Commercial Management For Shipmasters .pdf

THE NAUTICAL INSTITUTE COMMERCIAL MANAGEMENT FOR SHIPMASTERS A PRACTICAL GUIDE Robert L. Tallack, BSc, FNI

First published 1996 by The Nautical Institute, 202 Lwnbeth Road, London SEI 7LQ, UYL @The Nautical Institute 1996. Sponsored by the UK P&I Club All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or ransmitted in any form or by any means, electronic, inechanical, photocopying, recording or otherwise, without the prior written permission of the publishers, except for the quotation of brief passages in reviews. ISBN 1 870077 33 4 Although great care has been taken with the writing and production of this volume, neither The Nautical Institute nor the author can accept any responsibility for errors, omissions or their consequences. This book has been prepared to address the subject of commercial management for shipmasters. This should not, however, be taken to mean that this document deals comprehensively with all of the concerns which will need to be addressed or even, where a particular matter is addressed, that this document sets out tile on1v definitive view for all situations. The opinions expressed are those of the author only and are not necessarily to be taken as the policies or views of any organisation with which he has any connection. Readers and students should make themselves aware of any local, national or international changes to bylaws, legislation, statutory and administrative requirements that have been introduced which might affect any decisions taken on board.

PREFACE THE SHIPMASTER has assumed awesome responsibilities. Whereas in the past their ships were relatively small and therefore carried a limited amount of cargo, today the master in command of a VLCC, a passenger vessel, a large container ship or a Panamax bulk carrier controls a huge capital asset and a cargo worth millions of dollars. This responsibility assumes greater importance as society demands higher standards and the P&I Clubs have to make ever-larger provision for liability insurance. The shipmaster has a crucial role to play in managing risk. When the ship is at sea he manages the physical risk implicit in navigation and collision avoidance, but when the ships are working or carrying cargo there is a commercial risk which needs equally careful management to ensure the viability of the company and the satisfaction of the cargo owners. As director of a shipping company and chairman of a P&I Club, I see the necessity to train masters in commercial awareness, because so much depends upon the way they manage the whole venture. 1

As owners we entrust the master to sign the contracts of carriage on our behalf. As such, the shipmaster is the owner's last line of defence when deciding if a bill of lading gives a true description of the goods or cargo being loaded. If there is a charterparty, it is the shipmaster who has to ensure that the standards of performance are complied with. To be an effective commercial manager, the master 4iust have a good knowledge of trading terms, a detailed appreciation of the provisions expressed and implied in shipping contracts, and the confidence and worldliness to communicate with all contracting parties in such a way that the best results can be achieved for the company which employs his services. In many ways the shipmaster's job is more complicated today than it was a decade or so ago. Whilst modern c6mintinications enable the quicker exchange of information, the same process has enabled companies to control subcontractors in new ways and cargo owners to trade their cargoes whilst in transit with greater ease and frequency. Often the result is that the master has to handle a very complex set of relationships and must decide how best to resolve conflicts of interest in support of his owners. An equally important part of the master's job is to ensure that the ship is well run, properly maintained and the crew utilised to best advantage. Here the emphasis is on planning, budgeting, delegation and encouraging team work. The detailed examination of voyage accounts in any company operating a fleet of ships will indicate that there are some masters who achieve consistently better performance than others. It is important to encompass the knowledge, skills and attributes which make for success, and where appropriate link these to the standards demanded by the new ISM Code. In this respect, the ISM Code breaks new ground by establishing an approved system of safety management. The quality principles implicit in the code can also help to reduce accidents and prevent losses. We see in Commercial Management for Shipmasters the first comprehensive publication which sets out how the shipmaster can understand and then manage the intricacies of the marine venture from ship purchase, through voyages on charter or in liner trades, to the time of drydock. It does of course demonstrate that our masters have to be true professionals of high quality. This book I believe will be used as a foundation and support for the master and I am pleased that the UK Club has promoted this worthwhile project. N.-G. Pahngren, Chairman, UK P&I Club FOREWORD THIS BOOK on Commercial Management for Shipmasters is long overdue and one might wonder why this subject has not been covered in such detail before. As a commodity man, using the Baltic Exchange to fix the ships I wish to use, I am conscious that I do not know the exact condition of the vessel which will carry my cargo nor do I know the master. In such circumstances, I have to rely on the integrity of the industry to ensure that its ships are structurally suitable for the voyage in question, on the owner or operator to ensure that our contract can be fulfilled, and upon the master to ensure that the ship is directed in accordance with my instructions. It is of course in this area that a good shipbroker working in an environment such as the Baltic Exchange is of inestimable importance. The framework in which I conduct negotiations is prescribed by rules which can be considered legally binding and for which I prefer to use tried and tested methods rather than risk a dispute concerning a misunderstanding which neither the shipowner nor trader wants. The shipmaster's role in trade is a crucial one. He is the first signatory to the bill of lading which gives the trader the cash entitlement to the commodity. The bill of lading becomes the negotiable document upon which all further trading depends. Any trader submitting cargo to a ship will want a clean bill of lading; however, the trader or receiver to whom that cargo might be sold usually wants to know its proper condition. Certainly the shipowner can become liable if a cargo is found to be badly damaged when clean bills of lading were signed. When it comes to the charterparty, the master should be consulted to ensure that the vessel can in fact meet all the prior conditions of loading and that the vessel can deliver the cargo as specified. 2

This husbandry demands good management skills, an understanding of costs and budgets, an appreciation of the law of carriage and a rich experience in chartering and seafaring. We know that the main emphasis of the industry is safety. We can understand this from the casualties which have led to loss of life or damage to the environment, and, of course, we endorse all measures that improve safety at sea. However, I must emphasise that the main, indeed only, purpose of a ship is to carry cargo to facilitate trade and we must give equal weight to this important subject. That is why I am particularly pleased to write this foreword and urge that the book is used widely for the excellent advice it contains. A. Harper, Chairman, The Baltic Exchange

THE AIM OF THIS BOOK... THE AIM OF THIS BOOK is to help to improve the commercial performance of merchant shipping through increasing the shipmaster's understanding of that important aspect of his professional role as well as offering an introduction to some aspects of modern management practice. The book examines the Operation of a merchant vessel from the user's viewpoint-that is, from the viewpoint of those who generate the demand for services and who, in the long run, pay the wages, in other words, the customer. The objective is to assist the master in providing an efficient and economical service to his customer whilst at the same time protecting the equally valid interests of his owner. The book puts management in the context of commercial operations. It is designed to enable those who use it to optimise the use of resources, minimise down-time and contribute positively to a company's planning strategy, financial management and cost control. It will enhance voyage performance and enable Shipmasters to make better decisions or to be more focused when seeking specific information in order to achieve the best outcome in the many varied circumstances of shipping operations. It covers a number of areas which some may argue are the province of the superintendent or of shore-based managers. The Nautical Institute contends that there is little, if anything, which affects the efficient, economic and safe running of a vessel which is not the concern of the master. This argument is endorsed by the importance ,which the International Maritime Organization gives to the ship-shore interface in the ISM Code. Although not centred around checklists, this book is designed as a practical guide but one to be read during the planning stage rather than as a ready reference. Its commercial content necessarily involves reference to maritime law, but this is not a lawyer's book. Rather it is designed to give the background and guidance to help masters avoid the tricky waters of legal argument where decisions are reached, and reversed, after hours of learned argument and certainly not in the same circumstances and time available between completing cargo and sailing when decisions have to be made with regard, for example, to signing or clausing bills of lading. After reading this book, it is hoped that the shipmaster will feel the urge to explore some of the subjects further and no longer feel that commercial matters are 'not his part of ship' nor feel challenged by changing demands on his traditional approach to shipboard management. If he feels better able to organise and involve his crew, balance the many, often conflicting, commercial pressures he faces as a master or be more confident in arguing his corner in defence of his owner's interests, then the aim of The Nautical Institute and the book's sponsor, the UK P&I Club, will have succeeded. Much thought has been given to chapter layout, and the approach adopted is to provide a well structured insight into the master's responsibilities for the safe and efficient running of the vessel-an insight which might be as relevant to those ashore as much as those at sea. The book is defined by its contents rather than a detailed index.

ACKNOWLEDGEMENTS AND REFERENCES MOST OF THE REFERENCES and acknowledgements are given at the end of the chapter to which they refer. It is almost unnecessary to say that this book could not have been written without the help and encouragement of very many people. First amongst these must be The Nautical Institute 3

and all who travail in her, particularly the Secretary, Julian Parker, with whose assistance the concept of the book took concrete form. A glance at the references will quickly show that London is a centre of maritime excellence. Its ability to support the maritime industry is perhaps unsurpassed-all it needs are more shipowners. If one thing became apparent in writing Commercial Management for Shipmasters it was the importance of training young seafarers to understand shipping as a whole and to accept them as part of a total management team. Research started at the library at the British Museum, a recommended visit for those that do not know it. The use of the libraries at the Institute of Chartered Shipbrokers and solicitors Holman, Fenwick and Willian and Herbert Smith is much appreciated, as is the patience of Maddy Wright, the librarian at Ince & Co. but to all those who have given help and advice, my sincere thanks. A number of people have struggled to transform my midnight manuscript into legible typescript, none more so than Susan Walton; it then became the editor's, David Sanders, turn to set about the singular syntax. Finally, a debt of thanks is also due to the UK P&I Club and particularly its editorial team of Nigel Carden, Karl Lumbers, Roger Nixon and Sonja Fink, who kept faith, even when they were faced with the challenge of finding the fine balance between practical advice and legal exactitude.

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CONTENTS

CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER CHAPTER

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Preface. Foreword. The aim of this book Acknowledgements and references. Index of chapter and section headings. Owner, master and the vessel. Management. Budgets and management information systems. Terms of trade and bills of lading. Legal framework for contracts of carriage. Charterparties: The master's role as manager. Marine insurance. Contracts for purchasing supplies and services. Managing a technical cost centre. A changing approach to safety. Commercial perspective on emergencies. Renewal-sale, purchase and financing. End word.

ANNEXES and DOCUMENTS The Nautical Briefing referred to in this book is The Development of Maritime Commercial Practice, extracts from which are given at the end of the annexes, on page 282. The full briefing can be found in the companion volume, Watchkeeping Safety and Cargo Management in Port, or can be obtained as a separate publication from The Nautical Institute.

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INDEX OF CHAPTER AND SECTION HEADINGS CHAPTER 1 OWNER, MASTER AND THE VESSEL The shipping company Who are the owners? To whom is the master responsible? What is management? Safety About the book Role of The Nautical Institute

CHAPTER 2 MANAGEMENT Managing teams Knowing yourself Knowing your team Managing the team Delegating Making decisions Appraising your team Planning Mind mapping Setting objectives Time management Risk assessment Managing change Communicating Managing meetings Paper and telecommunications Body language Negotiating Multi-cultural environments Causes and consequences of cultural differences Management and STCW

CHAPTER 3 BUDGETS AND MANAGEMENT INFORMATION SYSTEMS Language of budgeting Terminology Format for a vessel budget Building an operating budget Receiving the budget package Briefing and the budget team Presenting the budget Management information systems Accounting system Financial accounts and cash flow The future Trading budgets and the voyage calculation Voyage calculation-dry cargo Voyage calculation-liquid bulk

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CHAPTER 4 TERMS OF TRADE AND BILLS OF LADING The sale contract generating demand for transport Initial considerations for buyer and seller Shipper's checklist Consignee's checklist Division of risk and cost Methods of payment Process of documentary credit Bills of lading and sea waybills Straight bills Marine/ocean bill of lading Non-negotiable sea waybill Charterparty bill of lading Multimodel transport document Terms on the reverse side National and international laws

CHAPTER 5 LEGAL FRAMEWORK FOR CONTRACTS OF CARRIAGE The sales contract Sellers, buyers and traders Sales contracts-dry bulk Sales contracts-liquid bulk Contracts of carriage Charterparties and bills of lading Right of consignees Hague to Hamburg-controlling the conditions of carriage The Hague-Visby rules The Hamburg rules The future General average and the York-Antwerp Rules Incorporation clauses Limitation of liability Cargo-related limitation Limitation against third parties

CHAPTER 6 CHARTERPARTIES; THE MASTER'S ROLE AS MANAGER Dry bulk voyage charter-Gencon Charterer, shipper and freight Club Correspondent Warning signs Arrival NOR and cancelling date Unsafe loading and discharge ports Laytime and demurrage When does laytime start? Calculation of laytime and demurrage Demurrage and damages for detention Seaworthiness Looking for evidence Contemporaneous,records Cargo Personal contact Dangerous cargo 7

Live animals and deck cargo Signing bills of lading The passage and deviation Delivery Voyage charter-liquid bulk Condition and cleanliness Signing bills of lading and delivering cargo Freight and liens Charterer's orders Loaded passage, speed and deviation ETA, safe berths and NOR Condition and seaworthiness Agents Time charterparties-NYPE93 The charterer Description of the vessel Delivery, re-delivery, hire payment and cancellation On and off-hire surveys, seaworthiness Owners/charterers to provide Safe berths, trading limits, sailing orders, and liberty clause Cargo, cargo work, holds, cargo claims and liens Speed and consumption, bunkers Charter hire, off-hire and withdrawal Clause paramount and other protective clauses Arbitration Summary

CHAPTER 7 MARINE INSURANCE Hull and cargo insurance The markets Precedent and the law The Institute time clauses-hulls The assured Utmost good faith Attachment of risk The clauses Assignment Scope of cover and navigation Total loss Perils covered Pollution hazard General average and salvage Damage and its repair Collision liability Sistership clause Additional and substitute clauses ITC Hulls-restricted perils The Institute cargo clauses Protection and Indemnity Associations The P&I Club structure Club income, reserves and reinsurance The Club's cover Personal injury-crew , Personal injury-stevedores Personal injury-passengers and others Diversion expenses Collision liabilities 8

Loss or damage to property other than cargo Pollution Towage contract liabilities Liabilities under contracts and indemnities Cargo's proportion of general average or salvage Legal costs Omnibus cover Inter-Club New York Produce Exchange Agreement Class II and other cover

CHAPTER 8 CONTRACTS FOR PURCHASING SUPPLIES AND SERVICES Purchasing stores and supplies Purchasing contracts Requisition Inviting quotations and selecting suppliers Orders and contracts Receipt of goods Terms and conditions in supply contracts Repair and other service contracts Selecting a repair yard Terms and conditions Placing and managing the contract Management contracts Bimco management contract Crew supply contracts

CHAPTER 9 MANAGING A TECHNICAL COST CENTRE The team and the hardware Team responsibilities True partnership required Management meeting Managing maintenance Bunkers-the energy source Constituents and quality Purchasing bunkers Taking delivery

CHAPTER 10 A CHANGING APPROACH TO SAFETY Safety and management International Safety Management Code Background Safety management system (SMS) Advantages of establishing an SMS Revised STCW Convention Risk assessment Definitions Five steps in risk assessment Decisions between the options available Risk assessment at operating level Incidents, inquiries and investigations The media

CHAPTER 11 COMMERCIAL PERSPECTIVE ON EMERGENCIES 9

Cargo claims and general average The incident The adjustment York-Antwerp Rules Owner's negligence and limitation of liability The facts The incident The analysis Judgement Collision and salvage The incident The salvage The collision

CHAPTER 12 RENEWAL-SALE, PURCHASE AND FINANCING Purchasing a vessel Negotiation and inspection Delivery Registration Finance and the vessel as collateral Raising the purchase price Securing the loan Mortgagee Possession Liens and other encumbrances Arrest

END WORD ANNEXES

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Chapter 1

OWNER, MASTER AND THE VESSEL

The shipping company -who are the owners? -to whom is the master responsible? -what is management?-safety

THE NAME SHIPMASTER is a well established and honourable title. It implies a long tradition of seafaring and has a bell-like quality which is authoritative and, like a seamark, should provide a strong sense of direction. Brief reflection reveals that, although the position of shipmaster is well understood, the actual job has changed with the development of the industry and perhaps changed more than traditional training has allowed. What are the qualities which make an effective ,shipmaster today ? And how can we provide guidance to ensure that the next generation of chief officers will be well prepared for the challenges which lie ahead? It is to address this issue that The Nautical Institute commissioned this book, and in the following chapters we will explore the knowledge, techniques and skills which shipmasters as managers can apply to improve the economic performance of their ships and in so doing increase the commercial viability of their company. No commercial situation is static. Competition means that someone, somewhere, is always seeking a better, more cost-effective, solution to the transport problem. The need to be forward looking rather than just relying on traditional values is essential to increase your worth and also to secure a viable future in a very complex and fast changing industry. In any team effort the role of the individual and the company are linked. For the individual to contribute to company profitability he or she must understand the business of the company and be able to relate their skills and expertise to the company objectives. In a competitive industry where trades, markets and commodity prices are constantly changing, where companies are developing, running down, merging or surviving; where ships are getting older and new more efficient ships are being introduced; where people progress through the ranks and employment patterns change, adaptation is, essential. When communications and technology alter -working practices and when subcontracting Management, maintenance, catering and manning is widely applied in a global industry which is affected by the varying cost of finance or the fluctuation of the currency market, then we have to recognise that to be self-centred and inflexible, relying upon the position and not the tasks to be undertaken, is to toll the bell for the demise of the profession of shipmaster To manage well in the competitive shipping industry is not easy. Those who succeed deserve special recognition. In no other enterprise are the money-earning units dispersed and moving around the globe in the way that ships operate. Even in the airline industry, where similar large capital units are deployed globally and safety considerations are paramount, the management challenge is not the same. The master/ owner/ manager relationship is critical to success and to achieve success it needs to be a two-way flow. This book is about building that relationship and giving the shipmaster the knowledge and skills necessary to: - Contribute to the company; - Adapt to changing circumstances; - Sustain efficient working practices; and - Manage all aspects of the vessels of which he must surely be more than just the driver.

The shipping company

A shipping company is becoming increasingly difficult for many of us to define. Although as can be seen from The Development of Maritime Commercial Practice, the structure of shipping companies and shipping ventures has changed over the centuries. For many the traditional understanding of a shipping company is a company that owns its own vessels and employs its own seafarers. Today, many of these functions are separated, not just divisionally but corporately, with different parts of the operation being undertaken by companies whose only formal relationship is contractual. Thus during the course of his career the shipmaster may work in a very wide range of company structures ranging from a close one-to-one relationship in a small, owner/operator company, through the structured divisional systems of a large corporation, to the web of contracts which links some 11

vessels to their beneficial owners, involving commercial managers, technical managers and one or more crew managers. Nevertheless, and perhaps more than ever, the shipmaster's job remains the same; to act as the fulcrum around which the commercial, technical and human aspects of the voyage turn. It must be evident even in this abbreviated introduction that it is not always easy, for the shipmaster to know for whom he is working or the priorities which constitute 'a successful voyage'. At this point we should reflect on the certainty that sustained the junior officer up to the rank of chief officer. They received orders, usually from colleagues of a similar ethos and cultural background, and carried them out to the best of their ability within the confines of the ship. The master's role is much less clearly defined and learning to accept commercial leadership is another way of explaining the need for this book.

Who are the owners?

The standard answer is 'those whose names appear on the ship's register', but before assuming that these individuals have the power of Roman emperors it must be remembered that the name 'appearing on the ship's register' may have very little to do with the operation of the vessel or the employment of the master and crew. Even if he does, this owner-the beneficial owner-may be substantially financed by private or public share capital and the shareholders, who may include major investors from pension funds, will expect to see a proper return on their investment. Similarly, if the company is being financed by a bank loan on a mortgage, the owners have to pay off the loan and interest as well as salaries and overheads before they can make a profit to reinvest in the future. A shipping company is a company which complies with the provisions of the Companies Act in the country of registration and whose main purpose is, generally, to make money out of shipping, although in many cases astute trading of the vessel as a capital asset may prove more profitable than trading the vessel in her role as cargo carrier. All these companies must comply with the provisions of the Companies Act concerning registration, disclosure of accounts, notification of directors and rules concerning nationality (tax in some jurisdictions). The technique of managing a large fleet by dividing it into single-ship owning companies in 'friendly' legal regimes is still widely practised with the aim of limiting liability in the event of a catastrophic claim, but regulatory authorities are now improving their ability to penetrate the corporate veil. It is surprising how many . masters, accept employment in a shipping company and do not have any idea of its financial viability nor corporate objectives. They are managers of the company's money-making process; awareness of' company profitability and corporate objectives will help to identify the future potential. It is, of course, well known that no single owner controls a market. They may capture a niche or use, the technique of mergers, acquisitions or pools to enhance market share, but pricing cannot be fixed. In the global economy the opportunities are too wide and varied. The effect of the market is to induce peaks and troughs. The supply side, the number of ships available, is primarily determined by an entrepreneurial view of future demand. This is modified by new technology (e.g., the VLCC, the containership), the international availability of finance and, to a certain extent, national but not necessarily economic desires to develop shipowning capacity. The demand side is established by global economic activity and the resulting levels of international trade. This in turn is modified by national or regional ambitions- e.g., the OPEC or independent oil producers desire to generate revenue-or the climate, affecting, for example, the grain trade or general stock levels and demand for fuel oil. Over all these factors are national ambitions to develop industries through protectionist policies (the British Navigation Acts which lasted from 1646 to 1840 are a good example) all of which should, in theory at least, be regulated by the General Agreement on Tariffs and Trade (GATT). Thus, the shipowner only controls part of the equation, and that imperfectly. At the turn of the century when larger steamships were displacing sailing vessels, many sailing vessels had to be scrapped and many masters were out of work. Fleet sizes increased until the 12

depression in the 1930s when tonnage was surplus to requirements and many seafarers lost their jobs. World War II reduced tonnage and after the war there was a massive increase in trade. This was sustained until the 1970s, when overtonnaging again (and still when this book is being written) became a serious problem. So, the owners are not free to act as they please. Monthly cash flow can be very meagre and, to survive, cutting costs has been the only solution. A master who does not understand the constraints placed upon his principals is going to feel frustrated and aggrieved when the demands for costly requisitions are turned down. In his 1994 address to The Nautical Institute AGM, Captain L.A. Holder, the Institute's President, stated that after 15 years of cost cutting there was little further to go and that in future companies would have to compete on efficiency. Cost cutting has not been an entirely satisfactory strategy. In a Nautical Institute paper on accident and loss prevention, Mr. Philip Anderson observes: Between 1986 and 1993 P&I insurance claims have risen by 300%. Insurance P&I plus Hull and Machinery used to be about 10 %, but can now represent as much as 45 % o operating costs in 1994. To establish the right balance between, say, maintenance and cost savings, a master needs to know how the owner wants to run his vessel. Frequently, the master does not even know who the owner is. A vessel was given a port State inspection in Vancouver where the lifesaving and firefighting appliances were found to be in an appalling state. The surveyor stated that the equipment had to be rectified before the ship could sail. The agent said he had the authority to ensure the work would be done in the next port but could not disclose the owner's name. The surveyor refused to allow the ship to sail until the owner personally presented himself and rectified the deficiencies in Vancouver Within six hours the American owner arrived. He even congratulated the authorities on establishing his identity! There are many owners like this who use management companies to protect their anonymity. This also applies to vessels which might have been repossessed by banks who employ management companies to trade their assets. Under these circumstances how is the master to know in what condition to maintain his vessel's hatches or when to employ shore labour for a particular task which would save money in the long term? The effect of the Hanseatic League (see The Development of -Maritime Commercial Practice, a Nautical Institute briefing paper) left its mark on the northern European and Scandinavia shipping scene where is clearly understood that a successful shipping venture is one which has close and genuine co-operation between those who play their part ashore and those at sea. In a somewhat similar way, the close relationship between owner and master and crew-has contributed to much of Greece I s maritime success. Everybody is familiar with the financial viability of the company, the freight rate, the opportunity for business and recognises the times when bonuses can be paid and the times when ships have to be sold. In good times profits are shared and in bad times crew are laid off but are retained with a subsistence wage. Such companies have high company loyalty and the owners can confidently leave ship business to the shipmaster and manage their fleet economically, only interfering when necessary. They practise management by exception. The relationship of the master to the owner and or shipmanager is an essential part of commercial management and will be discussed in more detail in the following chapters. However, it is also evident that there are many kinds of shipping company, variations in ownership and widespread subcontracting to the shipmanagement companies, but common to all these is the shipmaster.

To whom is the master responsible?

Traditionally, the master was responsible to the shipowner for the commercial success of the voyage. Sometimes owners retain direct links with the master for business purposes, leaving statutory and operational management to a shipmanagement company. With different contractual arrangements a master may deal directly with a management company for both commercial and operational matters and a manning agent for personnel. In these situations both subcontractors are likely to want to minimise costs within the confines of their contractual agreement with the 'owner'. That, after all, is their profit margin. The master also 13

has to minimise loss and damage and maintain safety standards in order to satisfy a wide range of parties, which will include: - The owner. - The manager. - Other subcontractors. - The charterer. - The cargo owner. - The regulatory authorities. - The classification societies. Just as the master may be linked to the beneficial owner by a chain of contracts, so the shipmaster is linked to the cargo owner, who may change during the course of a voyage, by contractual obligation. Master and crew must never forget that the reason they are employed is because somebody wants to move cargo and it is he, or she, who is the customer. To balance what can Often become a conflict of interest the master needs to have the knowledge and competence to optimise the use of resources in pursuit of the maritime venture - these are not the technical computational skills practised by the chief officer but management skills demanding a much wider appreciation of shipping. The relationship of the master to 'the company' also varies according to the management style of the organisation and the level of information supplied on board. Some managers prefer to provide the ship with direct instructions concerning cargoes, destinations, cleaning, fuel, stores and crew. Very little financial or budgetary information is given and the master is expected to respond as told. Other companies make the ship a full cost centre, supply all the necessary financial information and provide the resources to enable the ship management team do everything reasonable from planning the dry dock to storing and negotiating contracts. Charterparties will be negotiated ashore but in consultation with those on board. While there are many ways of organising a shipping company, and the ISM Code will undoubtedly influence this if implemented and monitored effectively, the trend is likely to be towards a more central role for the master in all aspects of the operation of his vessel. Thus, the master needs to understand how those control functions work which are (or should be) common to all shipping operations. These will include: - Ship finance, including voyage estimating and the budgetary control of running costs; - The effective management of human resources in an era where manning policies and social standards are changing; - The management of the commercial operation. In other words, the translation of a contract on paper into a successful voyage, taking into account the need for accident and loss prevention.

What is management?

The Nautical Institute defines management as 'The process of involving people and utilising other resources to achieve a given objective'. To be successful, the master must be able to provide: - Clarity of purpose. - Effective working practices. - Control. - Leadership and motivation. Management is like navigation. There has to be a clear understanding of the destination. Once that is known, an effective safe passage plan can be prepared. At regular intervals the vessel's position is plotted. If the ship is deviating from the track, corrective measures must be taken through the exercise of control. Motivation is more difficult, but a leader can only expect support if those following know what they are trying to achieve (involvement in planning), if they are encouraged and rewarded for good performance and their errors or omissions are corrected if they make mistakes. This book on commercial management for shipmasters should be unnecessary. After all, if the economic performance of companies depends upon good management it is reasonable to assume 14

that everybody would manage well to satisfy their own best interests. For example, it is well known that team work brings better results than individuals working a natural state, it is a higher order of development which has to be worked at and sustained. Those who can achieve this excellence can obtain greater rewards, but surprisingly it is not normal. These basic principles apply to all managers and to sea staff at all levels. It is unfortunate how contractual arrangements often inhibit the development of good working practices and, as so often happens with human relationships, measures to increase levels of control can destroy motivation. The ability to optimise relationships and results is the quality of a good manager and this theme is developed in later chapters.

Safety

In his preface for The Nautical Institute's authoritative book The Management of Safety in Shipping, Captain Warren Leback, the US Maritime Administrator, makes the powerful observation: Many of the changes which have occurred in recent times enabled cost savings to be made and the economic efficiency of shipping as part of the overall transport system to improve. However it must be appreciated that there is also more competition, less return on investment, much more complicated contractual arrangements, increased pressure on time and burgeoning legislation. With all these pressures, the demands of ship operational safety, which often appears on balance sheets only as a cost item, can be overlooked. Like all disciplines, safe practices have to be learnt and impressed. Once a company loses its commitment to safety standards, it loses its ability to contain risk. This important lesson is re-learnt every time there is a marine disaster, but by that time, of course, it is too late. Penalties following avoidable accidents are becoming more severe and claims for compensation can be crippling. It has to be observed that the consequences of oil pollution in sensitive areas caused by one ship can now threaten the viability of whole companies. Safety, like economic performance, has to be managed. It is human to make errors of judgement, suffer slips and lapses and make errors in calculations. It is also human to act carelessly, to forget other people, fail to secure moving objects and mistake dial readings, bearings and measurements. A shipmaster must attend to safety first. He must ensure good habits are encouraged, correct Procedures followed, and mistakes identified and corrected. If the ship has an accident the viability of the whole operation is put in jeopardy. Having established safe working practices, it is then necessary to concentrate on the earning capacity of the voyage. Both these objectives are most efftctively achieved through. good management. This book is directed primarily at management and specifically at commercial management because safety is adequately covered in a complementary publication. This does not mean that safety is unimportant. It means that the master has to exercise command over many disciplines. It is a position which is often undervalued by those living and working ashore. However, by demonstrating a knowledge and a competence in management, the master can communicate at a higher level and so demonstrate his worth. In opening this chapter we suggested that the title shipmaster has a bell-like quality because a bell rings with a clear and authoritative sound- clarity of purpose can only be achieved if the way forward is understood. Many shipmasters believe that their job is to ensure safety and no more. However, if the ship is not viable economically then either the managers will look for a 'more economical' management on board or the vessel is likely to be sold. Our challenge is to prove that 'more economical' does not mean cheaper and, usually if not always, less well trained crews but instead is achieved through more professional management, both technical and commercial. How much better to improve the bottom line by achieving improved charter earnings than by cutting the stores budget. However, the master cannot carry out his function unless the owner clearly defines their objectives and his responsibilities. The International Safety Management Code has taken a valuable step forward in viewing the shipside and shoreside operation as a single entity with a common purpose. This gives masters the opportunity to prove that they have a role in the commercial operation of the vessel, but in order to do this, they must also have both the desire and the capability to do so.

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However, before desire and capability comes interest and knowledge - the objective of this book is to stimulate the former and, it is hoped, to add a little to the latter.

