PROTECTION & INDEMNITY
P&I as a rule begins when cargo is ready for shipment, usually already at the inland point of origin, for a foreign port. A booking contract or charter party between the shipper/charterer with the shipowner is usually made prior to ship's arrival at the loading port. In the majority of ports in the world, the cargo is delivered to the dock or terminal where the "booked" vessel is intended to load
and a dock receipt and a bill of lading is issued, which states the full description of the cargo, including marks, numbers. weight and cubic.
A Bill of Lading is the written evidence of the contract for transportation and delivery of the cargo to the consignee's designated port of discharge and for which the shipper and/or consignee pay the agreed freight.
There are essentially three types of Bills of Lading.
The Order Bill of Lading basically is a contract between the shipper/charterer and the shipowner to deliver the cargo to the consignee or to another nominated receiver named by shipper/charterer.
The Straight Bill of Lading is a contract between between the shipper or charterer to deliver the cargo directly to the consignee named in the bill of lading. The difference between the two Bills of Lading are that the Order Bill Of Lading must be by law surrendered on delivery. The Straight Bill of Lading has no such requirement.
The Through Bill Of Lading is a contract between the shipper or charterer and the shipowner to deliver the cargo under one contract to, as a rule, an inland destination by transshipment of an other carrier, such as by rail or truck. This is specially important today in the ever growing container trade where contracts are made on a house-to-house basis, i.e. from shipper's or charterer's warehouse to the receiver's warehouse with the shipowner arranging for the transportation all along the line.
The great majority of Bills of Lading are issued clean and without exceptions to the condition of the cargo. In effect the shipowner gives a warranty to the receiver that the cargo was delivered to the ship in apparent good condition. Clearly this operates against the shipowner and precludes him from asserting something contrary to what is implied by a previous action or statement, i.e. to prove other than good order and condition. It sets up against the shipowner a
prima facie case of liability when the cargo is discharged other than in good condition and, ultimately, shifts the burden of proof to the shipwner. At this juncture the shipowner must prove that he exercised due diligence to make the ship seaworthy and that he cared for the cargo in an orderly fashion. See Letter of Indemnity further down.
In this short history it's next to impossible to go into the uncounted cases or decisions covering a shipowner's liability, but I'll try to set out below the exclusions as provided by The Carriage of Goods by Sea Act.
The burden to prove that the loss or damage was a result of or excusable as
provided by the above exceptions falls on the shipowner in that he claims the exception. The common adage for this situation is, "He who alleges must prove."
All cargo or movement of cargo is by it's very nature distinguishable and, thus,
the question of responsibility and/or liability is always questionable as to the party responsible. One must always keep in mind that there are many organizations involved in the carriage of cargo, e.g. the shipper/charterer, trucking companies at both ends, loading- and discharging stevedores and longshoremen, the freight forwarder at both ends and last but not least the shipowner. All these parties are candidates of potential liabilty.
In most cases, one could say almost without exception, the shipowner arranges to insure his liabilities with a P&I association. A few words about this follows further down.
From what I have discussed so far it can be clearly seen that a Bill of Lading represents a contract of carriage with any and all terms and conditions, usually printed on the reverse side. All terms and conditions that are not contrary to COGSA ratified by all parties once a Bill of Lading is issued and accepted by the shipper or charterer. The blank Bills of Lading are given by the shipowners to the shippers/charterers who fills in all relevant information and returns the document to the shipownere who then reviews the Bill of Lading for accuracy, i.e. correct weight, dimensions, agreed freight rate etc.
