Commentary: Charterers’ Liability

1. General

Historically, the P&I Clubs were formed by shipowners to meet their needs of insurance protection against third party liabilities. This need has not diminished over the years but has increased due to the accumulation of legal liabilities imposed by international conventions and domestic law. For several reasons the need for a similar protection of Charterer’s liability risks has also increased. Much of the old liner services which operated with owned tonnage have disappeared and been substituted by charter-operated services. The overall international liability increase has also affected Charterers. Charterers are obliged to accept exposure to substantial liability under most charterparties.

2. Different types of charterparty

2.1 Demise or bareboat charter

Demise or bareboat charters are for the lease of the ship without crew. They are often on a long-term basis.

A demise or Bareboat Charterer can either be entered as a Joint Member or co-assured on the Owner’s P&I policy or insure his risks separately under the Charterer’s Insurance. See the comments under and 30.3.3.

2.2 Time charter

Time charter is for hire of the ship is for a certain, specified period of time. There are a number of standard charterparty forms for a time charter.

Frequently used charterparty forms for time charter fixtures are the New York Produce Exchange form and Boxtime. The Group Clubs have agreed to recommend their Members to apply the NYPE Interclub Agreement in the handling and apportionment of cargo claims such as those for unseaworthiness, condensation, bad stowage and short delivery.

A time Charterer requires a separate cover unless he is affiliated to or associated with the Owner to such an extent that the Club may accept him as Joint Member or co-¬assured. See the comments under and 30.3.3.

All claims incurred in respect of an affiliated Charterer co-assured under an Owner’s P&I entry are limited to USD 350 million per event.

2.3 Voyage charter

Voyage charter of the ship is for one or more specified voyages. There are several standard charterparty forms for a voyage charter. A Voyage Charterer requires a separate cover.

2.4 Space charter

A space charter is for hire of less than the ship’s full carrying capacity. It can be for a certain specified hold(s) or compartment(s) or for a part of the ship’s cargo carrying capacity.

Space charterparties are often drawn up by the parties to cover their specific requirements.

Members should ensure that liabilities and claims handling are duly co-ordinated between the parties and their respective Clubs. It is important to ensure that bills of lading issued for such service are suitable.

Where a space charter agreement is part of a joint venture or of part of the operation of a consortium, the Club may agree to enter the participants as co-assureds (see the comments under 30.3.3). To be more fully protected, the participants may require cover in their own right for Charterer’s risks.

2.5 Slot charter

A slot charter is a charterparty in which the parties agree to carry a certain number of containers in each other’s ships or reserve a certain space for such carriage. Each party of a slot charter agreement requires cover for his responsibilities as carrier.

Slot charter agreements are used in the container trade between parties of a joint container operation. Members should ensure that liabilities and claims handling are duly co-ordinated between the parties and their respective Clubs. It is also important to ensure that bills of lading issued for such service are suitable.

Where a slot charter agreement is part of a joint venture or part of the operation of a consortium, the Club may agree to enter the participants as co-assureds (see the comments under 30.3.3). To be more fully protected, the participants may require cover in their own right for Charterer’s risks.

2.6 Other charter agreements

There are various contracts or agreements similar to or with the same effect as charterparties such as contracts of affreightment and freight agreements for project shipments. Any contractual liabilities should be minimised and care should be taken to ensure that those remaining are covered.

3. Extent of cover

3.1 Piggyback clauses

Charterparties often contain clauses that purport to allow the Charterer to piggyback on the Owner’s P&I Insurance. For example: “Charterers to have the benefit of Owner’s P&I Insurance as far as the Club Rules permit.” The fact is that Owners’ P&I Rules do not permit a Charterer any cover under an Owner’s policy. Nor may an Owner Member extend that cover by contract without the approval of the Club. At best such a clause is meaningless and (hopefully) of no adverse effect to the Owner. The clause may, however, give the Charterer the false impression that he is in fact covered. That might mean he does not see the need to have his own separate P&I cover of his liabilities under the charterparty. The Owner will then have to deal with an uninsured Charterer, which is not in his best interest either. Preferably, piggyback clauses should not be accepted.

4. Effect of charterparty conditions

The liabilities that are undertaken by a Charterer derive from the charterparty in each case. The charterparty in turn is the product of negotiations at the time of fixing and, therefore, influenced by the negotiating power of the parties and by the general freight market.

Liability arising from charter agreements on unusually burdensome terms not approved by the Club may not be covered. If during fixture negotiations an unusual pro forma is offered, or unusual clauses, the effect of which the Member does not understand, they should be referred to the Club for approval and advice.

5. Does a Charterer require P&I cover?

The question is often raised whether P&I Insurance cover is required for a Charterer who has back-to-back terms or where the conditions of the relevant charterparty seem to transfer all liability to the Owner or any other link in the chain of Charterers. The answer is that no guarantee can be given that a party under a charter chain will succeed in avoiding all liability.

