Commercial, Chartering, Insurance, Salvage

1. Elaborate the influences of a charterer on operation of propulsion and other ship board
machineries during a voyage. After taking over a ship as a chief engineer you have been
informed that the ship is on a time-charter and has a history of unforeseen auxiliary
machinery breakdown at sea. State the different options you have and actions you would
take as a chief engineer prior to the commencement of voyage?

Answer –

 CHARTERER:- It is a person or company who hires a vessel for a specified voyage or a

specified period of time. There are three types of charters:-
1. Voyage charter
2. Time charter
3. Bareboat charter
 In all above cases influence of charterer on operation of propulsion and other shipboard
Machineries during a voyage will be as follows:-

1. VOYAGE CHARTER:-
 A voyage charter is the hiring of a vessel and crew for a voyage between a load port
and a discharge port. The charterer pays the vessel owner on a per-ton or lump-sum
basis. The owner pays the port costs (excluding stevedoring), fuel costs and crew costs.
The payment for the use of the vessel is known as freight. A voyage charter specifies a
period, known as laytime, for loading and unloading the cargo. If laytime is exceeded, the
charterer must pay demurrage. If laytime is saved, the charter party may require the
ship owner to pay despatch to the charterer.
 In a voyage charter laycan days are given to owner. Laycan is a period of lay days plus
cancelling date. During this period vessel must arrive and be presented at the load
port/place. If the vessel arrives before that date the charterer need not accept her
until the commencement of the agreed lay days.
 In case of any machinery breakdown takes place during voyage and because of that if
vessel is not present at agreed port or place, the charterers are entitled to reject the
vessel and cancel the charter.
 So, it is the duty of chief engineer to check the main engine rpm so that vessel should
be present at the port or place as specified in charter party and between laycan days.
 Master can take appropriate route to reach the port without the permission of
charterer.
2. TIME CHARTER:-
 A time charter is the hiring of a vessel for a specific period of time; the owner still
manages the vessel but the charterer selects the ports and directs the vessel where to
go. The charterer pays for all fuel the vessel consumes, port charges, commissions, and
a daily hire to the owner of the vessel.
 In time charter vessel speed and fuel consumption is mentioned and agreed in charter
party.
 As fuel is supplied by charterer, so any deviation in case of fuel or speed, the owner has
to pay the compensation to the charterer.
 So, chief engineer has to maintain charterer required rpm to get the speed as specified
in charter party.
 Master has to take permission from charterer before diverting the route. Route of the
voyage should be approved by charterer.
 Similarly, cargo operation time is also mentioned in the charter party.
 And if it deviates from this, the vessel will be off hired for that particular period of time.

3. BAREBOAT CHARTER:-
 The charterer obtains possession and full control of the vessel along with the legal and
financial responsibility for it. The charterer pays for all operating expenses, including
fuel, crew, port expenses and P&I and hull insurance.
 In case of bareboat charter all responsibilities regarding navigation, propulsion and
maintenance of ship board machineries remain with the charterer itself.
 The ship owner receives lower hire payment, because of lower exposure to risk.
 Bareboat chartering is a financial tool, designed to help investors purchase ships. These
investors then leave the operation and management of their ships to the experts in the
shipping business.
 Most often the contract is signed in BARECON standard charter party form. Charterer
may have a purchase option at the end of the contract.

