CHARTER PARTIES


Time Charter Party


Payment of the Hire

Under a time charter agreement, the hire always has to be paid in advance. The means of payment can be agreed on between parties.

Example

  1. X $ / T / month (usually on summer freeboard)
  2. X $ / T / day
  3. X $ / M3 / day (for gas tankers).
- Every 30 days (or calendar month) (BALTIME, NYPE).
- Half-monthly.
- Per day (GENTIME, NYPE).

To meet possible price fluctuations due to inflation, devaluation, exchange rate variations, a “Monetary Clause” is usually included in the time charter agreement.

Inflation

In the past, long term charter parties were fixed on the basis of a fixed time charter rate.

To meet the sometimes heavy inflations, there is a growing tendency to foresee a price adaptation in long term charter parties. The operating costs of the Owner which can be influenced by inflation are:

  1. ship’s stores or victualling;
  2. wages;
  3. maintenance of the vessel;
  4. administration costs.

Therefore, in long term charter agreements, a “Index Clause” or “Escalator Clause” or a “Adjustment Rate of Hire Clause, ARH” is included.

Adjustment Rate of Hire Clause

The Adjustment Rate of Hire, ARH can be calculated by means of following formula:

                                               

In this formula, X + Y + Z is equal to the total hire. W represents the new monthly wages of the personnel on board and Wo those wages at the signing date of the charter party. S represents the monthly administration costs (or the monthly wages of the staff ashore) and So those wages at the signing date of the charter party.

X, Y, Z, each represent a certain percentage of the hire, where X is considered as a fixed amount (which e.g. will not fluctuate through inflation), while Y and Z, both represent variables; e.g.:

X  =  75%
Y  =  15%
Z  =  10%

Example

Suppose that the monthly hire of a vessel is equal to $ 12,500 per month. The wages of the sailors increase by 10% and the wages of the staff ashore remain unchanged. How much will the ARH be ?

We take as basis: X = 75%, Y = 15% and Z = 10% so that the new wages of the sailors will be equal to $ 20,625 and:

ARH  =  93,750  +  18,750 x (20,625 / 18,750)  +  12,500  or

ARH  =  93,750  +  20,625  +  12,500  =  $ 126,875

Conclusion

An increase of 10% in the variable part Y (= 15%) will increase the total hire by 1,5%.

The Charterer will always try to obtain a fixed hire of 100% which is to the disadvantage of the Owner because he will not be able to apply an adjustment for inflation and on a middle or long term he will suffer a loss.

On the other hand, The Owner will try to keep the fixed part of the hire (thus X) as low as possible and the variable parts (Y and Z) as high as possible so that in case of inflation he will not suffer any loss or even make a profit.

Escalator Clause

Some Owners only want to fix long term time charter agreements (for more than one or two years) on condition that the Charterer agrees to include an “Escalator Clause” in the charter party. If the fixed costs (as mentioned above) increase with a set percentage, then the monthly hire (or the remaining period or the next year) will be increased with that same percentage. Usually a standard of 5% is applied.

To that end, BIMCO introduced the following clause:

“Escalator Clause” 

This clause was used in the past and may now be obsolete. 

“The rate of hire agreed in this charter is based upon the level of owners’ monthly operating expenses ruling at the date of this charter as shown in the statement for future comparison attached hereto, including provisions, stores, master’s and crew’s wages, war bonus and other remuneration, maintenance and usual insurance premiums.

By the end of every year of the charter period the average monthly expenses for the preceding year shall be compared with the basic statement attached hereto.  Any difference exceeding 5 per cent to be multiplied by 12 and regulated in connection with the next hire payment.  The same principle to apply pro rata at the termination of the charter for any part of the year.”

Devaluation or Realignment of Exchange Rate

To meet a possible currency devaluation, long time agreements and in particular the “tanker time charter parties” include a “Currency Clause”.

Currency Clause


”It is mutually agreed that the monthly hire due under Clause ....... is based upon the mean of the present Bank of England's selling and buying rate for the U.S. dollar, viz: $ ...... to the Pound Sterling. Should this mean rate fluctuate it is understood and agreed that the Sterling hire payments shall be adjusted upwards or downwards and the amount actually payable in Sterling shall be the hire calculated at the agreed rate in Sterling of ....... multiplied by $ ....... and divided by the new mean rate in force on the due date of payment.”

