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Contracts of affreightment

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Chapter 15

Contracts of affreightment

Paul Herring*

15.1 Introduction

In a world where the carriage of goods by sea has become more sophisticated there are many different types of contracts which are designed to be used either directly or indirectly for the purposes of carrying goods, commodities, energy sources etc by sea. In addition to time and voyage charterparties, some charters combine some of the characteristics of each.

For example:

  1. 1. Time charter trips (for example ‘a round Atlantic voyage’) where the contract is essentially for a voyage but payment is made in accordance with the time spent; and
  2. 2. Consecutive voyage charters (for example, four particular voyages between A and B within six months).

This paper, however, focuses on another type of contract which is employed in the context of contemporary trade, namely the Contract of Affreightment (‘COA’).

These contracts are not strictly contracts for carriage of goods but tonnage/volume contracts providing for the delivery of a stated total quantity by a stated number of shipments over a stated period. So, for example, a contract for the provision of ‘200,000 tons of product in 5 shipments evenly spread over 12 months’. Each individual shipment is usually governed by the terms of an agreed voyage charter form but in the event of a conflict the terms of the COA are to override.

The COA usually identifies the loading and discharging ports or range and provides that the shipowner is to nominate either a named vessel or one satisfying an agreed description within the agreed shipment period and the Charterer is to make cargo available for that vessel in that shipment period.

The benefit of the COA rather than the time charter, to sellers or buyers of goods is that it gives them control over a vessel or vessels during periods when they have need of a vessel without the necessity of paying hire during periods when they have no such need.

It is noteworthy that there is no textbook on the subject of COAs. There are however certain BIMCO standard forms of COA code-named ‘Volcoa’ and ‘Gencoa’. There is perhaps surprisingly, barely any case law about the meaning of COAs though there have been recent cases1 in the context of claims for damages which raise interesting questions particularly with regard to (i) the date of assessment of damages and (ii) the operation of the ‘compensatory’ principle.

15.2 Problem areas

Despite the fact, as stated above, that there are standard forms of COA published by BIMCO most contracts of affreightment are devised by the parties. It is noteworthy that the Volcoa standard volume contract of affreightment contains only some 23 clauses (in addition to the Box layout which contains some 31 boxes) whereas bespoke agreements tend to be longer.

Problems tend to arise in the following areas:

15.2.1 What defaults constitute a breach which enables the other side to terminate and claim damages?

As will be demonstrated, for example, by the terms of the BIMCO standard form, none of the important provisions of the COA (e.g. the Owners’ obligation to nominate tonnage) are usually described as ‘conditions’ of the contract. Indeed, the BIMCO Volcoa form provides that if the Owners fail to nominate tonnage according to the applicable provisions of the COA, the corresponding quality shall be deducted from the total contracted quantity unless the failure results from any event which cannot be avoided or guarded against. The Charterers have the option, however, to postpone the shipment within the period of the contract by giving notice of the decision not later than 1 month after the Owners’ failure to nominate. The contract further provides that whether or not the Charterers exercise any option, no claim which they may have on the Owners shall be prejudiced. Not only is the nomination not a condition of the contract but the contract expressly preserves the Charterers remedy in damages. That is not to say, however, that the Charterers could not still rely upon the Owners repudiatory/renunciatory conduct, for example, if the Owners unequivocally state that they will not nominate vessels for the carriage of the cargo or a substantial portion of it.

The parties to a COA are generally the shipper or buyer of the cargo who is often motivated by requiring certainty for the transportation cost and the shipowner who is concerned to secure long-term employment and flexibility for his owned or chartered in tonnage. Whilst, as stated above, once a nomination has been made and accepted, the terms of a voyage charter will usually operate the least standardised part of the contract will be the shipping programme and nomination provisions and it is these provisions that are the most contested over the period of any lengthy COA.

Some individual contracts have very detailed and complicated provisions concerning nomination procedures but, however, broad or detailed the terms are, care needs to be taken in the terms used. For example, it is common that the expression ‘fairly evenly spread’ is used when neither party wishes to be tied down to any particular dates. The downside is that the term ‘fairly evenly spread’ is imprecise and difficult to enforce or determine from a legal point of view when, in a sense, the defining factor depends upon the parties’ own definitions of the suitable shipment intervals. When practical, timings setting out the quarter or range of months the shipments are to be carried out are preferable.

Nomination clauses will almost invariably set out the nomination procedure, ranging from who is to initiate the procedure to which party is to have a final say on the vessels’ required arrival date. More detailed provisions are generally better including terms as to the giving of notices.

The COA rarely makes provision for timely acceptance of nominations as being of the essence of the contract; however, consideration of such a provision may be beneficial especially where vessels are in high demand and of considerable earning power.

This in turn leads to further questions. If the nomination fails, is the Charterer entitled to nominate a further laycan spread or is it the case that once a vessel is nominated the contract becomes one for the charter for the vessel nominated and there is no scope for further nomination. Does the breach of the requirement of timely acceptance entitle the Owners to treat himself as discharged from the particular shipment?

15.2.2 Force majeure clauses

Since the performance of the Charterer depends upon availability of cargo, many Charterers seek to incorporate into the COA wide-ranging force majeure clauses. That is particularly so in relation to COAs which are in truth ‘ship or pay’ COAs where the Charterer is bound to ship a certain quantity of cargo during the course of a certain period. The width of these clauses can be of concern to Owners to the extent that they give Charterers the right to rely upon factors which they say prevent the availability of cargo. It is notable that the BIMCO Volcoa form provides:2

If the performance of this contract or part of it is interrupted through any event whatsoever which cannot be avoided or guarded against by either party, the performance affected shall be suspended until the hindrance ceases to have effect.

Quantities not carried by reason of such an interruption of performance cannot be demanded to be shipped nor to be carried afterwards.

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