 Unforeseen aux engine breakdown -

 If a ship is on a time charter and has a history of unforeseen auxiliary machine breakdown at
sea, I, as a chief engineer of the vessel, will check the nature and cause of breakdown.
 If the breakdowns are not severe and do not deter the cargo operation, there is a
maintenance clause in the carter party in a time charter. For e.g. standard BIMCO charter
party, it is 48 hrs/ year.
 So, I will plan and mobilize the engine room staff, so that maintenance is carried out in
stipulated time as given in charter party.
 All efforts to be made to avoid the vessel becoming off hire.
 But if the nature of breakdowns is severe and can cause delay of the ship during voyage or
during cargo operation, then:-
1. Company must be informed regarding the breakdown and proposed maintenance.
2. Any special assistance required like some spare parts / stores or technicians must
be requested.
3. Anticipated time for carrying out the maintenance will be taken into account.
4. All the maintenance will be carried out before the commencement of voyage, so that
vessel should not get delayed and off hired.
2.
a. What are P & I clubs? Describe how P & I clubs collect fund from ship-owners.
b. What are the risks that are covered under the term “protection” and “indemnity”.
c. State briefly what are the advantages of the formation of a P&I club in India?
Answer –
[A]
1. A Protection and Indemnity or P&I club is a nongovernmental, non profitable mutual or
co operative association of marine insurance providers to its members which consists of
ship owners, operators, charterers and seafarers under the member companies for the
purpose of mutual insurance against third party liabilities arising in connection with ship
operation.
2. P&I mean Protection and Indemnity. The protection refers to ship owner‘s protection
from risks which involve personnel injury, collision liability which is not covered by H&M
policy and indemnity refers to the clubs indemnity or compensation for liability to
cargo under a contract of carriage.
3. The P & I club membership is comprised of common interest group who wish to pool
their risks together in order to obtain “at cost” insurance cover.
4. It is governed by a board of directors (a committee elected). It has managers for
underwriting and claim sections and has correspondents, lawyers and surveyors at
various ports of the world. There are 13 major P&I clubs worldwide which covers almost
90% of the world fleet. Some of them are SKULD, GARD, BRITANIA, AMERICAN CLUB,
STEAM SHIP MUTUAL, NORTH OF ENGLAND, WEST OF ENGLAND Etc.
5. Each P&I club sets a premium rating for an individual owner reflecting the risk against
which he requires cover on the basis of his fleet‘s gross tonnage, his fleet‘s exposure to
risk, type of ships, etc.
6. The member is advised of his total estimated call (premium) for next 12 months. This
comprises of an advanced call and a supplementary call. Advance call is levied from all the
members at the start of the P&I year.
7. Later in the year if the claims have been heavier than expected, the managers will ask the
members for a supplementary call.
8. The clubs aim to be as much accurate in their prediction for future claims, so that they
do not burden ship owners with supplementary calls. Surplus refunds are made if income
(call + investments) exceeds outgoings (claims + expenditure).
9. If a ship owner or charterer requires P&I insurance in connection with the operation of
a vessel, he may contact a P&I association.
10. When a ship owner requires P&I insurance for a ship, the club underwriter will ask for
information which the ship owner has to furnish. Information he will require is:
1. The tonnage of the ship in GT,
2. Year of build, Number of crew members,
 3. Type of vessel (tanker, dry bulk, reefer, heavy-lift, container, passenger, ro-ro etc),
4. Type of cargoes to be carried (if a tanker is clean or dirty), Areas of trading,
5. Liner trade or tramp,
6. Classification society,
7. Management expertise,
8. Compliance with national and international legal requirements,
9. How many ships in the company,
10. Previous P&I history.
11. The club will often make a company audit with the management company of the
ship.
12. In addition, the club will often require a survey of one or more ships in the new fleet
to ensure the quality and technical standard of the ships. Entry into the club is often
dependent upon the ship being found satisfactory on inspection.
[B]
The protection and indemnity covers the following risks of an entered Ship
1. Crew related
a. Injury/ hospitalization
b. Deviation
c. Death, repatriation of body
d. Repatriation of injured crew and for his reliever
e. Personal effects, in case of fire
f. Crew wages, if the vessel lost and passenger saved.
2. Passenger claims
a. Third party people
b. Injury to Supplier, Agents, stevedores etc.
3. Cargo related
a. Damage to cargo ( Wet)
b. Collapsing of twin deck
4. Damage to fixed and floating objects/ installations
a. S.P.M, Buoys, shore crane etc.
5. Wreck removal: Sometimes ship wrecks has to be removed, marked or destroyed if it is in a
channel.
6. Pollution of any nature: Sometimes the claims will be so high and the individual clubs have
limitations. Those cases it will be paid by clubs, pools and reinsurance. Reinsurance is
available up to 2030B$
7. Fine - Customs, immigration contraband etc.
8. Piracy.
9. Stoways - Fines and cost for repatriation.
10. Salvage - Which is not a part of GA(Salvage for oil pollution)
11. General Average – GA unrecoverable for cargo or H&M.
[C]
Advantages of formation of P&I clubs in India:
1. Economic sanctions imposed against Iran by US and EU prohibited European Union based
entities from providing insurance and guarantee for transportation of Iranian oil.
2. Shipping companies of India, China, Japan and Korea are the largest importers of crude oil
from Iran. However Indian companies are more affected by these sanctions as they do not
have recourse to local P&I clubs as other importers have. To avoid similar circumstances in
future setting up of Indian P&I club would be advantageous.
3. Having an Indian P&I club would benefit the Indian ship owners as they can have localized
access and control within the club and hence will be able to provide insurance to their
members as per their requirements.
4. Since Indian P&I club will be a non-profit organization operating in India that is only meant
to provide insurance to its members, a lower premium can be expected.
5. A higher insurance cover can be obtained by members because of the system of
supplementary calls.
6. An Indian P&I club could also be set as a regional club to provide insurance cover not only
to Indian ship owners but to ship owners from South Asian and Middle East as well.
3. What are the principles of modern salvage law? What is general average? Explain with
context to general average (i) Entitlement (ii) Artificial (iii) Adjustment (iv) Contestation.
Answer –

a)
Principles of modern salvage law:
Salvage is the services rendered by a person who saves or helps to save a maritime property in
danger. A operation will be a salvage operation if and only if the following conditions are met
a) The salvage service must be voluntary.
b) The salvage service must be rendered to recognized subject of salvage.
c) The subject of salvage must be in danger.
d) The salvage service must be successful.
The peril need not be of “Imminent and absolute danger”
Not necessary to prove threat to environment (to get a safety net)

b) Modern salvage law is based on INTERNATIONAL CONVENTION ON SALVAGE 1989, which replaced the
1910 convention.

c) The Brussels convention was the first official convention to talk about salvage at sea and was
based upon the “NO CURE, NO PAY” principle. The major problem with the Brussels
convention was that salvors would not touch a high risk property as because of being high risk,
their chances of getting monetary benefits as well as to recover their expenses were minimal.

d) The 1989 convention seeks to remedy this deficiency by making provision for an enhanced
salvage award taking into account the skills and efforts of salvers’ in preventing or minimizing
damage to environment. Article 14 of convention introduced a special compensation to be paid to
salvers who have failed to earn a reward in the normal way which is listed in article 13.

e) If the salver by his salvage operation has prevented or minimized damage to the environment,
the special compensation payable by the owner to the salver may be increased up to maximum of
30% of the expenses incurred by the salver. It can be further increased in special cases but cannot
exceed 100% of the expenses incurred by the salver.

f) Both Salvor and the ship owners had few concerns with Article 14. Ship owners and P&I
clubs were concerned that Salvor could unnecessarily prolong the salvage operation to claim
more expenses under special compensation. Salvor’s concerns mainly were to the applicability
of article 14 as this was only applicable in coastal and inland waters and it only applied if there
was a threat to the environment which they had to prove.
g) Therefore it was finally decided to incorporate SCOPIC clause in LOF 2000 with no changes in
Salvage convention. SCOPIC clause once invoked substituted article 14. SCOPIC clause solved
two concerns for salvors. One, SCOPIC once invoked was applicable in all geographical
locations and was not limited to coastal and inland sea. Also SCOPIC was applicable even if
there was no threat to the environment and second, SCOPIC clause required security of USD 3
millions which made the salvor sure of the payments.

