There are several different charter types which shipowners and charterers can use for the purposes of maritime trade. These include voyage charters, time charters and bareboat charters. When the parties are looking to choose a charter type, it is important they consider their specific needs, such as the type of cargo, frequency of shipments, need for cost predictability, need for flexibility, tolerance for risk and any other preferences they may have. In this guide, we look at what voyage charters and time charters are, focusing on the advantages and disadvantages of both.
What is a charter?
In shipping, a charter is the name given to the contract / agreement between a shipowner (who owns the vessel) and a charterer (who hires the vessel) regarding the use of that vessel for a specific time period or specific voyage. The specific details of the charter are negotiated, then set out in a formal charter party agreement. This legally binding contract outlines the terms and conditions of the charter as well as the rights and responsibilities of both parties (e.g. duration of the charter, freight rates or hire rates, the ports of loading and discharge).
What is a voyage charter?
In shipping, a voyage charter describes an agreement to hire a vessel for a specific voyage or round-trip between specified ports. The one-off nature of voyage charters means they are commonly used for one-time shipments and occasional shipping requirements. For example, an oil company taking advantage of an unexpected crash in oil prices may decide to buy more stock than usual and choose a one-off voyage charter for a deep-sea tanker to transport the crude oil from Ras Tanura port in Saudi Arabia to Corpus Christi port in Texas, United States.
A voyage charter is agreed between a shipowner (who provides the vessel) and a charterer (who pays to transport goods). The charterer pays either a lump-sum or quantity-based freight rate to transport the cargo for the specific voyage, as well as the cost of loading and unloading the goods.
Advantages and disadvantages of voyage charters
Voyage charters have both pros and cons. Let’s look at some of the advantages and disadvantages of voyage charters for both the charterer and the shipowner.
Advantages of a voyage charter include:
- Flexibility
Charterers can decide how much cargo is loaded on each voyage, as well as the route taken according to the market conditions at the time. - Better cost management
Charterers pay a lump-sum or quantity-based freight rate for each voyage. This gives them better control over their costs, which is particularly useful in volatile market conditions. - Limited duration
Voyage charters, used for one-time or ad hoc shipping requirements, allow charterers to adapt to changing business circumstances more easily as there is no long-term commitment. - Ability to capitalise on market opportunities
During high demand periods, shipowners can set higher freight rates to maximise their profits. - No maintenance costs for the charterer
The shipowner is responsible for the vessel's maintenance and operating expenses.
Disadvantages of a voyage charter include:
- Cost uncertainty
The charterer could face unforeseen expenses linked to vessel loading, unloading, and other port activities. - Risk exposure for charterers
Unexpected events can result in additional costs for the charterer who, under a voyage charter, is responsible for navigation risks, delays, and market fluctuations. - Lack of stability
By their very nature, voyage charters are short-term agreements. This can make it hard to plan logistics for charterers with regular, predictable shipping requirements. - Fluctuating freight rates
During periods of increased demand, charterers may find freight rates for voyage charters are higher than time charters because they offer more flexibility. - Less control for the charterer
As the shipowner maintains operational control of the vessel, the charterer has limited control over its schedule and operations. - Potential for disputes
The flexible nature of voyage charters can make disputes over delays, cargo damage, or unexpected costs more likely.
What is a time charter?
In shipping, a time charter is an agreement to hire a vessel and its crew for a specified period of time, usually a set number of months or years. During this period, the charterer has more control over the ship, including choosing its schedule, route and cargo handling procedures. These features make time charters most suitable for businesses which ship cargo on a consistent and regular basis. Under a time charter, the cost of using the vessel is either a fixed amount or a hire rate, which is typically calculated on a daily basis. For example, a gas company may use a time charter to hire a LNG carrier to regularly ship gas from Qatar to Japan.
Advantages and disadvantages of time charters
Time charters come with both advantages and disadvantages, which must be carefully considered.
Advantages of a time charter include:
- Ability to plan
The fixed duration of time charters offers a predictability which enables both shipowners and charterers to better plan their logistics and transportation requirements. - More financially certain
The fixed or daily hire rate during the charter period makes budgeting and financial planning easier for charterers. - Operational control
The charterer is able to determine the routes, ports of call, and cargo handling procedures, giving them more control over the vessel's operations. - Flexibility in cargo handling
Charterers can be more responsive to changes in demand and/or the supply chain as they have the flexibility to load and unload different types of cargo at various ports. - Lower financial risk for the charterer
The shipowner assumes full responsibility for the vessel's maintenance and operating costs during the charter period. - Reliability
Time charters tend to be for longer periods of time and so are well-suited for businesses with regular, ongoing shipping needs. - Avoidance of market fluctuations
The agreed-upon rate remains constant for the full duration of the charter, thereby shielding the charterer from rate increases during peak season.
Disadvantages of a time charter include:
- Less flexibility
The charterer is committed to the vessel for the agreed-upon period of time, limiting their ability to adapt to changing market conditions. - Unused capacity costs
The charterer may still have to pay the agreed hire rate, even if they don’t use the vessel’s full capacity due to falling demand. - Port costs
In most cases, the charterer is responsible for all port-related expenses, including vessel loading and unloading. - Shared risks
Under a time charter, the shipowner is liable for vessel maintenance while the charterer takes responsibility for operational risks (e.g. delays and disruptions). - Potential for disputes
Differences in expectations regarding vessel utilisation could result in disagreements between the shipowner and the charterer. - Affected by long-term market trends
Charterers may be locked into a higher hire rate, even if the market goes through a downturn.
How Clarksons can help
At Clarksons, we understand the market dynamics of shipping and recognise the unique challenges businesses face in navigating the complex waters of global maritime trade. Whether you are looking for assistance with a voyage charter for a one-time shipment, or a time charter for a longer-term arrangement, our specialist Chartering team provides market-leading support. Plus, thanks to our extensive global network and up-to-the-minute intelligence, we are able to provide comprehensive shipping consulting and advisory services that take into account both regional nuances and the latest market trends.