About the book

Management is considered against a firm conviction that although leadership is an essential quality for the shipmaster, the way in which it is achieved and used must reflect the social, cultural, technical and economic environment in which the vessel is operating. An understanding of the economic environment, of budgets and cashflow, is also increasingly important to the shipmaster, especially as more companies trim their shore organisations. Such knowledge can also help the master to manage his resources more effectively and, when considering voyage calculations, to manage his contractual obligations under the charterparty. Managing the commercial activities of the vessel is a central theme of this book-and of the shipmaster's role. The approach taken is twofold: to explain the (mainly legal) framework within which international trade and maritime transportation is undertaken and to explore how commercial contracts can be managed most efficiently by those on board. It is here that shipowners have a crucial part to play in ensuring that the master is fully briefed about what is happening and how the owner requires his vessel to be managed. Another aspect of better economic management is found in achieving the best use of those resources available and necessary to operate the vessel and this is also addressed. Commercial efficiency and technical safety must be co-ordinated and here the shipmaster's role is pivotal although the difficulty of this balancing act is not always fully appreciated by those ashore. New initiatives are taking place within the international scene such as the implementation of the ISM Code, the introduction of competency-based training and assessment and a focus on less prescriptive legislation. And a greater role for operational risk management will also affect the way in which vessels are managed and operated. Nevertheless, accidents do happen and it is in this area that the balance between commercial and safety considerations is finely balanced and where the shipmaster will have to assess and resolve many conflicting pressures. Whatever the changes in operational practices, international maritime transport will remain a fumdamental part of the global economy and ships will continue to be bought, sold, demolished and new ones built. The final chapter looks at the master's role when a vessel is bought and at the financing behind the contract.

The role of The Nautical Institute

Commercial Management for Shipmasters is part of The Nautical Institute's programme for improving operational effectiveness at sea. The programme was introduced by a Nautical Briefing The Development of Maritime Commercial Practice and follows on as an instructional programme from the officers' handbook, Watchkeeping Safety and Cargo Management in Port, by Captain P. Roberts. In this book on watchkeeping all the basic commercial terms are defined and the role of the ship's officer responsible for cargo operations are explained. For this reason Commercial Management for Shipmasters assumes the level of knowledge outlined in Watchkeeping Safety and Cargo Management in Port and both books may need to be studied. Underlying both books is the understanding that all shipping operations are conducted for commercial reasons.

ACKNOWLEDGEMENTS

JULIAN PARKER, who primed the literary pump with his help in getting chapter one started.

REFERENCES

The Management of Safety in Shipping. The Nautical Institute, ISBN 1-870077-08-3. Watchkeeping Safety and Cargo Management in Port. The Nautical Institute, ISBN 1-870077-29-6. The Development of Maritime Commercial Practice (Nautical Briefing). The Nautical Institute.

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Chapter 2

MANAGEMENT Managing teams-planning-communicating-management and STCW Management, in the context of this chapter, is concerned with practical ways of achieving the best possible results from our most valuable, infinitely variable and increasingly scarce resource-people. The master's challenge is to achieve this, in an isolated environment within a limited period of time and, frequently, against a multi-cultural background. As EVERYONE who has entered a business bookshop knows, more trees have been sacrificed on the altar of modern management theory than almost any other subject. Many of the books, once analysed, appear to present commonsense in new clothes, or at least in new jargon. However, managing people effectively is one of the most challenging aspects of our professional career, if not of our life. Managing people means getting your relationships right in all directions; upwards with your superiors, sideways with your peer group, downwards with your suboTdinates-as well as with yourself. Although we often talk of subordinates, it is important to remember that we are all people; in this way we all belong to the same peer group. The aim of this chapter is to distil some of the management techniques which can help a ship's master manage more effectively. The techniques will concentrate on three critical aspects of effective management: team building; plannings and communicating. One can argue whether team building, communicating or planning would take precedence; certainly the need to plan exists, with or without an effective team. Neither your planning nor your team members will meet expectations unless you can communicate with them in a way in which they (not you) understand. But, you may argue, why is it necessary to change; management and leadership is really quite simple: - Leadership is a trait few had and few could develop; but, if you did not naturally have it, - Seniority in a hierarchical structure (and especially in a uniform) protected you; so - You told people what to do and how to do it; and - You operated a strict chain of command and control; which meant that - You needed to be the hero with all the answers; consequently - You guarded your knowledge and information; and - You watched your back for knives. In other words, you needed to know enough ... fast enough ... about enough things ... to be right enough ... enough of the time ... to control enough things correctly ... just to keep going. Just as navigation was possible using the old, earth-centred, view of the universe, so management is possible using the hierarchical pyramid structure for managing companies and organisations. Prone to grow many levels of management, these organisations tend to be over-managed and underled. Whether we like it or not, a harsh economic climate has focused attention on these layers of management. At the same time, society is changing. just as the role of parenting is changing from autocracy to trusteeship, so is the role of managers as leaders in organisations. The concept of managing is being replaced by that of true leadership; compulsory control is being replaced by voluntary co-operation based on trust and respect leading to a commitment to common goals. No master can be expected to achieve this magical transformation in isolation and there will be times when autocratic leadership is required, although even then, if the crew is a team, the objectives will be achieved much more effectively. Management is changing in a changing society; the traditional way of ordering from above without releasing enough real power to enable the management team to achieve objectives has brought the downfall of some pretty impressive captains of industry.

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The three sections which follow-managing teams, planning, and communicating-are designed to provide some practical steps towards people-centred leadership and, hopefully, to whet the reader's appetite for further study.

Managing teams

The crew on board every vessel is arranged into a more or less traditional organisation within which formal and informal groupings will occur. These may be on a departmental basis or be along cultural, ethnic or social lines and there will certainly be divisions along hierarchical lines. Some of these groupings will be passive, some active; some will be beneficial to the efficient operation of the vessel whilst others may be counter-productive. The master's challenge is to build this assortment of groupings and individuals into an effective and cohesive team which will assist and support him in managing the vessel in the most efficient and economical way. In order to achieve this it is first necessary to know and understand the members of your team. There are many techniques for assessing, analysing and understanding individuals. Psychometric testing is increasingly used as part of an interviewing and selection process and requires a degree of specialist knowledge and training before the results can be relied on as reasonably accurate. The end results are frequently quite straight-forward and consist of identifying which are the most dominant of a range of traits. Much simpler forms of analysis, based on Observation can, with practice, also give a good indication of an individual's strengths and weaknesses. Using this knowledge, the good manager can decide how to develop the members of his team for the common good. Some of the techniques which can be used to give a deeper understanding of how people think, work and react are looked at next. They can be used to help identify strengths, which can be developed, and 'weaknesses, where support and advice may be required. With practice, they can help a ship's master get the best out of his team members as individuals and also help him use the most effective approach when dealing with the general business community. The secret of success is to choose a technique and make a habit of using it every time you meet someone new. And, from time to time, to reassess your original classifications.

Knowing yourself

There is one person you will meet in every team you are ever in. It is essential that you get to know them thoroughly, honestly and objectively. The importance of analysing ourselves as others see us cannot be over-stressed. It is not always an easy exercise, but it can pay dividends. This was well known to the philosophical ancient Greeks who were known to inscribe above the entrance to a temple the simple admonition 'KNOW THYSELF'.

It is equally important to have an idea of the skills and attributes that a successful manager needs. To the need for self-knowledge can be added another ten and these are shown in Figure 2. 1. The 11 attributes have been divided into three groups. The first group forms the foundation level of basic knowledge and information required for decision making and taking action. The central group directly affect behaviour and performance, while the third brings together the qualities which enable managers to acquire and use the basic knowledge and information required in one and two; this area also has a direct bearing on a manager's ability to manage change. A manager needs to be sensitive to events both in his internal working environment (the ship and his team) as well as the external environment , company, industry, the demand for shipping services). Especially in his internal environment, the manager needs to be sensitive to 'soft' information, such as the feelings of other people, as well as 'hard' information, such as facts and figures. In a similar way, a manager needs to be able to identify in his decision making role between the need for logical, optimising techniques and situations which call for the ability to weigh pros and cons to resolve uncertain or ambiguous situations. At times, a high level of judgement or even intuition may be needed, especially when dealing with people. Here, too, social skills and abilities are required to get things done through other people. Communicating, delegating, negotiating, resolving conflict, 18

persuading and selling and using and responding to authority and power are all skills that need to be developed. In a world where hierarchical authority, 'the master next to God,' is no longer the only pattern of management, interpersonal skills are of increasing importance. Most masters will recognise the need for emotional resilience when the stress levels rise. Effective resilience does not mean an unbending I you've got to be thick skinned' approach; self-control with a little, measured flexibility provides a longer-term, less wearing solution.

In annexes to this chapter, these I I qualities are expanded into what could be described as a managerial health check. Some may find that the increased ease of communication, especially shipshore, and the expansion of rules, regulations and procedures generates a feeling of being reactive line managers rather than proactive managing directors. Our training should develop in us a tendency to set and achieve purposeful goals and the desire and confidence to want to take command in all situations rather than merely responding to demand. The 'underlying qualities' of the third group relate to the manager's ability to develop the situation specific skills needed to address the many challenges facing the master and all managers in the conduct of their professional life. Creativity and mental agility, and the ability to think on one's feet, arc skills that can be exercised and improved by a manager who takes responsibility for his own development and learning. Finally, we return to self-knowledge; the ability to look critically at one's managerial skills. There are many techniques for this, but for a master on board simple introspection is a good place to start. Annex 2.2 lists the 11 basic qualities, each with a range of questions which should help you in your analysis the most difficult part is perfect honesty. Having completed the analysis, the next step is to set goals for self-development, always more effective if linked to a timetable. Annex 2.3 gives a range of learning goals; these can be prioritised on the basis of your view of what is most urgent or you can start with the four learning areas; self-knowledge, balanced learning habits, mental agility, and creativity. In other words, learn to learn again.

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All learning processes require evaluation which will enable you to review, and if necessary, adjust your goals-the whole process should become a rolling progression of constant improvement. For the brave, the next step is to carry out a similar analysis using a colleague to give objective feedback and to challenge your assumptions. The choice of a colleague to undertake this role can be difficult, especially in the confines of the vessel. The ideal colleague is one who is also interested in undertaking a programme of self-development.

Knowing your team

As resources become increasingly scarce, the need to work as a team increases. Whilst certain vessels-passenger ferries and cruise vessels, for example may have two distinct teams on board, on the average vessel there is only room for one team. Despite departmental demands and different functions, the team must be developed, focused and led by the master. The first step is knowing and understanding the individual members of your team. Although human beings are far too complex to be completely categorised, some simple theories can help you see the wood from the trees. Carl Jung pioneered the modern approach to the study of personality types nearly a century ago. He started with a basic two-way split and developed his theory from there on the basis that most people have one predominant function, one or two that are semi-developed and one that is underdeveloped. The four functions are Thinker, Sensor, Intuitor, and Feeler and their main characteristics, together with an indication of how such people are likely to function on board, are set out in figure 2.2. As you learn to spot the strong and weak functions in your subordinates, it will help you decide who will be most appropriate for different tasks and enable you to build an effective team. In the shipboard context, this skill in classifying your colleagues can also, as you develop it, be used in a different way. The jobs which your team have to do are often fixed around the vessel's watchkeeping requirements, with limited requirement for project or task teams. However, the knowledge and understanding gained can be used to help you develop your officers and petty officers. - Assuming your second officer shows the dominant characteristic of an Intuitor; does this leave you feeling happy about his chart-correcting reliability as opposed to his functioning as a watchkeeper in traffic?

- After reading chapter three on building a budget, come back and think how you would distribute tasks amongst the four dominant functions in your budget team. You can use this skill (the knowledge of people's dominant characteristics) upwards, too, to react to your superiors in a way which they will best understand and appreciate and also which will complement their strengths and support their weaknesses. - Assuming your superintendent or fleet manager is predominantly a Thinker, talk to him in facts and figures when he visits the vessel, but give him a brief overview to take back to the office so he can give his boss the big picture. - Conversely, if he is mainly an Intuitor, talk overview to him, but give him a detailed brief with the facts and figures. 20

ALWAYS REMEMBER, WE ARE ALL PART OF SOMEBODY'S TEAM. Like Carl Jung's four functions, many of the subsequent attempts at classifying our dominant characteristics rely on a four-way division. Each method has its adherents. The key is to choose an approach that works for you and apply it so that it becomes second nature. With practice it can be used not only to help you manage your on-board team but also to deal more effectively with the intensive person-to-person interactions which you have to handle when in port. 'How do I handle the agent in order to get the best out of him?'; 'What sort of man is the cargo surveyor-is he a big picture man, in which case the third mate can take him round and I can release the chief officer, or is he a detail man ? These techniques are an aid to Personal relationships. As with aids to navigation, they can be invaluable but need to be calibrated with visual bearings at regular intervals. Another approach to people classification is shown in Figure 2.3. This method has a strong input from the development of sales teams. It enables assessments to be drawn from relatively brief meetings, looks at motivation and the level of risk at which different personalities feel comfortable. As illustrated in Figure 2.3, much can be achieved by the use of the mark one eyeball and a little practice. One of the characteristics of our fellow human beings is their constant capacity to surprise; applied with sensitivity and common sense, the surprise can often be how well your team works together if you motivate and manage them effectively.

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22

- TO BE USED CONSTANTTLY TO UPDATE ASSESSMENTS. Managing the team

You have now got to know yourself a little better in your role as manager and can identify some of the strengths and weaknesses of the varied bunch of officers and ratings who make up your crew. Your task now is to weld them into an effective and efficient team. One important aspect of how well your prospective team will respond to your management will depend upon their evaluation of you. An increasing number of companies are finding upward evaluation at least as valuable as the more traditional appraisal system. The traditional view of management is a pyramid with employees reporting upwards and instructions flowing downwards. The recognition that much of the productive work of the company, the work that actually earns income, was carried out mainly at the lower levels of the pyramid, has led to a reversal of this traditional view. The new view sees senior management as facilitators, responsive to the needs of their subordinates and responsible for providing them with the training, resources and environment necessary to enable them to carry out their functions most effectively.

As Lindsey observed, compared to the potentially solid stability of the old model, the stability of the inverted pyramid does at least ensure that senior management is alert and responsive. Although the objective is to develop a strong, interdependent team, in Western culture at least, and especially on board, very clear direction is required from the master in his role as team leader. It must be recognised that there may be many difficulties to team building on board, especially if the shipowner, shipmanager or crew suppliers are not employing similar management cultures. In many cases, the crew will look on the vessel as a transient appointment and it is quite likely that there will be no long-term commitment nor loyalty to company, vessel or prospective team. The master may also have a number of different cultures to understand and assimilate. On the positive side, by the very nature of the isolated on-board environment, there is an ideal environment for team building. Many is the manager who has wished that he could get his team together for as little as a weekend, let alone three to four months. Also, the strict requirements of the vessel's routine can, if handled properly, be used to give form and purpose to the way in which the team operate. Conversely, the watch structure and the reduced number of crew on board today's vessels can result in a number of isolated individuals who interact little more than is necessary to hand over the watch. How, then, does the master set about building his team and, especially in an unsupportive management environment, is the effort worth while? The argument for adopting a team-building style of management is strong. It starts with the premise that the master intends to take positive command and impose his personality on the vessel, rather than operate in a management vacuum 23

hopefully held together by four bands of gold braid and directed by the Satcom link with the ship's managers or owners. This observation is not intended as a cynical indictment of the modern ship's master. Indifferent shipmanagers, frequently changing crews, a consistent pressure to reduce costs and the magic of modern communications which, combined '. . . hardly encourages good management practice' are the real culprits (Donaldson Report Safer Ships, Cleaner Seas). Fortunately, the realisation that this is not perhaps the best way to manage high value capital assets with an inherent capability to cause loss of life and pollution of the environment is showing signs of bringing a sea change in the approach of the industry towards those at the sharp end. To an extent, this is illustrated by the introduction of the IMO's Safety Management System (ISM Code) which, in its preamble, states that: The cornerstone of good safety [and any other] management is commitment from the top. In matters of safety and pollution prevention [and commercial performance], it is the commitment, competence, attitudes and motivation of individuals at all levels that determines the end result. The inserts in square brackets are the author's and the words in bold are all areas directly within the master's influence. Commitment is achieved by having a clear overall purpose and by setting identifiable and achievable goals, both at group and at individual level. This is explored under planning in the next section. It is easy to argue that competence is not under the master's control; you have what you are sent. On the other hand, you have a wealth of experience on board which, through team work, can be released from the pigeon hole labelled' third mate' or' second engineer'. By getting to know and understand your team. using the techniques discussed earlier in this section, individual strengths can be directed to the common good and weaknesses identified and supported in a constructive way. In the field of handling human resources, the shortest distance between two points is not always a straight line. -Attitudes are very often a reflection. They reflect a combination of past experience and future expectation. Your crew's attitude will also reflect your attitude towards them. To change attitudes it is necessary to build trust and demonstrate commitment and consistency. Focus on issues, behaviour and problems, not the person. Bolster selfe-confidence and self-esteem and, above all, keep the relationship constructive and focus on the desired end result-a committed member of the team; part of the family. It may be a totally new experience for many seafarers in today's Merchant Marine. Books are written about motivation and theories abound but in the end, there are only three ways to motivate. You might be a charismatic leader, in which case, you will have already skipped this chapter; or at the other end of the scale, you resort to the stick and the carrot, the proportion of punishment and reward depending upon the resources under your control. Somewhere in the middle, and fitting well with the concept of team work, is engendering self-motivation. To be truly motivated, most individuals need to feel that they are satisfying a need. These needs can be many and varied. One of the earliest, and still one the best known, classification of motivational needs, is Maslow's hierarchy of needs, shown in Figure 2.5 in its traditional pyramid format. Except in extremis, it can be assumed that the existence needs are catered for (although mere may be real concerns about the safety and security of the family and home), so attention turns to the area of people needs. First may come the social need of being part of a supportive group. Despite the isolation of maritime life, the diverse social, educational and ethnic mix of many of today's smaller crews (which limits choice), may mean that social cohesion does not take place naturally. One way in which it may be achieved is through acceptance into an efficient and effective ship's operating team. This will need the active involvement of the master, working through his management which is the natural starting point. Once members of the crew perceive the existence of a socially and professionally supportive environment, the majority will want to be valued and respected by their colleagues. They will want to be part of the team. As yon get to know your team better, other motivational needs can be identified. It is not always easy, but the prize is worth the effort. Turning people starts with you. Every interaction you have 24

with your crew may have an influence on their motivation. It will make them more or less likely to pull out all the stops when it matters, stay on after the end of the watch to lend a hand, or to err in your favour in the numerous conscious and unconscious motivational calculations they make every day.

If you are not used to this approach to management and leadership, or if you are newly promoted, it all may feel strange and different. You will be changing: FROM Doing the job Using well understood technical skills

TO An uncertain supervisory role, relying on the skills of others. Learning new managerial

skills

Doing it yourself receiving delegated tasks Delegating tasks to others. Following routine

Planning and initiating.

Controlling the result

Being judged on the quality and output of your team.

Having knowledge

Managing others, who may have more specialist knowledge.

From this point of view you will see how important it is to get the best out of your team and to achieve this they need motivating at an individual level. People who feel good about themselves generally produce good results and three powerful aids to motivation are: 1. Goal setting Be sure that everybody is clear about what you expect from them: - 80% of results come from 20% of your tasks. - Identify key areas of responsibility. - Express them in few sentences. - Include the goal and performance outcomes required. 25

Then make sure that all the members of your team know that you will be letting them know how they are doing. This may be done directly by you, but you should also teach your managers how to praise and reprimand. 2. Praising People need to know that they are valued: - Tell people you are going to let them know how they are doing. - Praise people immediately. - Tell people what they did right-be specific. - Tell people how good you feel about what they did right and what it does for colleagues and the vessel. - Stop for a moment of silence to let them feel how good you feel. - Make contact-Smile. -Use their name. -Make eye contact. -Make physical contact.* 3. Reprimanding If people are not meeting the goals which they are capable of achieving, they must understand that underperformance is not acceptable. They need to know how they are doing, but this must be constructive, not destructive. - Tell people before that you are going to let them know how they are doing. First Half of Reprimand: - Reprimand people immediately, but never in front of others. - Be specific. - Tell people how you feel about what they did wrong. - Stop for silence to let them 'feel' how you feel-do not rush on almost as if you are embarrassed about making the reprimand. Second Half of Reprimand: - Shake hands or make contact reassuringly-* - Remind them how much you value them. - Reaffirm that you think well of them but not of their performance in that situation. - Finish and forget, don't hold it against them. - When you end a reprimand with a praise, people remember their behaviour not yours. One underlying principle of motivation and, indeed, of all aspects of personnel management is that people like to be treated as individuals. This includes listening to them, fully and with commitment; no telephone calls and other interruptions, no shuffling papers, make good eye contact and, as well as listening to their words, listen to their meaning and underlying, often unspoken, message. Be aware how much of the message comes across in tone and through body language. When they truly believe that you are interested in them, then they will be interested in your objectives and be a willing member of your team. ________________________________________________________________________________ *In these contexts, physical contact might be a hand on the shoulder, and is a very powerful way of developing relationships, but must obviously be used with great care. As explained in 'Body language' later in this chapter, you are invading a person's intimate space and different nationalities respond in different ways. ----------------------------------------------------------------------------------------------------------------

Delegating

A philosopher once said: - If you want one year of prosperity, grow grain. - If you want ten years of prosperity, grow trees. - If you want 100 years of prosperity, grow people.

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His ability to run the economy might raise questions, but people have one undoubted advantage over grain and trees; you can delegate tasks to them. If you do it correctly, they will even enjoy it and ask for more. Delegating is done in many ways and for a number of different reasons. The reasons for delegating are fairly straightforward. - It increases the output of the team. - It makes the team's work more satisfying. - It allocates tasks to those most technically competent. - It develops team members' competence. - It enables you to concentrate on more productive tasks. - It demonstrates your ability as a manager. 0 It motivates (if done properly). - It develops your subordinates and gives you back-up. - It frees you from tedious and mundane tasks. - It frees you to (metaphorically) 'go fishing'. The serious side of freeing you from tedious and mundane tasks to 'go fishing' lies in your ability to undertake more productive tasks. One of these tasks is planning, and particularly planning ahead. You may well find, once you have mastered the skill of motivating, that you need to learn another new skill, that of using your time productively. It is all too easy to feel busy doing the everyday tasks others can do; often quite difficult to stir the grey cells into conceptual thinking and forward planning. A blank sheet of paper can be a significant challenge. Mind mapping (as described later) can be a useful tool on these occasions. Most of the reasons for delegating are valid but to whom do you delegate? Some of the questions you might ask are: - Which of my people is least overloaded? - Who might benefit most from the task? - How did they get on last time? - Have I avoided unplanned delegating- e.g., through snap decisions in a meeting or a conversation? - Who is the best capable to undertake this task (Thinker, Sensor, Feeler, Intuitor)? - Do you need to explain how, why and to whom you have delegated the task to other team members? - How can I prevent my staff delegating tasks to me? What am I delegating and what do I need to tell the individual to whom I am delegating? - How long the task should take, or what the deadline is. - Any particular procedures they must follow. - How or why the task arose and how it fits into the vessel's operation (the benefits). - How you intend to measure performance. - The resources and authority he or she may use. - How are you going to instruct the individual: verbally, written memo, full job plan? -in some cases it may even require a formal contract. - How do you check that the individual understands the nature and extent of the delegated task? (This can be particularly difficult in a multi-cultural environment, as discussed later in this chapter.) How do you manage the delegated task? - Should the task be delegated in parts or as a whole? - What are the natural check points so you can monitor progress without appearing to interfere. - Can you accept that the individual may perform the tasks quite adequately without doing it as you would have done? - How will you reward the individual on successful completion? How do you delegate? - Do you command?-Not unless it is an emergency; if your team is working well there is no need and much of society today would consider you have no right. - Do you instruct?-Either formally or informally, this is the main way of delegating. As with all delegation, the necessary authority must be defined and delegated if the individual's position does not already hold the required authority. Delegating authority is delegating power and this can be explosive if not handled properly. Delegating responsibility without authority rarely achieves its aim and can frustrate and de-motivate the recipient. But, it is only being honest to recognise that delegating authority is a little bit like giving away something of yourself-make sure you get it back and, with luck and good management, you will see your subordinates grow and develop their own 27

natural authority. - Do you request?-This is perfectly valid but can leave the subordinate feeling that you owe him something in return. (Requesting should not be mistaken for politeness-you can say please and thank you with an instruction.) - Do you suggest?-Only if you are avoiding the issue or are very skilfully finding ways to develop the individual's potential. - Do you consult?-Can be good team work: 'Right, we have got to achieve "this" by "then", who has any ideas how we might go about it?' - Do you plead?-Never. 'Always delegate as you would wish to be delegated to 'Find out what they know and explain to them what else they need to know, do not assume that they know the same as you. Finally, motivate but be honest; false motivation, even if it survives first scrutiny, is a great de-motivator and de-motivation has a long shelf-life.

Making decisions

Rule of the Road apart, most decisions are a choice between alternative courses of action, neither of which is completely right or wrong. One of the greatest inhibitors to decision making is the fear of being wrong whilst all successful professionals will admit to making many wrong decisions-they just made more right ones.

- Endeavour to make your decisions only when you have the best available information-a series of (contradictory) short-term decisions impresses no one. - Prioritise your decisions, delegate those which you can, concentrate on those which only you can decide. - Do not ignore your (subjective) instincts but use (objective) information to test your conclusions. It is generally accepted that there are seven steps required to make an effective decision. 28

Step 1-Identify the problem: a great many decisions are generic-that is, they fall into distinct groupings which can best be solved by applying the appropriate generic rule, policy or principle. Different industries generate different sets of generic decisions and once this is recognised, the correct set of rules or policies can be identified and decision making speeded up. Less frequently, a decision is extraordinary and can only be dealt with on its individual merits. Step 2-Define the problem: what precisely is the nature of the problem? Check your definition against observable facts-and the opinion of your colleagues, if appropriate-make sure that you have all the relevant facts; the plausible does not necessarily represent the complete facts. Step 3-Specify the parameters: what exactly must the decision accomplish? These are the so-called boundary conditions that must be satisfied by the selected solution. Step 4-Decide the right course: select the right course of action that meets all, or most of, the specifications. Then look at what is acceptable. Step 5-Adapt the decision: in reality, there is inevitably a compromise, but achieve this by making the best decision possible first and then adapting it to the circumstances. Step 6-Implement the decision: assign the responsibility for carrying out the decision to those capable of doing so and delegate the necessary authority. Make sure that those who need to know about the decision and its consequences are informed. Step 7-Check the course made good: build feedback and monitoring into the implementation process.

Appraising your team

Before turning to the twin pillars of team management, planning and communicating, it is necessary to close the feed-back loop. Too many appraisals are periodic events (annual or end of voyage) which are approached with a degree of dread and embarrassment on both sides. And so they should be if treated in this way. The appraisal process should be ongoing, so that the formal appraisal interview and reporting is no more than a confirmation of what is known and understood by both parties. Prepare for the appraisal carefully, so that you can be relaxed and confident. Make sure you are clear in your mind of the standards against which you are appraising your staff. Do they know the performance criteria against which you are judging them? A good job description is an essential starting point and examples of one approach to job descriptions are given in the annex to this chapter. Give each individual good notice of the date and time of the appraisal meeting-a week is reasonable-and encourage him to think about what he wants to discuss. This gives the individual something positive to think about and leads to a more productive interview and reduces unnecessary worry. In your planning, take into account the individual's cultural background and dominant 29

personality characteristics and think how best to structure your approach. It is sometimes helpful to think of the appraisal as a business meeting rather than an interview. Make sure that the meeting takes place in a private and relaxed atmosphere. A checklist for preparation: - Compare actual performance with previously agreed or established standards. - List major differences. - Analyse differences for possible causes. - Consider possible solutions/ actions. - Advise job holder to review own performance against previously agreed standards. - Agree firm time and date for interview. - Ensure sufficient time is available for the interview. - Arrange for privacy with no interruption. - Develop a framework and anticipated sequence for the interview. - Prepare notes for use in the interview.

START AND END ON A HIGH BUT NEVER IGNORE UNSATISFACTORY PERFORMANCE Think carefully about how you will open the interview. A cheerful 'Good morning Third, is everything still all right with you for our meeting?' is infinitely better than 'Sorry to drag you away from your work but we've got to get these appraisals done.' Prepare the end of the interview so you can conclude on a positive note; your objective is to encourage your team members to try harder and do better. Nevertheless, unsatisfactory performance must be addressed. An employee will see no reason to change performance if it appears to be accepted by the organisation, even if this acceptance is by default. It is generally believed that at least 50 per cent of performance problems occur because of lack of feedback. Try not to be judgemental or authoritarian; draw the individual out by using open questions: How? Why? What? When? Who? Example: 'How can we reduce cargo claims?' will draw out an opinion or expression of feeling. Reflective questions pick up on the other person's statement and repeat it in the form of a question. Example: Officer: 'Cargo claims would be reduced if we modified the procedures for taking samples.' Master: 'You are convinced that the level can be reduced?' Directive questions are useful in soliciting information about a particular point or issue and are usually reserved until the other person has finished talking on the subject: Example: Master: 'If you are convinced that we can reduce cargo claims, what are the steps you would take and when would you take them?' Open, reflective and directive questions are all useful techniques to draw the individual into a thorough discussion of job performance and personal development. One major company has introduced a questionnaire which is completed anonymously by all employees every six months as part of an upward appraisal of management. Whilst the use of upward appraisal is not being advocated as it requires a high degree of expert counselling to ensure that it works effectively, the 36 questions do make both an effective checklist of management style and a useful prompt of questions to be used in an appraisal. The tone of the questioning is also important as indicated in Table 2.7, but, don't forget, you learn more by listening than by talking. Finally, who should you appraise? There is a growing body of opinion that every employee should be appraised by his or her immediate superior, or at least the departmental head should do the job. On the average vessel, this would leave the master with two appraisals, the chief officer and the chief engineer. Since the chief engineer's performance criteria are increasingly managerial and decreasingly technical, this should not cause a problem.

Planning

In some ways planning is second nature to us all but, perhaps because of this very reason, we frequently do not do it well. Professional competence can lead us into thinking that areas in which we should plan, and plan with our teams, and make contingency plans, such as a port call, are all part of the routine of the voyage. 30

Planning means collecting and collating information, it means being prepared for the unexpected, it means ensuring that your team knows what you intend to do and what you want them to do. Planning means having a plan if things do not go according to plan; it results in everyone pulling in the same direction and it enables you to get the very best results from the, sometimes limited, resources at your disposal. Planning is effective and efficient.

The SAS (Special Air Service) has a planning principle called 'the Seven P's': PROPER PLANNING AND PREPARATION PREVENTS POOR PERFORMANCE (The seventh 'P' is an emphatic adjective.) In other words:

I The need to plan is not reduced by 101 operations and procedures manuals; these are the raw materials, the skeleton, on which you build your plan. The major airlines, which probably have some of the best operational and procedures manuals, are very conscious of the need to develop their flight crews into an-effective, cohesive and responsive unit. Crew or flight deck resource management (C/FDRM) is an increasing part of flight crew training and is compulsory in aviation. The lessons of FDRM are moving into the shipping industry and the objective is 'to put people first, before technology, to get the bridge team and the engineers to co-operate as a team and share human resources.' To achieve this requires all the elements contained in this chapter; interpersonal 31

skills, linked to effective communication, all based around a common plan. In some ways, the airline industry's problem is easier; the crew meet, all having a common training background and corporate culture, they plan, they check, they take-off and, possibly with one or two intermediate airport calls, arrive at their destination and, if they are well trained, debrief-discuss what went right and what went wrong. The maximum time-span for this is probably 12 hours. The master's challenge is very different, he may be looking at a four-month period with a changing team from different cultural backgrounds. Nevertheless, during this period, just as there will be many passage plans, so there will be many activities when he should prepare a plan with his team, communicate it to all concerned and check its effectiveness after the event. Under the broad heading of planning, we shall explore: mind mapping; setting objectives; time management; risk management; managing change.