General average
General average is an ancient form of spreading the risk of sea transport and existed long before
marine insurance. General average means general loss, as opposed to a particular loss under marine
insurance.
It is defined in the Rule A of York- Antwerp rules 1994 as ― There is a general average act when
and only when any extraordinary sacrifice or expenditure is intentionally and reasonably made or
incurred for the common safety for the purpose of preserving from peril, the property involved in a
common maritime adventure.

1. Entitlement to general average

1. The G.A. act was usually ordered by the master originally, but now York – Antwerp rules
does not restrict this power to master alone but ship owner / agents on behalf of owners
can order G.A act.
2. The carrier must not have been at fault in law otherwise claimant is not entitled to obtain
contribution from other parties.
3. There must be a casual connection between the loss and the general average act i.e. losses
occurred due to direct consequences of the general average act shall be allowed as general
average.
4. The onus of proof is upon the party claiming in general average to show that the loss or
expense claimed is properly allowable as general average.

2. Artificial General Average

1. Artificial general average is the granting of a claim for general average even when one of
the five basic principles of general average found in rule A of York – Antwerp rules of 1994 is not
present.
2. The creation of artificial G.A was a part of the slow evolution favouring ship owners.
3. Peril did not have to be immediate, but real and not imaginary.
4. Claims for G.A were originally for jettison of cargo cutting away of masts/anchors carried out
for the common safety in order to avoid imminent ship wreck cause by the peril.
5. The expenses for which the carrier could claim are expanded by rule X(b) to include cost of
discharging cargo at a port of refuge when the discharge was necessary for the common safety
or to permit repairs necessary for safe prosecution of voyage. Here there are no perils same in
 XI(b) and XII of the rules.
6. Because there are no specific ‘’perils’’, requirements in X (b), XI (b) and XII claims are still
made for GA expenses at port of discharge. This is GA “by agreement” or “Artificial GA”

3. Adjustment of General Average

The lettered rules and numbered rules of “York – Antwerp rules” to be applied for the
adjustment of G.A. General Average shall be adjusted according to the lettered rules except as
provided by the rule paramount and numbered rules.

The process of adjusting a general average sacrifice or expenditure begins with the declaration
of G.A which is made by the ship owner through the underwriters.

The adjustment is made by ‘average adjuster’ who is appointed by the ship owner to collect all
facts regarding incidents. G.A claims must be submitted in writing to the G.A adjuster within
12 months of the date of termination of the common maritime adventure. If cargo has
been sacrificed, ship owner must obtain security form other cargo owners before discharging.
The security may be in the form of ‘G.A bond’ or an under taking from the cargo under
writer.
GA is adjusted according to the clause on general average as mentioned in Contract of
carriage, the contract usually provides for G.A adjustment as per rule G of “York – Antwerp
rules”, 1994. If no such clause is present GA will be adjusted at the place where the voyage
terminates according to the law applicable there.

The value of property scarified for the common safety and the corresponding contributory
values of the ship and remaining cargo are measured at the date of discharge or at the port of
destination
Fraction x = G.A. expenses / total value of property saved at destination
Contribution from each party is calculated as ‘fraction X’ is multiplied by each value of
property saved.

4. CONTESTATION OF G.A
The principle and calculation of G.A has been the subject of dissatisfaction in recent years for
six main reasons.
1) Exoneration or exemption of carriers for fault of the crew:
York-Antwerp rules say that the carrier should be exempted from liability for their
own crew’s negligence. However same rules say that cargo owners / shippers are
responsible for their fault or fault of their employees.
2) The interpretation rule – the second complaint arises from the interpretation rule which
gives numbered rules precedence over lettered rules.
3) Emergence of marine insurance – the 3rd compliant regarding GA has arisen because of
emergence of marine insurance, which has made GA un-necessary. In fact because of the
risk involved in GA, all parties now insure against responsibilities for GA contributions.
4) Expenses and delay in G .A. adjustments
5) Contribution collection problems – In GA the money is collected after the incident, as
opposed to marine insurance where premium is paid in advance. Many difficulties are
encountered in obtaining GA bonds and collection of contribution from cargo owners.
6) In case of small G.A – adjusters found it quite un-remunerable
4. Discuss the principles of Marine Insurance. Explain each of the principle with suitable examples.
5. What are the main statutes of marine insurance? Explain with reference to marine insurance
a. Direct Action
b. Reinsurance
c. Marine insurance and conflict of laws.
Answer –
Main Principles / Statutes of Marine Insurance Act 1963

1. Principle of utmost good faith:-

It is the very basic and primary principle of insurance. According to this principle, the insurance
contract must be signed by both parties (insurer and insured) in utmost good faith or belief or
trust.
The person getting insured must willingly disclose or surrender to the insurer his complete true
information regarding the subject matter of insurance. The insurer’s liability gets void i.e.
cancelled or legally revoked, if any facts about the subject matter is either omitted or hidden or
falsified or presented in a wrong manner by the insured.
While insuring the goods the insured must declare all relevant information to the insurance
company. For example, As the premium rates for hazardous cargo will be higher, the insured to
avoid paying higher premium may not declare goods as hazardous and this will not be utmost
good faith. In this case the insurer will void the contract and return the premium.
2. Principle of insurable interest:-