For the tanker trade, Intertanko introduced the following “US Dollar Exchange Rate Clause” and “Currency Clause”.

This clause was also used in the past and may now be obsolete. The currency used today in Belgium, France, Germany, etc. is the Euro.

Intertanko “U.S. Dollar Exchange Rate Clause”

“(For Incorporation in charter for medium or long periods, fixing the charter hire in U.S. dollars.)

  1. The charter hire to be paid under this charter party shall be subject to quarterly adjustments on account of changes in the exchange rate value of one U.S. dollar as expressed in the following Selected Currencies set out under 2a.


  2. a) Basic Exchange Rates shall be the arithmetical average of exchange rates for the Selected Currencies against the U.S. dollar quoted on the 1st, the 7the, the 14th and 21s of the three calendar months immediately preceding the date of this charter party. These rates are: FRENCH FRANC....., JAPANESE YEN....., POUND STERLING......., GERMAN MARK....., NORWEGION KRONE.......,*

    b) Quarterly Average Exchange Rates shall be the arithmetic average of the exchange rates for each of the Selected Currencies against the U.S. dollar quoted on the 1st, the 7th, the 14th and 21st of three calendar months immediately preceding the 1st January, the 1st of April, the 1st of July and the 1st of October, respectively.

    c) The exchange rates to be applied under this Clause shall be the mean of the opening buying and selling spot exchange rates in respect of the telegraphic transfer for the Selected Currencies into U.S. dollars as quoted by the First National City Bank in London.

    d) If on the dated referred to in these Clause all or some of the exchange rates in question are not quoted by the First National City Bank in London, the rates on the first day of quotation thereafter as set out in paragraph 2c) for each of the Selected Currencies shall be used.


  3. a) On 1st January, 1st April, 1st July and 1st October in each year the respective Quarterly Average Exchange Rates for each of the Selected Currencies against the U.S. dollar shall be Ascertained and the percentage increase or decrease as compared to the  Basic Exchange Rates shall be rounded off to two decimals only.

    b) If it is found that the arithmetic average of the percentages of increases or decreases of the selected currencies compared to the U.S. dollar amounts to two (2) whole percentage points or more, all charter hire instalments falling due under this charter party in the month when the calculation is made and the two following months, shall be increased if the U.S. dollar is weakened, or decreased* if the U.S. dollar is strengthened, by that percentage/the half of that percentage.

    c) The provisions of this Clause shall not apply to any charter hire instalments falling due in *the first year/the first six months of the period of this charter party.  Adjustment may immediately thereafter be made in accordance with the latest quarterly exchange rates.

    * Delete/complete as appropriate.”

INTERTANKO Currency Clause

  1. It has been established by Owners and Charterers that on the date of this fixture the Exchange Rates of 9 selected currencies against the U.S. Dollar are as set out in Attachment” A” hereto.

  2. a)  Owners and Charterers agree that on the 1st of January, the 1st of April, the 1st of July and the 1st of October in each year the mean of buying and selling spot exchange rates in respect of telegraphic transfers for the 9 selected currencies into U.S. Dollars, as quoted by the First National City Bank in London at 10.30 a.m. local time, shall be rechecked and the percentage increase (+) / decrease (-) in the rates of exchange for each individual currency against the U.S. Dollar as compared to the  Exchange Rates set out in Attachment “A” shall be calculated to two decimals only.

    b) If for one or more of the currencies in question two or more exchange rates for different kind of transactions are quoted, the one used in the calculation under this clause shall be the exchange rate quoted for import and export. If on the dates mentioned all or some of the exchange rates in question are not quoted by the First National City Bank in London the rates on the first quotation thereafter for each of the 9 selected currencies shall be used in the calculation.

  3. If this is found that the arithmetic average of the percentage increase (+) or decrease(-)of the 9 selected currencies compared to the U.S. Dollar, computed in accordance with the principles of Attachment “B” hereto amounts to two (2) whole percentage points or more, the charter hire to be paid under this charter shall be increased/decreased by and equal percentage. The revised charter hire shall become effective from the first payment of charter hire due following such revision.

