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How to avoid charterparty mistakes

How to manage risks which may lead to charter party disputes?

The Charter party is the core contract of commercial shipping since it regulates the relationship between the Shipowner and the Charterer and includes all the terms and conditions in regards with the charter, such as the ship and cargo operations as well as the payment of freight or hire. Given its central role, it is the source of several disputes which can lead to arbitration or litigation raising the costs of the parties and subsequently minimizing their potential profits.

Do you want to avoid main risks in your own c/p? Today we will discuss how to handle them.

Know Your Customer – Manage your Counterparty Risk

Since commercial shipping –especially the dry bulk market– is highly competitive with a lot of players, is not always easy to know or being able to evaluate the background of your counterparty. Therefore, there are a lot of serious disputes related with shipowner’s or charterer’s default. The Shipowner must be able to provide a seaworthy vessel, while the Charterer must be able to remit the hire or freight within the time specified in the charter party. Upon commencing negotiations, it is very important each party to check the background & profile of its counterparty in order to make sure that it will be able to perform its main obligations under the charter party. Asking for other parties’ references and previous fixtures will definitely assist for such evaluation.

Draft a Clear Charter Party – Manage your Legal Risk

An unclear Charter party may lead to confusion and muddy the waters of any dispute under it. Both parties should work on tested clauses and charter party forms and make sure that every aspect is clearly explained, without giving a significant benefit to one party over the other in such a way that will make it difficult or impossible for any party to perform. Furthermore, according to English law, the exchanges of both parties, under circumstances, do have legal effect therefore both parties should exchange clear offers and keep a proper filing of all these exchanges so as to avoid unilateral interpretation in regards with any clause at a later stage. Clearly-explained exchanges and a clearly-drafted charter party will definitely assist the parties to, amicably, settle potential disputes in a commercial way and avoid unnecessary legal costs.

Focus on Ship & Cargo operations – Manage your Operating Risk

According to P&I club annual reports, the most frequent claims are for improper cargo handling making up over 30% of the total claims. While both the shipowner and charterer focus on the economic part of each business, sometimes they do not give the proper attendance to other important factors and c/p clauses which describe issues like the required condition of the vessel, the cargo characteristics and their condition upon loading or the off-hire events (in case of time charter) and laytime/demurrage (in case of voyage charter). For example, bulk cargoes which are listed in the IMDG code may create several problems unless they follow the International standards and loaded & stowed properly. All these requirements and the protective actions which should be taken should be clearly mentioned in the charter party and followed by the parties accordingly.

Build Long Term Relationships

Even if one is experienced enough to manage all the main risks in the best possible way, It is always highly recommended to build long term relationships with prudent and stable counterparties, with whom you are able to communicate and solve any problem which may arise before it turns out to be a dispute. Not only long term relationships help you solve problems commercially, but they also help stabilize the company’s business in terms of market fluctuations by fixing freight rates, carrying volumes, and rate adjustment conditions. In the long run, this is much more effective and profitable than being stiff during negotiations in order to get a few more cents for a specific fixture.

The key role of the Shipbroker

A key role to manage your risks, build healthy relationships and avoid legal disputes is played by the reliable shipbroker who is usually involved between the two parties. Working with a shipbroker, who is well familiarized with the shipping practices in your target segment, can definitely help you come closer to the other party and better evaluate its performance. Shipbroker is also the one who handles the negotiations, makes suggestions on the clauses/terms to be incorporated and drafts the charter party, therefore his involvement is crucial in order for the final result to be successful.

After all: Find your lawyer & establish a P&I Cover

Even if each party takes all the relevant measures in order to manage its above risks efficiently, it will definitely assist to hire or cooperate with an experienced lawyer and/or claims handler. Since the chartering guys and shipbrokers are mainly commercial oriented people, an experienced lawyer can consult on the legal terms of the charterparty and assist on defending a dispute efficiently by mitigating the potential damages. It goes without saying that a defense cover with a P&I club should also be in place. P&I clubs not only provide their legal advice on the meaning of a charterparty clause or a dispute which may arise, but they also represent their client (Shipowner or Charterer) on disputes trying to resolve same commercially on mediation, while they cover a big part of the legal costs in case that any claim ends up to arbitration.

Be prudent - Save money!

FYI: With OpenSea you are able to manage your risks in the most efficient way. You can now have a clear picture of your counterparty’s profile and see references from other members, follow up all the exchanges and keep proper filing of historical communication, build-long term relationships with other members of our OpenSea shipping world and find new clients!

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