Optimizing Shipping Solutions for Long-Term Contracts

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Table of Contents

Introduction
Bareboat and Time Charter Definitions
Differences in Legal and Commercial Regulation of Time and Bareboat Charters
Recommendations for the Company
Conclusion
References

Introduction

An Argentine meat exporter with a 10-year contract with a British supermarket chain needs advice on how best to deliver its shipments. The organization aims to refocus on the two most popular types of charter: time charter and bareboat charter. For effective recommendations, it is necessary to study the legal and commercial obligations associated with charter transportation. To fulfill the agreement between the Argentinean organization and the supermarket chain, it is proposed to use the bareboat charter method. A bareboat charter is the most efficient since it allows control over the shipping process and is cost-effective in the long run.

Bareboat and Time Charter Definitions

There are several types of charters available in modern shipping. The two most popular are the bareboat charter and the time charter. A bareboat charter acts like a lease of a boat, not a contract of carriage (Wilson, 2010). According to the UK Government, a bareboat charter is understood as the hire of a vessel for a strictly agreed period on terms that give the charterer ownership and control of the vessel, including the right to appoint a captain and crew (Finance Act 2000, 22, 143). The charterer becomes the temporary owner of the vessel and bears full responsibility for the correct operation. The oblige of the carrier is the strict implementation of the agreements: the correct operation of the vessel and compliance with the time frame. During the bareboat charter contract, the hirer bears all costs associated with fuel (Tully, 2012). This method of organizing transportation is preferable if the charterer has the crew.

A time charter is also a charter agreement; it differs from a bareboat charter in that the vessel is rented with the crew. The crew follows the instructions of the charterer regarding the commercial operation of the vessel. However, the charterer obeys the orders of the shipowner related to the management of the vessel: navigation, internal regulations, and crew composition (Todd, 2015). Control over the technical operation of the vessel remains with the shipowner. The charterer must fulfill the terms of the contract, adequate commanding, and preservation of the vessel in its original form.

Differences in Legal and Commercial Regulation of Time and Bareboat Charters

There are a few differences between how bareboat charters and time charters work. The cost of maintaining the crew is taken into account during a time charter contract. The fixed costs of the joint venture (insurance premiums, mortgage interest, and depreciation) are borne by the shipowner. When concluding a bareboat charter agreement, the shipowner is obliged to perform several actions. Firstly, they must provide the vessel with seaworthiness suitable for carrying out the activities prescribed in the contract. Then it is necessary to identify and eliminate hidden shortcomings – in the event of an emergency on the ship caused by hidden malfunctions, the shipowner is responsible to the charterer. Finally, the damage caused to natural resources in the event of a shipwreck must be repaired (Cha et al, 2021). The shipowner provides the vessel with the necessary equipment in proper condition so that the charterer can comfortably rent it.

On the other hand, for a bareboat charter, the charterer as the temporary owner of the vessel during the term of the bareboat charter contract is obliged to fulfill the following. Firstly, the lessee undertakes to pay the freight on time, as specified in the contract (Gascon, 2021). The lessee undertakes to maintain the vessel’s operability and carry out regular maintenance. The charterer is responsible for the full operation of the vessel (Gascon, 2021). The charterer is not entitled to change the purposes of chartering or change the area of navigation. Crew costs, insurance fees, and regional trading fees are also covered by the charterer and not by the ship owner (Gascon, 2021). The charterer is responsible for the condition of the vessel and assumes full responsibility for its maintenance during operation.

Recommendations for the Company

Considering the differences between time and bareboat charters, the following recommendations can be taken into account. Firstly, the agreement between the meat exporter and the supermarket chain is a long-term one. Therefore, frequent and periodic goods shipment is implied. Based on this factor alone, the bareboat charter agreement is more suitable, since from a long-term perspective, renting a ship and hiring a crew is more financially efficient than paying for each trip individually. Additionally, in a bareboat charter agreement, both the charterer and the shipowner have an equal amount of authority. The charterer is responsible for hiring the crew and paying insurance and trading fees. The charterer has control of the shipping process and the quality of shipment, which makes regulation and monitoring easier.

Secondly, even though a time charter might appear like a safer option, from a long-term perspective, it seems to be too expensive and inefficient in terms of resource management. Although equipment, crew members, maintenance, and all fees are paid, time charter is limited in where it operates, on what distances, and for how long. The shipowner has more control over the process, which leaves the charterer with fewer options. This charter type gives more flexibility and operation control to the company, which is a significant advantage.

A significant minus of the time chart was considered in one of the court cases. The leased vessel suffers a fire, and it becomes clear that the repair time will be more than two months (Trowers, 2020). Since the hirer is responsible for the vessel, any benefit during the repair period will not be available. The charterer is obliged to bear responsibility, including for the ship’s crew. In the case of a bareboat charter, the team may be disbanded or transferred to another vessel. Thus, a bareboat charter is more profitable if the ship is damaged during transportation.

Conclusion

Thus, the bareboat charter is more suitable for the 10-year agreement with the British supermarket chain. The reasons for that are long-term cost efficiency as the demise charter requires a one-time investment at the beginning, providing more control over the operation process. Even though more financial investments are needed at the start and more bureaucratic processes are involved, the bareboat charter is more efficient for the company.

References

Gascon, A. G. (2021) “Insurance-related problems in bareboat charter agreements”, Journal of Shipping and Trade, Web.

Cha, J. et al. (2021) “Legal disputes under time charter in connection with the stranding of the MV Ever Given”, Sustainability, Web.

Todd, P. (2015). Principles of the Carriage of Goods by Sea. Routledge.

Trowers, S.N. (2020). “A Legal and Regulatory View”, InsurTech: A Legal and Regulatory View, p.363-401.

Tully, V. (ed.). (2012). Blackwell’s Companion to Maritime Economics, Chichester: Blackwell Publishing UK Government. (2000). “Financial Services and Markets Act 2000”. Web.

Wilson, J. (2010). Carriage of Goods by Sea. Pearson Education.

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