for the time charterers to circumvent rigidity of voyage charter rule of irrevocability of port election (see also Voyage Charters. Charterer’s obligation to nominate port.). To achieve this result charterers use so-called trip time charter where the vessel is timechartered for a duration of a trip. Trip is usually described as an option to trade vessel between the port or range of ports:

… in such lawful trades, between good safe port and/or good safe ports and good safe berth and/or good safe berths and good safe anchorage and/or good safe anchorages, always afloat, always within Institute Warranty Limits as the Charterers or their Agents shall direct …

Additionally to geographical limits trip time charter is also limited in time which is an estimation of expected duration of such trip, i.e. "duration about 40-45 days without guarantee" or "minimum 40 days without guarantee within below mentioned trading limits".

Notably that such form of charter gives the charterers much more flexibility to trade vessel between a number of ports in comparison with voyage charter, i.e. charterers can nominate, cancel and re-nominate again load and discharge ports within contracted limits as they like, as long as these ports are safe. The owners shall be careful while outlining limits of such charters, both geographical and of time period, not to face a burdensome duties of almost open-end charter, see also: Time Charters. Delivery and Duration.

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