In a back-to-back situation, a Charterer may find that the party to whom liability should have been passed on has gone bankrupt or is otherwise unavailable. In many jurisdictions, a claimant has the option to choose whom to attack. All Charterers ought to have their own cover.

Owner Members are also advised to ensure that Charterers of their ships have adequate liability insurance cover. The reason is that it is difficult to come to terms with an uninsured Charterer even if it is clear according to the charterparty that the liability lies with the Charterer. We recommend the names of the respective P&I Clubs to be included as one of the particulars in a charterparty. In an urgent situation it may be of considerable importance to effect contact between the two P&I Clubs concerned. Valuable time may be lost, otherwise, chasing this information.

A charterparty generally places some share of the cargo liability on the Charterer. Therefore, it is important that he has full cargo liability protection. This can be achieved either as a Joint Member or co-assured on an Owner’s P&I entry or directly by way of Charterers’ Liability Insurance.

There is an increasing tendency in the U.S.A. to make Charterers responsible for longshoremen injuries, on the grounds that they are often employed by the Charterers. Insurance protection against liabilities in respect of persons is therefore important, as these claims can involve large sums of money (see Owner’s P&I Rule 3 or Charterers’ Liability Insurance Rule 3).

An Owner may seek compensation from the Charterers in cases where stowaways have boarded the ship in the course of loading or discharging operations arranged by the Charterers.

Charterers may end up with tug liabilities under a tug contract signed by the Charterer. Cover under Owner’s P&I entry Rule 7 Section 8 or Charterers’ Liability Insurance Rule 12 is then important. Charterers are not immune either to fines and require protection under Owner’s P&I entry Rule 7 Section 6 or Charterers’ Liability Insurance Rule 10.

6. Same or different Clubs

An Owner and a Charterer often enter their respective P&I risks in different Clubs. Occasionally, however, it happens that they are in the same Club. Disputes can then be handled and settled within the organisation to the satisfaction of both Members.

In case of a compromise settlement, payment on behalf of each Member is subject to his own policy deductible.

7. Exclusions and limitations of liability

7.1 Same exclusions and limitations as owner

A Charterer co-assured under an Owners’ P&I entry has no greater cover than the Owner. All exclusions and limitations applicable to an Owners’ P&I entry also apply to a co-assured Charterer.

7.2 Global limitation

An Owner may have a legal right according to applicable domestic law, based on international conventions on global limitation, to limit his liability (see the comments under 2.11). If a Charterer is unable to limit his liability in the same way, the cover provided is restricted to the amount to which he would have been able to limit his liability, had he been the Owner of the ship.

7.3 Charterers’ Liability to Hull

It is an important principle of P&I Insurance that it does not provide cover for loss of or damage to the entered ship. That principle is reflected in Rule 11 Section 2 (l), applicable to cover for Owner’s risks.

Damage may be caused to the ship as a consequence of the Charterer’s operations without imposing any liability to compensate its Owner. An Owner may have to accept a certain amount of damage or wear and tear to his ship depending upon the type of trade for which he has put it on the charter market. If logs or scrap are carried as lawful cargoes according to the charterparty conditions, the Owner cannot expect his ship to be in pristine condition at the time of the off-hire survey.

Under the separate Charterers’ Liability Insurance, damage to the entered ship, wreck removal and obstruction are covered. That cover includes damage caused by stevedores and damage to the machinery as a consequence of burning unsuitable fuel provided by Charterers. It also includes contributions in general average in respect of Charterer’s bunkers and freight at risk.

8. Consortium claims

8.1 Consortium agreement

An agreement between the Member and operators of other consortium ships, not being ships entered in the Club, for reciprocal sharing of cargo space on both the entered ship and other consortium ships, is a consortium agreement. The consortium agreement must be submitted to the Club for approval, see also the comments under 2.5 of this chapter and 10.2.6.

8.2 Consortium ship

A consortium ship is a vessel, feeder vessel or space thereon, not being the insured vessel, employed to carry cargo under a Consortium Agreement.

8.3 Consortium claim

A consortium claim is a claim arising under an Owner’s P&I entry but out of the carriage of cargo on a consortium ship. For the purpose of cover the Owner member is treated as having effected a Charterers’ entry in the Club for the consortium ship.

Appendix II Rule 3 deals with consortium claims and clarifies the limit of liability that applies to the cover available.

8.4 Limitation of consortium cover

The aggregate of all claims against the Club and/or all other clubs from any one such Consortium Ship shall not exceed USD 350 million from any one event.

The same limit also applies for all claims incurred in respect of an affiliated Charterer co-assured under an Owner’s P&I entry.

9. Laid-up returns

The section makes it clear that a co-assured Charterer is not entitled to laid-up returns as provided in Owners P&I Insurance Rule 29.

10. Surplus

A co-assured Charterer is not entitled to a surplus under Owners P&I Insurance Rule 36.

11. Separate cover for Charterer’s risks

The Club can provide a Charterer with separate Charterer’s Liability Insurance cover. The cover is not based on mutual terms and is subject to its own rules contained in the Rules for Charterers’ Liability Insurance.