Mind mapping

There is a tendency, especially if we have been educated in a traditional way and work in a hierarchical environment, to approach planning in a linear fashion, what we may call a structured approach. This is very left brain dominated; it draws on those parts of the brain which govern language, sequential thinking and analysis, all very relevant aspects of planning, and consequently lists are drawn up of events and activities which then need prioritising and interrelating.

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Mind mapping enables a quick assessment to be made of an accident which can be used for a more formal report when time permits. Meanwhile, the assets located -in the right side of the brain are not being used. These include the ability for simultaneous thinking, conceptualising and visualising in a holistic (three dimensional) fashion. Mind mapping is a simple method of using these attributes to initiate the planning processe.g., the generation of ideas and their presentation in a form which enables the left side of the brain to use its analytical skills. Mind mapping may not be the best solution for everybody-or anybody-all of the time, but it is certainly an underutilised technique which challenges the traditional approach. For people who tend to visualise problems, it has a very definite potential. There are no strict rules for making a mind map beyond starting in the centre of the page with the central theme, in the first example the initial planning for chapter three on budgets. Upper case print (capitals) is usually used as it is easier and quicker to read. Despite a tendency for the left brain to take over, only a little prioritisation or regimentation of ideas should take place at this stage; the main aspects of a port call are placed around the central theme and generally the brain thought process will produce most of the important items first but this is not critical. Some thought will produce early and obvious linkages at the second level of activity and juxtaposing these items may simplify the mindmap. Some people like to enhance their mind map with diagrams and illustrations and, under certain- circumstances, this can help, especially in brainstorming sessions. The objective is to give the natural aptitude of the right brain free rein. Mind maps such as these have a number of other advantages. They are, for a start, easy to leave and return to. They are also quick to scan and thus can be a useful aid when discussing (the impending port-call) with colleagues. They also have a valuable role in note taking and report writing. By using the visual attributes of the brain, the number of words used can be kept to the minimum (thus TO DO BEFORE ARRIVAL need only be BEFORE ARRIVAL) and the need to 'locate' the thought or piece of information more necessary in linear note taking is obviated. This leaves more time to concentrate attention on the meeting, lecture or whatever is the subject under consideration. Similarly, for report taking, critical 33

aspects can be noted very briefly (with a time of occurrence), built on as events develop and then presented to the analytical left brain for the formal report writing later.

Setting objectives

'This is mission control.' Everybody should have a mission; most self-respecting companies have several about which they like to make formal mission statements. There is one for the shareholders, one for health and safety, quality control needs one and the International Safety Management Code is bound to want one. The mission is an important statement. It is generated as part of your (company's/vessel's/ personal) strategic plan and enshrines the long-term aim, the very raison d'etre. It is a key means of communicating the strategy and the tone of an organisation both to its customers and its employees. It is often the most difficult part of a strategic plan to agree as it should be succinct and also because it is more visible than the rest of the plan. The statement should be easily understood, and should define the business the organisation wants to be in, be measurable, differentiate the organisation from competition, be relevant to everyone and be stimulating and exciting. As well as its mission, an organisation may have a number of aims which are general statements about its ambitions. Aims are focused by the objectives which must be achieved and include the element of time. The introduction of specific numbers produces targets or goals, and to score goals, one has to be smart.

Although generally set by your mission and higher level aims, your objectives and attendant goals require resources to carry them out. As resources are finite, priorities need to be set, which requires analysis. SWOT is one well tried method of analysing and prioritising in planning: Strengths-which are to be built on; Weaknesses-which are to be cured (or avoided); Opportunities -which are to be grasped; and Threats-which are to be avoided (or removed). Strengths and weaknesses are internal characteristics of all organisations. The most common method of identifying them is brainstorming by a small group of managers. Once the key factors have been subjectively identified, detailed objective analysis is required. Problems come from trying to do the detailed analysis first. External circumstance is regarded as an opportunity or a threat, depending upon the organisation's ability to exploit it. Change is an excellent example, which might be regarded as a threat by some but an opportunity by others. Table 2.10 lists the factors, slightly modified, affecting both internal characteristics and external circumstances. Not all are under your control as master, but this should not prevent you from establishing a mission and defining objectives and setting goals for your vessel. Captain Kirk has been appointed to command m.v. Impossible, a recently purchased, secondhand vessel of indeterminate age and quality. The chief engineer is Scottish, the navigator Filipino and 34

nobody is quite sure where the chief officer comes from (but he is definitely a Thinker). Since all the senior officers are due to be working together for at least four months, Captain Kirk decides to make a plan. After sitting quietly in his cabin with a wet towel round his head for the first week of the Pacific crossing, he has decided on his main Aims and produces: Mission impossible. 'To operate an environmentally sound vessel"' which delivers charterer's cargo on time and on quality"' in the most economical fashion") &

The Mission contains a statement for: (1) The community at large and the insurer specifically; (2) The customer; (3) The owner; (4) The crew, since an efficient and economical vessel is generally less liable to trade crews downwards. Next, he called his senior officers together for a brainstorming session prior to undertaking a SWOT analysis. A variety of strengths (such as the chief engineer's previous experience on a sister vessel), weaknesses (such as the lack of stores and spares), opportunities (such as two good, long ballast passages) and threats (a rumour that managers were considering introducing a more 'cost effective' crew) were identified. One of the first aims agreed by the group (who were already beginning to see themselves as a team) was to upgrade the cargo facilities. Within this general aim a number of objectives were set. One of the objectives, given high priority and requiring resources from both deck and engine departments, was to check and repair all hatch seals. The master, who was beginning to get good at this, then delegated the task of setting out specific targets to the chief engineer and the chief officer. Before they left he reminded them that although their goal was already specific, measurable and relevant, it also needed to be achievable and time-bound.

Time management

Planning and management are directly involved with the use and allocation of resources and your main resources are listed below: 1. People: and, hopefully, your people are already forming an efficient and effective team;' 2. Materials: your vessel and its outfit and stores; although not fully under your control it can be, improved through careful management; 3. Finance: in this context, your operating, budget which is discussed in chapter 3; 35

4. Time: which is non-returnable and needs to be planned and used to maximum effect. Managing time, both your own and that of your team, is an exercise in realism and discipline. There is no avoiding the fact that time planning requires a painstaking and methodical approach. First you have to find 'Where you are at?' by analysing how you spend your day. Some recommend keeping a minute by minute diary, but you can achieve much the same by dividing your day into 30-minute segments. Compare this 'expenditure' with your personal and departmental objectives. If they do not match up, you are spending too much time on irrelevant details, and you must switch priorities. Be aware of your body's natural rhythm, although the maritime life is little respecter of this. Nevertheless, better performance can be achieved by matching your work activity to your personal rhythms; working in the morning if you are a lark or in the evening if you are an owl. Tips for good time management include: - Establish priorities-what is essential, how should you be spending the majority of your time? For all seafarers, and the master in particular, this is much more difficult than for managers in a more routine environment. Nevertheless, it is important. - Analyse and review how you use your own timebe honest and be critical and do it frequently as a matter of course. - Analyse and review the way in which you influence the way in which members of your management team use their time-are your priorities always reasonable? - Beware of clearing decks for the big job and then never getting round to it-attack it as soon as possible. - Slice the elephant' big jobs are generally accomplished by tackling a bit at a time. - What can you delegate-what should you delegate? - Always question tasks-are they important, essential, urgent, relevant-are they helping you achieve your alms? - Set conscious time targets-especially for meetings or when you are using other people's time, show that you appreciate brevity. - Recognise time wasting in yourself as well as in others and be critical of it. - Whilst you are always 'on call', guard your core time. - Take time to understand how the industry and your company works can save time and result in more efficient decisions. - Be aware of the natural rhythm of work-plan to instil enthusiasm when surges of effort are necessary. - Is what you are doing now the best use of your time?

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Risk assessment

Risk assessment, sometimes referred to as risk management, is a discipline which has developed in parallel with the insurance industry and impinges upon all our managerial and operational decisions. The decisions may be large or small and the risk analysis conscious or unconscious, but it inevitably occurs and does so with varying degrees of effectiveness. Good management uses all the managerial tools at the manager's disposal, and risk assessment is one such tool. Effective risk management comes from applying, and applying consistently, a few relatively simply disciplines to the decision-making process. The maritime industry has, perhaps, been slow in applying these techniques which have developed in high risk industries such as nuclear power and recently transferred to the offshore industry as the basis of safety cases for offshore modules. Risks associated with operating with defined and identified hazards are defined and analysed and risk management measures built into the operating systems. The maritime industry, where lives, cargoes and vessels are exposed to conditions which may. range from hurricanes to zero visibility, where there is a requirement to transport millions of tonnes of hydrocarbons and toxic chemicals across many thousands of miles of oceans or thousands of passengers across crowded sea lanes, is increasingly turning to these techniques. The maritime industry's approach to risk assessment is discussed in chapter nine.

Managing change We trained hard but it seemed that every time we were beginning to form up in teams, we would be reorganised. I was to learn later in life that we tend to meet every new situation by reorganising and a wonderful method it is for creating an illusion of progress while producing confusion, inefficiency and demoralisation. Petronius Arbiter, later a Roman governor, as a young man. Petronius Arbiter's words may have a familiar ring, but they reflect reorganisation without a clear objective and not well considered change designed to meet the challenges of a rapidly changing world. The first concept to grasp-and impart-is that real change is essential, for without it we would still be in the Dark Ages. The second is that very few of us like the challenge of change, though we might be quite happy with the final result; the condition in which we work is the result of somebody else's change. In a work environment, the reaction to the process of change will depend very much upon the skill and commitment of the manager and, on board, that is you. Change is, or should be, a response to demand and a recognition and full understanding of changes in demand is a good, if not essential, starting point if change is to be achieved successfully and effectively. Management must have clearly identified objectives which they aim to achieve through the process of change and they should be able to articulate them in a way which is understandable and relevant to all who are affected by the proposed changes. Commitment must come from the top, it should not be handed down from management level to management level, losing a degree of clarity at every level like a party game of Chinese whispers. This is not a time for delegation and, if the reason for change is not clear, then the manager responsible for implementing it is entitled to ask for clarification. Change can be perceived by the recipients either as a threat and a danger or as a challenge and an opportunity, depending partly upon the recipient's nature and partly on the way in which the concept of change is introduced. Generally, the response will be a combination of both and almost inevitably the individual, and the group, will pass through the four stages illustrated in figure 2.12 and they will require their manager's help to emerge as a committed and effective team.

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Denial is the first response to a major change in a person's familiar routines, whether it is in their personal or working life and it can be typified by shock and numbness. A tendency to withdraw (if we ignore it, it may go away) and an attitude of 'business as usual' may be evident. It is important to recognise this reaction and not be fooled into believing that business as usual and a low level of overt resistance means that the organisation can move straight into the new structure with full commitment (the so-called Tarzan swing). Confront individuals with information, let them know that change will happen and explain what to expect and suggest actions they can take to adjust to the change. Give them time (if possible; as always, time is a great healer) and then arrange planning sessions to talk things over. During the resistance phase you will see anger, blame, anxiety, depression; even in some cases, a downing of tools. The onset of this phase will be signalled by a much more overt reaction and it is the time to listen, to acknowledge feelings, to respond sympathetically and to encourage people to explore the possibilities of the new situation. Do not try and talk people out of their feelings, it is the time to listen carefully to get behind the overt response to the real concerns so that they can be addressed constructively. Although the management of change should not be delegated, it is generally advisable to have at least one other manager committed to the process of change at this stage (but not all management as this can produce a them-and-us reaction) as this will prevent the group focusing their resistance to change on you and therefore rejecting your counselling while at the same time it enables you to listen in stereo for the group's true concerns. It is also quite acceptable and frequently beneficial for the team to recognise that you too have had doubts and fears about the changes. If this stage has been handled successfully, individuals should be moving into the phase of exploration. This may be expressed by over preparation, confusion, even chaos, and an upsurge of energy; 'Let's try this, or that, and what about this ... ?' Lots of energy and new ideas but a lack of confidence. One of the problems of this stage is that different individuals may reach it at different times; if this is markedly apparent, take control of the situation by using the more advanced individuals to establish a pilot team or your more potentially committed individuals may revert to resistance. This is the phase of training. Concentrate on priorities and set short-term achievable goals. Form project teams as mentioned and encourage brainstorming and planning sessions-but remember, you are setting the course, do not let enthusiasm head you in the wrong direction or towards the wrong objectives. Commitment occurs when individuals begin working cohesively together as a team; there is cooperation and better co-ordination. Those who are most committed may already be looking for the next challenge. This is the time to set long-term goals and to concentrate on team building. Create your mission statement and acknowledge and reward those responding to the change. Look ahead and, in looking ahead, try to build in the realisation that change is a natural part of progress.

Communicating

Nothing can be achieved without communication in one form or another; and communication does take many different forms. The first and perhaps most obvious form is communication as the method of making our needs and desires known. The second and perhaps most important is communication as a means of understanding other people's needs and desires. Below this lies a third level of often subconscious communication by which our tone and actions can send messages which either raise or lower barriers to real interpersonal co-operation. The first golden rule of communication always has been 'God gave us two ears but only one mouth so that we can Rx twice as much as we Tx'. As we become more senior and people are constrained to listen to us because of our rank, this rule becomes ever more important. The second golden rule of communicating is not to get your message across, it is 'To ensure that the receiver understands, therefore, the communication should be transmitted in the receiver's (cultural) language rather than in the transmitter's'. Context is also important: 'What does the intended recipient know prior to my communication?', 'What does he need to know in order to carry out my requirements?' Ergo, the contents of my communication to them which may be very different in construction from the way in which the information reached me. 39

Communication is about perspective, and yours is not the only, nor necessarily, the most important. Within this section we shall look at the more formal methods of communicating: verbal, written, telephoning, meetings and briefings as well as at negotiating and at the 'second level' communications, including: body language and communicating in a multi-cultural environment.

Managing meetings

Meetings have a bad press? A committee is a cul de sac down which ideas are lured and then quietly strangled. Scientist Sir Barnett Cocks. or In committees trivial matters are handled promptly, important matters are never solved. Lord Gresham.

Nevertheless, no other method of collectively exchanging information has been discovered and well managed meetings can be effective. They can range from the formal, highly structured, events, through informal gatherings and briefings to a meeting of only two people, and these require the same forethought and consideration as their larger counterparts. Indeed, it is not a bad idea to have a formal meeting with yourself from time to time. A useful checklist when preparing for a meeting contains the following: 1. What is the meeting's objective and what style should it be? Some of the alternatives are: - A formal meeting, which tends to have a rigid, structured agenda and specific attendees. A ship's safety meeting is one example. - An informal meeting, often ad hoc-'It's time we talked'-or a sub-group. They tend to deal with specific issues and the outcome should be a plan or recommendation. - A planned informal meeting-you decide the objective and select the participants. The style of these meetings makes them an ideal vehicle for a wide range of purposes. - Brainstorming sessions, which require sensitive handling as many people have difficulty in lifting their sights from everyday work and real innovators may fear scorn from their peers. - Briefing meetings, called to disseminate information rapidly. Such meetings should be brief and usually followed by a further meeting to gather feedback. - Appraisals and other one-to-one situations which, as stated, require similar careful preparation as do large meetings. 2. Who needs to attend, when and where is convenient? With a watchkeeping system, this needs careful thought and organisation. The location needs to provide seating compatible with the style of the meeting. A formal meeting is satisfactory round a normal rectangular meeting table; a round table is better for informal meetings aimed at a participative or team result, and easy chairs can be used for a briefing. The main point is to think it through and pay attention to detail. A formal rectangular table with pads and pencils set out can send a strong signal about your approach to the meeting and its seriousness. For budget meetings, for example, plenty of room will be required for papers and backup material. 3. What should be in the agenda and is it necessary to circulate any information first? - Every meeting should have an agenda, even if it is not a formal written one. In some cases, it is useful to circulate a draft agenda first and request input from the participants. - Think carefully about the order of the agenda items and your objectives; do the items need timing as well as ranking? - Make sure that the previous minutes are circulated if they are to be formally agreed. 4. Are there any areas which will generate conflict of interest? - Consider how you will handle a confrontation. 5. Are there any new members? - They may require special briefing. 6. Are any other facilities required? 40

- Pens, paper, drinks, food-much can be achieved over the relaxed atmosphere of a meal, but circulating coffee pots can disrupt the flow of a discussion. 7. How will minutes be handled? - How promptly are minutes required; who will prepare them? - It is inevitably better to list action items, together with the person delegated as responsible and a time frame. 8. If you are chairing the meeting: - Be more concerned with the process than the content, keep the meeting moving and stay out of the discussion. Summarise frequently and definitelv at the end of each agenda item. Agree the action to be taken, by whom, by when. In a formal external meeting at which you have a particular point to make, consider whether to hand over the chairmanship for that item. - Control the strong; encourage the weak, their input can be just as valid. - Don't watch the speaker, watch the audience for reaction. - Ensure that disagreements are made public and discussed rather than taken away to fester-step in decisively if people begin quarrelling. - Keep one careful eye on the time, pace the meeting. 9. If you are attending a meeting: - Don't be in a hurry to speak: let others make their case, then construct yours by logically summarising their views, concluding in favour of your own. - Develop your skills of improvisation: have contingency plans, do not become so absorbed in the detail that you lose touch with the feel of the meeting. - If you know that someone else shares your views, let them speak first, then summarise and reinforce their arguments. - If you do not know the answer to a question, do not bluff-promise an early reply, and deliver. - Do your research, be clear about your objective, find out who supports and who opposes your views, plan your contribution but stay flexible. 10. There are five types of participant you will meet at a meeting: 1. The unknowns-observe and classify as soon as possible. 2. The passionates-who will usually only utter when they feel or fear that an issue will impinge on them. Generally you will know what they are passionate about, more often it is against than for. Passionates are more persuasive and less persuadable than anyone else and there is generally little to be gained in trying to canvass them. 3. The mums-who will stay silent almost throughout, so, unless a vote is being taken, there is little to be gained by trying to activate them. 4. The talkers-excluding the sub-species windbag, they are valuable contributors and can and should be canvassed. 5. The seers-those who only speak when they have something to say. It sounds very fine but seers are not often malleable and do not contribute to those subjects on which they do not have a point of view. A meeting full of seers would achieve little and, as D.H. Lawrence observed. 'Clever men are unpleasant animals'. Take time to consider the cultural background to the meeting; in some parts of the world, meetings are considered only to be the formal endorsement of decisions made informally elsewhere. Sometimes called the seven deadly skills, effective meeting behaviour has been classified into aggression, conciliation, enthusiasm, interrogation, patience, sulks, and withdrawal. Learn how to use them and how to handle them. Aggression is divided between angry aggression, which should never be used, and instrumental aggression, which must be used sparingly. Conciliation is an underrated weapon which like aggression, against which it is usually deployed, should be used sparingly. If you are a forceful character by nature, a pre-emptive apology (It's my fault) can be especially effective-this works on the supposition that a humble apology stimulates sympathy, stimulates guilt, stimulates generosity. Enthusiasm-usually a popular approach as long as it is not overdone; parry and thrust rather than monologue and filibuster. Interrogation-as well as being used for such basic reasons as getting more information or confirming a statement, questions can be used to: - Delay decisions: 'Surely we had better wait until we get all the facts before ... ?' - Incite arguments: 'Are you actually trying to claim that ... ?' or, done totally obliquely: 'Personally, 41

I don't feel strongly about this, Bill, but how can you ignore Sven's basic argument ... ?' - Camouflage statements: 'Aren't you interested in whether we finish cleaning the holds on time ... ?' Patience-contrary to popular belief, few successful people are impatient although they may well employ impatience successfully. Sulks-must be used with extreme caution and must not be self-piteous-its sole aim is to elicit sympathy. Research has indicated that people give more help to those whom they believe to be dependent upon them. Withdrawal-can be effective withdrawal-a combination of stubborness and sulks-or physical withdrawal, which tends to be pretty final. In formal situations, seating arrangements can affect the conduct of meetings and indicate approach and attitude.

In the situation depicted, which could well represent the master in his office receiving port agents and other visitors, Bi is seated in the competitive-defensive position of normal business negotiation. B2 has moved to an independent position and may be signalling detachment or disinterest. B3, the side position, is what every salesman tries to achieve as he partially reduces the physical barrier of the desk without aggressively invading A's territory. B4, the co-operative position, is achieved through close friendship or by invitation. Team-work can also be positively affected by formal and non-formal seating plans and this is discussed in the next section. Desmond Morris raised interest in body language in his book Manwatching- an awareness of body language can be a useful adjunct to the manager's skills. One final thought, from William H. Wyte Jr.: People very rarely think in groups: they talk together, they exchange information, they adjudicate, they make compromises. But they do not think.

Paper and telecommunications I am sorry I wrote such a long letter, I didn't have time to write a short one. Winston Churchill Before communicating by written report or by telephone-think, plan, prepare. 1. Telephone techniques The telephone has become as much a part of business life as the written word and, with the increasing development of satellite communications, has become so at sea. Nevertheless, it is still expensive and the aim must be to be brief, clear and concise. This can only be achieved by planning what you wish to communicate prior to commencing the call-how many times do you remember a critical question just after the telephone call ends? It is easy to think you have planned a call, it is sensible to know you have by writing down the items which you wish to discuss. 42

In the section on body language we quote research that indicates that up to 55% of the impact of a message is non-verbal expressions and actions and only 7% is words. Consequently, our tone and inflection need emphasising to enhance our message. An essential requirement is: - Know and state the purpose of the conversationthis may seem obvious but you cannot see the puzzled frown on the other party's face over the phone. Points to note are: - Intrusion: Some people resent even the brief loss of control over their lives when answering the phone. - Language: needs to be simple and uncomplicated. - Excessive intimacy: you invade someone's ear; any closer and you would risk a charge of assault. - Voice power: the voice is a great reflector- internal feelings quickly communicate, regardless of distance. - Distraction: doodling, ruffling papers, and typing are all possible whilst talking; however, it quickly communicates when you are not attentive. - Speed: the rapid nature of the phone can wrongly suggest that issues have been fully resolved. - Energy: it requires extra effort to make a conversation between two voices succeed. - Body language: there is none directly, but it does reflect through your tone. It can help to stand up to conclude a telephone call. - Cost: cumulatively, the cost is high-prepare and help reduce the number of calls. 2. Reports and letters Written communications: - Enable the recipient to retain and study information for as long as required; - Allow many people access to the same information; - Provide proof of action; - Register and emphasise your views; - Record information for future reference; They do not: - Give the opportunity for immediate feedback. Winston Churchill again: i) The aim should be reports which set out the main points in a series of short, crisp paragraphs. ii) Often the occasion can be met by submitting not a full dress report but an aide memoir ... which can be expressed orally [or through attached appendices]. iii) ... woolly phrases are mere padding ... Let us not shrink from using the short, expressive phrase, even if it is conversational. Your written output will have to compete for attention when it arrives at its destination, so be brief whenever you can: short memos and reports get read; short sentences are understood. Combine the two and you are winning. Most seafarers are brought up to make chronological reports; logbook entries driven by the precise time of a series of events. In many circumstances this approach is both correct and suitable and it enables others to draw out the information which they require. However, there are times when the sequence of information should be driven by events rather than times and it is not unusual to find expensive advisers recasting ship's reports when this could, and should, have been done on board. When preparing a report, think who is going to use it and what they will want to know. Then design your report to meet these needs-the mind mapping techniques mentioned earlier can be very useful under these circumstances. In the same way, layout is important. - Clear subject headings, preferably numbered. - A contents list. - A clear statement of subject or objectives. - A concise summary or conclusion-a busy manager will read this first. Remember this when you are drafting it. - Wide margins and generous space at top and bottom makes the report easier on the eye and allows readers to make notes. The first rule of style is to have something to say. The second rule of style is to control yourself when, by chance, you have two things to say; say one first then the other, not both at the same time. George Polya, Hungary. 43

For further reading consult Written Communications for Business, Nautical Briefing, 1992.

Body language

Especially in a multi-cultural environment, a basic knowledge of body language can act as a useful guide to other people's, often unspoken, thoughts and feelings. As early as 1872, Charles Darwin was studying scientifically The Expression of the Emotions in Man and Animals. Subsequent research (Mehrabian) indicated that the total impact of a message is about: - 7% verbal (words only). - 38% vocal (including tone and inflection). - 55% non-verbal (expressions, actions). Thus, being- economical with the truth is easier from behind a desk-where much of your body language is shielded-or over the telephone. Conversely, in the words of one author: 'Some people, whose jobs involve lying, such as politicians, lawyers, actors and television announcers, have refined their body gestures to a point where it is difficult to "see" the lie'. It is well known that animals claim a territory and although human beings do not usually mark theirs in the same way, they too have defined territories which we should enter with a level of awareness. This personal space divides into a number of zones, the size of which varies with both culture and temperament.

The intimate zone is by far the most important as it is the zone that a person guards as if it were his own property. Only those who are emotionally close to that person are invited to enter it-inadvertent entry by others can quickly lead to feelings of hostility or defensiveness. Willing co-operation is not achieved through authority exercised in a person's intimate zone. It can cause problems if a superior, with an intimate zone of 15-20cm, inadvertently enters the 40cm intimate zone of a junior. The personal zone is the distance we stand from work colleagues, at social functions and friendly gatherings. It is the working zone-its inner edge is roughly the distance of a handshake and its outer edge is roughly the width of a desk. The social zone represents the distance which we stand from strangers, and the public zone is the comfortable distance which we would choose to stand if we are addressing a group of people. Generally speaking, North Europeans and North Americans have a larger spatial requirement than Southern Europeans or Asians. Thus, for example, a Filipino or Chinese crew member may well naturally stand 'uncomfortably' close to a Northern European. Country dwellers also tend to have larger spatial zones than city dwellers (note how closely people stand when they shake hands) and people from sparsely populated areas may greet without physical contact. Many of the non-verbal signals which we use are well known and include the crossed arms and legs of defensive disinterest or displeasure. Leaning forward denoting hostility and leaning back, especially with the hands behind the head, indicating superiority, confidence or dominance. Most body signals centre around the closed body, closed attitude-open body, open attitude illustrated in Figure 2.14. By becoming sensitive to such signals, a good manager can adjust his approach to improve his communication.

44

Virtually all the communications in our working environment, both verbal and written, are, to some extent, a negotiation. Very few negotiations on board, unless the crew mutiny or strike, will become a fully fledged, formal, negotiation but, as giving and taking orders becomes a less acceptable aspect of business behaviour, you will regularly find yourself having to negotiate with peers, subordinates and your senior managers in order to achieve wholehearted commitment to your preferred plan of action. In theory, conflicts are resolved by reference to who is 'right'-assuming that right can be defined, again more difficult in a multi-cultural environment. Reality is even more complex, with its systems of favours done and owing. Negotiations will be both internal (within the ship team) and external, involving agents, chandlers, charterers, surveyors and, quite frequently, your managers. Of these, the internal negotiations have a particular potential for being divisive and there is a greater need for a win/win outcome. In other words, both parties should come away from the negotiation feeling satisfied with the outcome. This does not happen by accident and is one of the objectives a skilled manager takes into the negotiation. Introducing a new style of (team) management may well involve you in negotiations, especially with other departments. All parties to a negotiation must perceive that they have needs which require satisfying-you may find it necessary to demonstrate to the other side that a need exists which your objective will satisfy. (As in selling, you are showing the other party measurable benefits). Timing is an important but frequently overlooked ingredient and has two main points: - Is the timing right (for the organisation to accept the idea which you are trying to implement)? - Is it the right time to tackle the individual, is he or she under pressure, busy, depressed or in a bad-temper (no letter from home-be sensitive to small issues)? External negotiations will set their own agenda, although some can be predicted. Negotiating a dry-dock or repair contract, or the price of stores, is predictable and tends to follow standard patterns. Theoretically (although it is less clear in practice) there are four stages to a formal negotiation:

45

Negotiating

1. Preparation A large part of this is intelligence gathering; researching the problem and selecting your objective. Almost as important is trying to identify the other parties' main objectives. These may seem obvious- e.g., the chandler wants the highest price for his produce, but this may not be so. Perhaps he lost a contract to supply a cruise ship the day before and his main priority is cash flow, or moving a surplus of fresh food. Intelligence gathering may help identify such opportunities, especially if you can be flexible with your requirement. 'You can have any colour so long as it is black' said Henry Ford. Maybe this is your best solution on the basis of a cost-benefit analysis. What management-speak calls situational negotiation may also take place at this early stage. This is indirect negotiation using third parties or the grapevine (or the media in political or employer-union situations). At its most simplistic, 'we are intending to tank clean in X unless we can find a better solution' will generally elicit a better price than 'we must tank clean now'. 2. Negotiation Based on your preparation, which has included the identification of factors which support your objectives, you should have the following general principles in mind: - What is the ideal situation I would like to achieve? - What is the worst situation I can accept (this may call for a quick risk assessment)? - What reserves do I have (P&I representative, refer to managers/owners)? - What concessions can I make and in what order? - What is my weakest point and how do I defend it? - Do I need to work with a colleague as a negotiating team? - Let your opponents do plenty of talking-listen actively and observe their body language. - Ask plenty of questions-probe. - Be non-committal about their proposals or expectations. - Speak as firmly and assertively as may be necessary but never (actually) lose your temper. - If you need time to think, call for time out. Try to avoid thinking on your feet. - Summarise and spell out the implications. - Give reasons for your position. - Recognise your opponent's need to save face. Try for a win/win solution. - Review your performance afterwards and finally, unless you are really in for the kill and not expecting to return: - Leave your opponents the 'price of the bus fare home'. If possible, try and have support on your side of the table and discuss and agree your roles, as well as your objectives beforehand. Nothing weakens your position more than a negotiation within the negotiating team, although time out to discuss a revised proposal is a perfectly sensible and acceptable tactic. The supporting cast's role will mainly be to observe, take notes and offer discreet advice. However, specialists can effectively be let loose on a diversionary technical discussion if it becomes necessary to rethink your strategy on the hoof. The good guy/bad guy technique can ' be used although this is less negotiation than interrogation.

3. Consolidation

Once the negotiation stage of a contract has been concluded, it must be translated into a formal contract. This may be verbal and a handshake at one end of the spectrum or several volumes of contractual documentation at the other. 'We'll draw up the contract' may sound a very generous offer after a protracted negotiation during a busy port stay, but never forget the old adage that he who writes the minutes (or contract) is king. Take a deep breath and suggest confirming the main points there and then or ask for a recap (standard practice in charterparty negotiations). If a point is not understood or clear, clarify it now.