The principle of insurable interest states that the person getting insured must have some
interest in the object of insurance. A person is having insurable interest when the physical
existence of the insured object gives him some gain but its non existence will give him loss. In
simple words the insured must suffer some financial loss by the damage of insured object.
For the purpose of charterer it is ship owner’s absolute obligation to provide a seaworthy
vessel. At the time f contract is made the vessel must be fit to encounter ordinary perils of sea
and other incidental risks to which she will be exposed during the voyage.
Insurable interest must exist at the time of claim although it need not exist at the time of
effecting the policy. However, at the time of effecting the policy, the insured must prove that
he is going to acquire insurable interest soon.
For example: If A send goods to B on DDP (Delivery duty paid) basis and goods are damaged in
transit, A will be entitled for claim. Whereas if A sends goods to B on FOB (Free on board) basis
and good are damaged in transit, then B will be entitled for claim.
3. Principle of indemnity:-
Indemnity means security, protection and compensation given against damage, loss or injury.
According to principle of indemnity, an insurance contract is signed only for getting protection
against unpredictable financial losses arising due to future uncertainties. Insurance contract is
not made for making profit. Its sole purpose is to give compensation in case of any loss.
In an insurance contract, the amount of compensation paid is in proportion to the incurred
losses. The amount of compensation is limited to amount assured or actual loss, whichever is
less. The compensation must not be less than the actual damage. Compensation is not paid if
the specified loss does not happen due to a specified reason or during a specified time period.
3.1 - Principle of contribution:-
Principle of contribution is one of the derived versions of principle of indemnity. It applies to all
the contract of insurance, if the insured has taken more than 1 insurance policies for the same
subject matter. According to this principle the insured can claim compensation equal to the
extent of actual loss from all the insurers or any one of the insurer. If one insurer pays complete
full compensation, then that insurer can recover the proportional amount from other insurers.
For example – if a shipping company insures a ship worth 15 million $ with 2 insurers. Say
“TATA AIG ltd” for 9 million and “New India insurance Ltd” for 6 million $. Ship had a fire
onboard and got damage to a certain extent that the cost of repair is USD 6 million. Now the
company can claim USD 6 million from any of the 2 insurers, or company can claim 3.6 million
from TATA AIG and 2.4 million from New India insurance.
3.2 - Principle of subrogation:-
Subrogation means substituting one creditor for another. Principle of subrogation is also an
extension to the principle of indemnity, it also applies to all contracts of insurance.
According to this principle, when the insured has been compensated for the losses due to
damage to his insured property, then the ownership rights for such property are shifted to the
insurer. The principle is only applicable when the damaged property has any value after the
event causing damage. The insurer can benefit out of subrogation rights only to the extent of
the amount he has actually paid to the insured as compensation.
4. Principle of loss minimization:

According to this principle the insured must always try their level best to minimize the loss of
their insured property. In case of uncertain events such as fire outbreak or explosion, the
insured must take all possible measured=s and necessary steps to reduce the losses in such a
scenario.
The insured must not behave irresponsibly during such event because the ship is insured. Hence
it is the responsibility of the insured to protect his insured property and avoid future damage.
5. Principle of causa-proxima (nearest cause) -
It means when a loss is caused by more than one cause, the proximate or the nearest cause
should be taken into consideration to decide the liability of the insurer. The principle states that
to find out whether the insurer is liable for compensation or not, the proximate (closest) and
not the remote (distant) cause must be taken into account.
For example a shipment of oranges was insured as cargo against collision of ship. The ship
actually collided, and went to a port of refuge for repair, and the cargo was offloaded at the
port of refuge. After repairs was carried out, the oranges were reloaded but when the ship
arrives at destination the cargo was damaged. Now the immediate reason for damage is
perishable nature of cargo and unloading / reloading of cargo, therefore no compensation will
be paid as the goods were only insured against damage by collision which was not the
proximate cause.
Part B
1. Direct Action:- In marine insurance, a victim can take direct action against insurer or the
guarantor and the defences available to guarantor for a cargo claim. Compared to a system
where insurer has to reimburse the liable party for what he has paid the victim, the direct
action provides protection against fraud by the liable party. HNS, BUNKER & CLC all recognize a
direct action against the guarantor.

2. Re-insurance:- It is the insurance of insurance. It is the insurance arranged by an insurer to cover

all or part of cost of claims that it may incur under contracts of insurance it may have
written. Insurers reduce their exposure to risk by insuring themselves against claims. The
practice is known as re-insurance. General Insurance Corporation was designated as the “Indian
re-insurer” in November 2000 by act of parliament to function exclusively as Life and Non-life
Reinsurer. Being an Indian reinsurer, GIC plays the role of reinsurance facilitator for the Indian
insurance companies.

3. Marine Insurance & Conflicts of Law:- In case of any disputes related to marine insurance the
resolution is by mediation or other form of alternative dispute resolution. Disputes between
assured and underwriters may if not settled amicably by negotiations, be referred at the request
of assured or the underwriters to mediation or other form of alternative dispute resolution
such as Arbitration. Any such mediation or arbitration shall be in accordance with the
current CEDR (Centre of Effective dispute Resolution) model procedures.
Arbitration involves a decision by the intervening third party (neutral) after an evidentiary
hearing where the arbitrator is typically a passive participant whose role is to determine
right or wrong. The mediator by contrast, is generally an active participant who attempts to
move the parties to compromise and agreement, regardless of who is right or wrong. Both
the mediation settlement agreement and the arbitration award are legal documents and are
enforceable in a court of law.
6. How many types of warranties are there in marine insurance? Give an example of each
type with reference to hull and machinery policy of insurance.
Answer –

Warranties are the statement according to which insured person promises to do or not to do a
particular thing or to fulfill or not to fulfill a certain condition. It is not merely a condition but
statement of fact.
Warranties are more vigorously insisted upon than the conditions because the contract comes
to an end if a warranty is broken whether the warranty was material or not. Warranties are of
two types:
(1) Express Warranties, and (2) Implied Warranties.

