This article is written by Michael Shriney from the Sathyabama Institute of Science and Technology. This article outlines the contract of affreightment, its obligations, how it works, and the distinction between the contract of affreightment and contract of carriage.

It has been published by Rachit Garg.

Introduction

The term ‘contract of affreightment’ refers to a legal commitment between the shipowner and the charterer. A charterer is someone who borrows/ rents a ship from its original owner. For the charterer, the shipowner will contract to ship a certain amount of goods for a certain period of time. Regardless of whether the items are ready to transport or not, the charterer is liable for making payments to the owner under this commitment. When looking about chartering a ship, this contract is necessary. The charterer’s and shipowner’s duties, as well as the terms and conditions with liabilities, must be stated in the agreement, which is commonly known as the contract of affreightment (COA).

As an example of an affreightment contract, Italy was the world’s leading exporter of pasta, exporting primarily to Germany. Exporters in Italy have to enter into an affreightment contract with a freight operator. The contract states that the ship must deliver a certain quantity of pasta every month that will be exported to German ports for the next three years, which is agreed upon by both parties.

Contract of affreightment : a brief overview

A contract of affreightment is a deal between a shipowner and a charterer in which the shipowner promises to deliver a defined number of cargos for the charterer at a set price over a set period of time. The charterer is required under this contract to pay for the shipping regardless of whether the items are ready for shipment or not. The shipowner provides cargo room for items to be transported on a certain journey or voyages. The freight charges are the fees paid by the charterer. The charterer would settle the full price for the freight that is ready to be sent at the agreed-upon time. Even if the items are not available to transport at a particular time as per the schedule, the charterer will pay.

The shipowner is liable for the items carried on board until they are delivered to the stated destination on time. If the cargo products do not arrive at their destination as per the schedule, the shipowner will be held liable for any penalties incurred as a result of the delay. The shipowner and charterer each have their own duties and privileges under an affreightment contract. Its objective is to place responsibility on the transporter to transmit a particular quantity of goods within the time frame specified in the contract. A bill of lading and a charter party are the two types of affreightment contracts used in business.

Duties of shipowner

  • For a set period of time, the shipowner will lease a vessel to the charterer. The shipowner is responsible for uploading and managing the cargo entrusted to him in a safe and careful manner.
  • The shipowner must follow the authorised directions of the charterer.
  • The shipowner is responsible for carrying out the contract, which involves transporting a set amount of items for the charterer over a specified period of time during a given journey.
  • The shipowner is responsible for following the directions of the route and monitoring the management, which includes the captain, crew, and the ship.
  • It is the shipowner’s obligation to ensure that the ship is in perfect condition and that the diesel tank is full to reach the destined destination.

Duties of charterer

  • The charterer will be in charge of the vessel’s maintenance and security until the owner takes incharge of the vessel.
  • The charterer is responsible for the rental as well as the freight expenses.
  • Only the cargo damages will be held against the charterer.
  • The charterer has the authority to order the ship’s captain to follow the agreed-upon route.
  • The charterer is responsible for the cargo from loading to unloading process, as well as being held accountable for cargo damage.

Types of contract of affreightments

There are mainly two types of affreightment contracts namely ‘Bill of Lading’ and ‘Charter party’.

Bill of lading

A bill of lading, also known as a bill of agreement, is a receipt for cargo placed onto the ship for transportation to a set destination. The ship owners or agents sign the document to indicate that the shipping for the cargo of goods received for transportation has been completed. The agreement describes all the terms and circumstances under which the cargo will be transported to a specific spot. The document takes on three characters which are as follows:  

  1. The document serves as a receipt for freight services. 
  2. It acts as a commitment between a cargo operator and a shipper. 
  3. It also acts as a title document. 

It is required for freight cargo movement. The document will have all of the information that is required for a valid document to be issued in order to complete the cargo transfer, and the invoice must be specified accurately and verified.

Case law

Hamilton Fraser & Co. v. Pandorf and Co., (1887)

Facts of the case

The lawsuit concerns a shipment of rice that was damaged by seawater. The facts of the case are that a cargo of rice was damaged by seawater, which allowed water to enter through the hole made by the rats, causing the cargo of rice to be spoiled. A condition on the bill of lading that excluded marine hazards and accidents was determined to be applicable, and the shipper was not held accountable. Damage caused by seawater was thought to be a sea peril. The damages caused by the rats were not the perils of the sea. 

Issues involved in the case

The question is whether the shipper is liable for not properly enforcing the contract of affreightment.

Judgement of the Court

Lord Hershell gave a verdict in this case based on the contract of affreightment, which he examined and interpreted, stating that the shipper is not liable for not properly enforcing the contract of affreightment.

Charter party contract

In the context of a charter party contract, the charter can rent the entire ship or a portion of its cargo space for one or more voyages for a specific amount of time that must be legally stated in the contract. It is identical to a leasing contract in which the landowner rents out his or her place to a lessee in return for money. Similarly, the owner of the ship will lend his ship entirely or partially to a charterer to transfer cargo by charging the charterer fee till the ship reaches the destined location to deliver those items to the desired location. Generally, the shipowner will be in charge of the ship’s navigation and maintenance under this contract. The charterer must pick which destination the ship must visit based on the call he receives.