4. Execution

Not of the contractors but of the contract. Negotiations continue until the scheme of work of the supply item is complete and the final price agreed. As is discussed in chapter six, contracts need to be project managed whether they be charterparties or repair contracts. Address disputes as they arise, or, if not possible, keep accurate records, and compare them with your contractor's record of the same event. 46

5. Conclusion

In a charterparty, this may be the off-hire survey and in a repair contract it includes the agreement on final price, taking into account the inevitable additional (and cancelled) items. The point to remember is that this is an extension of the same negotiation which you initiated when you started your first intelligence gathering. If you have managed to ensure that the contract fairly reflected the agreement and if disputes during execution have been resolved promptly, this phase of the negotiation can be quick and relatively painless. And remember, it needs to be; you will generally be under time pressure and needing to sail-not the standpoint from which to initiate a renegotiation or resolve fundamental disputes regarding the interpretation of the contract. That is the basis of a large, formal negotiation which can be predicted and for which you can prepare. Other negotiations will arrive out of the blue-or more probably out of a cold, wet night shortly before you are due to sail. Chief officer: 'Half this steel is wet and most of it is already showing signs of rust.' Master: Then I am going to have to clause the bills of lading'. Shipper: Your charterparty states clearly that you have to sign clean bills of lading'. This is a stand-off situation in three short sentences; a cardinal principle of negotiating is to avoid,reaching a fixed position too quickly and, if possible, buy time (may not be possible but a standoff takes time too) and share the problem. Master.- 'Then we have a problem (let me call my P&I representative); I'll get some coffee and we can sit down and find a solution'. Remember too, the thesis of this book-we are offering a service, who are our customers?

Multi-cultural environments

All subjects need at least one impressive word and ethnocentrism is the understanding of how cultural perceptions and assumptions affect us. Virtually every seafarer works in a multi-cultural environment and many work with multi-cultural crews and you, as master, need to develop them into an effective team. Misunderstanding can start with language, and since the natural English speakers tend to be poor linguists, a lack of understanding of the problems of translation. This starts with the need to divert part of one's mental capacity to the task of translating into or out of the language in which thinking is undertaken. Thus, whilst in a single language interaction, 100% attention can be devoted to understanding the problem, this is not so if a language barrier is being crossed. It is also worth remembering that as senior managers, we tend to transmit a lot more than we receive; their problem is greater than ours. Not only are the words different in different cultures but the structure, grammar and concept can be too. In bi-national conversation, content and meaning pass backwards and forwards through two sets of cultural filters which may or may not give words and actions the same meaning to the receiver as they have to the originator.

47

Definitions of culture are not too helpful, but can be thought of as consisting of three dimensions, as illustrated in figure 2.15, with each dimension giving clues to the next less obviously visible inner dimension. Returning to language-even' when only 'one language is being used, different forms are used to address people at different levels of the hierarchy. Like Chinese whispers, this can distort meaning as illustrated by this light-hearted latter-day parable on educational development. In the beginning was the report and then were created the assumptions. The assumptions were without form and the report was without substance. And darkness was upon the face of the workers and they spoke unto their seniors saying: 'It is a crock of excrement and it stinketh'. And the seniors went to their heads of department and said: 'It is a pile of dung and nobody may abide the odour thereof' And the heads went to their faculty chairmen and said unto them: 'It is a vessel of fertilizer and none may abide its strength' And the faculty chairmen went to their deputy director and said: 'It contains that which aids plant growth and is very strong' And the deputy director went to the director and said unto him: 'It promoteth growth and is very strong' ' And the director went to the minister and said unto him: 'This powerful new initiative will promote the development and efficiency of lecturers and is strongly recommended'. And the minister looked upon the report and saw that it was good. And the report became policy. Fons Trompengars, in his book Riding the Waves of Culture, expounded an interesting and useful theory on the characteristics of different cultures in corporate situations. These are summarised in Table 2.16 and, whilst such extracts can be counterproductive if used for a quick fix, some aspects of multicultural crew behaviour and response can be easily recognised. Four national patterns of corporate culture are identified based on a comparison of the level of central or decentral control linked to the degree of formality in personal relationships. This produces a matrix: Decentral and Formal, Guided missile, USA, Canada, UK Formal and Central, Eiffel Tower, Denmark, Netherlands, Germany Central and Informal, Family, France, Belgium, India, Spain, Japan Informal and Decentral, Incubator, Sweden. 48

The corresponding corporate characteristics are shown in table 2.16 on page 41. These are just a few pointers to suggest that a little careful thought can result in a much more effective relationship and help build for you an effective team.

Causes and consequences of cultural differences

Dr. D. H Moreby, FNI, made the following observations with respect to communication problems inherent in a cross-cultural manning environment: As a person grows up, he or she interacts with parents, brothers, sisters, friends and with the environment. During childhood and early life he learns and adopts values on what behaviour is good' and what is 'bad' ' - what is 'fight 'and what is 'wrong.' When dealing with other people, it is important to understand that they interacted with different people and with different environmental factors so that they will have developed different values on what is 'right 'or 'wrong, "good’’ or 'bad'. A significant difference between people from different countries is their attitude towards authority and rules. This is a most important issue when considering the manning of merchant ships. By investigating managers and workers in 40 different countries, Hofstede (1979) developed a power differential index (PDT) which measures the hierarchical distance managers maintain from their subordinates and the distance that the workers see their managers are removed. A high PDT score indicates that the managers have a great deal of power over their workers and remain distant from them. A low PDT score indicates the opposite. Different factors cause high and low PDT scores as follows: High PD1 1. Tropical and subtropical 2. Less need for technology 3. More traditional agriculture and less modern industry 4. Less education of lower strata 5. Weak development of educated middle class 6. Less national wealth 7. Wealth concentrated in a small elite 8. Political power concentrated 9. Large size population 10.Historical events -colonialism 11.Less questioning of authority in general

Low PD1 Moderate to cold More need for technology Less traditional agriculture and more modern industry Higher education of lower strata Strong development of educated middle class Greater national wealth Wealth more widely distributed Political power by representation Smaller population Historical events -independence More questioning of authority in general

Later, Hofstede (1979) investigated the attitudes people held towards company rules. A high score on the rule orientation index (ROI) is when people abide by the letter of the rules even when, in the circumstances, this is against the company's best interests. A low ROI score shows that the workers use company rules as nothing more than general guidelines. Moreby (1989) applied the work environment preference schedule (WEPS) developed by Gordon (1970) to senior ships' officers and middle level shipping managers from 17 countries. A high WEPS score shows the willingness of a person to subordinate himself to the wishes of his superior (similar to a high PDI score) and to follow exactly the rules and regulations (similar to a high ROI score). By combining the results of all these investigations and using only the major shipping countries involved, the pattern is as follows:

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This pattern has very important implications for manning and shipmanagement. A shipowner, shipmanager or shipmaster employing crews from the same cluster finds it relatively easy for he does not need to change his management style. However, a shipmanager or shipmaster from one cluster (e.g., a low PDI, low ROI Scandinavian) will have to change his managerial style and become more authoritarian and more 'remote' from his crew if they consist of people from another cluster (e.g., high PDI, high ROI Indian). There are, however, shipmanagers, superintendents and senior officers from countries in the low PDI, low ROI cluster who believe very strongly in authoritarian styles of shipboard management and complete obedience to orders. Such individuals feel more 'comfortable' and prefer to manage people from the high PDI clusters. In addition to the effects of cultural differences on organizational structures and managerial styles, there are two further cultural issues that must be taken into account. Through Western eyes, the first is good and the second is bad. 1. Religion-In the Islamic and Catholic countries, religion plays an important role in the community and in every-day life. This is normally well respected and absorbed into shipboard working practices, feeding arrangements, etc. 2. Corruption-In one form or another, corruption exists in every country in the world. The only difference is that, in some countries, it is more open than in others. In some Third World countries from which crews are recruited, seafarers may have to pay for their jobs- e.g., up to half of his take home pay may have to be paid by a seaman to a clerk if he is to remain on the roster for another ship at the end of vacation. Under these circumstances seamen may try to stay on one ship for as long as possible because they simply cannot afford to take a vacation and find another seagoing job. This can present problems related to the discipline and discharge of seamen. It also affects safety and efficiency because if the good competent seaman from an area cannot afford to pay or refuse to pay the bribes, the seafarers supplied by the agent may be less competent but willing to pay. This is an important issue to be addressed and resolved by the major employers of Third World seafarers.

Management and STCW

The 1995 Annex to the IMO Convention on Standards, Training and Watchkeeping (STCW) emphasises the acquisition of skills (as opposed to just knowledge) and provides for a functional approach to certification. As reported in Seaways (September 1995), there are seven functional areas in which standards of competence are measured: - Navigation. - Cargo handling and stowage. - Controlling the operation of the ship and care for persons on board. - Marine engineering. - Electric, electronic and control engineering. - Maintenance and repair. - Radio communication. As an officer commences his training, his competence to demonstrate skills in those functional areas relevant to his job description are assessed in relation to his ability to support the more senior officers on board. These more senior officers are, in turn, assessed against their ability to demonstrate operational competence with an increasing need to be able to demonstrate managerial 50

skills as well. By the time the officer is promoted to master, managerial competence will form an important part of his capability. In the United Kingdom, this functional approach to acquiring skills by which to demonstrate competence is embodied in the National (and Scottish) Vocational Qualifications ~NVQs). When in place, the top Level 5 NVQ in maritime operations will equate to a Foreign Going Master's Certificate of Competency (subject to an additional requirement for a formal oral examination). The Level 5 NVQ in maritime operations will contain units of competence (qv) which are drawn from the middle management standards. The section is included to give a brief overview of how vocational qualifications work with particular reference to management standards.

Four key roles or functional areas were identified as encompassing all the areas in which managers operate. These are operations, finance, people, and information, and they equate to the seven functional areas identified within STCW. Each of these key roles is divided into what are called units of competence, the basic building blocks for NVQs. Each unit of competence is then subdivided into elements of competence. Thus, within the key role of being competent to manage people two of the four units of competence cover: - Developing teams, individuals and self to enhance performance. - Planning, allocating and evaluating work carried out by teams, individuals and self. Relevant elements might be: - Allocating work and evaluating teams, individuals and self against objectives; - Setting and updating work objectives for teams and individuals; - or in the functional area of managing finance under the unit of competence for monitoring and controlling the use of resources - Monitoring and controlling activities against budgets. 51

In order to be able to measure whether an individual's skills demonstrate a high enough level of competence, a number of detailed performance criteria are specified for each element. For example, two of the eight performance criteria which set the standard for monitoring and controlling activities against budgets are: - Actual income and expenditure is checked against agreed budgets at regular and appropriate intervals; and - Prompt corrective action is taken where necessary in response to actual or potentially significant deviations from budget. Since we all work within a set of organisational rules, operating policies, job descriptions etc., there will be limits to one's authority and areas of responsibility. This range of responsibility is defined by range indicators. For example: monitoring of budgets relates only to the accounting centre for which the manager has responsibility. And monitoring covers direct costs of. materials, staffing, expenses; relevant overhead costs; revenue earned by the accounting centre; and cash flow. Range statements help define the areas in which vocation assessors can assess a candidate's levels of competence against the various performance criteria for each element. Competence can be assessed by observation of the candidate performing a task at his or her work place or, if this is impractical, in a suitable simulation. Additionally, a candidate can present a portfolio of evidence (more comprehensive than a simple record book) to prove that he has achieved the required level of competence. The assessor may still require him to demonstrate some aspects of his competence and in both cases he will, through questioning, test the candidates' underpinning knowledge. Routes also exist by which prior learning, experience and qualifications may be accredited (APL, accreditation of prior learning) but good supporting evidence is essential. Candidates can only be assessed competent by a qualified vocational assessor who must be operating within the quality controls of an accredited assessment centre (frequently a college, but it can also be a shipping company). The award, which is only credited in unit size chunks, is checked by the centre's internal verifier before being advised to the awarding body for that vocational qualification (MCI or management charter initiative in the case of these qualifications). Competency-based learning and competency-based assessment of skills is going to increase-this section is designed as a brief introduction. Conclusion The knowledge and skills discussed in this chapter enable one person- i.e., the master-to manage more effectively. In the past without this higher level of awareness the individual had to cope as best he could, relying on the example set by other masters who influenced thinking, the operational requirements of the voyage, the tradition of the company and strength of character. Whilst these qualities generally ensure that ships reach port safely, it is necessary to challenge past assumptions and consider if there are better ways of obtaining results. Generally management techniques are transferable and can be applied equally well ashore as at sea. However, at sea the shipmaster is exposed to many more uncertainties than shorebased managers and so the need for good management practices is even more important than might be realised. For those wishing to take a deeper interest in management skills, The Nautical Institute runs a scheme on personal management effectiveness leading to a management diploma. The modules cover: - Setting objectives and planning. - Running effective meetings. - Managing, time. - Solving problems and making decisions. - Leading and motivating staff. - Coaching others. - Delegating. Similarly, most universities have a management faculty and may offer accredited courses by correspondence. In the UK, the Open University offers a full MBA for those with the determination to succeed.

ACKNOWLEDGEMENTS 52

IT IS ALMOST IMPOSSIBLE to write on management and management change without drawing on the skill of other authors, and this is reflected by the length of the reference list. Perhaps this only reinforces the truth that management skills are central and essential to all that we do. Thanks are due to Miles Martin at Ugland Ship Management for permission to reproduce their job descriptions. Particular thanks are also due to jenny Hill of Hill Tallack who proof-read the manuscript and suggested a number of improvements.

REFERENCES

Manager's Guide to Self-Development. Pedler, Burgoyne & Boydell: McGraw-Hill, ISBN 0-07-084924-2. Social Styles & GffT-Getting the Best from People. Hill Tallack: Human Resource Consultants. Effective Performance Appraisals. Robert B. Maddox: Kogan-Page. Meetings, Meetings. Winston Fletcher: Coronet Books, ISBN 0-340-36376-2. The Managers Book of Checklists. Derek Rowntree: Corgi, ISBN 0-552-99291-7. Riding the Waves of Culture. Forts Tromenars: Nicholas Brealey, ISBN 1-85788-033-1. The One Minute Manager. Blanchard and Johnson: Fontana. The Stages of Change. Flora/Elkind Associates: San Francisco. Communications Problems Inherent in a Cross-Cultural Manning Environment. Professor D. H. Moreby, FNI. Hierarchical Power Differences in Forty Countries. G. Hofstede. ANNEXES FOR CHAPTER 2 - Sample job description for the master. - Self-assessment and goal setting; some questions around the 11 management qualifies. - Self-assessment and goal setting; activities/learning area matrix.

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Chapter 3

BUDGETS AND MANAGEMENT INFORMATION SYSTEMS Language of budge ting-building an operating budget-management information systems-trading budgets and the voyage calculation. Increasingly, seastaff are being drawn into the budgeting process. Whether you are presented with a budget by your owners or managers, or are involved in drawing up your own vessel's budget, the budgeting process is becoming an essential part of the shipmaster's job. ALL COMMERCIAL ENTERPRISE is managed through some form of financial control. Like any form of good housekeeping, managers must know operational costs, they must understand the influences which affect these costs and they must be able to organise the company to ensure that it is profitable. All seafarers must understand this fundamental principle, for without financial viability there is no safety, no quality assurance and, indeed, no employment. It is, therefore, essential that sea staff understand the importance of good commercial management, of which budgeting and budgetary control form an important part. Good planning skills are fundamental to the success of any venture. In the same way that a prudent master plans his voyage before setting sail for the next port, so the prudent businessman plans his expected financial progress through the coming year with an annual budget. He will probably cast the budget forward three to five years as part of a strategic plan and may also produce short- or long-term forecasts, project budgets, for specific activities or new ventures. Once calculated, the budget should no more be forgotten than the course line on a chart. Just as the difference between a DR position and a fix shows the navigator how wind and tide are affecting his progress, so the difference between a venture's budgeted and its actual or estimated (financial) position will tell a businessman how his venture is performing. This difference is called the variance and is a crucial aid for the effective manager. If the budget is well constructed, the variances will enable the manager to pinpoint the cause, or causes, of any variance from his planned course. Once analysed, variances help the astute manager to take early and effective action to reduce the impact of negative influences or enhance the benefit of positive factors. A budget is not a dictum that must be followed slavishly; just as a navigator may change course to benefit from, favourable currents or avoid bad weather, so will the effective manager make the necessary adjustments to regain or improve upon his financial course through the year However, the budget remains the benchmark against which he can measure and calculate the effectiveness of his actions and should not, except as a result of fundamental changes to the budget assumptions, be changed within the budget period. If, and only if, budgets are prepared to a standard format, do they enable the manager to monitor the performance of a number of similar operating units. As such, they are fundamental tools for comparing vessel performance within a fleet. In a well ordered company, the budget format matches the management accounting system and is linked through the code of accounts as discussed later in this chapter. By the end of this chapter, you should be able to: - Understand how budgets are constructed and calculated; - Understand how to make a budget presentation and how to survive budget reviews; - Understand the relationship between budgets and management accounts and the use of codes of accounts; - Understand how to monitor actual performance against budget.

Language of budgeting

54

As with every task, there is some terminology to learn. The short glossary given below gives the most common usages but there may well be variations and it is important to clarify these before making any budget predictions. This is particularly relevant if changing companies or managers.

Terminology

Budget period (sometimes planning period): The basis is usually 12 months. This may be a calendar year, but normally corresponds to the company's financial year and is usually broken up into weekly, four weekly or monthly periods. Annual budget (or, sometimes, the annual operating plan, and frequently referred to as the budget): Financial projections are made in detail and the final budget is usually approved at board of directors level. As such, it cannot, and should not except in exceptional circumstances, be changed during the budget period and then only with board approval. This means that the annual budget does not change when you leave one charter and enter another at a different charter rate, that is part of normal trading. It will, of course, throw up variances (qv) in the actual to budget reconciliation, but that is quite normal-and, if the charter rate is higher, healthy. If the budget is revised or changed for some fundamental reason, it is good practice to clearly define it as a revised budget and logically, it should have its revised assumptions and data. Data: These are facts used in the calculation of your budget which you know to be true-your vessel's cargo-carrying capacity is (or should be) one; number of crew, classification cycle and bunker consumption could be others. Assumptions: These are beliefs; statements about the future which you, or the company, believe will be true. Freight rates during the budget period will be an assumption unless the vessel is fixed on a time-charter, in which case the income becomes data. Absolute clarity of assumptions and data used in budget calculations is the single most important factor in building and negotiating budgets since this is your chart datum. Many things may change, both during the budget negotiations and during the financial year; you may know where you are, but if you cannot remember where you started from you will not be able to calculate set and drift and make the right adjustments to achieve your objective. We will look at assumptions in greater detail. Be aware of the budget basis; different ships may have different longsplices and beware of assumptions built upon assumptions. Projections or predictions: These are the result of applying Assumptions to Data. Assumption x Data = Predictions e.g. I Freight Rates x Cargo Capacity = Trading Income Actuals and Accruals: As the year progresses, the management information system (sometimes management accounts) builds up a picture of actual financial progress which can be compared with the budget. This comparison produces a variance (qv), a kind of financial set and drift. The actual year to date (YTD) figure for cost and profit centres is calculated from the transactions which have already entered the accounting system together with a best estimate of any costs (or income) incurred but not yet in the system-these are accruals. (Accruals must, of course, be reversed out of the system when the actual transaction is formally recorded.) Estimates: The term can have two meanings. Sometimes circumstances can dictate that a vessel is to operate on a revised estimate and this may be for part or all of the budget period. It may happen, for example, if a vessel changes trade-say, a product carrier was budgeted on a specific time-charter carrying dirty products but the charter fell through and she ended up in the spot market trading clean. The overall effect at company level may not be significant enough for the formally approved budget to be changed, which would need to be sanctioned at board level but comparisons of actual against original budget would give variances (qv) not best suited to achieving good budgetary control. In such cases, revised budget may be recommended. Estimate, sometimes Forecast, is also the term used when predicting performance against budget during the balance of the budget period. That is, for the rest of the (budget) year (ROY). Journals: The generic term for all methods of making an entry into the accounting system; these days computer software ensures that a single (Journal) entry generates the double (debit/credit) 55

entry which forms the basis of the bookkeeping function. Journals provide evidence of transactions and are the method by which instructions are entered into the system. (There are also other types of evidence of transactions, a bank statement being one.) Management accounts: These are addressed later in this chapter. In best practice, they are the financial end of a general management information system (GMIS). It is the area where the budget and the financial accounting system meet in order to throw up comparisons between the two (variances). The GMIS should be able to do much more than just perform high-speed bookkeeping; it should be able to provide a wide range of historical and analytical data as well, and is a central tool in the planning process. Periodising: This is dividing the budget into usable segments. In shipping this is usually quarters or months. Periodising may be achieved by simple division (e.g. by 12) or by taking into account significant factors, such as seasonal changes or drydocking or repair periods. The approach to periodising is important when considering the cashflow. Taking the above example of drydocking, a period of no income and high expenditure, whose cash flow implications are not highlighted by simply dividing the budget into 12 equal monthly periods. Reconciliation: The essential but unexciting task of comparing the computer output with what you thought you input; mistakes need to be corrected (a contra entry made). (Like cleaning one's teeth, it needs to be done regularly, or rot sets in.) Sensitivities: A method of checking the robustness of the budget result or of the effect of changing assumptions or data. It is often done on a percentage basis and especially useful in project budgeting- e.g., what happens to the bottom line profit (in, say, pounds sterling and in which currency you pay half your operating costs), if the exchange rate in US dollars, in which you receive all your income, changes by 5% or 10%. Variances: The difference between budget and actual or estimate and the manager's major tool for analysing and correcting performance. Usually measured for the latest budget period (a month or a quarter), the year to date (YTD) and for the balance of the budget period (rest of year-ROY). Variances are either positive or negative and depend upon whether the budget item is income or expenditure. The conventions are not always the same, so beware that you understand them before entering into a discussion or making an analysis. They are also sometimes expressed in percentage terms-e.g., income is 110% of budget. Item Time-charter equivalent of freight rate ($/day) Bunker consumption Victualling

Budget 9,038 78,000 36,500

Actual 9,592 82,120 32,950

Variance + 554 -4,120 +3,550

The variances also must have an explanation, especially where figures have been consolidated and a small resultant variance might conceal significant variances from budget in a number of the subaccounts which require attention. In the examples above: The first variance might represent the budgeted T/C equivalent rate for a voyage charter predicted to take 26 days and earn US$235,000 in freight. In this case the explanation might be that the voyage was completed in 24.5 days. (T/C equivalents will be discussed later in this chapter). The explanation for variance two could be either: We budgeted a consumption of 30 tonnes per day for a 26-day passage at $100 per tonne and (1) adverse weather resulted in an increased consumption of 41.20 mt for the passage,- or (2) the actual cost of bunkers was $105.28 per tonne; or, indeed, a combination of both factors. Item three represents an annual victualling budget of $5.00 per man for a 24-man crew. Again, the reason for the positive (beneficial) cost variance requires explanation. Is it because stores were purchased at below budget cost or is it because two crew members were removed five days into the budget year? In the latter case the maintenance budget needs examining to see if the use of shore gangs has increased as a result and thus whether the overall saving is positive or negative. It cannot be emphasised too strongly that the careful analysis of variances is one of the most powerful tools for understanding what is happening, not just in your budget area (i.e., your vessel), but also across the fleet, in real as well as in financial terms. Because variances are used to correct 56

the course, it is essential that management information should be prepared and delivered in a timely fashion. An effective and efficient system is needed that gives a reasonably accurate picture of what is happening now; there is no benefit from over time-consuming detail. A final word, be very suspicious of small variances covering a number of budget items. Such variances inevitably cover large and opposite variances in underlying areas of activity, any one of %%7hicb can suddenly run out of control. And to monitor variances properly, it is essential to understand the basic budget assumptions. Budget consolidation: Company or group budgets are constructed by consolidating individual Operating unit budgets- e.g., similar types of vessel or vessels operating in the same trade or geographical areas. Because of this, it is essential that all of the individual operating unit budgets use the same data and assumptions. Because budget preparation and consolidation is a time-consuming process, there is frequently severe time pressure on managers responsible for unit level budgets. Strategic budget: Part of the strategic plan and often calculated by projecting the annual budget forward using given rates of inflation. Specific adjustments may be made for major items such as dry-docking and special surveys or for anticipated changes in freight rates or levels of economic activity affecting local or international trading conditions. This helps the company not only to understand its overall future trading opportunities but also its future cash position. Project budget: A budget made for a specific purpose. This could range from a long-term (10 years or more) calculation to assess the viability of purchasing a new vessel to a one- or two-week detailed budget for a repair period. One of the most common project budgets is the voyage charter calculation explored later in this chapter.

Format for a vessel budget

The format set out in figure 3.1 is one example of how a vessel's income and costs can be organised into logical groupings and be used for creating budgets and monitoring performance. The overall budget is divided into three distinct fields (defined as 'all the entries collectively' relating to that specific activity). These are trading, operating and financial, of which the operating budget is of most relevance to the shipmaster. Field 3-financial: This relates to the cost involved in owning the vessel and is primarily the province of the commercial or finance department. At its simplest, it may be represented by the payment of bareboat hire for a vessel on demise charter. For a vessel financed by a bank loan it will include loan interest- and depreciation (on a profit and loss accounting basis) or loan interest and loan instalments (on a cash-flow basis). Field 2-operating costs: This represents the cost of manning, maintaining, storing and insuring the vessel and having it in all respects ready to commence trading. This field may also incorporate an allocation of the company's establishment costs (overheads and administration) which are out with the vessel's control. The costs which are directly related to the vessel, often referred to as the running costs, are very much the province of the master and his staff. The running costs, which must cover the whole of the budget period, when divided by the number of days within the period, give daily running costs (DRC), which is a universal measure of vessel operating costs and will appear again in the calculation of voyage charters. It is sometimes argued that depreciation should be shown as part of the operating costs since it reflects the historical cost of the vessel spread over its economic life, but this is not general practice. Field 1-trading: This field covers the income generated by the commercial activity of the vessel, such as freight income, charter hire or passenger revenue, and the costs directly related to earning that income. These costs include brokerage commission, port and agency costs and, when trading on a voyage basis, bunker costs and the costs of preparing and surveying the holds or tanks for cargo. It should also make provision for ballasting and positioning voyage costs. In order to achieve manageable calculations, budgets for vessels spot trading are usually calculated using a time-charter equivalent rate multiplied by the number of trading days less estimated off hire. Trading costs are calculated for each separate voyage in a voyage calculation-in effect, a mini-project budget. Figure 3.1 sets out a typical vessel budget format and contains definitions for the individual budget components. It is recommended that these are studied before proceeding further. VESSEL BUDGET FORMAT 57

Field 1 Trading days note 1 (offhire) note 2 Gross trading income note 3 (Owner's expenses) note 4 Net trading income note 5 Field 2 (Crew costs) note 6 (Repair & maintenance) note 7 (Stores and spares) note 8 (Victualling & pantry stores) note 9 (Insurance) note 10 (Franchise/uncovered average) note 11 (Sub total) (Drydocking)* (Classification) * note 12 (Modifications) * note 13 (Sub-total-running costs) note 14 Gross vessel income (Overheads) note 15 (Administration) note 16 Net vessel income Field 3 Profit and loss (Loan interest) (Depreciation) Profit or (Loss)

Cash flow note 17 (Loan interest) note 18 (Loan instalments) note 19 Cash flow (Positive or negative) Field I represents the trading activities of the vessel. Field 2 represents the vessel's operating costs. Field 3 represents the cost of owning the vessel. *represents costs which may be spread over more than one year (see notes). Figure 3. 1 Sample vessel budget format

Field 1: trading days

Note 1-trading days: The number of days within the budget of accounting period, usually 365. Otherwise the number of days within the budget period from acquisition/reactivation (or until disposal). Note 2-off-hire: A combination of. (a) Off-service-The number of days within the budget period which it is estimated that the vessel will be unavailable for trading due to technical defects. For a modern, well maintained vessel, this should be at maximum three days except, of course, during dry-docking years, and many companies might argue for less. It is one of the master's main functions to ensure that this period is as low as possible; he must always aim for zero off service. (b) Idle days-The number of days that it is estimated that the vessel will be unfixed. For a vessel on a 12-month time-charter this will be the same as the off-service estimate; for a vessel trading on the spot market, it will depend upon the current perception of the market for that vesseli.e., it includes any idle time between fixtures. Note 3-gross trading income: This may be made up from passenger receipts, container freight or charter hire. The charter hire may be a known or anticipated time-charter rate (budget data or budget assumption) or, if the vessel is predicted to work the spot market on voyage charter, the time-charter equivalent rate is frequently used for ease of calculation. Since the budget will normally be stated in one currency and earnings (and costs) may be in several, clearly stated predictions have to be made on foreign exchange rates. 58

Note 4-owner's expenses: The costs incurred by trading the vessel. For a time-chartered vessel this will comprise the broker's commission and any bunkers for owner's account-e.g., for positioning voyages and any initial cleaning of tanks/holds to meet charter description and any costs incurred whilst offhire (some companies may well include these costs within the operating cost section of the budget). For a vessel operating on voyage charters, these costs are considerable and include all bunkers and port expenses, etc., but these are accounted for by the use of a time-charter equivalent rate and not usually estimated in the annual budget (see voyage calculations). Note 5-net trading income: The end of the trading budget, but also often the start point for the presentation of the vessel's operating budget within the management accounting system, although the management accounting system-perhaps better referred to as the management information system will throw up all costs and income. However, it is not included if a vessel is contracted under pure technical management. It is usually calculated on a time-charter basis-i.e.: (Trading days-offhire) x estimated time-charter rate = net trading income

Field 2. operating budget

Note 6-crew costs: The wage costs, including social costs of the crew' usually including an allowance for leave pay, study leave, sickness and overlap. A sub-section frequently included here addresses the cost of undertaking crew changes e.g., travel, hotels and subsistence. Note 7-repair and maintenance: The costs allocated for repair and maintenance of the vessel are usually subdivided into such vessel areas as: outside hull; deck, holds and hatches; cargo equipment; main engine plant; auxiliary machinery systems; accommodation; and bridge and navigational equipment. A sub-section here sometimes shows dry-dock costs, but see also note 12. Note 8 stores and spares: All consumable stores and spares for operating the vessel including lubricating oils (included here rather than under trading costs, as lube oils are not generally paid directly by the charterer). Again, this may be further subdivided into the vessel's functional areas, For budgeting purposes, much of this information should be historical and analytical data thrown up by the management information systems. Note 9-victualling and pantry stores: All food and other costs associated with supporting the crew. Sometimes put out to specialist subcontractors to supply food and monitor the victualling rate. Other owners have a fixed rate by supplying $x per man per day (as cash) to the steward-no variations permitted. Note 10-insurance: Premiums for all the usual insurances, both hull and machinery related and protection and indemnity. Any specific insurances related to a specific charter should generally be considered as an owner's expense within the trading field-and, if possible, recharged to the charterer. Note 11 -franchise /uncovered average: A prudent owner will make a budget provision for a certain level of deductibles and some costs resulting from accidents not covered by insurance. All costs of repairing an insured accident should be charged to a special (holding) account under this section, designated to that incident. When the insurance recovery is made, it is credited to this account leaving only the deductible as a debit. Very close monitoring of these accounts is necessary as, being a holding account awaiting insurance recovery, it is not immediately taken into the operating costs. Regular review and reconciliation should take place in order to avoid nasty shocks at end of year when all subaccounts must be fully reconciled. Note 12-drydocking and classification: This area covers costs that are periodic and can be handled "in two ways. Either they can be charged directly to the x-ear in which they occur (alternative A) or a provision can be made and the effect of the expenditure spread over a longer period (alternative B). The full cost must be shown as it occurs for cash flow planning. Note 12.1-drydocking: The cost of dry-docking should be shown in the year in which it occurs, but, as the benefit of the expenditure is not for that year alone, the impact of the cost can be spread across the drydocking interval by making a credit in the drydocking year and a debit in the non drydocking .vears, e.g.: Assume 30-month drydock interval: Cost of drydock Dry-dock equalisation 1995

A 1995* 1995

B 1996 1997

(120)* (120) 80

(40) (40) 59

Net effect on P&L (see 19) *= no provision made

(120) * (40)

(40) (40)

Note 12.2-classification: Although smaller than dry-docking costs, classification costs and other surveys (i.e., non-class), in particular safety surveys, can be handled in the same way. Note 13-modifications: From time to time, alterations, improvements or modifications may be made to the vessel which benefit her for the remainder of her life-modifications in connection with a major change in statutory or international regulations are an example, or a life enhancement refit. If of modest amount, these may be taken as a cost in the year in which they occur. If of a substantial amount (and especially if financed by a bank loan), company policy may dictate that the impact of the cost be spread over the rest of the vessel's life or, if of a more specific nature linked to a specific trade, over that charter period. This will require adjustments to the vessel's depreciation within the P&L accounts. Note 14-running costs: Sometimes called operating costs and care must be taken to ascertain whether running (or operating) costs have included either overheads and/or administration costs. Running costs for the budget period, divided by total trading days give daily running costs (DRQ, a figure central to all freight calculations. As mentioned previously, some companies may include annual depreciation within running costs. Subtracting the running costs from the net trading income gives a contribution to profits, frequently termed that vessel's gross operating income. This marks the end of the area in which the vessel has some degree of control over profitability. Note 15-overheads: Non-vessel specific costs allocated to a group or class of vessels. A typical example is sea staff study leave. In some companies, superintendent's travel and overseas costs are allocated to overheads. Incidental costs such as entertainment, medical and communications may be contained within overheads or under a separate budget item. Entertainment and communication costs relating to charterers fall under owner's expenses in the trading budget and must be, where contractually agreed, recharged. Note 16-administration: The allocation, usually on a percentage basis, of the establishment costs of operating the company (e.g., rents, rates, managerial salaries, etc.). If a vessel is under technical management, the management fee may appear here. The contribution at this level may be termed the net operating income.

