Supply chain disruption pressures retailers to charter their own vessels

Fear of supply chain disruption ahead of peak holiday season demand has led some large retailers and wholesalers to charter their own vessels and others to consider doing the same.

The recent convulsions in the marine chartering market have resulted in traffic jams at ports, with ships unable to berth and discharge their goods. At the same time, some vessels are earning record-breaking fees.

However, chartering a vessel is complex, involving a host of responsibilities and expenses that the unwary may not realise.

Types of charter contracts

Smaller traders often rely on cargo consolidation when they struggle to fill a whole shipping container with their goods, so the idea of hiring an entire ship is impractical. But for large wholesalers and retailers, chartering a ship could provide a degree of control they do not have when relying on others to carry their goods.

At the outset, organisations that decide to hire their own vessels must decide whether to voyage or time charter a vessel. The two types of charter are subject to their own agreements, known as “charterparties”.

Under a voyage charter, a vessel is hired for a single voyage, or a series of consecutive voyages. Under a time charter agreement, a vessel is hired for all voyages, during an agreed period of time, be it six months, a year, or longer.

Retailers and wholesalers that are considering chartering vessels typically opt for a voyage charter. Unlike professional vessel charterers, they are unlikely to want to hire a vessel for long periods of time.

Charterer responsibilities

There are a host of standard voyage charterparty agreements available, each requiring expert guidance as to suitability to the charterer’s needs, though they generally have common themes.

All, for example, place some obligation on the charterer. Where a charterer has a responsibility, there is also the risk of incurring a liability if that obligation is badly discharged or not discharged at all. A charterer’s responsibilities usually include:

1. Nominating “safe” ports

The charterer is normally expected to designate a “safe” port that the vessel is to sail to with the goods. A port could be deemed unsafe if it is not deep enough for a vessel to enter safely, or where political or weather conditions expose a vessel to unacceptable danger, potentially leading to damage or even loss.

There have been legal cases brought by ship operators where the port nominated by the charterer has turned out to be unsafe. For example, the so-called “capesize” bulk carrier Ocean Victory broke up after leaving the Japanese port of Kashima during a severe storm in 2006. The charterers were held liable for costs, after a judge held that the port was unsafe. In a case involving the vessel Athos (Citgo Asphalt Refining Co v Frescati Shipping Co ), the ship’s charterer was held responsible for costs relating to an oil spill in the Delaware River in 2004 as the charter contract established that Citgo would provide a safe berth.

When chartering a vessel, care needs to be exercised in ensuring that all the ports a vessel is nominated to enter (generally by the charterer), stay at, and leave are safe. Knowing the depth of a port, its cargo handling capabilities, the weather patterns, and political stability in the port area all need to be considered. Not to do so is to risk incurring a liability for damage done to a vessel visiting an unsafe port.

2. Assigning port agents

Under many standard charterparty agreements, the loading and unloading of goods is the responsibility of the charterer. Therefore, a charterer will need to consider appointing port agents at all the loading and discharge ports in order to safeguard their interests.

A vessel held up in a port because local cargo handlers – stevedores or longshoremen – are unable to discharge the goods on time could permit a ship operator to penalize a charterer for undue and excessive delay. This would be done under a measure found in most voyage charterparties called “demurrage”. An outbreak of COVID-19, for instance, could result in inadequate numbers of cargo handlers being available in a port to discharge a vessel, as has recently been the case at some Chinese ports.

3. Packing, sealing, and hazards of goods

When voyage chartering a vessel, great care needs to be exercised to ensure the goods are adequately packed and sealed at the loading port. Ensuring there is no leakage or spillage of goods at the time of loading, or that could be reasonably expected during the voyage, is often the voyage charterer’s responsibility. The cost of any spillage of goods during the voyage and any consequential clean-up expenses, especially if such events cause contamination of other cargoes on board or damage the vessel, could expose the charterer to liabilities.

Similarly, the charterer is responsible for any goods loaded that could endanger the vessel, for example, through fire or explosion. The charterer needs to ensure the master of the vessel is fully aware that such goods are on board and agrees to continue with the voyage. Otherwise, the charterer could be held liable for any damage caused to the vessel or other consignments by volatile cargoes.

Charterers often need to rely on a global network of agents at loading and discharge ports, especially where the goods are of a hazardous, volatile, or dangerous nature. The charterer needs to be confident that their local agents will pass on all relevant information to the ship operator about the nature of such goods. Otherwise, the charterer again faces potential liability for any damage to the vessel or other cargoes on board caused by those volatile goods.

4. Damage to ship

Damage to hull (DTH) insurance is designed to cover a charterer’s liability for damage caused to an owner’s ship. For example, a ship could be damaged in a port, which is subsequently deemed to be unsafe; or it could be damaged during loading or unloading by a charterer’s nominated stevedores or longshoremen. If the charterer owns the cargo on board a ship and that cargo causes damage – for example, as a result of fire or explosion – DTH insurance should provide charterers with the relevant cover.

Chartering will not permit queue jumping

The above are just a few of the responsibilities that a voyage charterer can expect to take on, and they are often buried deep within the wording of standard voyage charterparty agreements. If a wholesaler or retailer is prepared to take on these risks, they need to be aware of things that chartering a vessel cannot achieve.

If the port where the goods are to be discharged is suffering chronic delays – whether due to the pandemic or any other reason – the chartered vessel may be stuck outside the port, along with others. Chartering the vessel will not enable queue jumping.

The recent case of the Ever Given blocking the Suez Canal, which led to the delay of 400 vessels, is a reminder that delays and the non-arrival of vessels may be due to events over which a charterer has no control. Chartering a vessel may not alleviate these risks, and delays where no damage has occurred to the vessel generally do not represent insurable risk.

If chartering a vessel is still the preferred option, then managing the associated risk — for example, by purchasing marine charterers’ legal liability insurance — is a sensible precaution to take.

For more information on marine liability products, please contact your Marsh Specialty advisor.

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Supply chain disruption pressures retailers to charter their own vessels

Types of charter contracts

Charterer responsibilities

1. Nominating “safe” ports

2. Assigning port agents

3. Packing, sealing, and hazards of goods

4. Damage to ship

Chartering will not permit queue jumping

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Supply chain disruption pressures retailers to charter their own vessels

Are you ready to charter your own vessel?

Types of charter contracts

Charterer responsibilities

1. Nominating “safe” ports

2. Assigning port agents

3. Packing, sealing, and hazards of goods

4. Damage to ship

Chartering will not permit queue jumping

Related insights

An Eye on P&I Episode 7: Trading certificates

An Eye on P&I Episode 6: Risks covered and claims handling

An Eye on P&I Episode 5: The Pooling Agreement

An Eye on P&I 4: The International Group