There are four forms of chartering contracts of affreightment: voyage charter, time charter, bareboat charter, and lump sum contract.

Voyage charter contract

A voyage charter contract is the most common affreightment agreement. The ships are rented to the charterer on a one-way voyage basis to destined ports with a certain cargo at an exact price of freight agreed upon. The shipowner is in charge of the ship’s operations. He shall be held accountable for the monitoring and shipment of cargo to its destination. In this sort of contract, the freight amount, methods of shipment, and schedule of payment must be stated. It must also state the tenure, lay days for reloading and offloading the cargo, and the amount owed if the ship arrives later than the days specified. The charterer is held liable for the costs and hazards associated with bringing and transporting the cargo to the ship, till the end of the voyage. The shipowner must sign the bill of lading document for the shipment must be added to this contract, and the contract might vary based on the needs of the specific event.

Time charter contract

In a time charter contract, the charterer is in charge of the business operation of the ship, while the shipowner is in charge of sailing and other ship management. He  is responsible for paying the captain and crew’s salary, whereas the charterer is responsible for providing coal and paying port taxes. In terms of vessel handling, the captain must follow the charterer’s instructions. This contract will specify a location where the ship must be redelivered to the owners at the expiration of the period, and the freight will be paid until that point.

Bareboat charter contract

In a bareboat charter, which is less frequently used in ordinary commercial practice. In  bareboat charter agreement, the charterer effectively operates as a shipowner for the duration of the contract. The shipowner leases his ship to the charterer for an agreed-upon duration of time without the ship’s captain and crew, stores, or insurance policy. The charterer has the choice to select his own captain and crew, and he has the responsibility of the ship management, making all navigation choices and directing the captain of the ship. It is usually used mostly for financial agreements for the ownership of ships. The ships are rented as bareboat charter contracts with the opportunity to purchase. The charterer must make full and correct payments to the shipowner. The shipowner hands over the ship to the charterer as soon as the payment is paid to him.

Lump-sum contract

Contracts can also be lump-sum contracts, in which the owner agrees to carry a certain quantity of a specified cargo by sea from one port to another port for a mutually agreed-upon sum of money. It is also referred to as a stipulated-sum contract. The owner will provide detailed instructions for the work and the parties will agree on a price for the work to be performed. Clients benefit since the price is fixed, which is resulting in reducing risk. Work carried out by ships on the water, such as exporting or importing commodities from one port to another, is dependent on the parties involved.

Obligations of affreightment contracts

The contract terms must describe the duties and obligations agreed upon between the charterer and the shipowner.  Some of the responsibilities are as follows:

  • The master must provide notice to the charterer’s agent at a certain time as an obligation.
  • As specified in the contract, the vessel can be filled and released from the port included as an obligation.
  • The bill of lading must be issued within a given time frame included as an obligation.
  • The procedures to be taken if payment is late will also be included in the obligation of the contract.
  • When carelessness occurs, who will be held liable: the dockworkers or the crew will also be included in the obligations of a contract. 

These are to be included in the obligation of the affreightment contract. Other requirements are also included in the contract. They are as follows:

The seaworthiness of the ship

The agreement between the shipowner and the charterer states that the ship must be seaworthy. The ship must be capable of overcoming the threats it will experience on the sea voyage. The contract also contains specific terms and circumstances, such as the availability of fuel, the effectiveness of crew members on board, and other criteria pertaining to the transportation of products. The ship must successfully meet the charterer’s criteria in order to fulfil the contract’s objective. The ship must consider all things in order to provide the best service possible.

Staying on the agreed route- no deviation

The shipowner agrees to follow the route specified and not to depart from the ship’s route as agreed in the carriage contract. When both parties agreed on the contract’s pre-determined path, changing the route is not considered a fair switch.  The deviation is only authorised once the party has reviewed and acknowledged the contract deviation. Until then, the ship must take the correct path, which is a guided route for loading and unloading cargo between ports which is agreed upon. The ship may change its route only if the agreed-upon path poses a danger to the ship or cargo. When it is necessary to protect the ship, crew, and cargo from damage, it may be authorised to change routes.

No shipping of dangerous goods

Certain products are dangerous to the ship if they are not acknowledged by the carrier, and they are prohibited from being carried for their safety advantages. The shipper can not act independently. Some commodities are not harmful at the beginning of the journey, but they might become dangerous later if fuel or toxic gas escapes or fumes. If the shipper fails to disclose to the carrier dangerous goods or hides them for whatever reason, the shipper shall be held liable for any accidents or damages to the ship or cargo.