In the old days, the Master would sign bills of lading, however, with todays high volume and quick turn-around times, long ago the owners and master gave their port agents the authority to sign Bills of Lading on their behalf. After the B/L is signed it becomes a title document and is, as a rule, issued to the order of the shipper/charterer with a consignee party listed in the B/L. It is common practice
that Bills of Lading are negotiated through a bank. This makes sure that the receiver who has opened a L/C with a bank to secure title to the cargo upon presentation of the B/L by the shipper/charterer to the receivers bank. This L/C is a transfer of money which is paid by the bank to the shipper/charterer upon presentation of "clean bills of lading." One must make a difference between clean bills of lading and "cargo received for shipment", in that the former certifies to the cargo owners (shipper/charterer) that the cargo is actually loaded on board the ship. The majority of L/C's specify that the cargo must be shipped or be on board the ship by a certain date and any failure to do so renders the credit absolete. There are instances when a bank will accept "a received for shipment Bill of Lading" when the bank knows that the cargo is in the custody of the shipowner or his agents at the loading port. By no means does this confirm that the cargo is on board of the ship. While the bill of lading is negotiated through the bank, there are numerous terms in which a receiver accepts title to the cargo: F.A.S., F.O.B., C.&F., C.I.F.
With the advent of containerships, the terms of carriage had to be increased to include the following:
1. House to House
2. House to Pier
3. Pier to House
4. Pier to Pier
From the above it became clear that a shipowners' potential liability had to be expanded from the shippers' warehouse until the final destination at the receiver's warehouse. Not only had the Bills of Lading to be changed but the shipowner had to insure these added liabilities. It was for precisely this reason that several P&I associations pooled their resources and set upThrough Transit Insurance, which was especially designed to insure the shipowners against these added risks before loading and delivery of the cargo, which in fact, is outside normal P&I coverage.
Term and conditions of the contract of carriage may vary widely, and it thus must not be forgotten that the shipowner will remain responsible for the care of the cargo while in his custody. Any failure to do so makes him responsible to the cargo owners. The cargo owners (shippers and/or receivers) have the permission under the statutes to file a claim against the shipowner of up to one year after the cargo has been discharged, or in the case of non-delivery, one year after the cargo should have been delivered. In the maritime community it is considered that delivery should be after free time, which is 5 days after discharge from the ship. This statute is strictly enforced by the courts.
In relation to maritime transactions, the cargo owner has one year to submit his claim but, prior to the expiration of the one-year statute of limitation he must ask for additional extension of time, if needed, in which to file a suit against the shipowners. Failing to do so renders a late claim null and void. There have been many cases about this point in the Maritime Courts of the world..
PROTECTION AND INDEMNITY ASSOCIATIONS
You must put yourself into the shipowner's situation to fully understand what P&I Associations represent to him. Let's assume, momentarily, that you own a ship valued at $18 million trading worldwide to both small and large nations. Even a non-member of the shipping community will realize that a ship potentially might encounter serious problems 24/7. In case of an emergency, the shipowner must be able to call upon someone with the expertise in a particular area for assistance. The function of a P&I Club is basically that a group of shipowners got together and set up a self-insurance scheme named a Mutual Association.
The association collects premiums which are put in the over-all reserves. With these reserves the shipowners fight off legal liabilities. Each P&I Club has a Board of Directors which are elected by the members to ensure that the Club is run in the best interest of the members. The great majority of P&I Associations are in London, although you also have Clubs in Japan, Norway, Bermuda and a number of other countries. The Board of Directors appoints managers which are given a great deal of discretionary powers, they, nevertheless remain ultimately responsible to the Board of Directors. The managers in turn appoint representatives throughout the world, who are knowledgeable about the problems a shipowner might encounter. A book is published annually listing all representatives so that the Master and/or shipowner can communicate with the nearest representative for assistance. As in all insurance policies, there are terms and conditions which must be met before the P&I Club reimburses the shipowner. Normally, when a problem occurs, the local representative will handle same on behalf of the owners and the Club. Then detailed investigations are conducted and reports and recommendations concerning settlements or declinations are delivered to the Managers for their approval or direction. After the Club's approval is obtained, as far as their interests are concerned, they must also obtain the shipowners' authority, as a rule, through their agents.
Settlemen money is then transferred to the plaintiffs via the owners. Then subject to his deductible and his terms with the Club, the owner files his claim with the Club for reimbursement for expenses exceeding his deductible. Over the years the Clubs learned to make approximate forecast of the costs which they need to fund liabilities which they are likely to have to pay out. If their estimates fall short, the members, i.e. the shipowners, are liable for increased premiums, to cover the costs which have to be paid out. In other words, this completes the cycle and it is for this very reason a Club is called a Mutual Association. It is of course clear, should the Club have a good year and the outlays are less than the premiums paid, the shipowner is entitled to a proportional return of the premiums he paid. Unfortunately, this rarely is the case. The Clubs are a very important part in stabilizing the maritime industry by providing securities in the form of guaranties for liability of one of its Members.
