In maritime trade, the operation of a vessel is not always carried on through the owner’s own organisation. A vessel may be allocated to another person’s commercial plans for a defined period of time and in return for an agreed sum. The time charter contract, regulated in Article 1131 of the Turkish Commercial Code No. 6102, meets precisely this need. Under that provision, the allocating party (the shipowner) undertakes to place a fully equipped vessel, together with its commercial management, at the disposal of the party to whom the vessel is allocated (the charterer) for the agreed period and in return for a sum of money.
The distinguishing feature of the contract is that control over the vessel is divided in two. The vessel, together with its master and crew, is left to the commercial management of the charterer; the master is bound by the instructions conveyed to him within the scope of that right of management. The technical management of the vessel, by contrast, does not change hands and continues to rest with the shipowner. The shipowner, who assumes technical management, is expected to make the vessel ready at the agreed date and place and, further, to keep it seaworthy, fit for the voyage and fit for the purpose stipulated in the contract throughout the term. The charterer’s counter-performance is to pay the charter hire and to bear the expenses arising from commercial operation; in addition, the charterer is obliged to redeliver the vessel at the agreed place and in the agreed condition at the end of the period.
In this briefing note we address, in turn, the obligations that this division of functions imposes on the parties, the regime governing hire and expenses, the redelivery obligation and the limitation period to which claims are subject.
Form of the Contract and the Time Charter Party
The time charter contract is not subject to any formal requirement for its validity. The parties may agree in writing or orally, as they wish. Nevertheless, Turkish Commercial Code No. 6102 Art. 1132 entitles each party to require that a time charter party containing the terms of the contract be drawn up and delivered to it, provided that it bears the cost.
The time charter party is an evidentiary document establishing the existence and the content of the contract. In practice, the parties are seen mostly to prefer standard charter party forms whose terms have been settled in advance.
Parties to the Time Charter Contract
Taking the definition in Turkish Commercial Code No. 6102 Art. 1131 as the basis, the parties to the contract are designated as the allocating party and the party to whom the vessel is allocated. It is difficult, however, to say that these two concepts have gained currency in doctrine or in practice; a different terminology has become settled in both fields.
For this reason we too prefer to use the designations known in the sector rather than the statutory expressions. In the remainder of this text, the party that opens the vessel to the commercial management of the other side for a defined period will be referred to as the shipowner, and the party that assumes the obligation to pay hire in return for that allocation as the charterer.
Rights and Obligations of the Shipowner
The principal performance undertaken by the shipowner is to open the equipped vessel, together with its master and crew, to the commercial management of the charterer. Accordingly, the vessel must be made ready at the time and place determined in the contract. Mere availability is not sufficient, however; for commercial management actually to function, it must also be ensured that the master and the crew act in accordance with the instructions coming from the other side.
The technical management of the vessel, by contrast, remains within the shipowner’s sphere. The shipowner, retaining technical management, is obliged to keep the vessel seaworthy, fit for the voyage and fit for the purpose set out in the contract throughout the term of the contract. These obligations are addressed separately below.
Making the Vessel Ready at the Agreed Place and Time
The vessel that is the subject of the allocation is in most contracts identified specifically by its name and its characteristics. The shipowner’s principal obligation is to make that vessel, so identified, available at the stipulated time and place. The charterer is not obliged to accept any vessel other than the one indicated in the contract.
In order to soften this rigidity, a replacement clause (substitution clause) may be inserted into the contract. Where such a stipulation has been provided for, making ready another vessel bearing the same characteristics at the determined date and place likewise counts as performance of the obligation; the charterer may not reject a vessel allocated in conformity with the characteristics required by the clause.
The rule is that the vessel is to be made ready on the agreed date. In practice, however, the parties are observed to avoid fixing a definite date. Instead, a cancellation clause (cancelling clause) giving rise to a right of termination is inserted into the contract, and it is agreed that the vessel is to be delivered to the charterer by the cancelling date at the latest. If the shipowner does not transfer commercial management by that date, the charterer may terminate the contract.
The position of the master is determined by the following provision:
Turkish Commercial Code No. 6102 Art. 1134(2)
“The master shall be bound to comply with all instructions given to him by the party to whom the vessel is allocated, within the framework of the provisions of the time charter contract, concerning the commercial management of the vessel.”
What falls to the shipowner at this point is to ensure that the master and the crew act in conformity with the orders and instructions coming from the charterer.
Keeping the Vessel Seaworthy
Turkish Commercial Code No. 6102 Art. 1133(1)(b) obliges the shipowner to keep the vessel seaworthy for the duration of the contract. What is to be understood by seaworthiness is defined in Turkish Commercial Code No. 6102 Art. 932(1):
Turkish Commercial Code No. 6102 Art. 932(1)
“A vessel which, as regards its essential parts such as the hull, general equipment, machinery and boilers, is able to withstand the perils arising from the waters in which the voyage is to be made (wholly abnormal perils excepted) shall be deemed ‘seaworthy’.”