The obligation of reasonable dispatch

The shipowner and carrier must be able to properly fulfil their dispatch responsibilities. If the contract’s conditions do not include the delivery date, the shipper must deliver the products within a reasonable amount of time. This is based on the shipowner’s wishes. If the carrier fails to meet the specified commitment, the charterer has the right to claim cargo damages. Damages caused by natural disasters such as floods, heavy rains, and other events beyond the charterer’s control are not recoverable.

Nominating a safer port

If the charterer insists on nominating the port of  his choice, it must be a trustworthy one. It is the charterer’s obligation to choose a safe port for the charter service and to guarantee that the cargo is safe for the duration of the contract. The safe period will record the time of arriving and departing from the port, which must be noted. The ship must have safely left the port while loading and unloading are also checked.

Frustration

When one party is at fault in performing the contract, frustration arises; in other words, the contract cannot be completed until one of the parties makes a mistake, which causes frustration. For example, if the chartered ship is destroyed or the charterer is missing, this will result in the contract’s inability to be fulfilled. Transport delays are often a source of frustration since they prevent the contract’s goals from being met. They must convince the court that the contract is no longer useful or is unlawful as a result of its failure to execute

Nomination procedure and potential problems

The shipment schedule and nomination processes will be the least standardised aspects of the contract. Some contracts are extremely detailed, including complicated requirements in the nomination method. The terms governing the nomination procedure will usually include everything from who is responsible for initiating the procedure to who has the final authority on the boats necessary during the time of delivery. The provisions in this process are written in a highly detailed way, which prevents misunderstandings since the procedures are well-written and include the contractual conditions. It’s necessary to let the parties be aware of where they are in the case of a COA and quick acceptance of the vessel nominated. When charterers violate a condition, owners will be able to easily and confidently place the vessel on a new contract.

Difference between a contract of affreightment and a contract of carriage

Contract of AffreightmentContract of Carriage
The contract of affreightment is between the charterer and the shipowner.The contract of carriage is between the carrier and the shipper.
The  charterer pays for the freight as per the contract.The carrier gets payment in return for the carriage as per the contract.
In this agreement, the shipowner promises to transport the cargo or use a portion or all of the ship’s area across a certain voyage for the advantage of the charterer.In this agreement, the carrier agrees to transport the items delivered to the lawful owner through the shipper in exchange for money.
To be enforceable, the contract must have agreed-upon payments, a stated time period with a specific location or voyage, and the cargo products stated on the contract.The contract must have both necessary and formal aspects for the carriage of goods in order to be enforceable.
5.This contract requires the charterer to pay just the lease charges over a specific time frame.This contract requires the payment of freight undertaken to deliver goods from one port to another port.
6.It deals with both the voyage and the port.It is dealing with moving from one port to another.
7.The payment is done for the freight whether the goods are ready for shipment or not.The payment is done for the freight that is ready for shipment. Only after the payment, the contract is executed to deliver the goods.

Difference between charter party and bill of lading

Charter partyBill of Lading 
1.The charter party is an individual who holds a lease from a shipowner in exchange for payment to use his ship and get into an affreightment contract.The bill of lading is a negotiable instrument in an affreightment contract that acknowledges receipt of the goods on board for carriage to a particular port of shipment designated by the owner or charterer.
2.A charter party is not transferable to a third party.A bill of lading is transferable to any third party by authorisation and shipment.
3.For a limited time, the captain and crew act as the exporter’s agents.For an indefinite amount of time, the captain and crew act as the shipowner’s agents.
4.A charter party is the charter party’s lease of the ship.A bill of lading is not a ship lease.
5.A charter party cannot be used to secure a loan.A bill of lading can be used to secure a loan.
6.A charter party is not a document that declares the ownership of goods.A bill of lading is a document that declares the ownership of goods.
7.A charter party is for a specific journey.A bill of lading is connected with a certain destination.

Conclusion

The aim of a contract of affreightment (COA) is to obligate a carrier to deliver a specified or ascertainable volume of goods of a particular kind over a certain time frame. The contract does not apply to a single vessel but operates to a series of journey charters. Freight is paid according to the amount of cargo being transported, and the carrier assumes the risk of route delays. Except for the unique trip charter conditions that involve lifting each vessel after it has been offered for loading, this contract is a set of standard terms. 

The charterer is liable for all costs associated with carrying goods, as well as any cargo losses. If a ship fails to deliver goods on schedule or deviates from the agreed-upon route, resulting in cargo damage, the shipowner will be held liable for the losses. When chartering a ship for a time or voyage charter, it is important to make sure that it is safe during the duration of the contract. A contract of affreightment is a contract between a shipowner and a charterer for the purpose of renting his ship. As a result of such an agreement, certain responsibilities and obligations must be met to fulfill the contract.

References

  1. https://thebusinessprofessor.com/mgmt-operations/affreightment-definition
  2. https://www.myseatime.com/discussion/difference-between-contract-of-affreightment-and-the-contract-of-carriage
  3. https://www.steamshipmutual.com/publications/Articles/COANomination0107.asp
  4. https://www.globaltrademag.com/contract-of-affreightment-how-to-know-your-obligations/ 

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