If you will, assume that there was no P&I coverage, and a ship puts into a port with $1 million worth of cargo damage. The vessel is then arrested and either a cash security or a bond has to be posted by the shipowner to have his ship released in order to sail. An uninsured shipowners would not be able to raise the cash or bond which in practice requires 100% collateral, the ship would remain under arrest and ultimately would be up for a Marshal's sale. As a member in good standing with the Club, however, the Club would authorize its representative to post the necessary security, which, as a rule, is called a "Club Letter of Guarantee." Principally, this can be considered that the P&I Club agrees to transfer the funds directly to the successful plaintiff after an award by the courts or an appeal. This is of tremendous importance to the cargo owner for security in the event of a possible subsequent casualty to the ship and/or if the shipowner cannot meet his obligations. In closing one can say without hesitation that the P&I Clubs, through its Managers furnish dispense invaluable advice in general as well as specific matters, not only relating to the cargo but also in personal injury matters, collisions, pollution as well as charter party problems in general. In other words any responsible shipowner is a member
of a P&I association.
FREQUENT CHARTER PARTY DISPUTES
First a word about the origin of the words charter party.
The words charter party derives from the Latin "Carta Partita" which literally means "divided chart", the reason being in ancient times (which essentially was comprised of the Mediteranean world) a shipping cargo document was split into two parts, one part being kept by the Master and the other by the shipper who dispatched it to his buyer and when the pieces of paper matched upon vessel's arrival at the discharge port, the Master would release the cargo to the receiver. This method of trading survived for about 1500 years until the advent of the Hanseatic League in the 13th century, which initially was founded as an association of north German cities to form commercial alliances for trade between the eastern and western parts of northern Europe. The League was joined in short order by other important trading centers in northern Europe, by
cities like Copenhagen, St. Petersburg, Stockholm, Bergen etc. and at one point had about 100 members, with its own army and navy, because piracy was rampant in the Middle Ages. The League began to collapse in the late 17th century and only three major cities (Hamburg, Bremen, and Luebeck) remained when it was finally disbanded in the early 19th century. The cities of Hamburg and Bremen are called "Free and Hanseatic Cities" to this day. Hamburg has been a city/state for over 800 years. With the Hanseatic League the charter party as we know it today was born, albeit, in a quite primitive form when compared with today's modern charter parties.
Today a charter party is just a commercial term for a contract, nothing more, nothing less. The charter party is a contract which meets contingencies with specific terms which have been defined through the ages by inumerable judgements, decisions and arbitrations. There are three clearly defined types of charter parties.
1. The Demise Charter Party, also known as Bareboat Charter (see our Page "Gen.&LegalTerms").
2. The Time Charter. This type of charter is basically a speculative charter. The shipowner charters out his ships(s) to a charterer, for say 6 months with an option declarable at the end of the 5th months, for a further 6 months. When market freight rates reach a certain level, the time-charterer may feel it is more advantageous to him and pay the shipowner a mutually agreed daily hire rate, whereas the shipowner may feel voyage freight rates have reached their maximum level and he will be better off to timecharter out his vessel for one year,
ensuring a steady income enabling him to pay his mortgage in a timely fashion.
