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Voyage Charter vs Time Charter

  • Author :
  • TATA AIG Team
  • Published on :
  • 06/02/2024
  • 2 min read

If you are involved in maritime trade, you know how important it is to choose the right type of charter for your vessel and cargo. Chartering is the process of leasing a ship or a part of it for a specific purpose, such as transporting goods or passengers.

The two main charters are time charter and voyage charter. They differ in terms of features, advantages, and disadvantages.

Here is a detailed understanding of Voyage Charter vs Time Charter in India.

What is a Voyage Charter?

A voyage charter agreement is where you lease a vessel for a specific voyage. You agree with the shipowner on the ports of call, destination, and cargo you want to transport.

The shipowner is liable for providing the vessel, the crew, and the fuel. You pay the shipowner a fixed amount, called the freight, to use the vessel and cargo transportation. The freight is usually calculated based on the cargo's weight or volume or the voyage's distance.

A voyage charter also involves some terms and conditions you must follow. One of them is laytime, which is the amount of time you are allowed to load and unload the cargo at the ports. If you exceed the laytime, you have to pay the shipowner a demurrage penalty for the delay.

On the other hand, if you finish loading and unloading faster than the laytime, you may receive the shipowner's reward, called despatch, for the saved time.

Advantages and Disadvantages of Voyage Charter

Voyage charter parties enjoy some perks while experiencing a few downsides.

Advantages for Charterer

  • You pay a fixed charter cost and know exactly how much you will pay for the voyage.

  • You can control the cargo and choose the type, quantity, and quality of the cargo you want to transport.

  • You are less likely to lose money due to market fluctuations if you pay the freight in advance or upon cargo delivery or purchase marine insurance in India.

Disadvantages for Charterer

  • You must bear the voyage's ongoing costs, such as port charges, customs duties, and insurance fees.

  • You have less flexibility in changing the route, the destination, or the cargo during the voyage, as you have to follow the contract terms.

  • You are more responsible for the cargo and must deal with any issues or damages that may occur during the voyage if you do not have marine insurance.

Advantages for Ship Owners

  • You have a guaranteed income from the voyage and can plan your budget accordingly.

  • You have less responsibility for the cargo and do not have to worry about the type, quantity, or quality of the cargo you transport.

  • You have more flexibility in managing the vessel and the crew, as you have the authority to decide the speed, route, and vessel maintenance.

Disadvantages for the Ship Owner

  • You have to bear the ongoing costs of the vessel, such as fuel, wages, and repairs.

  • You have less control over the vessel and must follow the charterer's instructions regarding the ports of call and the destination.

  • You are more likely to lose money due to market fluctuations, as you cannot adjust the freight according to the demand and supply of the vessel or the cargo.

What is a Time Charter?

A time charter is when you lease a vessel for a specific period. You agree with the shipowner on the hire rate, which is the amount you pay to the shipowner for using the vessel per day or month.

The hire rate is usually based on the market conditions, the vessel size, and the vessel condition. The shipowner provides the vessel and the crew, but you are responsible for providing the fuel, called bunkers.

Talking about the terms and conditions, the key one is off-hire. This is the period when the vessel is unavailable for your use due to repairs, maintenance, or strikes. During the off-hire period, you do not have to pay the hire rate to the shipowner.

Another key term in time charter is trading limits. These outline the geographical areas or types of ports where you can operate the vessel. You must follow the shipowner's trading limits, or you may face penalties or contract termination.

Advantages and Disadvantages of Time Charter

Time charter has some pros and cons for both the parties involved.

Advantages of Time Charter

  • You have more flexibility in choosing the cargo, the route, and the destination, as you have the authority to decide where and what to transport.

  • You have more control over the vessel and its crew, as you can instruct them to adjust the speed, course, and maintenance.

  • You have more convenience in managing the voyage, as you have less administrative burden, communication, and dispute resolution with the shipowner.

Disadvantages of Time Charter

  • You have to deal with variable charter costs, and you do not know exactly how much you must pay for the vessel until the end of the contract.

  • You must bear the ongoing costs of fuel, which can be significant depending on your consumption and the fuel price.

  • The risk of losing money is significant due to market fluctuations, as you must pay the hire rate regardless of the demand and supply of the cargo or the vessel.

Advantages for Shipowners

  • You have a stable income from the vessel and can plan your budget accordingly.

  • You have less responsibility for the fuel, and you do not have to worry about fuel consumption or the fuel price

  • You have more control over the trading limits, and you can protect your vessel from unsafe or unsuitable areas or ports

Disadvantages for the Shipowners

  • You have less flexibility in managing the vessel and the crew, as you have to follow the instructions of the charterer regarding the speed, the course, and the maintenance of the vessel.

