This article is written by Jyoti Choudhary, pursuing Diploma in Advanced Contract Drafting, Negotiation and dispute resolution , from Lawsikho. She is a legal associate at John Deere India pvt ltd.

Introduction

The world economy is running through the transactions and trading occurring by modes of oceans, air, railways, and freight.

These transactions shall be done in compliance with rules and regulations laid down by the authorized regulatory in the world. Every company involved international trading has to be sure that they have highly complied are with these regulatory.

More particularly, the shipping industries follow the rules and regulations passed by the International Maritime Organisation (IMO) and laws of respective countries, whilst performing any International transaction through maritime.

The Shipping Industry is the oldest industry in existence and hence, becomes the crucial part of the world economy. In earlier days all the trading, transactions, travelling and transportations were mostly achieved through shipping. There is no denial that it plays a vital role in present economy also.

It is found that Greece and Japan own two largest ships by capacity and China now owns the large numbers of ships.

What is the shipping industry?

International trading usually happens via four major modes of transportations. Shipping Industries being part of the transportation have a vital role to play in the growth of the world economy. Shipping Industry provides facilities of transportation of goods and commodities to domestic and global companies to enter into transaction i.e., sale and purchase and trading. It also provides domestic and international delivery facilities directly to customers.

In recent times, direct customer demands have been raised by electronic commerce businesses. E-commerce is the activity of sale and purchase on the internet. The potential e-commerce companies like Amazon, ebay and many more, providing international trading facilities for customers and seller or importer and exporter, whereby expanding the business of shipping.

How shipping business is significant to Indian Economy?

Like any other country in the world, the shipping Industry has a huge impact on the development of the Indian economy as well. In India, a major part of trading and transportation of goods and commodities is done through shipping.

As per the records, India has 12 major and 200 notified minor and intermediate ports.

As per IBEF, shipping sector in India is mostly involved in external trade. In the financial year 2018, charges of the biggest ports have reached 679.36 million tones and other ports have received the highest growth.

The growth of shipping industry is so prominent that the Government of India is now working on developing policy for shipping by targeting to establish port with capacity of 3200 MMT by 2020.

The Government is also planning to execute the National Maritime Development Programme with a budget of US$ 11.8 billion.

The shipping sector is playing vital role in sustaining growth of India’s trade and commerce.

Further, the Ministry of India has declared to do a massive investment in ports and roads sectors, which aiming at more development of Indian Economy. Also, there are plans to develop 10 coastal economic regions as part of plans to promote country’s Sagarmala project.

What are the regulatory frameworks involved in the shipping business?

Since independence in 1947, shipping industry has played a vital part in the growth of Indian economy. Every big industry comes with their own set of risk and drawbacks which might result in more loss than good to the country. Thus, industry is managed and regulated by Ministry of Shipping and mainly governed by the following Acts:

The Merchant Shipping Act, 1958

The Inland Vessels Act, 1917

The Coasting Vessels Act, 1838

The Multi-modal Transportation of Goods Act, 1993

The Indian Ports Act, 1908  

The Dock Workers (Regulation of Employment) Act, 1948

The Major Ports Trust Act, 1963

The Seamen’s Provident Fund Act, 1966

The Inland Waterways Authority of India Act, 1985

Apart from these agreements, shipping industry is also regulated by the rules and regulations framed by International Maritime Organization (IMO).

What are the 10 most important contracts in the shipping industry?

The shipping industry has a significant role in the development of the economy. The shipping businesses are carried out on cargo ships, container ships, bulk carriers and tankers. For a smooth transition of the business, companies need to be complied with rules and regulations and shall ensure that trading are under the purview of law and not involved in act which is forbidden by the law.

Here, the parties can approach to the attorney, to negotiate and draft agreements in manner that it will serve the purpose of the parties and have legal binding. These are the shipping contracts.

The following are the top 10 important contracts in the shipping industry:

1) Ship or Vessel Sale and Purchase Agreements

The sale and purchase of ship or vessel is one of the important tasks in the shipping industry.

A Ship or Vessel sale and purchase agreements are entering between the seller and buyer of ship or vessel.

To perform such a kind of transactions the parties need to have huge capital, knowledge of a particular kind of ship, legal knowledge and negotiation skills.

In order to minimize the future disputes and have smooth transaction, the parties need to negotiate every term relating to Ship Sale and Purchase Agreement. This means having number of conversations between the parties before finalizing the contracts’ clauses.

The agreement should discuss important clauses like protection of buyer and seller, obligations of buyer and seller, payment terms, termination clause and what are the remedies are provided to buyer and seller in case of breach. Through numerous communications during negotiation process, the parties can finalize the pricing and terms of the contract for sale and purchase of ship.

2) Transportation Services Agreements or Logistic Services Agreement

Transportation Services Agreements are entering between the goods provider and those who offer transportation for those goods. In these types of agreement, the goods provider will agree to pay some amount to the service provider and in return, the service provider will agree to deliver the goods to the vendors or distributors or customers. This agreement the parties shall agree on the delivery date and time, quality standards, obligations of each parties, rights of the parties, terminations and compensation in case of breach. The parties shall also discuss the insurance clause. What will happen if shipped goods get destroyed in the event of force majeure? What are the consequences for delay in delivery of goods because of the event which is uncontrollable? In case of breach of contract, what is the agreed compensation? Who will stand responsible for making good to the loss occurred to the other party?