Smaller shipowners often encounter difficulties securing financing from their bankers and shipyards to order newbuildings, unless they can present a long term time-charter from a blue chip time-charterer for periods ranging from 5 to 10 years. In fact time-charters have been concluded for up to 25 years. One could say then, a time-charter is a compromise between the two parties. The time-charterer has a ship at his disposal at a fixed daily rate enabling him to make long term calculations and projections, and he has no other expenses except to pay for bunker fuel, diesel oil and liability insurance. The shipowner on the other hand is responsible and liable for all other expenses to run the ship efficiently, i.e., he must maintain the ship in good running order (i.e. speed and consumption as agreed in the charter party), and which necessarily includes regular drydocking, crewing, victualling, special surveys to maintain her class and keep the load/discharge gear in good working order. The shipowners' failure to do so will result in a dispute between the two parties and the time-charterer will cease to pay charter hire until the shipowner has remedied any discrepancies, however, for all intends and purposes for the period of the time charter to charterer has become the disponent owner, directing and fixing the ship's next cargo, paying all port fees, canal fees etc just as if he "owned" the ship. The most frequent disputes in time-charters arise about the vessel's speed and bunker consumption. If the ship was described in the original time charter party as having a speed of 'about 15 knots with a daily consumption of 22 tons fuel oil' and during the course of the charter the ship delivers a speed of only, say, '13.5 knots with a daily consumption of 23.5 tons fuels oil', the time-charterer has a legitmate claim against the owner, for loss of time and extra fuel expenses. This dispute is usually settled, if both parties are amicably disposed, with the owner reimbursing the time-charterer for the additional expenses, or by a general reduction in the time-charter hire rate. If they cannot come to an agreement satisfactory to both parties the case will be submitted to an arbitration panel. Should either party not accept the majority decision of the arbitrators, the case is headed to court, which in New York is the Court of the Southern District of New York, where all maritime cases in the United States are tried and where I defended my company in many cargo claims and charter party disputes. I never lost a case.
3. The Voyage Charter. As the name implies this type of charter is for the owner to let and the charterer to hire the ship for one voyage or several consecutive voyages. Among consecutive voyages one has to differentiate, whether the owner has to ballast straight back to the original load port or whether he has the option to carry cargo back to the general direction of the original load port. Under consecutive voyages great deviations are generally not acceptable to charterers. A good example would be, if a grain house has sold five 18.000 tons cargoes of bulk wheat from the Great Lakes (usually from the Lakehead, i.e. its two main ports, Duluth and Thunderbay) to Venezuela (usually its main port Puerto Cabello) and all five cargoes have to be delivered within a certain time frame. In this case the charterer will not allow the owner to carry return cargo, but the charterer will have to pay a freight rate premium above the prevailing market rate. On the other hand if the time frame is flexible and the owner is allowed to carry a return cargo into the Great Lakes, say, Bulk Phosphates from Tampa, Florida to Lake Ontario (usually the port of Hamilton) then the owners will accept a slightly lower southbound freight rate. So much of the commercial aspects of a voyage and/or consecutive charter parties.
Now we have to explore the myriad of disputes that can and will arise under a
a Voyage Charter Party. It goes without saying disputes arise under all three types of charter parties. But, there is no question, the majority of problems and disputes occur in Voyage Charter Parties. Many of these disputes result from the fact that many owners and/or charterers and/or brokers do not think thoroughly through the many pertinent points that must go into a charter party and its many attached clauses. Even the most experienced shipbrokers tare sometimes not too clear about certain issues. Many disputes are born from simple sloppiness and forgetfulness.
As stated in the beginning of this page a charter party is a contract dividing the obligations between the signatories, namely, the Charterer and the Shipowner. Therefore, the Original Owner or the Disponent Owner (as Time-Charterers or Demise (Bareboat)-Charterers) are allowed at the time of fixing the charter party to vary the duties as they see fit. Any additional clauses can expressly be stated as warranted or unwarranted. Nevertheless, there are quite a few warranties that are not expressly included in charter parties, yet are by implication considered part of the charter party (although the interpretation can and will vary in various countries). It is to the credit of British Shipping Laws, that the majority of the world's countries accept and have adopted the British versions.
By law the word warranty is always implied to exist in a voyage charter for the ship to be seaworthy and fit to carry the intended cargo, and after completion of loading the cargo, to proceed with all reasonable despatch to the discharge port as ordered by the charterer without unjustifiable deviation except in 'Mayday' situations. See 'Mayday' in our page "Gen.&LegalTerms." All ships on the high seas are by universal law obliged to come to the aid of a vessel in distress, if they are within a reasonable steaming distance from the vessel facing imminent danger.