  • You have to bear the ongoing costs of the vessel, such as wages, repairs, and insurance fees.

  • You have more risk of losing money due to off-hire periods, as you do not receive the hire rate when the vessel is unavailable for the charterer.

Time Charter vs Voyage Charter: How to Choose One

Here are some of the criteria that you should consider when choosing a charter type:

Feature Time Charter Voyage Charter
Charter Cost Variable Fixed
Ongoing Cost Shared between charterer and shipowner Borne by the charterer
Flexibility More flexible Less flexible
Contract Length Longer Shorter
Convenience Depends on the parties involved Depends on the parties involved

Now let us understand these parameters in detail:

Charter Cost

The charter cost of a voyage charter is usually fixed and agreed upon before the voyage. It is calculated based on the cargo's weight or volume or the voyage's distance. This cost is also affected by the market conditions, such as the demand and supply of the vessel and the cargo, the seasonality, and the competition. Also, consider the potential demurrage or despatch fees that may apply to a voyage charter.

Depending on the contract terms, you can pay the charter cost of a voyage charter in advance or upon cargo delivery.

The charter cost of a time charter is usually variable and paid periodically during the contract. It is calculated based on the hire rate.

Generally speaking, a voyage charter costs less than a time charter.

Ongoing Cost

This is the amount you pay for the expenses during the voyage. The ongoing cost can significantly impact your cash flow and risk management.

The charterer usually bears this cost for a voyage charter. They are responsible for paying the port charges, the customs duties, and the insurance fees for the cargo and the vessel. The port charges include the fees for docking, berthing, pilotage, towage, and other services provided by the port authorities.

Customs duties include the taxes and tariffs levied by the governments of the countries you visit. Insurance fees include the premiums and deductibles the insurance providers require to cover the risks of loss or damage to the cargo and the vessel.

The ongoing cost of a time charter is usually shared between you and the shipowner. You pay the fuel, the most significant expense in a time charter. The shipowner bears the port charges, the customs duties, and the insurance fees for the vessel. However, depending on the contract terms, you may have to reimburse the shipowner for some of these expenses.

Here, a time charter has a higher ongoing cost than a voyage charter.

Flexibility

This is the ability to change or adapt to circumstances that may arise during the voyage, such as cargo type, route selection, and market fluctuations. Compare the flexibility of a voyage charter and a time charter based on the contract terms, the trading limits, and the demand and supply of the vessel and the cargo. Assess the potential risks and rewards that may result from the changes.

A time charter offers more flexibility than a voyage charter but also carries more risk and uncertainty regarding charter cost and profitability.

Contract Length

This is the duration of the charter agreement, which can range from a few days to a few years. Compare the contract length of the voyage charter and time charter based on the demand and supply of the vessel and the cargo, the vessel availability, and the contract renewal options. Consider the potential stability and sustainability that may result from the contract length.

A voyage charter has a shorter contract length than a time charter but has less stability and sustainability in terms of income and relationships.

Convenience

This is the ease and comfort of managing the voyage, which can involve various aspects such as administrative burden, communication, and dispute resolution. You should compare the convenience of voyage charter and time charter based on the number and type of parties involved, the frequency and quality of interaction, and the level and method of conflict resolution.

Consider the potential customer satisfaction and reputation that may result from the convenience.

Conclusion

Trade-offs and risks are involved in choosing a charter type. One has to weigh the pros and cons of each type of charter and decide which one is more aligned with their goals and preferences.

You also have to be aware of the market conditions and the contract terms that may affect your choice and marine insurance policy coverage. Ultimately, the best type of charter is the one that meets your needs and expectations and that provides you with the best value and benefit and instant coverage under transit insurance.

Tata AIG offers customisable marine insurance plans at affordable rates.

FAQS

What are the 3 types of charter?

The three types of charter are voyage, time, and demise (or bareboat) charter. These types differ in how the vessel is used, paid for, and managed by the parties involved.

What is a voyage charter?

A voyage charter is an agreement where the shipowner transports a specific cargo for the charterer from one or more origin ports to one or more destination ports. The charterer pays a freight rate based on the amount or weight of the cargo.

What is the difference between a demise charter and a time charter?

A demise charter and a time charter are different in terms of who has the possession and control of the vessel. In a demise charter, the shipowner transfers these rights to the charterer, who is responsible for hiring and managing the crew, maintaining the ship, and obtaining insurance. In a time charter, the shipowner keeps these rights, but the charterer can decide how the vessel is used within the agreed limits.

What is the difference between the main time charter party clause and the main voyage charter party clause?

The time charter party clause defines the duration, hire rate, trading limits, and off-hire conditions of the charter. The voyage charter party clause defines the voyage, cargo, freight rate, laytime, and demurrage of the charter.

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