Field 3: financing budget

Management will also be interested to know whether the vessel is covering her financing costs. In other words, whether the contribution resulting from the vessel's trading (field 1) after allowing for the vessel's running costs (field 2)-i.e., the net operating income-meets, in profit and loss terms, depreciation and loan interest. Shareholders particularly will be interested to know whether there is a surplus which will generate a dividend. Although vessel financing will usually be consolidated across the fleet and organised to achieve the optimum tax plan, perhaps involving other activities of the group, it is good management discipline to be aware of the whole range of a vessel's financial performance. Note 17-loan interest: The interest falling due in that period on any loan (debt) financing related to that vessel. Note 18.1-depreciation: An accountancy method of spreading the capital cost of the vessel over the vessel's reasonable lifetime. The simplest approach is straight line depreciation to a residual value, often 10% of cost but it may also be an estimate of scrap value. Thus, a vessel purchased for US$33.3 million would be given a residual value of $3.3 million and depreciated at $2.0 million per year over 15 years. As illustrated in chapter 12 (sale and purchase), if the vessel is sold in mid-life, then the balance of the depreciation (i.e., the book value of $7.5 million) plus the residual value ($3.3 million) must be deducted from the net sale profit. The net sale profit is, depending upon the tax regime of the nationality of the owning company, taxable. The impact of depreciation can be adjusted by the choice of depreciation period and residual value, but auditors will look for consistency of reporting. The cost of any major conversions or modifications may, if they can be said to enhance the vessel's value or effective operating life, be added to the existing book value and depreciated over the balance of the vessel's (extended) operating life.

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Note 19.1-profit & loss: The result is a net profit (or loss), before tax, and represents the amount available on which the company will be taxed and which is available to pay shareholders a dividend on the equity which they have invested in the company. Note 18.2-loan instalments: Any repayment of loan principal falling due in the period in question. Note 19.2-cashflow: P&L does not address fully the actual movement of cash. To achieve this it is necessary to add back all non-cash items, such as the allowance for depreciation and the provision for dry-docking, and, in its place, deduct any loan instalments or lease payments falling due within the period under consideration.

Building an operating budget

Building a budget needs careful planning and coordinated input from a number of different sources. Here we will concentrate on field 2, the operating budget, on the basis that the master is required to prepare a full operating cost budget for his vessel. The calculation of voyage estimates is discussed later in this chapter. It is important to realise that this is a protracted exercise of which your input may well be only one small link. There will inevitably be some immutable date at which a whole fleet, company or group budget package must be presented to a senior board of directors for approval. The date of this meeting will generally be a couple of months before the budget period commences. Prior to this date there will be a long period of calculation, consolidation and review, resulting in a process something like the one depicted in figure 3.2. This means that you may well have to start preparing your budget four or five months before the budget period in question (on the other hand, in a badly organised company, you may well find yourself being asked to prepare a budget in what seems like only five minutes). A protracted budget period presents its own problems. It means that, even before the budget period starts, you could be working on data that is four months old (and it will be 16 months old by the time you get round to reconciling your actual performance to your budget). Much can change during this period and this is one of the reasons why budget assumptions are so important, must be recorded and are, effectively, an intrinsic part of the budget. After looking at the stages which it is necessary to go through in preparing a budget we will explore the exciting challenge of presenting, and defending, your budget.

Receiving the budget package

This may arrive in many ways, from a large, brown envelope full of forms and instructions which lands on the master's desk with a dull, heart depressing thud to a brief 'Oh yes, and we need your budget by ... I from a departing superintendent. Either way, your first task is to go through a checklist of what you have and what you need.

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The checklist should cover the points set out in the flow diagram and you should be aware of the overall timing. Consolidating corporate budgets can be a lengthy process as illustrated by the flow diagram.

Preliminary questions

1. Who are my points of contact, to whom will I be delivering my budget, how strongly can, or will, he support or attack it and who is the best source of the information which I shall inevitably need? Your immediate point of contact might be your superintendent (who, according to Murphy's Law, will never be there when you need him, so make sure that you get all the information you can when he is there) or the ship group manager. The person who will present your budget up the line will probably be the fleet director and the source of much of the information which you will need may well lurk somewhere in the finance department.

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Remember to make personal contact with the finance manager when you are next in the office, discuss his problems and make an ally. 2. What is your timescale, is it realistic? Probably not, and this leads to the first lesson in the tactics of budget presentation (sometimes known as jungle warfare). Only in exceptional circumstances, like a wish to die young and gloriously, confront a problem with a direct rebuttal. 'Your budget deadline is totally unrealistic, kindly reconsider' may well secure the group finance director's attention but 'Your budget package received and presentation date noted. View of trading pattern, crew change and intervening dry-dock programme time available will only allow rough estimates in some budget areas-please advise if any flexibility' could be a better approach. Do not ask for an extra week/month or voyage, this indicates that you will then have no problem at all in delivering the most accurate and detailed budget; and keep the message-it has become part of your budget assumptions. 3. What does the Budget Package contain? Do you understand the format of the budget; is the level of detail clear-you get no prizes for calculating the expected cost of crew travel to the last cent when it should be rounded up to the nearest hundred or even thousand pounds, dollars or kroner (the nearest hundred as a decimal of $1,000-e.g., $17.2 for $17,200-is usually about right except on coastal and smaller craft). Remember, too, that a good management information system will be able to produce a range of useful historical and analytical data which will help you prepare your budget. If it does not, build up your own data base using information which is readily available on board. An example could be the average running hours and resultant fuel consumption of the generators, supplemented by information relating to the trading pattern-e.g., how much difference does 30% more time trading in tropical waters make? Note: There are two bits of terminology which you may come across-line and level of control: Line refers to the presentational line in the budget. A vessel's budget can be represented by one line- i.e., the net result (or profit/ loss) -this might be adequate for the chairman of an international transportation group but not for the fleet manager. Additional lines give additional and increasing levels of detail. The chairman has a high level of control, the chief engineer requires considerably more detail and has a lower level of control. The key question is, does management care how the result is achieved? Do you have freedom to go over on one account (say, crew costs) and under on another (say, repair and maintenance)? Probably not, especially in the personnel manager's eyes but how much flexibility is there in the crew cost subbudget? The information frontier: The operating cost budget can be presented as one figure; $625,300. We know that management will require it to be presented in greater detail than this: R&M, crew costs, etc., but in how much more detail? Level 1-victualling and pantry stores - $42,500. Level 2-victualling - (20 crew x $5 x 365 days) + 5%, plus $4,200 for pantry stores. At the highest level of detail will be the inventory for pantry stores. The astute manager always has one level of detail in reserve with which to counter attack on his budget. When preparing to present your budget, know the expected level of control and prepare at least one level beyond the information frontier 4. What are the budget assumptions? This is of fundamental importance and in this context, refers to both assumptions and data. As well as the budget period and required date of presentation, your company or managers will need to advise you of those budget assumptions which are common to all budget units. These must include: exchange rates to be used; expected trading pattern; insurance costs; any contract supply itemse.g., lube oil-and may include number of crew, wage and leave rates; victualling rate; repair/drydock schedule, riding gangs to be provided; indicative costs of various stores- e.g., paints, chemicals. Do not be reticent about requesting the information which you need to build your budget; much time and effort can be lost working on false assumptions. It is also good practice to discuss the budget assumptions with the members of your management team responsible for that section of the operation. As well as ensuring that the assumptions are realistic, it also improves the 'ownership' of 63

the budget by those on-board managers who will be responsible for operating within the constraints of the budget. And a golden rule, record all budget assumptions, budget data and resulting predictions.

Briefing and budget team

A cardinal mistake is to retire into your cabin, wrap a wet towel round your head and periodically phone bemused subordinates with demands for answers to a string of, to them, seemingly unrelated questions. Budgeting, like so much on board, is a team activity.

NEVER PLAN ALONE BUT ALWAYS KEEP CONTROL. Budgeting is an ideal stimulus to reviewing how effectively you are managing your operation. Good ideas and good insights come from everywhere, so involve the whole management team, but in a controlled and logical manner. Your objective is to: - Give them a clear and concise brief on the task, the timescale and the underlying assumptions; - Stimulate their interest so that they give thought to the whole shipboard management and detailed thought to their own areas of responsibility (maybe the third mate can think of a more economical way of maintaining the lifesaving equipment-at least the challenge makes him think and feel part of the management team). Ownership of the budget is important; and - Set out clearly the information which you require from each member of the team, and by when. Once this has been done, you can send your team away to calculate their own individual section of budget input. Remember, they, too, will need to know the level of precision you require and (referring back to the explanation of line and level of control) should go at least one level beyond the information frontier which you require. This means that he will have additional detailed information at hand with which to answer your (hopefully) penetrating questions. A good example of this could be: Management level and line and level of that manager's required control I

Associated assumptions

Level 1:Senior management when presenting to main board:

$1,971,000 DRC equal to $5,400 per day

Annual operating cost budget assumptions and data Vessel name and type, trading pattern, crewing and dock/survey plan Overall figures for each section-e.g. crew costs, R&M with an appropriate degree of supporting detail Stores and spares would be specified as, say, main engine spares, aux machy spares, lube oil with the associated price assumption and assumed running hours The C/E should explain his

Level 2:Fleet manager when presenting to senior management: As above but in greater detail as set out in the operating budget Level 3:Master when presenting to fleet manager: Each section will be broken down into its subsections, assumptions and data

Level 4:Chief engineer, when presenting to master: 64

maintenance schedule, existing stock, etc. From the table, it should be clear how important it is to be armed with at least one additional level of detail but this is your tactical reserve; do not deploy the information in the defence of your budget before it is required. Before dismissing your team to start their calculations, share with them the secret of good planning, the five-minute budget. No matter how complex the problem, force an answer in five minutes. Then, take your time to examine it, clarify the uncertainties and reduce them in order of importance. The advantages are (to borrow some soccer euphemisms): - You establish quickly if you are in the right ball park. - You keep focused and do not lose the big picture. - Time spent refining assumptions is rarely spent steaming in the wrong direction. But remember another golden rule: Beware of assumptions built upon assumptions. Once the team have calculated their individual budget inputs, it is time (a) to review each part of the budget to ensure that assumptions have been applied correctly and (b) to construct the budget as a whole, using either the format specified by the company or a standard format such as the one contained in figure 3.1. Once the annual budget has been calculated, it will require periodising, either by month or quarter. Many of the cost centres can be divided by the number of periods (four or 12), but some, for example, repair and maintenance, especially if there is a drydock due, will benefit from allocating the costs to the expected period. Remember, too, as described in Note 12 (earlier in this chapter) a credit or a debit may have to be allowed for special non-annual expenditure, such as dry-docking. Finally, you may be required to cast forward a three- or five-year budget. This is usually calculated using inflation indices or percentages but, again, beware of non-recurrent costs and, remember, the indices used form part of your budget assumptions.

Presenting the budget

On almost all occasions, you will be required to submit your budget (your budget, into the world and outside your care and protection for the first time) in writing. If you are lucky, for a well-presented budget enhances every manager's reputation, you may have the opportunity to present it in person at a later date. One of the most effective ways of reviewing your budget is to use your team to make a budget presentation to you. Each member of the team should state the assumptions and data upon which they have calculated their input and, if the figures are available explain if, how and why this varies from the current year's estimate or previous year's actual. You should open proceedings by setting the context and restating the overall assumptions. Use the exercise to challenge the information frontier, go one level beyond the level at which you are presenting the budget-and then one level beyond that. Rerun the exercise until you and your team sound confident and you feel that you can make a clear, concise and convincing presentation to your fleet manager, fleet director or owner or chairman if required. Use the opportunity to assess the effect of changes in the assumptions by making a number of sensitivity allowances. If you are required to make a verbal budget presentation, take charge of the situation. Just as it is not good policy to have half a dozen surveyors wandering unaccompanied round your vessel, so it is unwise and unprofessional to let your management wander, undirected, around your budget. When presenting the budget, emphasise the underlying assumptions. If they are correct, the sums will be arithmetically correct. Gentlemen, I would like to present the budget for mv Well Run for the 12-month period commencing next January. The budget is calculated in US dollars and is based on the assumption that we will ,trade grain and coal trans-Atlantic before ballasting to the Pacific mid-year in 65

accordance with commercial department's predictions. Main assumptions are those received from the finance department in September and revised towards the end of October We have budgeted on the proposed reduction in crew level, although to maintain operating efficiency, especially in connection with hold cleaning, we have increased marginally our use of riding gangs. There is no dry-dock scheduled during the budget period, but an allocation is made toward the cost of the next dry-dock in 30 months' time. If you would look at the left-hand column headed annual budget on the line for repairs and maintenance. At $73,600, this shows a 2~12% increase on this year's estimate due mainly to the need to renew all hatch seals. Hopefully your dry runs on board will mean that even if your budget is not accepted and is sent back for review, you should have left the impression of a competent, articulate and efficient manager. However well you present your budget, bear in mind that budgets are an intensively competitive actvity. Senior management is permanently trying to persuade income generating departments to revise their estimates upwards and cost centres to either reduce expenditure or improve productivity. At the same time, departmental managers are endeavouring to defend their areas of responsibility, even at the expense of others. The astute manager learns the rules of jungle warfare, although this does not constitute good budgeting. Good budgets are a valuable tool in improving performance and should be owned by all involved, on board and ashore, and should be the result of co-operative effort. 1. Margins or pad the hierarchy: If budgets are rolled up from the lowest level of the company, expense managers pad costs to make the budget easier to achieve. If the budget rolls down from senior management, managers will endeavour to retain margin at their level of control and shave the budget they pass down. 2. When to spend: Very often the expectation of savings to be imposed later in the year will induce managers to commit early in the year when funds are available. This is not always the wisest use of funds but those who have seen training allocations trimmed to enable budget expectation to be met, may well wish they had committed early. Conversely, delaying cost items can produce a positive, and usually false, positive expense variance for a majority of the year. 3. Knowledge and ignorance: Specialist knowledge, or a keen and newly-promoted manager, often leads to an imbalanced concentration on the budget area known best by the recipient. The most effective way to counter this is by driving the discussion down through the information frontier until you arrive at one level beyond that of your inquisitor. Conversely, ignorance leads to arbitrary and autocratic cuts. Your defence is similar, ask which assumptions are to be changed to achieve the revised figure. 4. Life on the edge: Those of an adventurous frame of mind can, when pressed for savings, offer the most important thing in their control. You may divert the cuts into other areas. 5. The cunning co-operator: Many thrusts of the budget parer's knife can be diverted by a discussion on alternatives. Flat refusals rarely survive. Of course we can reduce the crew by a further two: - If we increase the number of riding gangs. - If you can accept an extension to hold or tank cleaning time of two days (have a realistic figure which you can justify or you lose). 0 If we get a new set of lightweight mooring ropes; the tension winches are overhauled; we have another radar fitted; we have a deck scaling machine and pneumatic paint spraying equipment; etc., etc. You never know, you could take a cut and win. Before making your budget presentation, whether written or in person, it pays to reconnoitre. Know the territory; who are your friends and who are your enemies; whose department is under pressure; who is strong and expanding.

A WELL PRESENTED BUDGET CAN BE A VERY EFFECTIVE INTERNAL CV Take the trouble to set out your budget and its assumptions neatly and in a well indexed and easy to understand format, especially if you arc not going to be there to defend it. Attention to detail matters. Remember, the budget is your representative with senior management and budgets can be fun; there is little more satisfying than having survived a tough budget session by preparing well and 66

presenting well. Finally, whatever the outcome of the budget presentation, when you receive the result, get your team together and debrief them.

Management information systems Accounting system

Having produced a budget, the prudent financial navigator wants to plot his progress towards his destination, a profitable year-end result, note any deviation (variance) and take early and effective corrective action if necessary. The tool for achieving this is the management accounting system which is described earlier under terminology. Figure 3.3 shows the flow of transactions which is common to all accounting systems which are, effectively, databases which organise a large number of large and small transactions in a variety of predetermined ways. (Purists may argue that the payroll account is not truly a ledger-see journals.) Each transaction is entered into the accounting system through a journal entry which, as well as stating the amount and date of the transaction, includes a brief narrative description and a (usually) numerical indicator which instructs the computer where to store the transaction within the database. The numerical indicator is found in the code or chart of accounts. The code of accounts directs the transaction to its relevant subsidiary ledger (ledger originally referring to a book-or register-that lies permanently in one place). Figure 3.4 represents the typical functions of a number of subsidiary ledgers, some of which store raw or primary data (accounts payable and receivable, fixed asset register) and some of which handle the data in order, for example, to produce a stock control system or accumulate historical data from which project estimates can be generated (e.g., drydock costs). The subsidiary ledgers feed into the general ledger where, in the context of management accounting, the actuals are compared against budget to calculate variances. The output from the general ledger is in the form of the three types of accounts mentioned earlier-financial or statutory, cash and management. The importance of ensuring that the journal entry for each transaction directs the data to the correct ledger is self-evident. Great care must be taken in generating and using a code of accounts.

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A typical code of accounts may be constructed in the following way: - A two-figure number representing the profit centre or vessel group. - A three-figure number representing each individual vessel. - A six-figure number directing the transaction to the correct subsidiary ledger and providing linkages which enable specific reports to be generated-e.g., how many cylinder liners were purchased across the total number of vessels in that profit centre. The journal entry for a single transaction would look like this: [47/349/712732 / / $20,725.93 / MAN Hamburg /5/95] or [43/337/612010/ x / $245,000 / VOY 120 SEAWAYS /3/95] would represent: 47 Vessel group (say, all product tankers forming a profit centre). 349 Identifier for mv Anon. 71 Operating costs-repair and maintenance. 27 Main engine-support systems. 32 Turbochargers-impeller. supplied by MAN in Hamburg in May 1995. or a freight payment (X denoting a credit) for a vessel in profit centre 43.

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The code of accounts can be used to call up information in varying degrees of detail. Taking the example given above: 710000 Total repair and maintenance budget or: 712000 Total main engine R&M budget. or: 712030 Total M.Eng R&M Turbocharger budget. Very specific information can be pulled from the accounts, for a year or between given dates, for an individual vessel, profit centre or the whole fleet.

Financial accounts and cash flow

Although financial accounts do not normally form part of the ship's responsibility, the input of data into the management accounting system also provides the raw data for the statutory accounts. Increased financial involvement also tends to result in increased curiosity and a knowledge of cash management is useful if not necessary. In many ways, cash flow is the simplest concept and it is certainly the lubricant which keeps the organisation operating. A simple summary of cash receipt and disbursements could look something like this: Cash receipts: From customers for products sold to them From borrowing on interest bearing notes From issuing new capital stock shares

£5,922,636 £1225,000 £100,000 £6,247,636 69

Cash disbursements: For purchase of products sold or being held for sale £4,030,205 For various operating expenses £1,484,099 For interest on notes payable £74,231 For income tax (part prior year) £132,218 For building improvements, new equipment, etc £389,400 £93,750 For cash distribution to shareholders (dividends) £6,203,903 Net increase/ (decrease) in cash £43,733 What cannot be seen from the above is: The profit for the year; and the financial condition of the company at the end of the year. To take just a few points: - Have we yet received cash for all the product which we sell on credit? - Cash borrowed or raised from shareholders cannot contribute part of profits. - Product purchased and held in stock has a value as well as a cost. To produce an income or profit & loss statement, accruals are applied to the trading and operating level costs and stock in hand is taken into account (or the balance between opening and closing stock). The long-term benefit of the purchase of land, buildings or equipment is shown by only charging a portion of the cost (depreciation) to that particular year. Finally, income and costs are set out in a specific order as shown in figure 3.5 where the interrelationship between profit and loss, balance sheet and cash movements is also shown. The balance sheet provides a snapshot of the company's assets and liabilities at any point in time (although normally at the end of each financial year). Assets are shown, traditionally on the left or at the top, depending upon the format used. Fixed or long-term assets are stated first, e.g. land and buildings, plant and equipment, furniture and fittings, vehicles etc., all net of depreciation charged to date. Current assets include stocks and inventory, debtors and cash and bank balances. Below or to the right, liabilities are listed starting with current liabilities. These include creditors (accounts payable), accrued expenses, loan repayments (due within the following financial year), income tax due and bank overdrafts. To this is added long-term loans and leases. The difference between assets and liabilities is balanced or financed by shareholders equity (i.e., retained earnings and share capital). If liabilities exceed assets, the company has negative equity and very worried shareholders. The income statement and balance sheet form the statutory accounts and are often accompanied by a modified form of cash flow sometimes called the application of funds, starting with the net income generated from the income statement which is then adjusted' to show the cash flow from profit-making operations.

The future

It was originally intended to include a section on double-entry book keeping, but one undoubted benefit of the computer is that to a great extent it has made this exercise unnecessary. Both statutory and management accounts can be derived from single entry operations and calculations and comparisons made electronically. Thus, the management information system, containing as it does-or should-a user-friendly method of keeping track of your cost and your income, is an invaluable tool for achieving cost effective and efficient ship operations. To get the best from the system, organisation, understanding and a level of discipline are required. If these are applied, the system will serve you rather than you becoming a slave of the system. One of the finer judgements is the frequency at which budget actual comparisons are made: too infrequently and the output becomes too old to guide effective corrective action, too frequently and the system begins to take over. The future holds great potential. Crews on board have been reduced to around their safe and practical minimum; many companies are now looking for savings within the shore-based staff. As chief executive of a major subsidiary, there is no reason why the master should not be primarily responsible for his own budget, just as his counterpart in industry ashore would be. Modern computer and communications technology is making this a cost-effective reality as data-can be compressed and transmitted in a fraction of the time and at a fraction of the cost that 70

was possible only a few years ago. Thus the master can truly become the master of his own vessel in the same way that the master of old took total responsibility for the operation and running of his vessel. The finance department and the personnel department-and to an extent, the technical operations department-become his support systems and he truly owns not just his budget but the command of his vessel as well. In this scenario he becomes even more central in responding to the shipper; the customer upon whom the whole organisation depends for its livelihood.

Trading budgets and the voyage calculation

The management of a voyage charter is one of the prime areas where the commercial acumen and managerial effectiveness of the master can impact directly on to the financial viabil1tN- of the vessel for which he is responsible. Chapter five looks at the commercial negotiations which lead up to the contract of carriage which is set out in the voyage charter and chapter six explores how the voyage charter can be project managed. This part of chapter three focuses on how the 'project budget' for a voyage is constructed (the voyage calculation), how it is used to select the most profitable voyage and how it can be used to assist in reviewing the level of efficiency with which a voyage has been prosecuted. Brokers, either the owner's own house brokers or competitive brokers in the market, will be feeding to an owner with a vessel about to become open (i.e., become available for charter) a range of different employment options. When it comes to selecting future employment, the owner and his broker, must be clear about whether their objectives are: - Short term: The best paying cargo and/or the shortest delay or ballast voyage (q.v.). - Medium term: Positioning the vessel globally for other economic reasons, such as cheaper dry docking in the Far East or a perception that freight rates are better in the Atlantic than, say, the Pacific or in the clean rather than the dirty products market. - Long term: A long-term view of freight rates trends which, if downward may cause the owner to fix long. Similarly, a need for financing collateral may also drive him towards a long-term (and bankable) time charter, even if the immediate return is less. Conversely, on a rising market, he will want to fix his vessel, or at least a larger part of his fleet, short. Nowhere is the old adage 'time is money' more true than in voyage-charter operations. A fundamental objective is always to present, load, sail, discharge and become open for the next cargo in as short a time as possible, as is evidenced by the owner's willingness to pay despatch for an earlier than anticipated release of his vessel. Even if the freight market is rising and the broker recommends waiting for a better rate, the owner must, however, remember that the potential increase in rate is not all 'profit' but will also have to contribute to the vessel's costs during the extended waiting period. It is essential for the owner and broker to keep in mind that 'operating costs arc for ever' as are overhead and administrative costs and financing costs. All of these must be covered by the earnings of the voyage charter, or at least the contribution which is left after trading costs have been deducted. The longer the ballast or repositioning voyages and the waiting time between charters (and the technical offservice) the fewer the 'earning days' in any given period. This may sound obvious, but unless the time factor is forever in mind, its implications will not be fully hoisted on board. For many years, shipping companies operating in communist-based command economies failed to understand the implications of time. They would calculate the potential net profit from a charter, say, S240,000, its projected length, 30 days, and calculate a time-charter equivalent rate, $8,000. This would then stand as the rate achieved despite the fact that the voyage had, as it frequently did, taken 50% longer to perform, reducing the achieved or actual rate to $5,333 per day. Looked at in a different way, instead of performing 11 or 12 voyages within a budget year, they were only achieving seven or eight. One reason for this was a tendency to undertake long ballast and positioning voyages between charters and although this was often driven by 'national strategic' requirements, the financial implications do not change-eventual bankruptcy. Assuming that the broker is conscious of the need to keep the vessel earning, he then needs a simple and reliable way in which to reduce the many (or few) options open to him into simple, comparable figures which he can present quickly and easily to the owner. The voyage calculation does this. It removes variable costs, such as port costs, bunker price and additional costs such as might be necessary for hold/tank cleaning and produces the net revenue earned.

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The great remaining variable is time and the combination of net revenue and voyage time gives a figure (generally expressed in US dollars per day) which is universally referred to as the time-charter equivalent (TCE). This is the universal unit of comparison and it is truly representative as it takes into account the ballast voyage to the load port from the position of the vessel at time of fixture (or at least the time at which the calculation is made).

Voyage calculation-dry cargo

It is not the intention to become too involved in the technical detail of voyage calculations; many excellent publications cover this and one of the best is listed within the reference section to this book. Rather the intent is to: - Deepen the understanding of how voyage calculations reflect what happens on board; - Explore how variations in one or more factors affect the end result (sensitivity analysis); - See how knowledge of the voyage calculations can assist in project managing the charter; and, always important, - Learn from the comparison of actual result against budgeted result (variances). In order to make a voyage calculation, the owner's broker or operations manager will collect as much information as possible about the various options available. Nevertheless, a proficient operations department should be able to make a good estimate using relatively little market information. The basic ingredients, over and above the specification of own vessel, are: - Type of cargo: giving stowage factor and hold/ tank cleaning requirements. - Amount of cargo: in tonnes or volume plus margin- e.g., 5% MOLOO (more or less, owner's option) - Load and discharge ports: either a specified port or ports or designated range- e.g., one safe port Hamburg-Rotterdam range. This adds an additional variable to the costing. - Loading and discharge rates: either in volume or in time- e.g., tonnes per hour. The potential variation of cargo-handling rates is one of the main differences between dry bulk (complicated) and liquid bulk (standard) calculations. - Freight rate: either in US dollars (or other currency) per tonne or lump sum, including, if payable, a ballast bonus. - Laycan (lay days and cancelling date): giving the range of time within which the vessel has to present ready for loading. The cardinal rule, discussed above, is that generally all voyages are calculated on a round voyage basis, in other words, the ballast voyage from start point to load port is included in the costs and time. There is a wide variety of formats for voyage calculating, with much of it being undertaken using customised computer programs. However, all follow the same basic principle, and the example used here is a typical pro-forma for a computer-based system. When using one of the more sophisticated computer-based systems, voyage distances can be generated automatically by entering the load and discharge ports. Frequently, voyage time and bunker consumption can be calculated from automatic input of vessel data and the broker has the ability to calculate a range of sensitivities at the touch of a keyboard. Impressive though this is, it should not take the place of thinking, and this includes thinking about the operating end of the business-the vessel. One important aspect of manual calculation is that the thinking tends to come first and the end result is better understood. The owner is not led to believe that the vessel can change from a coal from Hampton Roads to a grain cargo from Galveston with the same facility as a computer can calculate the time-charter equivalents. One aspect which many calculating formats do not include is a simple way of comparing the voyage estimate against the actual result achieved. Just as the variance assists the technical manager to understand how his vessel is performing, so the differences in, say, bunkers costs, total voyage time, port costs, etc., indicate both how well the initial estimate reflects reality and also where time or money was lost or gained. There is a very strong argument for sending the master a copy of the voyage estimate together with his voyage orders and again when the actual voyage outturn is known. This would not be on the basis of 'possible' interest, but to involve the master and his management team in the very core of the commercial success of their vessel. There is no doubt that, if done properly, a valuable two-way flow of information would ensue. 72

In commencing the calculation, what will the broker have to work with, apart from his, hopefully, accurate knowledge of the lifting and steaming capability of his owner's vessel? The input from the market into the chartering department will generally be in the brief formats set out here. In the example given, a Panamax bulk carrier is due to come open after discharging a cargo of coal in Yokohama. The owner wants to remain trading in the Far East despite improving freight rates in the Atlantic as he is shortly due to dry-dock. He also wants to avoid the need to clean for grain which he is contemplating doing during the upcoming dry-dock. He therefore instructs his broker to concentrate on charters which will bring him back to his chosen dry-dock area. The broker culls two possible charters which fit his time scale from the mass (or depth) of information crossing his desk: ACCOUNT HPS -40/70,000 TS COAL -LOADING NEWCASTLE NSW -DISCHARGE HONG KONG -LAYCAN 3RD/15TH FEB -30,000 + 12 HRS/15,000 + 18 HRS -RATE $9.10/MT 2.5TTL HERE -GENCON CP

-

ACCOUNT NUTTYSLACK -50/70,000 TS COAL -RICHARDS BAY/INCHON -LAYCAN 15TH/25TH FEB -LOAD/DISCHARGE 34,000/10,000TS SHINC -AMWELSH CP 2.5 ADDRESS PAST The broker then needs to consider all or some of the following points: Do we recognise the charterer, is he reliable, can we find out more about him? Can his vessel enter all ports under consideration and lift a full cargo (possible telex to master)? Can he meet the laycan: Richards Bay looks a bit tight but, on current performance, just achievable (urgent telex to master which arrives in the middle of the night)? What is the competition, which vessels are where, does the lower 40,000 tonne limit at Newcastle significantly increase the number of vessels which might be tendering, can he get a feeling from the charterer's broker whether he is more interested in lifting 70,000 tonnes or 40,000 tonnes? What is the cargo's stowage factor, are there any special precautions, do I have to do any hold cleaning (can the master achieve this and at what cost-6r do we worry about this after the event!)? Do I have good port cost information, if not where can I get it and are there any impending problems at any of the ports- e.g., congestion or strikes? What is the bunker situation, when does the vessel need to bunker (bearing in mind that she is going to dry-dock, assuming the technical managers/ department have divulged this piece of information)? Another telex to master and mental note re deviation clause. Charterparties; both different, does this have any implications? Mental note to reconsider after the voyage calculation. Only one indicative charter rate: can the broker get any idea from charterer's broker, what is the market doing, can he calculate on basis of 'last done' and see what it looks like?