The phrase “arising from the waters in which the voyage is to be made” in the definition is decisive. The assessment is made not by reference to an abstract sea or to any voyage whatsoever, but on the basis of the specific voyage agreed in the contract. Indeed, a voyage to be performed in the Sea of Marmara in the summer months and a voyage to be performed in the Atlantic Ocean in winter conditions cannot be subjected to the same criteria of fitness. Accordingly, what is expected of the shipowner is to secure conditions suitable for the voyage stipulated in the contract and to render the vessel seaworthy accordingly. Moreover, it is not enough for fitness to be secured only at the outset; maintaining that condition throughout the term of the contract is likewise the shipowner’s responsibility.
Keeping the Vessel Fit for the Voyage
The same provision, namely Turkish Commercial Code No. 6102 Art. 1133(1)(b), also places on the shipowner the obligation to keep the vessel fit for the voyage for the duration of the contract. The content of the concept is set out in Turkish Commercial Code No. 6102 Art. 932(2):
Turkish Commercial Code No. 6102 Art. 932(2)
“A seaworthy vessel shall be deemed ‘fit for the voyage’ where, as regards its organisation, loading condition, fuel, provisions and the competence and number of its crew, it possesses the qualities necessary to withstand the perils of the voyage it is to make (wholly abnormal perils excepted).”
Proceeding from the provision, for a vessel to be regarded as fit for the voyage the loading must have been carried out in due form, sufficient fuel and provisions must have been procured, and the crew must meet the requirement in terms of both competence and number. Securing these conditions is, as a rule, among the shipowner’s obligations.
Turkish Commercial Code No. 6102 Art. 1135 nevertheless introduces a different arrangement as regards expenses:
Turkish Commercial Code No. 6102 Art. 1135
“All expenses arising from the commercial operation of the vessel, including in particular the expenses necessary for procuring fuel of a quality and in a quantity that will ensure the proper functioning of its machinery, shall be borne by the party to whom the vessel is allocated.”
In our view these two provisions must be interpreted together. The fact that the burden of bearing the expense lies with the charterer does not mean that the power to determine the type and the quantity of the fuel has also passed to it. It is for the shipowner to decide which fuel is required, and in what quantity, for the technical management of the vessel; the charterer’s obligation is confined to bearing the expenditure to be made for procuring the fuel determined by the shipowner. Keeping the vessel fit for the voyage and, consequently, determining the fuel required remain the responsibility of the shipowner.
Keeping the Vessel Fit for the Contractual Purpose
Pursuant to Turkish Commercial Code No. 6102 Art. 1133(1)(b), the shipowner’s third obligation of fitness is to keep the vessel fit for the purpose stipulated in the contract. The content of this concept is not directly defined in the statute. In practice, however, time charter contracts are seen to be concluded predominantly for the carriage of cargo. Where the subject matter of the contract is carriage, it may be said that the vessel must be kept fit for the cargo. The statute defines this concept as follows:
Turkish Commercial Code No. 6102 Art. 932(3)
“A vessel whose parts used in the carriage of goods, including the refrigeration installation, are fit for the reception, carriage and preservation of the goods shall be deemed ‘cargoworthy’.”
The assessment of cargoworthiness is made having regard to the type of cargo that has been undertaken to be carried. If the goods forming the subject of the contract are fresh meat, which cannot be carried without a refrigeration system, the fitting of the vessel with that installation is a precondition of fitness. In some cases residues left from the previous cargo must be cleaned; for example, for grain to be carried in a hold in which coal was previously carried, the hold must be cleared of coal residues. If this is not done, the conclusion is reached that the vessel is not cargoworthy.
Securities Provided for the Claims of the Shipowner
A shipowner who has performed the allocation in conformity with the contract becomes entitled to claim the charter hire in return. The expenses arising from commercial operation are likewise on the charterer; where those expenses have been met by the shipowner, the shipowner may claim them as well. In respect of both items, however, there is a risk that payment will not be made.
Bearing that risk in mind, the legislature has afforded the shipowner means of security. Turkish Commercial Code No. 6102 Art. 1136(3) offers the shipowner three separate means in respect of all claims arising from the contract: a right of retention over the charterer’s movables and negotiable instruments, a pledge of the claim over the freight payable to the charterer, and, again over that freight, a right of retention within the framework of Turkish Commercial Code No. 6102 Art. 1201. By contrast, a freight debtor who has not been notified of the pledge of the claim is discharged from its debt by the payment it makes to the charterer. The regime peculiar to the contract of affreightment is the subject of a separate study.
Rights and Obligations of the Charterer
In a time charter the commercial management of the vessel belongs to the charterer. Commercial management means, in its simplest expression, the use of the vessel with a view to earning a profit. Within this framework the charterer makes use of the vessel in performing the commercial contracts it concludes; in return it undertakes to pay the charter hire and the expenses arising from commercial operation. Besides these payment obligations, the charterer also bears the obligation to redeliver the vessel at the agreed place and in the agreed condition when the contract comes to an end.
