Charterer's liabilities under the ship time charter.

• Author: Nunes, Tony

1. BACKGROUND II. SCOPE III. THE TIME CHARTER A. Nature Of the Time Charter 1. Contract 2. Allocation of Duties B. Limited Duties of a Time Charterer 1. Cargo Risk of Loss 2. Safe Ports/Berths 3. Special Nature of the Ship IV. POTENTIAL THIRD-PARTY LIABILITIES UNDER A TIME CHARTER A. Potential Liability Based on Direct Negligence or Fault 1. Collisions and Explosions 2. Burden of Proof 3. Navigation, Operation and Maintenance of the Ship 4. Towage, Loading and Unloading 5. Jones Act--Death on the High Seas Act 6. Minimum Potential Liability B. Potential Liability Based on Strict Liability Theories 1. Inherently Dangerous Cargoes 2. Owner of the Technology/Design Defect C. Potential Liability Under Carriage of Goods Regimes 1. Carriage of Goods Under United States and International Law 2. Bills of Lading 3. Applicability of COGSA V. LIABILITY LIMITATIONS UNDER MARITIME LAW A. General B. United States Law C. International Conventions 1. General 2. The 1976 Convention 3. The 1996 Protocol VI. ENVIRONMENTAL LIABILITY RISKS AND REGULATIONS UNDER UNITED STATES LAW VII. INSURANCE A. Shipowner Policies B. Charterer policies VIII. CONCLUSION I BACKGROUND

   In the early hours of the morning of October 30, 1951, the steamship Wagon Mound was taking on fuel, bunkering oil, at a wharf in Sydney Harbor. During the process, a large amount of that oil was spilled into the bay. The oil quickly spread across the bay, and a significant amount accumulated under the wharf of a nearby ship repair facility where welding work was being performed on two ships. After completing its loading operations, the Wagon Mound slipped its lines and left Sydney Harbor. Some twelve hours later, the oil laying under the nearby repair facility wharf was ignited by sparks from welding torches being used by workers above. The subsequent fire severely damaged the wharf and the two ships being repaired alongside. At trial, lengthy expert testimony showed that--although the fuel oil was clearly designed to burn in the Wagon Mound's furnace, which powered the ship the owners of the Wagon Mound could not reasonably have been expected to know that fuel oil was capable of being set on fire when spread on water. (1) The Wagon Mound owners were, therefore, found not liable to the wharf owner for the damages caused. After years of working its way through the courts, the Judicial Committee of the Privy Council eventually upheld the trial court's finding that the Wagon Mound owners were not guilty of negligence to the shipyard wharf owner. (2) However, in a related case, the Privy Council later held the Wagon Mound owners to be negligent to the owners of the two ships damaged in the blaze based on evidence which showed that even though unlikely, the owners should have known it was possible the oil could have ignited and that the Wagon Mound owners' representative at the scene made no attempt to contain the spillage of oil into the water. (3)

   The Texas City disaster of 1947--when the French vessel, Grandchamp, which was loading a cargo of ammonium nitrate fertilizer, caught fire and exploded, triggering the subsequent explosion of two other nearby ships--left approximately 500 dead and 3,500 injured. (4) The original cause of the fire on the Grandchamp is still unknown, but the subsequent loss of life, personal injury, and property damage is unparalleled in the United States maritime industry. (5)

   Clearly, the risks of personal injury and damage to property and the environment in the marine transportation industry have increased substantially since the arrival of the internal combustion engine and the discovery of oil. Since that time, transportation of oil, petrochemicals, and other energy-related products have led to a proliferation of laws and treaties governing trading on and use of our seas. In the author's view, albeit prodded by these laws and treaties, the industry has responded remarkably well to the increased risks associated with those cargoes. The result is that ships plying our oceans are substantially safer and cleaner than they were fifty years ago. Nevertheless, maritime transportation remains a hazardous occupation, especially in the energy and petrochemical business.