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Everybody has a different voyage calculating format but they should all produce basically the same answer. From an initial comparison it would seem that voyage (a) to Newcastle NSW is the obvious choice. In many cases, such as trans-Atlantic round voyages with grain or coal, the differences may be marginal and sensitivities may need to be run on the effect of 5 % MOL cargo or plus or minus 10 cents in freight rate. In this case, however, the technical managers in Cyprus have advised the commercial managers in London (or at least, they will do at some stage-it rather depends how much the owner is in control) that the spare part they need is not available until 1st April. Consequently, they hold a good price on a drydock stem in Singapore for 12/15 April. This puts a new complexion on the calculation. If voyage (a) can be repeated, the vessel could steam the 2,552 miles from Inchon to Singapore and present on 14 April, if there is no loss of time-the next available dry-dock at Singapore is not for another two weeks. Voyage (b) would put the vessel off Singapore, slow steaming from Hong Kong on 5 April with seven idle days. But if she steamed at a more economical speed from Richards Bay and saved on bunkers, does a sensitivity analysis show a benefit-assuming the master is confident that he can make the Richards Bay laycan in the first place? In which case, is it better to stem more expensive bunkers in Yokohama and save time at Singapore? As can be seen, even with only two options and, admittedly a dry-dock stem, the permutations begin to grow. Sensitivity analysis, or “what if’s “ can now be applied. For example, what if the cargo intake is 500 tonnes less (because the chief engineer has 500 tonnes of bunkers up his sleeve)? Time-charter equivalent is reduced by $125 in voyage (a). What if the vessel loses two and a half days through bad weather and then loses another day because she cannot tender NOR until Monday morning? (TCE is reduced by $1,350 per day.)

Voyage calculation-liquid bulk

It was the British and American Governments' chartering out of requisitioned tankers during the period immediately after the 1939-45 war which gave rise to the concept of freight rate schedules which have become today's Worldscale. In order that the government could be seen to be even-handed, the rates within the freight schedules were calculated so that, after allowing for port costs, bunker costs and (if any) canal expenses, the net daily revenue (timecharter equivalent) was the same for all voyages. As with dry bulk, the calculations were made on the basis of a round voyage and the various scales issued in London were all built up from old MOT (Ministry of Transport) rate of 32/6d (thirty-two shillings and sixpence, now Y-1.62Y2p or about $3.90 at the 1969 exchange rate) for a cargo from Curacao to London. In September 1969, the separate British and American freight rate schedules were combined into the Worldwide Tanker Nominal Freight Scale or Worldscale (now generally referred to as Old Worldscale). The word nominal is important. During the days of government control, the rate paid was the flat rate of the relevant scale. With the release of government control, market forces moved the contract rate up or down from the flat rate according to supply and demand pressures. Initially movements above or below the flat rate, which was set at Worldscale 100 (the equivalent of the 32/6d flat rate), were expressed in points of scale, but common practice today is to express the rate in terms of a percentage, Worldscale 70 and Worldscale 135 being 30% below and 35% above the flat rate of Worldscale 100. Worldscale was continuously monitored and, when required, updated by the combined efforts of a panel of independent banker brokers in both London and New York. On I January 1989, a new Worldscale was introduced which brought the base criteria into a closer alignment with the realities of modern tanker practice. The Old and New Worldscales are compared here. Old Worldscale (15/9/69-31/12/88) STANDARD VESSEL Total capacity 19,500 long tons Average service speed 14.0 knots Bunker consumption: - At sea 28 tons/day -Purposes other than steaming -In port 5 tons/day

New Worldscale (1/1/89) 75,000 metric tonnes 14.5 knots 55 tonnes/day 100 tonnes/day 5 tonnes/day 76

Grade of fuel oil Port time FIXED HIRE *final amendment

180 cst 380 cst 72 hours laytime plus 12 hours per port $1,800/day $12,000/day

Old and New Worldscales In addition, Worldscale is based on a number of variable costs and, for New Worldscale, these are: (a) Bunker prices - Worldwide average price for 380 cst during the month of September prior to the effective date. (b) Port costs - Based on information available up to September converted into US$ at the September rate of exchange. Much of this information is provided indirectly by owners reporting to Intertanko. (c) Canal transits - 24 hours for Panama, 30 hours for Suez (d) Freight rates - US$/tonne of 1,000 kg; officially the 'quantity shipped', usually based on bill of lading quantity (plus deadfreight if any). (e) Revisions - Annually on 1 January or as judged necessary. A. Typical Voyage Calculations on a VLCC 01-Jun-95 01-Nov-95 $ $ Freight 250,000 mt Rate $10.75 WS 47.5 1,276,563 250,000 mt Rate $10.75 WS 72.5 1,948,438 Commission 1.25% 15,957 24,355 Port exp loadsport Ras Tanura 32,500 32,500 Port exp dischport Chiba 150,000 150,000 Days: Ballast: 6653 mn 15 kno 18.48 Laden: 6653 run 14 knot 19.80 Bunkering: 0.5 Load: 2 Discharging: 2 Bunker: FO 68 mt/day 2617 mt $85 22,445 222,445 FO Load/disch 550 mt $85 46,750 46,750 Total 808,910 1,472,387 Daily running costs $8,000/day 342,249 342,249 Result 466,661 1,130,138 Result per day 10,908 26,417 B. Typical Voyage Calculations on a 30,000 MT product carrier 01-Jun-95 01-Nov-95 $ $ Freight 22,000 mt Rate $3,28 WS 245 178,792 22,000 mt Rate $3,28 WS 202.5 146,124 Commission 1.25% 2,210 1,827 Port exp loadport Mongstad 15,000 15,000 Port exp dischport Immingbam 20,000 20,000 Days: Ballast: 484 nm 14.5 knot 1.39 Laden: 484 mn 13.5 knot 1.49 Bunkering: 0 Loading: 1.75 Discharging: 1.75 Bunker: FO 20 mt/day 58 mt $110 6,346 6,346 77

FOP Load/disch Total Daily running cost Result Result per day

15 mt

$110

$5,000/day

1,650 131,586 31,923 99,663 15,610

1,650 101,301 31,923 69,378 10,866

Figure 3.6 Voyage calculations-tanker market (a) VLCC-Ras Tanura to Chiba, Japan (b) 30, 000-tdw product carrier-Mongstad to Immingham The voyage calculations in Figure 3.6 are set out in a much foreshortened format and are not produced to show a comparison of competing voyages but rather the effect of market movements. Two things become immediately apparent: the nominal rate stays the same ($10.75 per tonne and $3.28 per tonne respectively), and it is the Worldscale rate that changes. The other is that during the same fivemonth period the rate has risen 25 percentage points in one trade and fallen 42.5 percentage points in another. It is against a market such as this that the shipowner must endeavour to make investment plans with anything from five-to-15 year pay-back periods. The introduction suggested that information such as the voyage calculation would help the master manage the voyage more efficiently. Certainly, if knowledge improves performance, it should. Much depends upon whether the master wishes to be involved or purely reactive. Reverting to bulk carrier voyage (a), the vessel is nearing dry-dock time and who should know better than the master whether she can maintain 13.5 knots both in ballast and laden? Should an experienced master, knowing the trade and the area, have a better idea than most whether currents and weather will improve or reduce the overall voyage speed? Is it reasonable to expect him to have views on the likelihood of being able to save a few hours on Newcastle? In short, would he like to be asked his opinion on whether to go for two round voyages to Newcastle or play it safe (or relatively safe, bearing in mind the cancelling date) and go for Richards Bay. And should the owner be actively involving and using his masters in this way? Without a good understanding of the factors involved, there is little point in asking the master for his advice. However, the purpose of this book is to provide the master with a good working knowledge of chartering and its should be able to contribute to improving the quality of the commercial decisions upon which the viability of the company depends.

ACKNOWLEDGEMENTS

THANKs are due to Graham Murray, a colleague from Maersk days, for his proof-reading of this chapter, to friends at A. P. Moller for data for the voyage calculations and to the Worldscale Association (London) Ltd.

REFERENCES

How to Read Financial Reports. John A. Tracy: John Wiley & Son, ISBN 0-471-59391-5. Bookkeeping. Geoffrey Whitehead: Butterworth-Heinemann Ltd.

ANNEXES FOR CHAPTER 3

- Correlation of income statement, balance sheet and cash flow. - Reconciling the cash and accrual basis.

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Chapter 4

TERMS OF TRADE AND BILLS OF LADING The sale contract generating demand for transport-bills of lading and seaway bills. The movement of containers is probably the most highly structured of all modes of maritime transportation. The master's role is dominated by the need to minimise offservice and maintain a schedule with head office back-up or tied agents at every port. Nevertheless, the master's responsibility remains the same and the obligation to safety carry and deliver is not removed. The through transport nature of modem container operations ideally demonstrates the differing times at which risk and title can change. The need to transport goods from producer to user is so fundamental to international trade transactions that both buyer and seller need to consider it at the outset of their negotiations. Some of the considerations which they need to have in mind are set out in the following checklist. This is based on the recommendations of a major container operator to its customers, and covers the whole of the transport operation. This chapter looks at how the terms of trade between buyer and seller are translated into shipping requirements, often using the 13 Incoterms described within the chapter. These define the transfer of risk and title as well as the division of costs and, together with the requirements for funding the transaction, form the background against which bills of lading are generated and presented to the master for signature. The sale contract generating demand for transport Initial considerations for buyers and sellers THE AGE-OLD CONCEPT of the common carrier, introduced in The Development of Maritime Commercial Practice, is found most frequently today in the mainline container operation. Here, the utility of the container has resulted in three developments which radically affect and extend the original liner terms contract of carriage. Traditionally, the liner operator would accept goods for shipment on his advertised berth where they would be checked for quality and quantity by an army of tally clerks. Mates' receipts would be produced from which, theoretically at least, bills of lading would be generated for each consignment, together with the ship's (Customs) manifest. The goods would be carried against an advertised schedule (both time and freight rate), to a stated destination where they would be discharged into the care of the consignee against presentation (usually to the liner operator's port agent) of an original bill of lading. These berth-to-berth operations have now expanded, and nowadays: - The liner operator, and certainly the vessel, will receive a sealed container and, except in general terms--e.g., weight, hazardous, reefer-the contents and their quality and quantity will be unknown; - The concept of through transport has led to the extension of the contract of carriage far beyond berth to berth to include, for example, collection at the seller's factory premises (EXW) or at a container freight station (CFS) and delivery to the buyer's premises. This inevitably, incorporates other modes of transport (road/ rail/ river) and makes the main transport operator, the carrier, responsible for the performance of a range of subcontractors under the single contract of carriage. - The utility and integrity of the container has also resulted in it, effectively, becoming the unit of transport rather than the vessel. This has given rise to the Non Vessel Owning (Common) Carrier (NVOCC), who can be described as a carrier issuing a bill of lading for the carriage of goods on a vessel which he neither owns nor operates.

Shipper's checklist

When entering into an international trade contract involving an element of maritime transportation, both the buyer and the seller need to consider a range of factors, both documentary and physical. The checklist set out below is based around the recommendations of one of the world's major container operators.

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A. Documentary Contract of sale 1.

2. 3. 4.

How trustworthy is my buyer? What is his payment record? What steps do I need to take to ensure I get paid and paid on time? (Advice/ assistance from bankers/credit agencies.) What Incoterm do I use as the basis for my sale contract? Are there any statutory regulations in the exporting or importing country which affect this transaction and if so what must be done to comply with them ? (Advice/ assistance from bankers/ chambers of commerce.) What vital points in the sale contract do I need to control to ensure that my buyer is not free to insert problem-causing provisions in the letter of credit when he opens it? (e.g., do I nominate a carrier, stipulate transhipment allowed, not call for a shipped-on-board endorsement-I get paid quicker that way, call for a combined transport document and not a marine/ocean bill of lading, stipulate places of receipt/ delivery/ports of loading/ discharge that are viable, etc). (Advice/ assistance from bankers/ carriers/chambers of commerce, etc.)

Receipt of documentary credit

Check immediately. Does it contain any requirements with which I cannot comply (e.g., dates, routes, no transhipment, special clauses)? If so now is the time to revert to the buyer for amendment. If you leave it until after shipment, the buyer has you over a barrel and will probably want a discount to agree to any amendment, however minor.

B. Physical Shipment 1.

2. 3. 4. 5. 6. 7.

8.

Do goods require any special attention during carriage (e.g., refrigeration, ventilation, etc)? If so the carrier must be informed and the correct type of container requested. Is shipment FCL or LCL? This will affect the level and type of packing and marketing required. Are any of the goods classified as hazardous by IMO? Have all necessary declaration and packing requirements been observed? All FCL containers must be inspected upon receipt and prior to packing to ensure that they are clean and watertight (by internal visual inspection). Any that are not must be rejected. If goods are refrigerated they must be at the correct temperature at the time of shipment and FCL packing must be such as to permit free circulation of cool air to avoid 'hot spots'. Circulation channels must be so constructed so as not to collapse during transit. Packing and securing must be such so as to prevent movement within the container during transit (regular shipments of cartonned goods should be designed with dimensions to create a tight fit module within the container). Do not stow heavy items over light, nor liquids over solids. Don't overload. Ensure even weight distribution within container, especially of any large and/or irregularly shaped loads. Use dunnage where necessary to spread the weight of heavy loads. Do secure stow at door end to prevent fallout at discharge. Remember-if you pack the container you are liable for any injury or damage caused by your failure to do a good job and need insurance against this potential liability. If consignment is FCL, has the driver presented a carrier's seal (and not just some nondescript model so he can swap to the right one down the road after helping himself!)? Have you affixed seal and checked it is in position;~ Have N-ou recorded the seal number on your documents.

Consignee's checklist A. Documentary Contract of sale

1 . Do I need to take steps to control the quality/ quantity of goods ordered to ensure that what I order is what I get (e.g., preshipment survey/tally into container etc)? (Advice/ assistance from bankers/chamber of commerce.) 2. Which Incoterm do I use? 3. Am I unhappy with any stipulations/restrictions which the shipper is insisting upon in the sale contract?

Opening letter of credit 80

1. Is the letter of credit in conformity with the contract of sale? 2. Are all of the stipulations/restrictions which I am inserting in the letter of credit really necessary? (Look carefully at each one and justify its inclusion or leave it out. Include nothing on the basis of 'might as well', 'usual practice', 'doing no harm'). Particularly think carefully about the following:(a) No transhipment clause-bank will ignore anyway if goods containerised and through bill of lading issued, so why put it in? (b) Have I asked for the correct document as a contract of carriage? (If you have asked for a marine/ocean bill of lading then you must be thinking of port-to-port shipment only. If you want combined transport then you should be requiring a combined (or multi-modal) transport document.) Have I considered the advantages of waybills? (c) If the carriage is combined transport, is a shipped-on-board endorsement really necessary? 3. Are any special stipulations put into the letter of credit clear and unambiguous? (Any abbreviations or references to 'standard' clauses or requirements must be internationally recognised or confusion will ensue and the transaction may be delayed or incur additional expense.)

B. Physical Delivery 1. 2.

Respond promptly to arrival notification form when received. If bill of lading issued lodge original with carrier and pay any outstanding freight and charges due at destination promptly to preclude delay in delivery. 3. Give prompt instructions relating to Customs clearance to the container operator or your freight forwarder, providing all necessary data and documentation. 4. If delivery is FCL ensure that the advice relating to seals is observed. 5. If delivery is LCL ensure that apparent order and condition is noted on delivery note at time of delivery and any discrepancy is additionally notified promptly to the container operator. 6. If goods are damaged advise cargo insurers as well as the carrier so that a joint survey can be arranged where appropriate and steps to mitigate loss agreed. The buyer's and seller's decision-making processes should result in one of the 13 standard International Chamber of Commerce Terms (Incoterms 1990) being selected as the basis of the -sale contract and this in turn will affect the way in which the transportation is contracted. The Incoterms are designed to arrange for the orderly transfer of risk from seller to buyer at a place where the goods can be inspected. Table 4.1 sets out the 13 terms (note that cost and freight, C&F, now appears as CFR), whilst table 4.2 demonstrates who bears the cost of the different segments of the total contract of carriage. If all the above points have been dealt with correctly, the buyer or seller should now be on the way to their bank confident of having their documents accepted and payment effected. They can also be confident that their risk management approach has reduced or removed the chance of their goods being damaged in transit, impounded, delayed or of them incurring uninsured liabilities as a result of this transaction.

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Division of risk and cost

In the Nautical Briefing, the 13 Incoterms 1990 were introduced and described briefly. Incoterms stem from a study initiated by the International Chamber of Commerce in the 1920s which resulted in the International Rules for the Interpretation of Trade Terms and the publication of the first international commercial terms in 1936. They were revised in 1953 and 1967, expanded to include goods carried by air in 1976 and expanded again in 1980 to reflect the increasing impact of through transport. The 1990 revision incorporated the increasing trend towards paperless trading-this is the use of electronic data interchange (EDI) instead of paper documents. The 1990 revision presented all the Incoterms in a systematic manner. The objective was to make it easier for buyer and seller to select the best alternative for their particular trade. By grouping the matters dealt with under each term under the same heading having the same numbering throughout, the obligations of the parties are mirrored. Not every obligation is applicable under every Incoterm, nor do the terms refer to obligations towards third parties or to whether it is common sense or prudent for one of the parties to take a certain measure. For example, a free-on-board (FOB) contract places no obligation on the buyer to insure the goods for the sea passage, but he would be prudent to do so since the seller's obligation ceases at the ship's rail.

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The 13 Incoterm terms of trade to which the ten considerations are applied are briefly described on the following pages, fuller explanations being available from the International Chamber of Commerce (ICC) through local (national or city based) chambers of commerce. EXW 'Ex works' means that the seller fulfils his obligation to deliver when he has made the goods available at his premises (i.e. works, factory, warehouse, etc.) to the buyer. In particular, he is not responsible for loading the goods on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed. The buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination. This term thus represents the minimum obligation for the seller. This term should not be used when the buyer cannot carry out directly or indirectly the export formalities. In such circumstances, the FCA term should be used. FCA'Free Carrier' means that the seller fulfils his obligation to deliver when he has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into his charge. When, according to commercial practice, the seller's assistance is required in making the contract with the carrier (such as in rail or air transport) the seller may act at the buyer's risk and expense. This term may be used for any mode of transport, including multimodal transport. 'Carrier' means any person who, in a contract of carriage, undertakes to perform or to procure the performance of carriage by rail, road, sea, air, inland waterway or by a combination of such modes. If the buyer instructs the seller to deliver the cargo to a person, e.g. a freight forwarder who is not a I carrier', the seller is deemed to have fulfilled his obligation to deliver the goods when they are in the custody of that person. 'Transport terminal' means a railway terminal, a freight station, a container terminal or yard, a multipurpose cargo terminal or any similar receiving point. 'Container' includes any equipment used to unitise cargo, e.g. all types of containers and/or flats, whether ISO accepted or not, trailers, swap bodies, ro-ro equipment, igloos, and applies to all modes of transport. FAS'Free Alongside Ship' means that the seller fulfils his obligation to deliver when the goods have been placed alongside the vessel, on the quay or in lighters at the named port of shipment. This means that the buyer has to bear all costs and risks of or damage to the goods from that moment. 83

The FAS term requires the buyer to clear the goods for export. It should not be used when the buyer cannot carry out directly or indirectly the export formalities. This term can only be used for sea or inland waterway transport. FOB 'Free on Board' means that the seller fulfils his obligation to deliver when the goods have passed over the ship's rail at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export. This term can only be used for sea or inland waterway transport. When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use. CFR'Cost and Freight'means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. The CFR term requires the seller to clear the goods for export. This term can only be used for sea and inland waterway transport. When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the CPT term is more appropriate to use. CIF 'Cost, Insurance and Freight' means that the seller has the same obligations as under CFR but with the addition that he has to procure marine insurance against the buyer's risk of loss of or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium. The buyer should note that under the CIF term the seller is only required to obtain insurance on minimum coverage. The CIF term requires the seller to clear the goods for export. This term can only be used for sea and inland waterway transport. When the ship's rail serves no practical purpose such as in the case of roll-on/roll-off or container traffic, the CIP term is more appropriate to rise. CPT 'Carriage paid to . . .' means that the seller pays the freight for the carriage of the goods to the named destination. The risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, is transferred from the seller to the buyer when the goods have been delivered into the custody of the carrier. 'Carrier' means any person who, in a contract of carriage, undertakes to perform or to procure the performance of carriage, by rail, road, sea, air, inland waterway or by a combination of such modes. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier. The CPT term requires the seller to clear the goods for export. This term may be used for any mode of transport including multimodal transport. CIP 'Carriage and Insurance paid to. . .'means that the seller has the same obligations as tinder CPT but with the addition that the seller has to procure cargo insurance against the buyer's risk of loss of or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium. The buyer should note that under the CIP term the seller is only required to obtain insurance on minimum coverage. The CIP term requires the seller to clear the goods for export. This term may be used for any mode of transport including multimodal transport. DAF 'Delivered at Frontier' means that the seller fulfils his obligation to deliver when the goods have been made available, cleared for export, at the named point and place at the frontier, but before the Customs border of the adjoining country. The term 'frontier' may be used for any frontier including that of the country of export. Therefore, it is of vital importance that the frontier in question be defined precisely by always naming the point and place in the term. The term is primarily intended to be used when goods are to be carried by rail or road, but it may be used for any mode of transport. DES 'Delivered Ex Ship' means that the seller fulfils his obligation to deliver when the goods have been made available to the buyer on board the ship uncleared for import at the named port of 84

destination. The seller has to bear all the costs and risks involved in bringing the goods to the named port of destination. This term can only be used for sea or inland waterway transport. DEQ 'Delivered Ex Quay (duty paid)' means that the seller fulfils his obligation to deliver when he has made the goods available to the buyer on the quay (wharf) at the named port of destination, cleared for importation. The seller has to bear all risks and costs including duties, taxes and other charges of delivering the goods thereto. This term should not be used if the seller is unable directly or indirectly to obtain the import licence. If the parties wish the buyer to clear the goods for importation and pay the duty the words 'duty unpaid' should be used instead of 'duty paid'. If the parties wish to exclude from the seller's obligations some of the costs payable upon importation of the goods (such as value added tax (VAT)), this should be made clear by adding words to this effect: 'Delivered ex quay, VAT unpaid (named port of destination)'. This term can only be used for sea or inland waterway transport. DDU 'Delivered duty unpaid' means that the seller fulfils his obligation to deliver when the goods have been made available at the named place in the' country of importation. The seller has to bear the costs and risks involved in bringing the goods thereto (excluding duties, taxes and other official charges payable upon importation as well as the costs and risks of carrying out customs formalities). The buyer has to pay any additional costs and to bear any risks caused by his failure to clear the goods for import in time. If the parties wish the seller to carry out Customs formalities and bear the costs and risks resulting there from, this has to be made clear by adding words to this effect. If the parties wish to include in the seller's obligations some of the costs payable upon importation of the goods (such as value added tax (VAT)), this should be made clear by adding words to this effect: 'Delivered duty unpaid, VAT paid, (... named place of destination)'. This term may be used irrespective of the mode of transport. DDP 'Delivered duty paid' means that the seller fulfils his obligation to deliver when the goods have been made available at the named place in the country of importation. The seller has to bear the risks and costs, including duties, taxes and other charges of delivering the goods thereto, cleared for importation. Whilst the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation. This term should not be used if the seller is unable directly or indirectly to obtain the import licence. If the parties wish the buyer to clear the goods for importation and to pay the duty, the term DDU should be used. If the parties wish to exclude from the seller's obligations some of the costs payable upon importation of the goods (such as value added tax (VAT)), this should be made clear by adding words to this effect: 'Delivered duty paid, VAT unpaid named place of destination)'. This term may be used irrespective of the mode of transport.

Methods of payment

Once the terms of trade have been decided, the exact means of payment must be selected. Cash in advance is straightforward, cheap and, as has been stated, requires a high degree of trust. Open account describes an arrangement whereby the goods are manufactured and delivered before payment is required; and obviously a particularly high degree of trust is required by the seller. Collection describes an arrangement whereby the goods are shipped and a bill of exchange (draft) is drawn by the seller on the buyer and documentary evidence (of which the bill of lading is a key ingredient) is sent to the seller's bank in order to effect collection through the buyer's confirming bank. The logical extension of this is the documentary credit or letter of undertaking. This is issued by a bank for the account of a buyer (the applicant) -or for its own account-and is an undertaking to pay the beneficiary the value of the draft, provided that the terms of the documentary credit are complied with. The documentary credit can satisfy the seller's desire for cash and the buyer's desire for credit; it serves the interests of both parties independently and offers a unique and universally used method of achieving a commercially acceptable undertaking by providing for payment to be made against complying documents that represent the goods, and making possible the transfer of title to those goods without contemporaneous physical transfer of the goods being necessary.

85

It will immediately be obvious that payment (and consequent transfer of ownership, ie title and risk) by way of a documentary credit, introduces the financial institutions and converts the originally simple, one contract transaction into a distinct, trianglular contractual arrangement: - First-the sale contract between buyer and seller-, - Second-the 'application and security agreement, or the 'reimbursing agreement' between the buyer (the applicant) and the issuer (the issuing bank); and - Third-the documentary credit between the issuing bank and the beneficiary. The documentary credit may also be confirmed by another (confirming) bank and it is important to understand that each contract is independent of the other: 'Credits, by their nature are separate transactions from the sales or other contract(s) on which they may be based, and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and / or fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from his relationship with the issuing bank or beneficiary' and A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank. ' UCP 500 sub-Articles 3a & b.

86

Process of documentary credit

There are many advantages which flow from the use of documentary credits of which the foremost can be seen to be the provision of a confirmed method of payment. However the process involves many more institutions (and their costs) than in the originally simple contract between buyer and seller; and as the frequent non-availability of bills of lading in the port of delivery proves, documentary credits generate a paper chase of their own. A particular advantage of credits, documentary or otherwise, to commodity traders and others who buy and sell goods is that they can enable an onsale to take place before the buyer's bank has to effect payment under the credit. If the trader structures his transaction correctly, his buyer will pay him before the trader's bank settles under the credit, thereby leaving the trader with a positive cashflow. A cargo of crude oil from the Gulf may be traded several times in this way en route to North America, Europe or the Far East. Behind each of these complementary but totally separate transactions is, at its simplest, a banking structure similar to the one depicted in Figure 4.3. Each set of transactions requires original documentation in order to effect payment, and central to this documentation, is the bill of lading in the dual roles of document of title and proof of quantity and quality. Although a documentary credit represents the payment end of a single sale contract, each link in the chain-buyer (or applicant) to issuing bank, issuing bank to advising (or confirming) bank and advising bank to seller (or beneficiary)-is a separate and distinct contract. Thus, if incorrect documentation is presented to the issuing bank by the advising bank, the issuing bank's recourse is to the advising bank, not to the seller. Since the documentary credits department of a large, international bank will be handling thousands of transactions daily, they will rely totally on the validity of the documents presented to them, and will have no knowledge of or, for that matter, interest in the physical movement of that cargo. This goes a long way to explain why banks will generally only accept a clean bill of lading, that is, a bill of lading that normally stipulates that the goods were 'in apparent good order and condition' when accepted. Since, as is inherent in their very name, documentary credits are executed by the presentation of the specified documents, including inevitably, the bill (s) of lading, it is hardly surprising that these same bills of lading are frequently unavailable at the port of discharge. Figure 4.3 reproduces a standard application for an irrevocable documentary credit and there are a number of points to note from the 'shipping' end of the transaction. For a start, a documentary credit is time-related and stipulates an expiry date. Secondly it describes the goods to be shipped and this description, which should tally with the description on the bill of lading, will certainly contain no reference to defects in quality, quantity or even packaging. Thirdly, the application stipulates the documents that must be presented; and it is against these documents alone that the credit is transacted. There is a wide range of documentary credits, from irrevocable to transferable and revolving which all follow the same basic principles. The 'Red Clause' documentary credit, so-called because it was originally written in red ink, is an interesting variation. Here funds can be made available before shipment and this can be useful where traders or dealers require a form of pre-financing. An example might be where a grain exporter is purchasing parcels of grain to form an economical Panamax cargo. His eventual buyer may allow him partial advance payment to settle with his supplier and reserve silo space in the port of loading. Whatever method of credit is used, the same basic principles apply and settlement follows the procedure illustrated in Figure 4.4.