Charter Hire and the Payment Regime
For the charterer, the principal performance is payment of the agreed charter hire. In practice this hire is seen to be calculated either on a daily basis or by reference to the cargo-carrying capacity of the vessel (dead weight). The parties are free to agree the manner of payment in the contract. Where there is no such arrangement, Turkish Commercial Code No. 6102 Art. 1136 comes into play and the charter hire is paid monthly in advance as from the day on which commercial management is in fact left to the charterer.
The rule is that the hire is to be paid in full and without deduction. In certain cases, however, a deduction may be made. Where the period of inactivity reaches twenty-four hours, hire may not be claimed for the period during which the vessel was not commercially usable. In relationships to which Turkish law does not apply, a similar result may be reached by means of an “off-hire” — otherwise known as a “suspension of hire” — clause added to the time charter party. That clause lists the cases in which the vessel is to be deemed not to have been used, and when one of them occurs a reduction is made from the charter hire.
Bearing the Expenses Arising from Commercial Management
Turkish Commercial Code No. 6102 Art. 1135 places all expenses arising from the commercial operation of the vessel on the charterer. The provision gives “procuring fuel of a quality and in a quantity that will ensure the proper functioning of its machinery” as an example, thereby rendering the limits of the responsibility ascertainable through that example.
Accordingly, loading, stowage, securing and discharge charges, port and transit dues, cleaning expenses and the price of fuel and lubricating oil may be counted among the items the charterer must bear. By contrast, expenditure that would be incurred even in the absence of any instruction from the charterer falls outside this scope. The wages of the crew and the cost of provisions are expenses of that kind, and the shipowner continues to be responsible for them.
Redelivery of the Vessel at the End of the Charter Period
In a time charter, what is transferred to the charterer is only commercial management. Within the scope of technical management the vessel remains under the direction of the master and the crew, who are in fact employees of the shipowner. For that reason there can be no question of a physical redelivery when the contract ends; upon expiry of the period the charterer’s right of commercial management, and with it the power to give instructions to the master, lapses automatically.
Notwithstanding this, Turkish Commercial Code No. 6102 Art. 1137(2) places on the charterer the obligation to redeliver the vessel in the agreed condition and at the agreed place at the end of the period. The provision is to be understood as meaning that the instructions given by the charterer must not prevent the vessel from reaching the port of redelivery. The vessel must be left to the shipowner on the agreed date and at the agreed place. Where delivery does not take place at the stipulated time or port, the charterer is obliged to pay twice the amount of the charter hire in respect of the period during which the delay continues. If the shipowner has suffered a loss exceeding that amount, it may also advance a higher claim to the extent that it proves such loss.
Liability for Loss Arising from Commercial Management
Turkish Commercial Code No. 6102 Art. 1137(1) holds the charterer liable for the loss suffered by the shipowner by reason of the commercial management of the vessel. The charterer must exercise its right of commercial management within the limits drawn by the contract. In this context it is expected to refrain from giving instructions that would render the vessel unfit for the voyage; where it gives instructions contrary to the contract, it must make good the shipowner’s loss.
Statute of Limitations
In respect of all claims arising from a time charter contract, the limitation period is one year pursuant to Turkish Commercial Code No. 6102 Art. 1246. Time begins to run when the claim falls due.
Independent Legal Assessment
A significant proportion of time charter disputes arises from the boundary between commercial management and technical management not having been made sufficiently clear in the contract. Machinery breakdowns caused by fuel quality, late redeliveries and off-hire allegations most often rest on the same question: within whose sphere of authority did the relevant decision fall? For that reason, setting out the allocation of authority and of expenses item by item during the contract negotiations affords more effective protection than any argument conducted afterwards.
Secondly, adopting standard charter party forms as they stand is a frequently encountered tendency. Yet those forms may have been drafted on the basis of different legal systems; in relationships governed by Turkish law, compliance with mandatory provisions must additionally be verified.
The following headings come to the fore in particular in practice:
- Expressly regulating the cancelling date, and the right of termination attached to it, in the contract
- Where a replacement clause is to be provided for, specifying by concrete criteria the characteristics the alternative vessel must possess
- Carrying out the assessment of fitness according to the specific voyage agreed in the contract and the type of cargo to be carried
- Keeping the power to determine the type and quantity of the fuel separate from the obligation to bear that expense
- Recording in writing the off-hire situations and the effect of the twenty-four-hour inactivity criterion on the calculation of hire
- Conducting a risk analysis that anticipates the double-hire sanction for late redelivery and the shipowner’s claim for loss exceeding it
- Monitoring the one-year limitation period by reference to the date on which the claim falls due
Independent Legal provides advisory services and litigation representation in the drafting and negotiation of charter contracts and in the resolution of disputes arising from them.