   Subsequent oil spills--such as the Torrey Canyon disaster of 1967 when the Torrey Canyon grounded just eleven miles off the English Coast, and 119,328 tons of crude oil were discharged in the Atlantic Ocean--further impressed on owners the environmental hazards involved in transporting oil. (6) More recently, the escape of 38,800 tons of oil on the coast of Alaska, when the Exxon Valdez ran aground and split apart on March 23, 1989, completely changed the legal landscape. The United States Oil Pollution Act of 1990 (OPA 90) (7) was a direct result of this incident. OPA 90 also led to the passage of other tough laws overseas and international treaties on a rapid basis.

   These tougher anti-pollution laws and treaties were instrumental in persuading most of the world's major oil companies to depart from the marine transportation business. Many of these companies sold their tanker fleets to independent owners who then chartered the ships back to the oil companies. Today, reluctant to shoulder the burden of large overhead costs, extensive capital outlays, and the risks involved with ship ownership, marine cargo owners typically turn to independent ship owners to carry their cargoes under a private contract. Since most of the energy transportation business is expressed in terms of large volume deliveries over an agreed period of time, shippers often enter into a "time charter party" whereby they hire a ship for a specified term and direct its trade pattern to meet customer delivery needs.

   While charterers may escape the risks associated with operating a shipping company, a prudent charterer should still be concerned about potential liabilities to third-parties, ship's crew, and the environment in connection with the transportation of its product, particularly if that cargo has been classified as a "dangerous cargo" by local or international law.

2. SCOPE

   This article focuses on the nature of the time charter relationship and potential third-party risks that a time charterer carrying dangerous cargoes in U.S. waters may be expected to assume by virtue of the time charter relationship. (8) Due to the increased focus on transportation safety since September 11, 2001 and a rising interest of natural gas as the clean energy alternative of the twenty-first century, this article also covers the potential risks involved in the transportation of liquefied natural gas (LNG) (9) and compressed natural gas (CNG). (10) The U.S. Coast Guard has classified both LNG and CNG, as well as numerous other energy products, as "dangerous cargoes. (11) U.S. Coast Guard rules in this area are in line with the International Marine Organization's (IMO) classifications of LNG and CNG on its Dangerous Cargoes List. (12)

   This article focuses not on a time charterer's liability to owners of cargo carried on board the ship--the time charterer is often the actual cargo owner but instead on the time charterer's duties and potential liability to the ship's owner and crew and other third-parties not owning or purchasing cargoes being carried on the ship.

   After exploring the nature of the time charter and the time charterer's limited duties and responsibilities under the time charter itself, the article discusses potential liability based on the direct negligence or fault of the charterer, theories of strict liability, and certain statutory obligations concerning the carriage of goods by sea. The article then turns to a discussion of specific laws and conventions that may serve to limit the liability of ship owners, charterers, and certain other parties. Following a brief analysis of environmental issues, the article concludes by examining risk mitigation under existing insurance options.

3. THE TIME CHARTER

   1. Nature Of the Time Charter

      1. Contract

         A charter agreement, known in the trade as a "charter party," is a specialized form of private contract for the hire of a ship. The party that contracts for the use and service of the ship is called the "charterer" or "shipper," while the party supplying the ship is the "owner" or "carrier." The charter party, commonly abbreviated by the industry as simply the "charter," is the underlying agreement that governs the duties, obligations, and liability allocations between a ship owner and a ship charterer. Under a time charter party, a "time charterer" enters into a contract of affreightment with a ship owner for the use of a named ship to transport the charterer's cargoes during a specific period of time. The charterer may be chartering the ship either to carry its own cargo or cargoes owned by third-parties. The time charter must be distinguished from the demise or bareboat charter under which the charterer is considered to become the ownerpro hac vice (13) and as such is responsible for the operation, navigation, and crewing of the vessel. (14) The term of the time charter can be short, six months to one year (even as brief as one or two voyages lasting several weeks), or long--seven to twenty years, with renewal terms. Given the capital costs that are associated with the development of a specialized ship, such as an LNG carrier, an LNG time charter would likely be for a long-term period, perhaps for the entire useful life of a newbuilt ship.

         The time charter, therefore, is by its nature a private contract. The rights and obligations of the time charterer under such a contract are derived from the contract itself. Since charter parties have been used in international shipping for hundreds of years, certain standards and forms have been developed to govern the charterer's responsibilities in the time charter relationship. Various forms of time charters have been developed and are used for different types of cargoes and trades. Many of these forms contain similar or...