Bills of lading and sea waybills

This section of the chapter looks at bills of lading and sea waybills predominantly in their through transport role. It is recognised that in the container trades the bill of lading and other cargo related documentation is handled almost exclusively by the company's shore organisation, but despite EDI and changes in transport practice brought about by the container, they still remain the central document for facilitating international trade and transportation. The story mentioned below is told by a deck officer who served as a cadet on a liner vessel in the mid-1950s and it well illustrates the use and importance of the bill of lading. Every trip, the vessel called at a small Indian outport and every trip, a local farmer arrived at the quay on a bullock cart containing six bales of hides. He watched the cargo being loaded, collected the mate's receipts and checked them carefully to ensure that there was no endorsement regarding quality. Then, 87

with the agent, he went to the master who, at his insistence, always signed the bill of lading (three originals) in front of him. These he collected and, keeping one, he went straight to the post office and posted the other two, in separate envelopes, recorded delivery, to his consignee in England. He was a shipper, the shipowner's essential customer, and each trip he entrusted his work and his livelihood to the care and custody of the master, the bailee of his goods. The scale may be different today, the principle is not. The extension of the carrier's responsibility to meet the needs of through transport as discussed in the last section has meant that the basic liner terms bill of lading has been modified and a few definitions -ire required. The ones that follow are based on the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits UCP500) which replaced UCP400 on 1 January 1994. The relevant documents are: marine/ocean bills of lading; non-negotiable sea waybill; charterpartv bill of lading; multimodal transport document. The three well known functions of a bill of lading remain: (a) as evidence of the terms of a contract of affreightment; (b) as evidence of shipment of the goods, and (c) as a document of title. These three functions will be explored in greater detail in chapters 5 & 6.

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Straight bills, open bills and delivery

If the bill of lading states that the goods are deliverable to bearer, then the cargo can be claimed by a person who presents an original document. This is known as an open bill of lading. If the bill of lading states that the goods are deliverable solely to a named consignee, then only he can take delivery of the goods. This is known as a straight bill of lading. In most cases, the bill of lading states that the goods are deliverable to a named consignee or order. This makes the document negotiable, which means it can be endorsed to someone else if they buy the cargo. Endorsing means adding a clause to the document and signing it. If the original consignee signs the back, with no other remarks (this is known as endorsed in blank), the document becomes an open bill of lading. If the endorsement states deliver to XTZ, the document becomes a straight bill of lading. If the endorsement states deliver to XYZ or order then XYZ can further endorse it to someone else if they resell the cargo. At the discharge port, the master must only deliver the cargo to a bona-fide holder of an original bill of lading. If the bill of lading is open, then he can deliver the cargo to whoever presents the document, provided he has not been informed of any theft or fraud. If the bill of lading is straight, he should check that the person claiming delivery is the same as named in the document. If the bill of lading is negotiable, it is very important that he checks whether the document has been properly endorsed, and that the person claiming delivery is entitled to the goods. Once he has done this, the master will endorse the bill of lading as Accomplished, and date and sign this remark. At this time, the other original bills become null and void.

Marine / ocean bill of lading

The marine or ocean bill of lading is also referred to as a port-to-port bill of lading, which describes its role perfectly. A specimen bill of lading is shown in the annexes. The UCP500 requirements are that it should: - Appear on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by the carrier or the master or by a named agent for or on behalf of the carrier or the master; - Indicate that the goods have been loaded on board or shipped on a named vessel; - Indicate the port of loading and the port of discharge stipulated in the documentary credit; - Consist of a sole original or, if issued in more than one original, the full set so issued; - Appear to contain all of the terms and conditions of carriage or some of such terms and conditions by reference to a source or document other than the bill of lading (short form/blank back bill of lading). Banks will not examine the contents of such terms and conditions; - Contain no indication that it is subject to a charter party and/or no indication that the carrying vessel is propelled by sail only; - Comply with the requirements of the Credit; and - Comply with the stated transhipment requirements.

Non-negotiable sea waybill

The fundamental difference between a bill of lading and a waybill is that a waybill is not a document of title. Their advantage is that in a world of increasing EDT, there is no need for physical documents to be used as delivery can be made to the nominated consignee (order' waybills are not possible) against proof of identity. This is increasingly made against a delivery order on the consignee's headed paper. However, there is a problem if security of payment/delivery or subsequent sale is involved. It should also be noted that waybills are not mandatorily subject to the relevant Carriage of Goods by Sea Act (Hague or Hague-Visby Rules).

Charterparty bill of lading

The inter-relationship between bills of lading and charter parties is discussed in detail in chapter five. In general, such a bill of lading is a much simpler document-see, for example, the Gencon Bill in the annex to chapter 6, and, so far as the UCP500 is concerned, their requirements are that it: - Specifies that it is subject to a charterparty; - Appears on its face to have been signed or otherwise authenticated by the master or by the owner, or by a named agent for or on behalf of the master or the owner; - Unless otherwise stipulated in the documentary credit, does not indicate the name of the carrier; - Indicates that the goods have been loaded on board or shipped on a named vessel; 89

- Indicates the port of loading and the port of discharge stipulated in the documentary credit; - Consists of a sole original bill of lading, or if issued in more than one original, the full set as so issued; and - Contains no indication that the carrying vessel is propelled by sail only.

Multimodal transport document

UCP500 defines a multimodal transport document as one which: - Appears on its face to indicate the name of the carrier or multimodal transport operator and to have been signed or otherwise authenticated by the carrier or multimodal transport operator, the master, or a named agent for or on behalf of the carrier, multimodal transport operator or the master; - Indicates that the goods have been dispatched, taken in charge or loaded on board; - Indicates a place of taking in charge stipulated in the documentary credit which may be different from the port, airport or place of loading, and a place of final destination stipulated in the documentary credit which may be different from the port of discharge; - Consists of a sole original multimodal transport document, or if issued in more than one original, the full set as so issued; - Appears to contain the terms and conditions of carriage or merely contains some or all of such conditions by reference to a source or document other than the multimodal transport document (short form/blank back multimodal transport document)-banks will not examine the contents of such terms and conditions; - Contains no indication that it is subject to a charterparty and/or no indication that the carrying vessel is propelled by sail only; - In all other respects meets the stipulations of the credit. MTDs acquire a number of names but the most critical difference is between a: (a) Through bill of lading: here the carrier only accepts responsibility for the sea carriage whilst the cargo is carried on his own vessel and acts as agent in respect of sea or land carriage not actually performed by himself (in the strictest definition, a through bill is not a multimodal transport document); and a (b) Combined transport bill of lading: here the person on whose behalf the bill of lading is issued accepts responsibility for the cargo for the entire period of the carriage. He will subcontract all or part of the carriage and will be responsible for the acts and omissions of the subcontractor that he uses. The ultimate extension of the subcontract of the actual performance of the carriage is a NVO (C) C bill of lading (the non vessel owning (common) carrier) also referred to as a combined transport document (CTD). Many of the major container operators have produced a hybrid Combined transport bill of lading which covers the requirements of both port to port (or Ocean/Marine) and combined transport. The P&O Container universal bill of lading, reproduced in the annex, is a good example. The sections marked place of receipt/place of delivery are only used in the combined transport role. Other points to note are: (a) Consignment to the order of: this space may be completed either with the name of the consignee or to his order or the words 'to order' in which case the shipper becomes the consignee and delivery is made in accordance with his instructions. These instructions may be given: (i) By specific endorsement- e.g., deliver to J. Smith & Co. (stamp and signature of shipper). (ii) By attaching authorised delivery instructions on the shipper's stationery e.g., a delivery order from shipper to consignee. (iii) by means of a blank endorsement and passing the bill of lading to the consignee-i.e., shipper's stamp and signature with no qualification. 'Order' bills of lading are the usual requirement in a documentary credit transaction but it can be seen that, like a bearer cheque, a blank endorsed 'order' bill is a dangerous document as whoever holds the bill of lading is entitled to demand delivery of the cargo. It is, perhaps, strange that in view of their potential for fraud, bills of lading are relatively easy to secure. There appears now to be a move towards numbering, watermarking and bar-coding bills of lading. Certainly a shipmaster is wise to keep a careful log of bills of lading in his possession, whether blank or completed and should control access to them, whatever his trade.

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(b) Above particulars as declared by shipper, but not acknowledged by the carrier: The main details shown in the body of the bill of lading are commercial details and are required by the shipper for commercial reasons and, so far as the carrier is concerned, they should be kept to a minimum. It is the tally entered under 'total number of containers/packages received by the carrier' for which the carrier accepts responsibility. (c) Freight and charges: generally freight is earned on receipt of the goods and is non-returnable. In some cases, freight details only appear on copy bills which are then used as the freight invoice. (d) Place and date of issue: note that this may be any date after the goods have been received for carriage; by contrast, the date of any 'shipped on board' endorsement must reflect the precise date of shipment. (e) Incorporation clause: this is the clause which incorporates both the carrier's tariff rate and the small print on the back of the bill of lading and/or any charter-party terms.

Terms on the reverse side

The terms and conditions on the reverse of a bill of lading do not make the most exciting reading, even in summary form. On a liner bill they are generally more extensive than on a charterparty bill (see the annex to chapter six for an example). The synopsis of the 27 clauses contained on the reverse of one ma or container operator's universal bill of lading is set out below for completeness rather than for detailed study.

Clause

(1) Definitions-such terms as 'subcontractor', ,carriage', etc. (2) Carriers' tariff-in so far as they are not inconsistent with the terms of the B/L. (3) Warranty-by the merchant that he has authority to give instructions to the carrier in relation to the goods concerned. 'Merchant' is widely defined as the shipper, holder, consignee, receiver of the goods, any person owning or entitled to the possession of the goods or of the bill of lading and anyone acting on behalf of any such person (bearing in mind that none of these persons is a signatory of the B/L!). (4) Subcontracting and indemnity-giving the carrier the right to subcontract and at the same time establishing a 'Himalaya and circular indemnity' which provides that: (i) The cargo interests undertake not to bring claim against the carrier's employees, agents, subcontractors, etc; (ii) That if cargo interests do bring such a claim, subcontractors have the benefit of the B/L terms excluding and limiting the contractual carrier's liability; and (iii) If cargo interests do bring such a claim and succeed, the carrier will be indemnified by the merchant-hence the importance of dealing with bona fide shippers. (5) Carrier's responsibility: port to port shipment- provides for the basis of the carrier's liability to be Hague-Visby if this is mandatory (e.g., shipments from the UK, Germany, Holland, France, Belgium, Scandinavia, etc) and Hague Rules if not. 6) Carrier's responsibility: combined transport -provides, amongst other things, for the circumstance where damage has occurred to goods in the container (hidden damage) and it is not possible to ascertain where this occurred, establishes a limitation of liability of 2 SDRs (Special Drawing Rights) or US$2.50 in USA per kilo and incorporates other relevant conventions-e.g., CMR for European international road movements; CIM for European international rail movements; 7) Sundry liability provisions includes the supply of the container in the B/L contract, provides the approach to liability where extra freight is paid for on ad valorem B/L (i.e., when the value of the goods is included in the B/L) and generally addresses the basis upon which the value of goods is calculated for claims purposes. 8) Shipper packed containers-addresses the basis of liability for FCL packed by the merchant. 9) Inspection of goods-giving the carrier the authority to check on the carriage of hazardous goods, stowage generally and correct freighting. 10) Carriage affected by condition of goods-if a problem arises with the goods, the carrier has the right to take such steps as are necessary on behalf of the merchant in that merchant's best interest and to recover his expenses (sue and labour). (11) Description of goods-links up with incorporation clause and provides that, except for the 'total No. of containers/ packages received . . .' the carrier makes no representation relating to any details of the goods. 91

(12) Shippers'/ merchants' responsibility-covers warranty that details on the face of the B/L are correct, compliance with regulations (Customs, etc.) and the return of the container. (13) Freight-non-returnable, cannot be offset against unpaid claims and the carrier's right to levy a surcharge against unexpected cost (e.g., war risks premium). (14) Lien-on both goods and documents and covering general average contribution. (15) Optional stowage and deck cargo-the right to consolidate cargoes, the right to stow on deck and the effect on liability. (16) Live animals-primarily the acceptance of no liability. (17) Methods and route of carriage-allows transhipment and the carrier's right to pack goods in a general purpose container unless specific request and payment has been made for a 'special'. (18) Matters affecting performance-cove ring circumstances which make for frustration of the carriage. (19) Dangerous goods-carrier's prior agreement required together with proper packing and marking. (20) Notification and delivery-the merchant's responsibility to ensure that delivery is taken within (usually) 30 days or the goods may be sold. (21) FCL multiple bills of lading-all B/Ls to be presented or the container will be unpacked and the goods delivered piecemeal. (22) General average and salvage-the New Jason clause is incorporated to cover the event of GA being adjusted in America according to US law which prevents carriers recovering GA contributions in certain circumstances unless they have made specific contractual provision which this clause also covers. The Sistership salvage clause is also incorporated and the master is appointed as agent to engage services if needed. (23) Variation of the contract-only by the carrier's agreement. (24) Law and jurisdiction-provides any claim or dispute under this B/L shall be determined, at the option of the plaintiff, either by the Courts of the country where the carrier, or the defendant if not the carrier, has his principal place of business, according to the laws of that country. (25) Validity-covering conflict with national laws or international conventions. (26) Both to blame collision clause. (27) USA Clause Paramount-this makes provision for the application of the appropriate US legislation to shipments to and from the USA. The small print on the back of a bill of lading is never an easy read and is frequently highly technical. The preceding summary is intended to give general guidance only to the types of clauses and the gist of the terms and conditions found on the back of a bill of lading.

National and international laws

Before moving on to the next three chapters which deal with the legal framework within which contracts of carriage are carried out, their management and then insurance, this section gives an insight into how international conventions are negotiated. The concept of sovereignty linked to the national flag and operating against a background of the freedom of the seas is generally well known and two general strands of law developed over the years. What was frequently described as public law dealt with matters generally associated with the freedom of the seas and the right of free passage. As international trade increased, a body of private maritime law grew up regulating such matters as collision, liability' insurance and the conduct of contracts of carriage. The rapid rise in the extent and complexity of international trade during the 19th and 20th century and increasing interest in the sea and seabed as a source of mineral wealth blurred this distinction and increased the need for a greater degree of international co-operation-or at least, international regulation. It is interesting to note that the depletion of fish stocks has generated a once unthinkable move towards the restriction of a fishing vessel's traditional rights to fish in international waters. The move towards establishing international maritime law came mainly from continental Europe with its tradition of codified civil law. Although this approach sometimes conflicted with English common law based as it is on precedent, both regimes now work closely together. One of the earliest forums for co-operation was the Comite Maritime International (CMI), formally established in 1897 with a mission to work for the international unification of maritime law. One of its stated aims was to encourage the formation of national maritime law associations in countries with a maritime tradition and the British Maritime Law Association was formed in 1908. In the almost 100 years of its existence, the CMI has been involved in drafting the following Conventions: - Collision (1910) 92

- Salvage (1910 & 1989) - Limitation of Liability for Maritime Claims (1924, 1957 and 1976) - Bills of Lading (1924, 1968 and 1979) 0 Arrest (1952) - Carriage of Passengers (1961) 0 Carriage of Luggage (1967) - Carriage of Passengers and their Luggage (1974) 0 Civil Liability Convention on Oil Pollution (1969) Fund Convention (1971) - Maritime Liens and Mortgages (1926 and 1967) as well as in contributing to many others. The drafting process generally follows the same pattern. The CMI identifies an area of law in which unification would be an advantage and appoints a small working group to start work on the project. Generally, the first step for a working group is to circulate a questionnaire to all member national associations seeking advice on the law applicable to the subject in each member country. A working group will then produce a first draft of a convention or set of rules and a representative sub-committee will be established. Several years of negotiation and redrafting may then take place before the subcommittee is in a position to lay a document before the CMI Executive. The draft convention or set of rules will then be subject to a clause-by-clause analysis at a periodic CMI conference and on the final day the text will be voted through in a plenary session. If the end product has been a convention it will then go to a full government-sponsored Diplomatic Conference at the end of which it will, if approved, become a fully-fledged international convention available for ratification and incorporation into the law of ratifying states. Generally, the international convention will set down how many countries need to ratify the Convention before it comes into force. Ratifying nations then have a specified period of time to make the convention part of their own national law; in the United Kingdom this is done initially through an Act of Parliament supported by enabling legislation in the form of Statutory Instruments. Those nations which have not ratified the Convention by the time it achieves international status must accede to the convention, which effectively introduces the regulations directly into their national law. In recent years the role of the CMI has changed due to the creation of three United Nations agencies (IMO, UNCTAD and UNCITRAL-the latter being the United Nations Commission on International Trade Law). These agencies have, to some extent, replaced the CMI as initiators of international conventions although the CMI and its national agencies still retain an important advisory role both to the UN agencies and to their respective national governments. An example of this is the proposed review of the Hague, Hague-Visby and Hamburg Rules which the CMI plans for its centennial year (see chapter 5). An interesting example of how the international consultative process works is the 1994 Revision of the York-Antwerp Rules which are also discussed in chapter 5. The history behind the Rules was traced in the Nautical Briefing, with the conference of 1804 in York producing the York Rules (York was a major centre of the wool trade to the Continent) with a revision in Antwerp in 1877. This tradition of revising the Rules to bring them up to date with modern maritime technology and to take into account changes in legislation has continued every 20 to 25 years. It was the International Convention on Salvage, 1989, discussed in chapter ten, which triggered the latest revision. The Salvage Convention. in Articles 13 and 14, introduced the concept of protection of the environment into the maritime legal framework. As salvage awards are allowable in General Average (Rule VI), it was apparent that the York-Antwerp Rules, 1974, would require revising. The CMI was therefore asked to amend Rule VI accordingly and this was done at the Paris conference in June 1990. This was recognised as only a stopgap measure and a process of consultation was put in hand prior to a general revision which was undertaken at the next conference in Sydney in 1994. The CMI established an International Sub-Committee (ISC) which sent a questionnaire to all 52 member-maritime law associations. These in turn consulted interested parties within their own countries; The British Maritime Law Association (BMLA) for example, consulted particularly closely with the Association of Average Adjusters. Other organisations consulted by the ISC included the Association Internationale de Dispacheurs European (AIDE, founded in 1961), UNCTAD and the International Union of Marine Insurers (IUMI), who debated the proposed changes at a conference in Toronto in September 1994. The International Group of P&I Clubs, Lloyd's Underwriter's Association (LUA) and the Institute of London Underwriters (ILU) also showed a healthy interest in the revision. If the theme of the 1974 revision was a desire for simplification, the objective for the 1994 revision, as well as including the provision relating to the protection of the environment, was clarity. There was also a strong lobby from underwriting interests, as well as UNCTAD, that emphasised a desire that the scope of general average should not be expanded. 93

Forty-two national delegations of varying size attended the CMI Conference in Sydney in October 1994 which, as well as a revision of the York-Antwerp Rules, discussed claims for pollution damage and offshore mobile craft. Some 25 delegates, together with a variety of observers, attended the five days of discussion of the ISC dealing with the Rules revision. The first two days were given to debate, and on the third, a drafting committee produced texts based on the previous two day's discussions. On the fourth day, the texts were remitted to the full ISC for approval and formal submissions to the plenary session of the ISC, following further debate and a vote by each national delegation. On the fifth day, each of the Rules was debated and adopted at the full plenary session of the Comite Maritime International which then adopted the 1994 Rules as a whole and passed the following Resolution. 'The delegates representing the National Association of Maritime Law of the States listed hereunder: 1. having noted with approval the amendments which have been made to the York-Antwerp Rules, 1974, as amended 1990; 2. propose that the new text be referred to as the York-Antwerp Rules, 1994; 3. recommend that the York-Antwerp Rules, 1994 should be applied in the adjustment of claims in General Average as soon as practicable after 31 December 1994.' It is interesting to note that, whereas the major safety-based conventions such as SOLAS and MARPOL are brought into legal effect through the enactment of national law by the ratifying governments, the York-Antwerp Rules 1994 became the (generally) accepted guiding rules for general average through a proposal and a recommendation by a body, the CMI, which has no formal, international, legal standing. There is no doubt that maritime law is drafted by many learned people who have a vast experience in resolving the problems which arise from disputes relating to contracts of carriage. Just as we have found a benefit when there is a closer understanding between the designers of ships and those who take them to sea, so might there be a benefit from involving the professional mariner in the drafting of maritime conventions.

ACKNOWLEDGEMENTS

MY THANKs are due to the International Chamber of Commerce and to John Richardson, author of P&O's Merchant’s Guide.

REFERENCES

The Merchant's Guide. John W. Richardson, FCII. P&O Containers Ltd. Incoterms 1990. International Chamber of Commerce. Guide to Documentary Credit Operation. International Chamber of Commerce.

ANNEXES FOR CHAPTER 4

- Bill of lading/waybill - Bill of lading terms and conditions

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Chapter 5

LEGAL FRAMEWORK FOR CONTRACTS OF CARRIAGE The sales contract-contracts of carriage-limitation of liability. This chapter is about how the demand for maritime transportation is generated and the legal and commercial structure within which this demand is translated into the employment of a vessel and how it thereby generates the income with which to pay for everything from loan interest to crew wages. One of the objectives of the Nautical Briefing on maritime commercial practice is to heighten awareness of the activities and needs of the shipping industry's customers (the buyers and the sellers of internationally traded commodities) who are the generators of demand for maritime transportation. Just as the sale contract is the key document at this initial stage of activity, so it is that contracts of carriage are the documents which translate this general requirement into a specific demand for the services which the shipmaster is responsible for managing. THE CENTRAL DOCUMENT in virtually all contracts of carriage is the bill of lading (or perhaps, as seen in chapter four, the waybill). The bill of lading can stand alone, as it does on a liner trade, or be linked with one or more charterparties. The relationship between and rights and responsibilities of the shipper and consignee (the seller and buyer), the charterer, if any, and the shipmaster and shipowner are governed by a number of international conventions. It is the aim of this chapter to discuss the master's role against the background of these conventions as an introduction to chapter six. The ways in which contracts of carriage can be carried out with the maximum degree of efficiency and with the best return both for the vessel and the shipowner, whilst still ensuring customer satisfaction, will be examined. In a world of satellite communications, multinational corporations (although these are not new-think of the East India Companies described in the Nautical Briefing), and frequent changes of trade, it is too easy to forget the special relationship between shipper and shipmaster. During the early part of the sixties, a large and well established liner company made a (fairly) regular call to a small port not far from Cochin on the south-western coast of India. The sailing date and itinerary were well published by the local agent and his cargo canvassers. Freight rates were available on demand; the company was acting as a common carrier. Every two months or so, an hour before dawn, the headman from a village some 20 miles inland from the port loaded the village's output of six bales of hides on to his ox cart and set off for the port. When he arrived, he reported to the agent and then moved his oxen into the shade of a godown and waited patiently. Eventually he was called forward and the village's six bales of skins were swung into the appropriate 'tween deck tinder the watchful eye of the deck officer on cargo watch. The stow was noted on the tally sheet and a mate's receipt prepared. Since the headman was well known in the port, the chief officer would give him his mate's receipt after agreeing to the condition and quantity of the skins. Accompanied by the agent, the headman would climb the three decks from the cargo office to the master's cabin. The master, who was expecting them, would carefully make out, stamp, date and sign three original bills of lading which he exchanged for the mate's receipt. After a few minutes polite conversation, the headman would set off for the post office. There he would post two of the bills of lading, each in a separate envelope, to his buyer in Leicester, knowing that the village's produce was in safe hands and would, against the appropriate freight, be delivered by the master at the agreed destination (Hull) to the consignee on presentation of one of the original bills of lading. The headman would then start the slow journey home, content that the village's livelihood had been entrusted to the care of the master. This story is repeated from chapter four because in an age of computerisation, satellite communications and burgeoning safety regulations and inspections, it is all too easy to forget that this is still the essence of the professional mariner's role. It is also the only activity undertaken on board a commercial cargo vessel, be it a LNG carrier, a 5,000TEU container vessel or a 3,000-tonne single decker which generates income.

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The sale contract Sellers, buyers and traders

The basics of international trade are described in the Nautical Briefing on the development of maritime , commercial practice, tinder the heading 'international trade today'. The six essentials of every international trade transaction are identified as: - An agreed product or service. - A sale contract, - Shipping and delivery details. - Terms of payment, - Documentation, - Insurance cover. Behind this simple summary is an intensively competitive world which generate, the movement of over 200 million tonnes of cereals annually and some 1,120 million tonnes of crude oil amongst a wide range of primary bulk commodities which are predominantly transported by private carriers outside the liner trades. The cereals, feeding stuffs and pulses trades provide a valuable insight into how these markets work and the way in which the shipping industry's customers-growers, traders, manufacturers and retailers-operate and perceive the industry's role in their business. Marine transport is one crucial link in the chain of events which takes the rice from the paddy field to the supermarket shelf at a consistent quality or enables manufacturers to combine half a dozen different raw ingredients from around the world into a consistent end product. A typical example is the manufacture of animal feedingstuffs. The UK market for animal feedingstuffs is some I I million tonnes per annum, of which over half is imported. Fifteen buyers process the feeding stuffs through 27 feed plants. With the delivered cost of raw materials constituting 80% of final price, margins are low and competition fierce. A major manufacturer may monitor 500 different commodity classes and subclasses grown in different regions around the world, although a mainstream of 25 products plus 15 alternatives will fill the 35 or so silos at his main dockside processing plants most of the time. In an increasingly complex technological world, with the UK Food Safety Act (or the many overseas equivalents) requiring an exacting level of due diligence throughout the production process, quality is a key consideration. With material costs ranging from £60/£70 per tonne (for rice bran) to the equivalent of £15,000 per tonne (for vitamins), giving an average ingredient cost of about £128 per tonne, stocks (which represent idle money) must be kept as low as possible consistent with continuous production runs. An animal feedingstuffs manufacturer analyses his business, clearly defining the delivery of nutrient product packages (animal feeds) as his prime business objective. In order to achieve this he knows that his most valuable core skill is nutrient knowedge. With low margins over incoming raw materials and a demand for a high level of quality control, supporting core skills are identified as: - buying, with its associated demands for the ability to hedge financially against commodity price movements; - marketing and close contact with the consumer; and - transportation, including shipment. Of these it is transportation which can most easily be contracted out with the potential of cost savings. Thus, the manufacturer decides to end his direct involvement in shipping and to buy the majority of his raw materials requirements ex-store in the countries in which he manufactures. Whilst the manufacturer's buyers and nutrition experts, continue to travel the world maintaining contact with growers of soya and sunflowers in Peru and India, rice bran in Thailand, vegetable oil in Malaysia and cereals in Argentina and the USA, the decision on where and when to buy and how to ship passes to a third party, the trader. The trader's prime objective is to meet the requirements of the buyer (the feeding stuffs manufacturer) which will be translated into a sale contract. In this case, it will most probably be GAFTA (Grain and Feed Trade Association) Contract 109, Bulk Feeding Stuffs Ex Store/Silo. As the manufacturer (the buyer) will want to keep his stock as low as possible, the trader knows that he must provide: security of delivery; consistent quality; and competitive pricing. 96

His first task is to identify a supplier who can meet his requirements in terms of price, delivery, quality and consistency (which he may well undertake in conjunction with the manufacturer's nutrition experts). The relative strengths and weaknesses of the supplier and trader will determine the terms and conditions under which the goods are shipped: - A small grower may well sell ex-field to a contractor (who may provide harvesting services) or to a cooperative; - The co-operative, some hundreds of miles from the nearest port, must decide whether to: (a) Sell 'ex-railhead silo' to a trader who will transport to, and consolidate at, the seaport; (b) Transport it to the seaport and organise an FOB (free on board) sale; or (c) Sell directly on a CIF (cost insurance and freight) to the end user (the manufacturer) for delivery to his warehouse. This will require the co-operative to organise both the overseas sale and the marine transportation. A number of factors will affect the decision on how the goods are exported, access to the buying market and the ability to, cost-effectively, organise the seaborne transportation leg being two of the most important. Raw materials are frequently sold on an FOB (free on board) basis and the trader will be endeavouring to match his purchase contract with his sale contract to the manufacturer. Some 80% of all cereal contracts and a major proportion of all feeding stuffs and pulses contracts move on one of GAFTA's 80 contracts, in this case Contract No. 119, General Feeding Stuffs, Bulk/Bags, FOB. Thus, the trader will want to back-to-back this contract with his GAFTA Contract 109 covering the onsale to the manufacturer, whilst at the other end of the chain, the co-operative will be endeavouring to match the export contract with the local contracts on which they have secured the commodity from the grower. The trader, meanwhile, having fixed his buy and sell contracts and hedged any exchange rate exposure between purchase and sale currency, will instruct his shipping department to charter the necessary tonnage to meet the loading and delivery dates. It is very likely that the trader will be aiming to consolidate two or three parcels to achieve economies of scale and thus a handy-size bulk carrier, lifting, say, 30,000 tonnes could well be chartered against a background of several purchase contracts and two, three or four sale contracts by the trader. Behind this may well be organised documentary credits facilitating deferred payments, as described in chapter four. All these aspects of international trade depend centrally on one or more of the roles of a bill of lading and on the way in which the master presents his vessel, loads, stows, carries and eventually delivers the cargo.