3) Ship Management Agreements

When the parties enter into a contract to supply the goods and commodities through maritime, they also think about managing the ship for such transactions.

In earlier days, the shipowners used to look at several functions like financial management of vessel, employment of personnel, maintaining the vessel, technical supervision, operation etc. But now, the shipowners usually hire resources to manage the operations carried on ship while supplying goods.

A ship may cost as much as cost of buying a factory. Thus, it is always better to employ professionals to manage the operations of the ship.

Thus, shipowners nowadays delegated their functions in various areas to ship management companies, chartering companies etc.

When ship manager enters into contract with a third party for purchase of goods or services and transport, become obligated as contracting party towards third party.

4) Vessel Lease Agreement or Ship Charter Agreement

A lease agreement is between the shipowner and lessee or charterer. Under this agreement charter party put the vessel on rent, either in full or part, for stipulated period of time.

The terms of this agreement are formed on the basis of shipowner, charterer and the market. The parties will also comply with the laws applicable to the transaction to keep the trading from any legal interference.

There are two types of charter viz., time charter parties and voyage charter parties. In case of voyage charter, the parties can make their own terms of the contract and if possible, make changes in the standard terms to be align with the requirement of the parties and same should be accepted by them.

In time charter, the vessel can be on lease for specified period of time and the time which have been agreed by both the parties. In this kind the charterer controls the ship’s commercial activities. Thus, the terms of contract should explain about fuel consumption, loading capacity, speed of the ship and most importantly the time for usage of the ship should be mention clearly in the agreement.

5) Import and Export Contracts

Import and export contract is a contract between importer and exporter of various countries for selling and purchasing of goods and commodities. The contract is useful for the international trading of certain products like industrial supplies, raw supplies, manufactured goods or e-commerce delivery. These contracts will include the requirements such as quantity order, price per unit, delivery conditions, payment terms, documents and retention of title, etc.

6) Contract of Affreightment

A contract of affreightment is a contract between a ship owner and another person whereby agreeing to transport the goods in a stipulated period of time.

This contract is popular with small coasters employed in short voyages and it is cost effective also.

Contracts of Affreightment are also used by government authorities for international trading.

7) Marine Insurance Contracts

Since ages merchants are engaged in maritime commerce ways to minimize the impact of threats of their trade presented by natural and man-made perils.

Marine insurance covers the loss or damages of ships, cargo, terminals, and other transport by which goods and commodities are transferred, acquired, or held between the points of origin till delivery point.

This is important to protect parties’ goods from any damages or an event which is uncontrollable.

A contract of marine insurance is a contract whereby insurer agrees to compensate or indemnify the aggrieved party against marine losses or damages.

A marine insurance contract shall include elements like features of general contracts, insurable interest, utmost good faith, indemnity, subrogation, warranties, proximate cause, assignment and nomination of the policy and return of premium.

The proposal for marine insurance can be made by broker or insurer itself. The broker can prepare slip wherein all material information is recorded.

8) Seafarer’s Employment Contracts

Seafarer’s employment contracts gained importance since the enforcement of the Maritime Labour Convention (MLC). MLC mandates the shipowner/employer to have written employment agreements with all seafarers working on seagoing ships. The payment of wages of seafarers shall match the standards formed by MLC.

The agreement must be signed by both the parties i.e., the seafarer and the employer/shipowner.

9) Collective Bargaining Agreement

A Collective Bargaining Agreement is an agreement which is made between an employer and a trade union whereby agreeing on terms and obligations of employment relating to rates of pay, hours of work and other conditions of crew employed on the ship.

10) Freight Forwarding Agreements

Freight Forwarding is a service used by companies engaged in import and export of goods. It provides guarantee that the goods will get delivered to proper destination and maintain good condition.

For this purpose, companies enter into an agreement with Freight Forwarder. A Freight Forwarder is a commission agent performing on behalf of the importer and exporter, in activities like loading and unloading, storage of goods, maintaining quality of goods, arranging local transport, collecting payment from customers, etc. In simple words, a freight forwarder will provide services which cover the total transportation and distribution process.

A freight forwarding agreement shall include rights and obligations of the parties, standard quality norms, terms relating to import and export of goods to customers, delivery terms, modes of payment, terminations, indemnity, etc.

What are the risk factors in the shipping industry?

Every industry has their own risk factors, shipping industry is no different. There are numerous factors that must be considered while trading in shipping industry,  which are delivery time, safety of the crew members, etc.

Other major factors are rapid changes in technology, cyber security, technical uncertainty etc.

Conclusion

The Shipping Industry has been in existence for decades. The industry contributes 90% in the development of the world economy. Hence, it is important to understand the consequence of mismanagement of shipping contracts. If not taken care of properly it can cause holdups and delays occurring throughout the process. Therefore, it is essential to properly negotiate the terms and obligations of the parties before signing the contract. Abovementioned are 10 important contracts one must come across when dealing with shipping industry.

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