  4. When a revised charter hire has become effective, the provision of paragraphs 2 and 3 shall apply to allow for subsequent revisions of the charter hire in the calculation of the percentage points by which any revised charter hire shall be increased/decreased, the following rules shall be observed:

    a) The exchange Rates set out in Attachment “A” shall be replaced by the quotation for each of the 9 selected currencies applied to calculate the percentage points actually used to fix the revised charter hire in question:

    and

    b) The calculations shall be based on the increase/decrease in the rates of exchange subsequent to the date of such quotation.

    Any revised charter hire shall remain effective until a new charter hire fixed according to the provision of this paragraph has become effective.


Attachments “A” and “B” have not been reproduced hereunder.

A “money basket” is composed, comprising nine countries and every three months the new value of the money is determined. For the nine countries it is assessed how much the currency has increased or decreased. The result is divided by nine and every three months the hire is adapted accordingly.

Hire Adjustment for Speed and Fuel Consumption

When the charter party is signed, the Owner guarantees that his ship will sail at a minimum speed and that the fuel consumption will not exceed a maximum quantity (± 5%). This commitment on the part of the Owner is one of the “Charter Party Warranties” and in case of non compliance, the Charterer may not cancel the charter agreement but he will have the right to receive a compensation in the form of a “compensation in arrear” or a “adjustment of hire”.

Suppose that the guaranteed speed in the charter party is represented by Vcp and the fuel consumption by Tcp. We assume that the vessel will make X equal voyages per year.

Hire Adjustment for Speed

The total sailed distance per year Dy = X x Dvoy  (Dvoy = distance per voyage).

The total number of hours to be sailed per year Hrscp = Dy / Vcp

If the actual speed of the vessel Vact, is greater or smaller than the guaranteed speed Vcp indicated in the charter party, then the actual number of hours sailed Hrsact must be calculated as follows:

Hrsact = Dy / Vact

  1. If Hrsact > hrscp then the Charterer suffered a loss;
  2. If Hrsact < hrscp then the Charterer made a profit.

In the first case, the Owner will have to pay a “compensation is arrear” to the Charterer; in the second case, the Charterer will have to pay a compensation in arrear to the Owner expressed in ….$ per day. The number of days will be calculated as follows:

Hrscp – Hrsact = Δ Hrs

ΔHrs / 24 = number of days (too many or too little).

Hire Adjustment for Fuel Consumption

The guaranteed number of days at sea is calculated as follows:

Dy / (Vcp x 24)  =  X cpdays per year

The guaranteed fuel consumption  =  Xcp d/j  x  Tcp /  =  Zcp T/year

The actual consumption  =  Xact d/y  x  Tact /d  =  Zact  T/year

To be refunded:

ΔZact  -  Zcp  =  Δ Z Tons x average price of fuel.

Example

The guaranteed speed and fuel consumption of a vessel is respectively 15 mph and 50 T per day. In one year the vessel has to make twenty equal voyages, each of 3600 miles. After one year, the Charterer states that the average speed was only 14 knots and that the vessel used 55 tons per day. The hire was equal to $ 350,00 per day and the average price of fuel $ 210,00 per ton.

Hire Adjustment for Speed and Fuel Consumption

Dy  =  3,600  x  20  =  72,000 miles

Vcp  =  15 kn

Hrscp  =  72,000 / 15  =  4,00 hrs

Vact  =  14 kn

Hrsact  =  72,00 / 14  =  5,142.9 hrs

∆hrs  =  4,800  -  5,142.9  =  -342.9 (sailes too much)

Number of days to repay = 342.9 /  24  =  14.29 days

To refund by Owner:  14.29 x 350 = $ 5,001.5

The guaranteed fuel consumption  =  (72,000 / 15 x 24) x 50  =  10,000 T

The real fuel consumption = (72,000 / 14 x 24) x 55  =  11,785.7 T

To be refunded by the Owner = (11,785.7 – 10,000) x 210 = $374,997

Note

If the ship had been able to sail at the normal speed of 15 knots, then the compensation for fuel would have been equal to:

4,800/24  x  5 x 210  =  $210,000

If the Owner can prove that the loss of speed or the extra fuel consumption were due to the bad quality of the fuel, then he would not have been indebted of any hire adjustment to the Charterer.







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