1. Express Warranties:
Express warranties are those warranties which are expressly included or incorporated in the
policy by reference. Few examples of express warranties are given below:

a) Warranty of nationality:
A warranty of nationality stipulates that part of the crew, whole crew, master, or certain officer
or the vessel itself, etc. shall be of a particular nationality. The reason is usually to ensure that
the person or vessel covered by the warranty complies with the laws of a certain jurisdiction.
b) Navigation Restrictions:
A navigation restriction can both concern a restriction for special operations undertaken by the
insured vessel, for example towage or for geographical limitations, being areas the vessel may
not enter or enter under special conditions. For example the Northern hemisphere during
winter, when there is risk for ice.
c) Survey Warranties:
While the insurer is protected by the implied warranty of seaworthiness from the start of the
insurance period, this is only a minimum requirement, and the insurer may need further
reassurance as to the physical state of the vessel, therefore it is common to require surveys.
Such warranties are used quite often today, as it is said that it will provide mutual benefit to
both the assured and the insured, as both will be ascertained of the safety of the vessel.
2. Implied Warranties:
These are not mentioned in the policy at all but are tacitly understood by the parties to the
contract and are as fully binding as express warranties.
In marine insurance, implied warranties are very important. These are:
1. Seaworthiness of Ship.
2. Legality of venture.
3. Non-deviation.
All these warranties must be literally, complied with as otherwise the underwriter may avoid
all liabilities as from the date of the breach.

1. Seaworthiness of ship:
The warranty implies that the ship should be seaworthy at the commencement of the voyage,
or if the voyage is carried out in stages at the commencement of each stage. This warranty
implies only to voyage policies. There is no implied warranty of seaworthiness in time policies.
A ship is seaworthy when the ship is suitably constructed, properly equipped, manned,
sufficiently fuelled and provisioned, documented and capable of withstanding the ordinary
perils of the voyage.
Seaworthiness also includes "Cargo-Worthiness". It means the ship must be reasonably fit and
suitable to carry the kind of cargo insured. It should be noted that the warranty of
seaworthiness does not apply to cargo. It applies to the vessel only. There is no warranty that
the cargo should be seaworthy.
It cannot be expected from the cargo-owner to be well-versed in the matter of shipping and
overseas trade. So, it is admitted in seaworthiness clause that the cargo would not be raised as
defense to any claim for loss by insured perils.

2. Legality of Venture:
This warranty implies that the adventure insured shall be lawful and that so far as the assured
can control the matter it shall be carried out in a lawful manner of the country. Violation of
foreign laws does not necessarily involve breach of the warranty. There is no implied warranty
as to the nationality of a ship. The implied warranty of legality applies total policies, voyage or
time.
Marine policies cannot be applied to protect illegal voyages or adventure. The assured can
have no right to claim a loss if the venture was illegal. The example of illegal venture may be
trading with an enemy, violating national laws, smuggling, breach of blockade and similar
ventures prohibited by law.

3. Other Implied Warranties:

(a) No Change in Voyage:
When the destination of voyage is changed intentionally after the beginning of the risk, this is
called change in voyage. In absence of any warranty contrary to this one, the insurer quits his
responsibility at the time of change in voyage.

(b) No Delay in Voyage:

This warranty applies only to voyage policies. There should not be delay in starting of voyage
and laziness or delay during the course of journey. This is implied condition that venture must
start within the reasonable time. Moreover, the insured venture must be dispatched within the
reasonable time. If this warranty is not complied, the insurer may avoid the contract in
absence of any legal reason.

(c) Non deviation:

The liability of the insurer ends in deviation of journey. Deviation means removal from the
common route or given path. When the ship deviates from the fixed passage without any legal
reason, the insurer quits his responsibility. This would be immaterial that the ship returned to
her original route before loss.
7. State the different type of marine insurance policies that could be taken by owners, shippers
or other related parties. Explain the salient liabilities and exclusions related with each case for
an insurer. Name the various agencies in India which deal with marine insurance policies.

Answer –

The different types of marine insurance policies are detailed below:

1. Voyage policy – It covers the risk from the port of departure up to the port of destination.
The policy ends when the ship reaches the port of arrival. This type of policy is purchased
generally for cargo. The risk coverage starts when the ship leaves the port of departure.

2. Time policy – This policy is issued for a particular period. All the marine perils during that
period are insured. This type of policy is suitable for hull insurance. The ship is insured for a
fixed period irrespective of voyages. The policy is generally issued for one year. Time
policies may sometimes be issued for more than one year or they may be extended beyond
a year to enable a ship complete a voyage.

3. Mixed Policy – This policy is a mixture of time and voyage policies. A ship may be insured
during a particular voyage for a period, e.g., a ship may be insured between Bombay and
London for one year. These policies are issued to ships operating on a particular route.

4. Valued Policy – under this policy the value of policy is decided at the time of contract. The
value is written on the face of the policy. In case of loss, the agreed amount will be paid.
There is no dispute later on for determining the value of compensation. The value of goods
includes cost, freight, insurance charges, some margin of profit and other incidental
expenses.

5. Unvalued policy – When the value of insurance policy is not decided at the time of taking up
a policy, it is called unvalued policy. The amount of loss is ascertained when a loss occurs.
At the time of loss or damage the value of the subject-matter is determined. In finding out
the value of goods, freight, insurance charges and some margin of profit is allowed to the
policy in common use.

