The Main Components of a Vessel's Costs

The cost of running a vessel can broadly be divided into two parts. There are routine costs which accrue on a daily basis and which are not affected by the specific voyage on which the vessel is engaged. Then there are costs which are specific to the individual voyage.

The following may be considered the main routine costs incurred in running a ship:

1. Capital cost of the ship, which will normally be expressed as a depreciation cost (the capital cost divided by the number of years the ship is expected to trade, minus its expected demolition value at the end of its working life) plus the funding cost of the capital, which may in part be in the form of a bank loan (mortgage).

2. Crew wages, overtime, pension contributions, insurance, travelling costs.

3. Victualling.

4. Insurance (Hull and Machinery and Protection and Indemnity).

5. Tonnage tax and management fees.

6. Deck and engine room stores and spares, lubricating oil.

7. A suitable daily allowance to cover periodic costs such as dry-docking, special surveys, running repairs.

The Main Components of a Voyage Cost

The following may be considered the main costs which are specific to a voyage:

Bunkers (fuel), port disbursements, stevedoring/load/discharge costs if payable by shipowner, canal dues. Additionally, there may be other expenses, such as war risk insurance premium, over-age insurance, freight tax, local taxes and/or dues, income tax and despatch money etc.

Main Charterparty Types

A Charterparty is a contract of agreed terms and conditions between the shipowner, disponent owner (the person who controls the ship by virtue of an existing Charterparty with the shipowner or other disponent owner) or operator and the charterer, for the carriage of goods or hire of the vessel in return for payment of an agreed freight or rate of hire.

Charterparties fall into three main categories – voyage, timecharter and bareboat:

Voyage Charters

a) The charterer employs the vessel for a specific voyage or voyages, with cargo which is customarily loaded and discharged at their expense within a specified time (see Laytime) in return for freight calculated on an agreed rate per ton of cargo or as a lump sum. The owner pays for fuel and operating expenses, and (generally) port disbursements, of the vessel.

b) Contract of Affreightment (COA) This form of contract is an agreement by an owner or operator to lift an agreed number of cargoes of a certain size over a period of time.


The charterer has the use of the ship for a specific trip or a period of time. Charterers may direct the vessel within the trading limits agreed, and, in normal circumstances, the Master must obey these orders. Whilst the timecharterer has the commercial control, the owner retains responsibility for the vessel and the Master and crew remain in their employment. The hire, usually calculated per day, is paid in advance at regular, agreed intervals, normally semi-monthly or monthly.

Whilst on timecharter, the timecharterer usually pays for all port charges including their own agency fees, canal dues, pilotage, and generally (if not covered elsewhere) cargo insurance.

Normally, the charterer pays for the fuel on board at the time he accepts delivery and for fuel supplied while the vessel is on hire. When the vessel is redelivered the owner pays for bunkers remaining on board. The prices applicable on delivery and redelivery and the respective quantities are normally agreed by negotiation.

The owner pays for the operating expenses of the vessel. If the ship breaks down or, as a result of the shipowner’s fault, the charterer does not have the use of the vessel, the vessel goes ‘off-hire’ for that period subject to any terms in the Charterparty.

Timecharterers may be owners who want to temporarily augment their own fleet, charterers who have a variety of commitments to meet, charterers who believe term chartering will hedge the market, operators who foresee a profit by taking voyage contracts from charterers and timechartering vessels themselves to cover those contracts.

Bareboat Charters (Charterparties by demise)

The registered owner passes over to the demise charterer the complete control and management of the ship. The demise charterer becomes, for all effective purposes, the owner during the period of the contract. The Master and crew are their employees and may be appointed by him. 

Law of Contract

Almost all Charterparties, and many other contracts agreed in international trade, are concluded under English law (sometimes more precisely expressed as the Laws of England and Wales). There may also be a specific statement that disputes will be referred to the English courts (see also Arbitration) without which other courts may hear cases albeit applying English law. All comments on legal matters herein assume the choice of English law and are general statements which cannot be taken as advice for a specific situation.Specific legal advice should only come from practising lawyers.