6. Floating policy - When a person ships goods regularly in a particular geographical area, he
will have to purchase a marine policy every time. It involves a lot of time and formalities. He
purchases a policy for a lump sum amount without mentioning the value of goods and
name of ship etc.
When he sends the goods, a declaration is made about the particulars of goods and the
name of the ship. The insurer will make an entry in the policy and the amount of policy will
be reduced to that extent. This policy is called floating policy.
The declaration by the insured is a must. When the whole amount of the policy is reduced,
 it is called ‘fully declared’ or ‘run off’. The underwriter will inform the insured who will have
to purchase another policy.

7. Block policy: Sometimes a policy is issued to cover both land and sea risks. If the goods are
sent by rail or truck to the departure, then it will involve risk on land also. One single policy
can be issued to cover risks from the point of despatch to the point of ultimate arrival

8. Composite policy – a policy may be undertaken by more than one underwriter. The
obligation of each underwriter is distinctly fixed.

9. Fleet policy – A policy may be taken for one ship or for the whole fleet. If it is taken for each
ship, it is called a single vessel policy. When a company purchases one policy for all its ships,
it is called a fleet policy. The insured has an advantage of covering even old ships at an
average rate of premium. This policy is generally a time policy.

10. Port policy – It covers risks when a ship is anchored in a port.

The marine insurance policies that a ship owner can take are:
1. Hull and machinery insurance policy. (H&M)
2. Protection and indemnity cover. (P&I)

The insurance policy for a cargo owner include

1. Marine cargo insurance policy.

Liabilities and exclusions under:

 Hull and machinery policies :
o These are usually time policies with a maximum period of 12 months. Normally the
items covered will be clearly stated in the clauses of each policy. Any extra port to be
covered will raise the insurance premium.
o Perils include
1. Peril of seas
2. Fire / explosion
3. Theft from outside
4. Jettison
5. Piracy
6. Earthquake volcanic eruption, lightening - Force Majure
7. Accidents during loading or discharging – Inchmaree clause
8. Machinery damage, manufacturing defects in machinery or hull
9. Negligence of master, officer or crew unless willful.
10. 3/4 collusion liability – Running Down Clause
 o Items not covered under insurance include
1. Loss / damage e.g. insurer deliberately set fire to ship caused by willful
misconduct willful negligence by owner.
2. loss of charter hire due to delays
3. loss due to wear and team
4. War risk cover.
5. Valuation clause i.e. in case the vessel is a constructive total loss, salvage values are
not considered.
6. Loss / damage from nuclear weapon or by radioactive material.

 P & I cover
The protection and indemnity covers the following risks of an entered Ship
1. Crew related
a. Injury / hospitalization / repatriation of injured crew and for his reliever.
b. Deviation.
c. Death, repatriation of body.
d. Personal effects, in case of fire.
2. Passenger claims
a. Third party people
b. Injury to Supplier, Agents, stevedores etc.
3. Cargo related
a. Damage to cargo ( Wet)
b. Collapsing of twin deck
4. Damage to fixed and floating objects/ installations
5. Wreck removal.
6. Pollution of any nature.
7. Fine - Customs, immigration contraband etc.
8. Piracy.
9. Stoways - Fines and cost for repatriation.
10. Salvage - Which is not a part of GA(Salvage for oil pollution)
11. General Average – GA unrecoverable for cargo or H&M.

 Limits and restrictions on P&I cover:

1. Deviation,
2. Delivery of cargo at port not specified in the contract of carriage,
3. Failure to arrive or late arrival at port,
4. Delivery of cargo without bill of lading, out dated bill of lading, clean bill of lading in
respect of damaged cargo,
5. Arrest or detention.
 Cargo insurance policies :
Most policies incorporate Institute Of Cargo Clause A, B or C.
1. Institute of cargo clause C: This covers only against major casualties. i.e., Fire, Explosion,
Stranded, grounding, sinking, capsizing, collision or contact, discharge at port of
distress, GA sacrifice and jettison.
2. Institute of cargo clause B: this covers all the above plus the damages due to earthquake,
volcanic eruption, lightening, washing overboard, entry of sea, force majeure.
3. Institute of cargo clause A: Offers cover against all possible risks including piracy and
both to blame collision clause in the contract of affreightment.
 Items excluded in marine cargo insurance are
1. Claims resulting from insufficient or unsuitable packing or protection of subject insured.
2. Claims for loss or damage arising from the financial default of Owners, Company,
manager or charterer.
3. Claims against the use of nuclear weapons.
4. Claims arising from the damage by terrorist or politically motivated groups.
5. Claims arising from the unfitness of the ship.

Following are some insurance companies which deal with marine insurance policies
1. New India insurance company.
2. Bajaj Alliance
3. National Insurance
8. Explain the following maritime terms:-
a. Charter party
b. Freight
c. Bare boat charter
d. Bill of lading
e. Lay time, Demurrage and off-hire / off hire clause.
f. Contract of affreightment.

Answer –

a) Charter Party
A charter party is defined as a contract between a ship owner and charterers for the use of
a ship or her cargo space in exchange of a sum of money called freight or charter hire. There are
several methods available in today’s freight market to employ vessels. Some of them are for short
term while others are for the longer term.
The main employment methods for vessel are as follows:
1. Voyage chartering.
2. Consecutive voyages.
2. Time chartering
3. Bareboat chartering.
4. Shipping pools
5. Contract of affreightment
6. Slot chartering
7. Parceling
8. Joint venture
9. Project cargoes.
There are 3 important elements governing chartering, the charterer, the owner and
the freight.

b) Freight
In a voyage charter, vessels are employed for a single trip, loading cargo from one or more
load ports and discharging to one or more discharge ports. The ship owner’s reward on
completing the contract successfully is the payment of freight for the cargo carried.
Freight can be paid on a lump sum basis; more commonly, it is prorated. Lump sum freight
does not depend on cargo quantity (generally used for packaged cargo), but prorated
(proportional) freight depends upon the exact amount of the cargo loaded (used for bulk cargoes).
 The freight is expressed per ton loaded cargo. This is normally payable in accordance with
the terms of a Freight Clause which stipulates the amount of freight, the time for payment
and the method of payment. This is often payable under the C/P terms partially or fully in
advance, on loading or on the issue of B/Ls.
Dead freight is not genuine freight, but owners’ compensation for lost freight, payable by
Charterers on a quantity of cargo short-shipped, i.e. a quantity which they agreed - but failed - to
load.
Back Freight: in case the consignor wants to get the cargo back and not deliver it to the
consignee he will pay the freight to get the cargo back. This is called back freight.

c) Bareboat Charter

 It is leasing contract between the charterer and the actual owner in which the charterer
operates the ship as if it is his own for an agreed period. Bareboat chartering is also called
‘demise’ chartering.

 The charterer obtains possession and full control of the vessel along with the legal and financial
responsibility for it. The charterer pays for all operating expenses, including fuel, crew, port
expenses and P&I and hull insurance.

 In case of bareboat charter all responsibilities regarding navigation, propulsion and

maintenance of ship board machineries remain with the charterer itself. The ship owner
receives lower hire payment, because of lower exposure to risk.

 Bareboat chartering is a financial tool, designed to help investors purchase ships. These
investors then leave the operation and management of their ships to the experts in the
shipping business.

 Most often the contract is signed in BARECON standard charter party form. Charterer may
have a purchase option at the end of the contract

d) Bill of Lading
The bill of lading is issued upon the goods being received for shipment or, traditionally,
upon their shipment. It is signed by the representative of the owner of the carrier, e.g. The Master
of the vessel or in practice, more often by owner’s agent.
The functions of a B/L are as follows:
 A receipt for the goods which have been received for shipment or shipped.
 Evidence for the contract of carriage of goods. (This contract is governed by the Hague-Visby
rules as amended.)
 A document of title (The owner of the bill of lading is entitled for possession of the goods)
A bill of lading is governed by one of the three international conventions i.e. Hague rules, the
Hague-Visby rules or the Hamburg rules, which set out the minimum terms and conditions which
the carrier and shipper must abide by.
Details are entered into the B/L on the basis of mate’s receipt. It is a receipt issued and signed by
the ship’s chief officer for goods received onboard and is used for all types of cargoes except liner
trades. The master of the vessel needs to treat the B/L as a very important document due to its
legal implications.
Role of B/L – When a carrier issues a B/L to a shipper, he is bound by the T&Cs of Hage/Hague-
Visby rules as amended to deliver the goods safely at the destination. One of the main
requirements of these rules is that due diligence must be exercised to ensure that the vessel is
seaworthy at the beginning of the voyage. If the cargo is damage because the vessel was
unseaworthy because of the want of due diligence, the carrier will be liable for the said damage.

e) Lay Time

Time allowed to the charterer for loading and or discharging by the owners without
payment additional to freight. In this period the owner is supposed to make and keep the
vessel available for loading or discharging. There are 3 types of laytime –

1. Definite laytime – It is stated in the charter party as a definite period of time eg on

tankers it may be 48 hrs or for cargo ships it may be 6 days.

2. Calculable laytime – It is determined by making calculation from the information in C/P

e.g. Cargo weighting 20,000 t to be loaded at the rate of 10,000 t/day, laytime is 2 days.

3. Indefinite laytime. – In this the C/P states that the cargo is loaded with “customary
despatch” or as fast as vessel can receive.
Demurrage
Demurrage is the cost pertaining to cargo operation during the charter with regards to
laytime. If cargo operations are completed after the expiry of the laytime for which the
owners are NOT responsible, then the charterers are technically liable for damage due to the
delay. For such delay beyond the expiry of laytime, the charterers need to pay demurrage for
each day / part of a day to the owners.

Demurrage is only payable only if a demurrage/despatch clause is included in the C/P.

Demurrage rate is normally a daily rate, which at least covers the owner’s cost of keeping the
ship in port.
Off-Hire / off-hire clause –
Off-hire is the period in which the ship is not available for service under the time charter and
accordingly the charterer generally is not required to pay the hire rates. Off-hire periods may
include days spent on repairs, dry docking and surveys, whether or not scheduled.
Provisions are normally made in an OFF-HIRE clause that no hire shall be payable during periods
when the full use of the vessel is not available to the charterer because of some accident or
deficiency which falls under the owner’s sphere of responsibility. The clause specifies the
occasion on which the ship will go off-hire and is triggered my mere occurrence of events,
irrespective of the fault on the part of ship owner.

f) Contract of affreightment (Tonnage contract)