Generally, the parties to a Charterparty have freedom to contract on such terms as they may agree during negotiation. The aim should be clarity of expression and the avoidance of ambiguity and inconsistency of clauses. If disputes arise, which eventually come before the Court or an arbitral tribunal for determination, the judgment or award will normally reflect the presumed intent of the parties. The case (or unwritten) law thus made (unwritten in the sense that it is not an Act made by Parliament) represents the common law which develops according to the changing needs of commerce. One may contract out of common law but not out of statute law. From time to time an accumulation of common law has been codified into Acts of Parliament; the Merchant Shipping Acts, the Marine Insurance Act and the Arbitration Act are examples.

The terms of a contract may be:

• a condition, the breach of which entitles an aggrieved party to elect to be released from further performance and claim damages for any loss suffered, or maintain the contract and sue for damages; or

• a warranty, the breach of which carries only the entitlement to sue for damages (Note: The term ‘warranty’ used in connection with marine insurance has the same meaning as ‘condition’ in other contracts.) 

Bills of Lading

A Bill of Lading has the following functions:

• It is a receipt for the goods, signed by the Master or agent on behalf of the carrier, with admission as to condition and quantity of the goods.

• It is a document of title to the goods, by which the property in the goods may be transferred.

• It is prima facie evidence of the terms and conditions of carriage.

• The Charterparty is the contract between the charterer and the owner. However, the lawful holder of a Bill of Lading has vested in them all rights and liabilities under the contract of carriage as if such holder had been a party to the contract of carriage. 

Usually, the Bill of Lading contains a suitable clause to incorporate the terms of the Charterparty pursuant to which it is issued. If, however, it is the parties’ intent that disputes arising under the Bill of Lading should be resolved in accordance with the terms of the arbitration clause that has been written into the charter, explicit reference to this needs to be made on the Bill of Lading. Should that Bill of Lading purport to involve the shipowner in a liability greater than agreed in the Charterparty, it is considered that the charterer indemnifies the shipowner to the extent of this greater liability towards the cargo. If charterers are also the Bill of Lading holder then it is the Charterparty and not the Bill of Lading that is the contract of carriage. 

Letters of Indemnity (LOI)

Discharge or delivery of cargo at a discharge port without the production of the original Bills of Lading has become commonplace over recent years. While this is certainly not an ideal scenario, the charterer presents to the shipowner a Letter of Indemnity (LOI), the wording of which is typically provided by the owner's P&I Club, and the letter is then signed by the charterer.

The purpose of the LOI is to indemnify the owner against claims arising from the delivery of the cargo without presentation of the original Bills of Lading which demonstrate title to the cargo. It is also sometimes necessary for owners to be prepared to consider accepting an LOI for the change of destination to a port other than that specified in the original Bills of Lading.

It is recommended that an LOI covering any other situation should be resisted because it could be concealing a fraudulent act. A situation may arise in connection with the signing of Bills of Lading where the shipper desires to obtain a condition expressed in the sale of goods contract, but where the condition of the goods shipped is not such as would strictly warrant a clean Bill of Lading being issued.

A Bill of Lading is intended to express ‘the apparent order and condition of the goods and the date of shipment’ and a representation so made which is knowingly false has all the elements of fraud. Consequently, an LOI from shipper to shipowner in exchange for a clean or incorrectly dated Bill of Lading in such circumstances is not legally enforceable. Such action is defined as an unacceptable practice under the Baltic Code.

Role of the Ship's Master

The burden of responsibility resting upon the Master is reduced for routine matters in modern times with improved communication between the ship and the owner. However, the Master retains the duty of care for the safety of the ship and of the cargo placed in their charge. He cannot delegate this responsibility. In the exercise of their duty he has powers to bind the shipowner and cargo-owner by their actions in case of need.

The Master is the agent of the shipowner. Thus, the shipowner is bound by acts of the Master, which are within the authority of a Master; and third parties with whom the Master deals are entitled to be guided accordingly unless they are aware that the Master's authority has been limited. 

If the Master signs Bills of Lading which are incorrectly dated or knowingly false in any other respect, or for goods which are not on board, or if he unjustifiably deviates from the ordinary course of the voyage, he may incur personal liability. A Master must be very careful about the description and condition of cargo and where a Charterparty calls for the release of ‘freight prepaid’ Bills of Lading. Before releasing such bills, their agents must have the owner's confirmation that they have received the freight. If signed Bills of Lading stamped ‘freight prepaid’ are released, the Master has an obligation, having signed the Bills of Lading, to deliver the cargo whether freight is paid or not.