A contract of affreightment is a long term contract where the cargo and not the vessel is central
to the contract. As the cargo quantity is large, a ship owner contracts with the cargo owner to
carry a negotiated quantity of cargo regularly between named ports, on agreed voyage
chartering terms, over several voyages, using several vessels. These vessels could be his own or,
could be chartered in specially for the contract.
The advantage of such a contract is that a ship owner obtains security of employment for his
vessel(s) for the duration of the contract. COA contracts could be tailor made to suit the cargo
and/or route, voyage contracts could be amended to suit the cargo to be carried. A standard
COA document that incorporates a voyage charter party for vessel performance could also be
used.
COAs are normally negotiated for longer periods of time, for e.g. 2 to 3 years and are therefore
useful when the ship owner wants a regular, stable income. Cargoes carried are commodities in
great demand e.g. LNG. Loading dates are specified and punctual performance is necessary.
Each individual shipment is normally subject to the terms of conventional charter party.
9.
a. Explain different costs that are incurred by a ship owner when his ship is on a long term time
charter.
b. Write short notes on the following:
i. Liner trade:
ii. Charter hire:
iii. Notice of readiness;
iv. Redelivery of vessel.
Answer –
A.
The costs that are incurred by ship owner when his ship on long term time charter is as follows,
1. Crew Cost (wages , travel, bonus, medicals , medical insurance)
2. Provisions and stores(Food, Hotel costs, Stores)
3. Maintenance and repairs(Spares, cost of transport of spares, maintenance costs etc)
4. Insurance
5. Administration and general charges

Crew Cost: - The two major factors which determine crew costs today is crew numbers and
nationality of different sections of officer and crew. The effect of numbers is offset to some extent
by the fact that all the members of reduced crew will have a higher standard of training and as
a consequence will be paid more per capita. The automation and higher quality materials
required to reduce watch keeping and maintenance and enable the reduced crew to work the
ship satisfactorily will increase the capital cost, while there is also likely to be a demand for higher
class accommodation although this will be offset by the reduced number of cabins required.

Provisions and Stores: - Provisions are normally bought at ships trading port and the annual cost is
calculated on a per person per day basis. Ships consume an extra ordinary variety and quite
considerable quantity of miscellaneous stores with the three most important items being
chandlery, Paints, chemicals and gases but with smaller sums being expended on such item as
fresh water, laundry and charts. Lubricating oil is also mostly included in this item.

Maintenance and repair:-With today’s small crews maintenance at sea is necessarily limited, but
careful planning by the ships staff whilst at sea can greatly accelerate the work carried out when in
port and minimize its cost. Budget for maintenance generally include sums for work on the hull and
superstructure, cargo spaces and systems, the main and auxiliary machinery, the electrical
installation and the safety equipment plus survey fees. Also included under this heading is the cost
of riding squads which are now used to carry out maintenance and repairs which would have
formerly being done by the crew but which is beyond the capability of the reduced crews of
today.

Insurance:-Insurance can be subdivided into Hull & Machinery and P & I. The cost of hull insurance
is directly related to the capital cost of the ship with the Insurance History of the managing
company exercising a secondary effect. Cost have escalated significantly in recent years due to the
number of major casualties and generally ageing tonnage. Policies now provide for more
deductibles and in the event of a claim these can increase running costs considerably.

Administration and general charges:- Administration costs are a contribution to the office expenses
of a shipping company or the fees payable to the management company plus a considerable sum
for communications and sundries, together with flag charges. Amongst the items included in
general charges can be the cost of hiring items of ships equipment such as the radio installation
which are sometimes hired rather than bought as part of the ship.

B.
1. Liner Trade: - The liner conference or freight conference is a group of operators of vessel
who operate on the same routes and cooperate on shipping schedules at the standardized freight
rates between ports. Liner trade has regular sailing schedules, thus is called the liner service. In
liner shipping, a shipping company deploys vessels at regular lines between two or more ports
according to predetermined and published sailing schedules. Important factors concerning liner
shipping are regularity, accuracy, fastness, reliability and fixed freights. The vessel operates on a
fixed route, with scheduled sailings advertised in freighting journals. The sailing schedules
usually contain various ports in order to find a sufficient amount of cargo. The objective of liner
shipping is the transport of (small) parcels of goods, coming from various shippers, destined for
various receivers, which are reached by the different ports. So in liner shipping various goods
belonging to different owners are loaded in the same vessel. The user of the vessel pays a fixed
due per ton of cargo he wants to transport. The transport of the goods between the different ports
happens in accordance with the conditions of price and responsibility determined in the bill of
lading. Liner shipping is well suited for the transport of general cargo, containers, RO/RO, etc.

2. Charter Hire: - Charter hire is the reward for the ship owner for performance of contract under
time chartering. The payment is made as regular amounts of hire money, normally paid in advance
as negotiated in the contract. The charter hire can be based on the vessel’s total deadweight
carrying capacity. The quantity of cargo carried has no effect upon the charter hire, as it is entirely
up to the charterers to provide full cargo in order to utilize the vessel’s cargo carrying capacity to
maximum extent. Time charter hire is normally payable in advance, either monthly or half monthly.

3. Notice of readiness (NOR):- NOR must be given only when the vessel is ready ‘In all respects
ready to load’ must be given before lay time can commence. It must be given within the
‘laycan’ period. It must be given in accordance with the procedure in the Notice Clause or Lay
time Clause in the C/P (charter party). It must usually be tendered during office hours from
Monday to Saturday. It should be given in writing by delivery of a printed form or letter, or by
telex, fax or cable. It should be sent in duplicate with a request that the second copy, with the
time and date of acceptance completed, should be returned for the master’s retention. The
Charter Party will normally state that lay time will commence a certain number of hours after
NOR is given or accepted. A few minutes delay in tendering on a Saturday morning could mean
that lay time will not commence until Tuesday morning, even though cargo work starts earlier. In
case of 2 or more load ports, the NOR should be given only at the first load port unless the C/P
provides otherwise.

4. Redelivery of vessel: - Charterers are normally required to redeliver the vessel in the ‘same good
order’ as when delivered to Charterers, fair wear and tear is accepted. In the event of
redelivery not being in the same good order and condition, Charterer would be liable for the
cost of repairs. If Charterers are given the option of redelivering the vessel ‘dirty’, a sum in
compensation to the Owners will be provided for.