Sale contracts-dry bulk

The Grain and Feed Trade Association is one of a number of organisations which provide a range of services central to which are a number of internationally recognised procedures and standard contract forms (similar, in many ways, to the range of BIMCO charterparties). A general understanding of the terms and conditions of the sale contract (based on the GAFTA standard) gives a useful understanding of the imperatives driving the shipper, charterer and receiver. Contract No. 64, General Contract FOB Terms for Grain in Bulk, is one of the most frequently used and is summmarised below as well as being included in the annex for this chapter although readers are not advised to get too involved in the detail of this section. Signed by sellers and buyers but specifying the intervening brokers (unlike the average charterparty), the contract contains 30 clauses, of which: Clause 3-Quantity: allows 5% more or less at buyer's option (which translates recognisably enough into the equivalent charterparty (C/P) clause). For full and complete cargoes, the margin shall be 10%, with the excess or deficiency over 5% being settled at 'FOB price on the date of last bill of lading . . .' Clause 6-Quality: There are a number of standard options and an understanding of the way in which the contract approaches this problem may aid the master in the event of a query as to the correct wording on the bill of lading. - Government, official or customary inspector's certificates issued at time and place of delivery will be final as to quality. - Of fair average quality of the season's shipments at time and place of shipment to be assessed upon the basis of, and comparison with, GAFTA's official FAQ standard of the month during which the bill of lading is dated. - To average at time of shipment about equal to the official standard of the (relevant) chamber of commerce. 97

- At the time and place of shipment about as per sealed sample marked ... Clause 7-Delivery: This refers to delivery of the grain to the load port and requires buyers to give a certain stipulated notice of the vessel's 'probable readiness and the tonnage required', so it is important for the vessel to give as reliable as possible notices of arrival since the charterer must base his logistics on this information. It is sad but true that many traders expect that vessels on charter to them will, at best, be economical with the truth when advising ETAs. The vessel is to load in accordance with the custom of the port (unless otherwise stipulated) and B/L ,shall be considered proof of delivery in absence of evidence to the contrary'. Clause 8-Extension of delivery: Buyers have the option to extend the contract period of delivery by up to 21 consecutive days, provided that buyers give written notice not later than 1600 hours on the next business day following the day of the delivery period. All charges for storage, interest, insurance and other such normal carrying expenses shall be for buyer's account. Good customer relations do not aim to put one's customer in this sort of situation. Clause 10-Shipment and classification: per first-class ... (excluding tankers and vessels which are either classified in Lloyd's Register or described in Lloyd's Shipping Index as 'ore/oil vessels') steamer(s) and/or power engined ship(s) classed not lower than 100 Al in Lloyd's Register or British Corporation BS or top classification of other equal register, or ships not inferior to these classifications. Clauses 13, 14, 15 address certificates of origin, export duties, taxes, levies, etc. (seller's responsibility) and export licence. Clause 16-Weighing: leaves the description of the weighing procedure open to negotiation but establishes the right for both sellers and buyers to attend. This should be correlated with the requirements for establishing weight under the B/L and it is very important for the master or his cargo officer to take an interest in this procedure if at all possible. P&I Clubs receive many shortage claims which could be refuted or mitigated with the assistance of a, pro-active master. Clause 17-Sampling: Provides the option for an average sample to be taken and sealed jointly by buyer and seller and assessed in line with GAFTA's sampling rules (see annex). As with quantity, the vessel can easily become caught up in a dispute about quality between buyer and seller and if the master is aware of the sampling procedures being used, the information may well help to defend the owner's position. Clause 18-Latent defect: The grain is not warranted free from latent defect. Clause 19-Insurance: Marine and war risk insurance to be effected by buyers, but note that if buyers do not confirm that insurance is placed at least five consecutive days prior to the expected readiness of the vessel(s), sellers have the right to effect insurance at buyer's risk and expense. Clause 22 & 23-Notices: all notices received after 1600 hours are deemed to have been received on the following business day; facsimile is not considered a satisfactory method of transmitting notices. Note that many of the notices to be given by the buyer will depend upon timely and accurate information from the master. Clause 24-Non-business days: Hopefully correlated with the charterparty. Some FOB contracts, such as 'Thai Rice in Bags or Bulk' (GAFTA Contract No. 120) have more specific wording for: Clause 9-Inspection and fumigation: This specifies independent inspection and supervision in respect of the quality, weight, condition and packaging of the rice prior to loading (at the expense of sellers) and that this quality, weight, condition, etc., shall be 'final at port of loading according to the certificate issued by. . .' Thus, in the minds of sellers and buyers, it would appear that the quality and quantity which they, and any financing bank, rely upon is determined prior to the cargo being loaded. The fumigation requirements are also specified. Clause 11-Loading: This is much more fully addressed and is to be undertaken by sellers (load, stow and trim), free of expense to the vessel (except that opening and closing of hatches shall be done by owners at their own time and cost), at 1,200 metric tonnes per WVATD (weather working day of 24 hours), SSHEX (Saturday afternoons, Sundays and Holidays excluded, even if used) basis five working hatches. Matting, dunnage and ventilation for buyer's account. Presentation of NOR (notice of readiness), laytime, despatch/ demurrage (as per C/P) are all addressed (see chapter six) and, if the vessel is lost prior to completion of loading, buyers pay for loaded rice as per B/L or mate's receipts (M/R). Goods pass to buyer's risk upon 'delivery over the ship's rail' (Clause 13). 98

Contracts based on CIF (cost, insurance and freight-or C&F, cost and freight) such as No. 100 (Contract for Shipment of Feeding Stuffs in Bulk) naturally extend the seller's involvement beyond the ship's rail at the port of loading. The contracts are generally TQ (tale quale) although a dozen are RT (rye terms-see clause 13). In general terms, these two terms relate to the condition of the goods on arrival at destination, as opposed to their quality. (Confusion sometimes arises when attempting to differentiate between quality and condition. Quality is the inherent nature of a product, whatever its condition-a rusty Rolls-Royce remains a quality product. Certain other cars, even in prime condition ex-factory, never, it might be argued, are quality products). The main difference in the GAFTA sale contract arising out of the use of CIF terms, based on contract 100, are: Clause 2-Quantity: The margin to ship more or less moves to the sellers but is reduced to 2% with an option of shipping a further 3% more or less, with the price calculated at the discharge port. Under the terms of sale, a Performance Bond may be established on which the buyer can draw in the event of a default by the seller. Quality, quantity and timely loading are three important areas of consideration and, at 10 per cent of full value, the Bonds can be of considerable value in the case of a large contract of affreightment. Very often disputes are left to be resolved until the last shipment of a series and the seller will endeavour to detain the vessel in an attempt to offload claims for poor quality or short delivery on to the shipowner. Clause 3-Price: This now naturally covers 'gross weight, cost, insurance and freight'. Such wording presupposes that the seller knows the cost of freight prior to concluding the sale contract or is prepared to live with this exposure. Clause 5-Quality: This is established through a warranty given to the buyer by the seller based on: - At the time of loading to be fair average of the season's shipments; or - At time and place of shipment to be about as per sealed sample marked ... in the possession of ... Penalties are established for below specification quality with buyer's right to reject if the sand/silica content exceeds 5%. Clause 6-Period of shipment: 'As per bill(s) of lading dated Or to be dated ... the bill(s) of lading to be dated when the goods are actually on board. Date of the bill(s) of lading shall be accepted as proof of date of shipment in the absence of evidence to the contrary. In any month with an odd number of days, the middle day shall be accepted as being in both halves of the month'. The price of the goods may well be fixed against the bill of lading date so it is crucial that B/Ls are not signed until the cargo is on board, whatever the pressure from the shipper. Clause 7-Sales by named vessels: For all sales by named vessels, the following shall apply: (a) Position of the vessel is mutually agreed between the buyers and sellers; (b) The word 'now' to be inserted before the word 'classed' in the shipment and classification clause; (c) Appropriation clause (qv) cancelled if sold ,shipped'-i.e., in the event that a CIF sale is made on a named vessel on a 'shipped' or ,afloat' basis, the appropriation clause is cancelled as the goods have already been effectively identified and loaded (see clause 10). Clause 10-Appropriation: The purpose of the notice of appropriation is to confirm to the buyer that the shipper has fulfilled his obligation to provide, identify and ship the goods described in the contract within the quantity and time constraints of that contract. The purpose is to provide the last CIF buyer/receiver with enough information to take delivery of the goods on arrival of the appropriate vessel. Thus the notice of appropriation is particularly useful to receivers when shipping documents are delayed in the banking system or in the coastal trades where it is frequently the case that the vessel can arrive before the shipping documents. It is not, however, an alternative method of passing title and cannot replace a bill of lading. Very often there will be a number of intermediate buyers and sellers, collectively known in this context as a 'string', intervening between the first seller/shipper and the last buyer/receiver. The 'strings' can be of indeterminate length and where long strings are involved in the more volatile markets they can be a constant source of problems since, rather like a game of pass the parcel, there is a tendency to buy and resell on the basis of market price movement. At some stage the music stops and the last buyer then unwraps his contract and starts to read the small print. As has been previously mentioned, the owner then has a direct responsibility to deliver the cargo to that buyer in strict accordance with the description on the bill of lading and to which the buyer receiver was never a party. Clause 11-Payment: made: '(a) in exchange for and on presentation of shipping documents'; '(b) in exchange for shipping documents on or before arrival' but sellers have the option to call on buyer to take 99

up the documents 'on or after . . . consecutive days from the date of the bill(s) of lading'. If the shipping documents are not available, sellers 'must provide other documents or an indemnity'. Clause 13-Rye terms: Addresses contamination which may occur as a result of shipment in 'tankers or in oil compartments of oil /ore carries and provides for sellers and buyers to 'give each other all reasonable assistance in the prosecution of claims for recovery from shipowners. . .-again it is imperative for the master to be aware of quality. Clause 14-Shipping documents: - Invoices. - Full set (s) of bill (s) of lading an ' d/or ship's delivery order(s) and/or other delivery order(s) in negotiable transferable form. Such other delivery order(s) if required by buyers to be certified by the shipowners, their agents or a recognised bank. - Policy(ies) of insurance. - Other documents as called for under the contract. Clause 16-Discharge: As fast as the vessel can deliver in accordance with the custom of the port (or, if liner bills of lading are used, as fast as the vessel can deliver in accordance with the terms of the B/L). The cost of discharge from hold to rail for seller's account, thereafter for buyer's account. (Note that in the scenario described earlier, the end buyers were buying ex-store/warehouse, and in such a case the trader would have to cover the cost from ship's rail to his store.) Clause 17-Weighing: Buyer makes final settlement on the basis of the gross delivered weights at the port of discharge at buyer's expense. Clause 18-Sampling and analysis: Although in this contract, the details for sampling and analysis are set out in some detail the requirements for sampling are established by GAFTA in sampling rules No. 124 and methods of analysis No. 130. The sampling rules are set out as an annex to this chapter as a useful industry guide and the master's responsibility for sampling discussed in more detail in chapter six. In the section on sellers, buyers and traders at the beginning of this chapter, we looked at the provider of animal feedingstuffs who had moved out of the shipping activity by buying on an ex-store/silo basis and the trader's requirement to match his 'buy' contract and shipping 'arrangements with the requirements of his 'sell' contract. Contract No. 109; Contract for Ex Store/Silo in Bulk Feedingstuffs, is such a contract and the main point of interest is the obligations which it lays on the seller to have his goods available: Clause 7-Period of delivery: if sold 'prompt' the delivery period shall be deemed to be 14 days from the date of the contract. Sellers shall have the goods available for delivery in good condition. Clause 15-Loading strike: The period of delivery (clause seven) shall be preceded by a theoretical number of voyage days and a deemed period of shipment of 31 days at origin shall precede those days. The voyage days range from: - Mexican Pacific, West Coast North America, China, Indonesia, Japan and other Far Eastern Ports ... 45 days. through - Mediterranean, Morocco to Liberia ... 15 days. to - Baltic, Iberian Atlantic Ports ... 7 days. and - Other European Ports ... 3 days. If civil and/or military commotion or strikes or lockouts prevent loading during the 28 days of the deemed period of shipment the seller must give notice and will require documentary evidence of the cause of the delay to support any claim for an extension under this clause. The relevance to the master is both in an understanding of the potential need to give timely notices of delay supported by properly collated evidence as well as an understanding of the time pressures against which the seller/shipper (his customer) is conducting his business. This has been a brief introduction to the type of contract on which international trade is carried out and which generate the demand for maritime transportation. It is important to remember that the marine sector is just one leg of a journey from, in this example, corn field to breakfast table or cattle trough. At all stages, buyers and sellers will be endeavouring to minimise their exposure by ensuring that their contracts are, as far as is possible, back-to-back. Outside this chain, but running parallel with it, are the contracts of carriage (bills of lading and charterparties) which control the seaborne, and arguably the most difficult, leg of the journey. Whoever is responsible under the terms of the sales contract for providing the shipping services will, naturally, also be endeavouring to reduce his exposure by matching, so far as is possible, the contracts of carriage with the contract of sale. Time, and the timely arrival of the vessel, can be crucially important.

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Sale contracts-liquid bulk

The example of a range of sales contracts set out earlier in this chapter is fairly typical of the way in which a wide range of commodities are traded with a trade association establishing the contractual ground rules and probably providing a level of quality control through a sampling and analysis service. Much of the trading in hydrocarbons was initially undertaken by the oil majors using their own contractual formats. These, not surprisingly, reflected a fairly heavy legal input and still provide much of the framework for current trading practice. As independent traders entered the market and began trading against each other, an abbreviated form of contract became popular. Examples of two of these, one FOB and one CIE, are contained as an annex. A few of the relevant points to note are: - CIF price Linked to the bill of lading date so, on a falling market the shipper will be pushing for early signing and vice versa. - FOB title At buyer's vessel's intake pipe. - FOB delivery - Note the seller's right to reduce the laycan to three days one month before actual delivery, and understand the buyer's natural anxiety about the vessel's timely arrival. - Demurrage - An example of the direct linkage between the sale contract and the contract of carriage (e.g., charterparty). - Delivery - Linked with NOR at port of discharge or physical discharge and an example of the interaction between the three contracts involved: sale, bill of lading and charterparty. Buyer, seller and the bank providing the credit line are all very dependent upon clear and precise information from the master. Both contract notes refer to major oil company standard terms and conditions and, as indicated, these are substantially longer. Considerable attention is given (in an FOB contract) to the procedure for nominating a vessel and ensuring its timely arrival at load port. Significant attention is also given in the sales contract to details of laytime and demurrage.

Contracts of carriage Charterparties and bills of lading

With the sale contract either well advanced or completed, the shipper (who will be defined by the Terms of trade in the sale contract, basically FOB ,he buyer, CIF-the seller) will need to put in place a contract for the carriage, or affreightment, of the goods. There are two broad types of carriage document in common use which he can turn to, the charterparty or the bill of lading. Charterparties are typically used when a shipper wishes to make use of an entire vessel whilst bills lading are used where the shipper only wishes book space on a vessel. This leads to two crucial differences between the two documents, one of function and the other of breadth of coverage. Charterparty, involving as it does the hire of an entire vessel, will contain some clauses which relate directly to the carriage of the goods as well as many clauses which go far beyond the mere carriage of the goods and relate to the management of the vessel. Bunkering, delivery and employment of the crew are typical examples. Secondly charterparties can only perform one of three functions of which the bill of lading is capable-namely, that of being a record of a record of a contract of carriage. Charterparties do not, and cannot, perform the crucial role of the bill of lading as a document binding the carrier, under the signature (usually) of the master, to statements he makes about quantity and the (apparent) condition of the goods on shipment. Nor can charterparties share the magic of a bill of lading as a document of title. For this reason, it is common for bills of lading to exist together with charterparties within the same transaction and why it is also common to find clauses in one or both documents relating to the other. It is the nature of this relationship which will be explored in this chapter and it is one which has kept the legal profession gainfully employed for many years.

Rights of consignees

The rapid expansion of trade during the 19th century and the continuing tendency for merchant adventurers to separate their activities so as to specialise either as shipowners or traders led to an increase in national and international law governing the carriage of goods by sea. One major strand of international maritime law was generated because of the principle of English law under which only those who are party to a contract can sue under that contract. Under CIF and C&F contracts, it is the duty of the seller to conclude the contract of carriage. The ordinary application of the English doctrine of privity of contract meant that the buyer (or consignee/ 101

endorsee) would be left without a remedy against the carrier (shipowner) even though he has sustained a loss, as he was not a party to the contract of carriage (see figure 5.1). This severely undermined the commercial value of a bill of lading and restricted its negotiable value at a time when international trade was becoming more complex and banks were increasingly involved in financing transactions on the face value of documents alone, particularly the bill of lading. This in turn led directly to the Bills of Lading Act 1855 (the 1855 Act) which was central to maritime commercial practice for nearly 140 years until the effects of containerisation and through transport and an increasing need for the endorsee to be brought more fully into the scope of the Act resulted in the Carriage of Goods by Sea Act 1992 (the 1992 Act). (This is not to be confused with the Carriage of Goods by Sea Act 1924 which is a different branch of .the legal tree which implemented The Hague Rules in England and which is discussed later in this chapter.) In a CIF or C&F sale contract, the contract of carriage is the responsibility of the seller and, although the bill of lading is evidence of this contract, the bi1yer, as consignee, is not a party to the contract of carriage although he may be affected by it. The 1855 Act established the legal link between carrier and receiver by providing that: Every consignee of goods named in a Bill of Lading, and every endorsee of a Bill of Lading, to whom the property and the goods therein mentioned shall pass upon or by reason of such consignment or endorsement, shall have transferred to and vested in him all right of suit, and be subject to the same liabilities in respect of such goods as if the contract contained in the Bill of Lading had been made with himself Whilst the tenor of the 1855 Act might seem to have solved the problem, presiding judges were keen to ensure that not too wide an interpretation was made of the freedom to litigate bestowed by the Act. After all, it was establishing a right which extended beyond the long established law of privity of contract. The increasing complexity and sophistication of modern trade, attributable to improved international communications, revealed severe limitations with the 1855 Act. Without exploring the legal complexities relating to the 1855 Act, the Carriage of Goods by Sea Act 1992 (the 1992 Act) expands the scope of the contractual link between carrier and receiver and brings English law more in line with European law-e.g., Dutch Commercial Code Article 510, French Decree 99-1078 of December 1966 Article 49, Section 606 of the German Commercial Code and the US Pomerene Act (Federal Bills of Lading Act 1916). In summary, the 1992 Act provides for the following: (1) Documents to which the Act applies (section 1) (a) Bills of lading, unless it is a document which is incapable of transfer by endorsement (e.g., a ,straight' or 'nominated' bill of lading). A ,received for shipment' bill of lading now falls within the Act. (b) Sea waybills (this is an important new extension). (c) Ship's delivery orders but not merchant's delivery orders. (d) Electronic data interchange (EDI) -the Act makes provision for the future application of EDI. (2) Rights under the shipping documents (section 2): The essential objective of the Act is to enable the lawful holder of a bill of lading to assert contractual rights against the carrier, irrespective of the passing of property (the goods or cargo) and regardless of whether the lawful holder of the bill of lading has suffered loss himself. . Although under the 1855 Act there was a problem with title to sue where the endorsee came to hold the bill of lading after the goods had already been delivered (by the carrier), this problem no longer applies. 'Property' in the goods is no longer a requirement for title to sue and, just to make the point completely clear with respect to bulk cargoes, Section 5 (4) (b) states expressly that it does not matter that goods cannot be identified because they are mixed with other goods (e.g. grain in a silo, oil in a tank).

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However, there are still many countries whose law is governed by the old Act and it is for this reason as has been demonstrated time and again, good original records and contemporaneous evidence from the vessel is frequently crucial to the Courts or arbitrators who are attempting to unravel and adjudicate on complex transactions which have taken place some years previously. The master's commercial responsibilities mean that he plays an active and involved role in that happens on board and in connection with the cargo which has been entrusted to his care. It does not become, somebody else's problem' as soon as the discharge port is reached and the hoses are connected or the hatches opened. Without an intention to enter into a discussion of case law, a pre-1992 Act claim, the Delfini (1990) Lloyd's Rep 252, illustrates a situation which is only too well known to masters of bulk vessels and, especially, tankers. - First sale contract: Vanol International BV, by contract dated 2 July 1985, purchased 100,000 tonnes of Algerian condensate from Sontrach. - Second sale contract: Vanol onsold 20-25,000 tonnes to Enichem, CIF terms, delivery Gela. The sale contract provided that payment and delivery could be made against either the shipping documents or a 103

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letter of indemnity backed by a bank guarantee to be in place no later than the date of nomination of the vessel. Contract of carriage: Vanol, as shippers, entered into a voyage charter with the owners of the Delfini (the defendants). The voyage charter provided that Vanol were allowed to instruct the vessel to discharge against Vanol's letter of indemnity if bills of lading were not available at time of discharge. (A P&I Club would not be happy with this condition being written into a charterparty which if complied with prejudices Club cover. However, P&I Clubs do recognise the realities of the commercial world and do have recommended wording for such indemnities.) Bills of lading issued: The vessel was loaded on 2 August and bills of lading issued naming Sontrach as shippers. Delivery: The vessel arrived at Gela on 4 August, gave notice of readiness but did not berth until 7 August. Bills of lading were still in the hands of Sontrach and on 5 August Vanol issued two telexed letters of indemnity, one to the ship instructing it to deliver to Enichem without presentation of the bills of lading and the other, with an invoice, to Enichem who were to pay for the goods. The vessel discharged between 7 and 9 August. (The instruction to the master to discharge without presentation of bills of lading, if it is to be given, should properly come directly from the shipowner and not the receiver and should, preferably be undertaken against a letter of indemnity in accordance with the Club's recommended wording. The L.O.I. will then replace the Club cover in the event of a claim for mis-delivery and this is why Clubs recommend that the L.O.I. be backed by a bank.) Settlement: On 12 August, Enichein paid Vanol. It was only on 20 August that Enichem's bank received a complete set of shipping documents from Sontrach including the bills of lading, which had never been presented to the defendants and which, naturally, stated the quantity of condensate loaded and, therefore, to be delivered. There followed a dispute in which Enichein sued the shipowners for short delivery. The 1855 Act: (a) The initial judgement was that once the vessel had unloaded and sailed away, the contract of carriage was discharged despite the incomplete delivery, whereupon the bill of lading ceased to be effective as a transferable document; accordingly, no contractual rights were acquired by the transferee (Enichem). (b) The plaintiffs (Enichem) appealed but the Court of Appeal held that they had no right of suit because endorsement of the bill of lading to Enichem on 20 August did not play an essential part in the transfer of title to the cargo which occurred at the latest when Enichein paid Vanol on 12 August and probably earlier on discharge or even when Vanol telexed Enichein on 5 August. (This illustrates how critical and how complex the precise identification of a specific act or event may be within the course of a normal commercial operation. It also emphasises the need for accurate and concise records to be kept on board.)

- The 1992 Act: It was the realisation that the precedents, which established the strict interpretation of the 1855 Act rather than the natural justice of the case, were having a detrimental effect on the future of London as an international centre for the resolution of disputes which was the impetus for change. By providing that the bill of lading should be capable of endorsement so as to pass contractual rights and title even after delivery of the goods has been made (provided that the endorsement is effected in pursuance of contractual arrangements made before the delivery of the goods) the problem of the Deyini and sever4 other similar cases is avoided. It might be added that this has still to be confirmed by the establishment of precedents confirming that interpretation of the 1992 Act. In summary, it is perhaps unfortunate that the revision of the 1855 Bill of Lading Act carries the name Carriage of Goods by Sea Act 1992, thereby risking confusion with the 1924 and 1972 Carriage of Goods by Sea Acts, which implemented The Hague and Hague-Visby Rules respectively. However, the 1992 Act does bring English law relating to the rights of suit against a carrier even closer to the practice of other major maritime nations. It is interesting to note that the Law Commissioners, in their recommendations to Parliament, declined (as did the 1855 Act) to attempt a precise, legal definition of a bill of lading and left it to be identified by reference to its three well known functions. The principal recommendations which effectively summarise the exposure of the carrier-i.e., the shipowner and the master, are:

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- The lawful holder of a bill of lading is entitled to assert contractual rights against the carrier, irrespective of the passing of property and regardless whether he has suffered loss himself, if necessary, being able to recover substantial damages for the benefit of the person who has suffered the loss. - The shipper and any intermediate holder of a bill of lading should not be entitled to rights of suit after someone else has become the lawful holder of the bill of lading. - The consignee named in a sea waybill (or other such person to whom the carrier is instructed to deliver) and the person entitled to delivery in accordance with an undertaking contained in a ship's delivery order are able to sue on the contract of carriage. - A bill of lading, representing goods to have been shipped or received for shipment and in the hands of the lawful holder, constitutes conclusive evidence against the carrier of such shipment or receipt (this reverses the rule kn6wuas Grant v. Norway whereby it was held that the master has no authority to sign a bill of lading for goods not put on board). The master's signature does bind the carrier and the bill of lading is conclusive evidence of shipment against the carrier. It can easily be seen how dangerous it is for a master to sign bills of lading on trust without having ascertained to the best of his ability that the goods have been loaded and are in compliance with the description on the face of the bill of lading. It is also essential that the carrier has clear and concise procedures for delegating authority to agents to sign bills of lading on their behalf and that the master knows how these operate.

Hague to Hamburg-controlling the conditions of carriage

Increasingly during the 19th century, shipowners were adding exception clauses to their contracts of carriage which limited their liabilities at the expense of the shipper and, more especially, the consignee. The situation was not helped by different laws being applied in different countries at a time when international trade was expanding. In 1893, exporters in the United States first established the legal obligation of the shipowner to provide a seaworthy vessel and to exercise due diligence in the prosecution of the voyage. However, the Harter Act did not gain universal acceptance and it was another 30 years before the main European maritime nations managed to reach a pragmatic but piecemeal agreement by the adoption of The Hague Rules in 1924. These were implemented into the (then very extensive) English sphere of influence by The Carriage of Goods by Sea Act (1924). The advent of The Hague Rules imposed two distinct obligations on carriers: (i) to exercise due diligence to make the vessel seaworthy before the voyage; (ii) to care for the cargo during the voyage. The first obligation is essential and overriding, although the obligation arises before, not throughout, the voyage. This was a recognition of the near impossibility of achieving seaworthiness under all circumstances. The second obligation is subject to a catalogue of exceptions of which the most important are Acts of God, fire, unless caused by the actual fault or privity of the carrier, and negligence in the navigation or management of the vessel. Even then, the carrier is able to limit his liability to a fixed amount per package or unit (then £100 and today linked to Special Drawing Rights –SDRs). The carrier, master or agent is required to issue bills of lading showing: the leading marks necessary for identifying the goods; the quantity and number of packages or weight of the cargo shipped as furnished in writing by the shipper; and the apparent order and condition of the goods. The practicalities and problems arising from this from the master's point of view are discussed in chapter six together with the corresponding duty to 'properly and carefully load, handle, stow, carry, keep, care for and discharge the cargo'. This is an interesting requirement since it is generally the shipper and the consignee who appoint stevedores and thus have a direct influence on the loading, handling, discharging and, to a lesser extent, stowage. The application of the Rules also produced its own problems. Although by 1968 73 States had ratified the Rules, each State gave the Rules legal status by incorporating them into their own legal system and, as we have already seen, these vary, at least in detail, from country to country. Since The Hague Rules are applied in accordance with the corresponding national law of the country of loading, two identical parcels of cargo could be loaded in two 'Hague' countries for discharge in a third and find differences in the interpretation of the law in the event of a claim. A more serious limiting factor was the fact that The Hague Rules only apply to contracts of carriage covered by a bill of lading or similiar document of title and only applied from the moment the goods were loaded until discharged. This created problems for the growing container market who were offering through transport and increasingly making use of sea waysbills. 105

The Hague-Visby rules

The container industry was one of the major influences behind the Visby amendments to The Hague Rules which were negotiated between 1962 and 1968. Since the amendments dealt with specific problems a piecemeal approach was again adopted. The result inevitably, was a combination of pragmatism and compromise. Indeed, when the Visby protocol was introduced in 1977, it was necessary to generate a second protocol as the monetary limits to liability under the Visby amendments (Poincare francs, denominated in terms of gold) were already inappropriate. SDRs (special drawing rights), calculated against a basket of major currencies were introduced, a more pragmatic if less romantic solution. That the Visby Rules are a compromise is demonstrated by the fact that only 21 States have adopted The Hague-Visby Rules. Furthermore seven of these States have not adopted the 1977 SDR Protocol. The number of States applying only the original Hague Rules has (at this date) been reduced to 63. Bearing in mind that Hague, Hague-Visby and Hague-Visby with SDR Protocol are then applied to export cargo through the nuances of national law, a comprehensive and common basis for conducting the international carriage of goods by sea (which, remember, does not apply to charterparties) has hardly been achieved although, in the main, it works. The main point which the Visby Amendment addressed was limitation of liability-the Visby Rules failed to address the problem of linking values to Jhe outmoded gold standard but did introduce a weight alternative-i.e., 10,000 gold francs per package; or 30 gold francs per kilo of the goods lost or damaged, whichever is the higher. The issue of what constitutes a package for the purpose of limitation has been the subject of a great deal of litigation. When the cargo is containerised the number of packages enumerated on the bill of lading will be deemed to be the number of packages for the purpose of limitation. These limits were subsequently revised to 666.67 SDR (special drawing rights) per package or unit or 2 SDR per kilogramme weight of the goods lost or damaged, whichever is the higher. The owner's responsibilities and the conditions under which he can limit his liability are discussed in more detail later in this chapter.

The Hamburg Rules

As with the Harter Act, shippers in countries which felt themselves disadvantaged by the international legal regime which affected their exports pressed for change. This pressure appeared as a report to UNCTAD (UN Conference on Trade and Development) in late 1970 and led to a series of negotiations, not at the CMI or IMO but at UNCITRAL (UN Conference on International Trade and Law) which culminated in a convention made in Hamburg in March 1978 and generally known as the Hamburg Rules. Not surprisingly, since this convention was generated more by 'trade interests' than by ,transport interests', the overall effect of the Hamburg Rules is to reduce the risks borne by cargo and their insurers whilst increasing the risks borne by the carrier and his insurers. The major areas of differences between The Hague, Hague-Visby and Hamburg Rules are summarised in the annexes. They include: 1. A wider application of the Rules. Under Article 2 the Hamburg Rules apply: (a) When the port of loading is in a contracting State; and/or (b) When the bill of lading, waybill or other document evidencing the contract is issued in a contracting State; and/or (c) Where the contract of carriage provides for the application of the Rules or any national law giving effect to them; and/or (d) Where the port of discharge is in a contracting State or the optional port of discharge in fact used is in a contracting State. The last point is significant because, as a consequence, a loaded voyage can be subject to two inconsistent legal regimes, the cargo being loaded in a Hague-Visby port (in, for example, the UK) and discharged in a Hamburg Rule port (in, for example, Egypt). The regime applicable would in practice depend on where the Court or arbitration in which the proceedings were brought was situated. It is, therefore, essential to be aware of where proceedings might be initiated although this can be difficult if the various bills of lading, the voyage charter and, possibly, the head time charter all stipulate different countries. Under the Hamburg Rules (Article 21), this could be: (a) The principal place of business of the carrier (and that is not easily defined in all cases); (b) The place where the contract of carriage was made, provided that the defendant had a place of business there; (c) The port of loading or discharge; 106

(d) Any place named in the contract of carriage; and (under Article 22), any contracting State in which the vessel (or vessels in the same ownership) can be arrested. Other provisions in the Rules are designed to widen the application of the Rules even further and, as set out in table 5.2, they apply to all contracts of carriage by sea whatever type of document is issued (or even if no document is issued) but excluding charterparties. Although the name and principal place of business of the carrier must be identified on the face of the bill of lading, the Rules (Article 1) widen the definition in that the 'Actual carrier' covers any person to whom the whole or part of the carriage of goods has been entrusted. It has not yet been conclusively established whether demise clauses, protecting the owner of a bareboated vessel, will remain effective. 2. A wider range of cargoes: The carrier is only entitled-to-carry cargo on deck if such carriage 'is in accordance with an agreement with the shipper or with the usage of the trade or is required by statutory rules or regulations' (Article 9). If it has been agreed that the goods be carried on deck or if carried on deck by 'usage of the trade' it is essential for the master to insert a record on the face of contract of carriage to that effect (a standard liberty to carry on deck clause is not enough). Wording to the effect that 'The shipper has agreed that the cargo carried under the bill of lading may be carried on deck or under deck at the carrier's option' is recommended. In the absence of such clause, the standard application of the Hamburg Rules takes effect: the burden of proving that there was such an agreement falls on the carrier and the carrier is not entitled to invoke that agreement against a third party, including the consignee, who has acquired the bill of lading or other contract in good faith. So far as animals are concerned, the carrier will not be liable for loss, damage or delay in delivery resulting from any special risk inherent in carrying live animals (Article 5). The carrier must, however, be able to demonstrate that he followed the shipper's instructions and once again we see the importance of keeping a good and careful record which could, usefully, be partly photographic. 3. Responsibility and liability: Whilst the standard period of the carrier's responsibility under The Hague/Hague-Visby Rules was 'tackle to tackle' or 'hook to hook', the Hamburg Rules widen this (Article 4) to: (a) From the time that he has taken over the goods from a shipper or his agent or (effectively) a port authority; until (b) The time he has delivered the goods to the consignee, an authority (e.g., port authority, Customs) pursuant to the regulations at the port of discharge or such other third party in accordance with the contract or the usage of the trade. It should be remembered that at present there is little case law related to the Hamburg Rules and, consequently, little precedent to act as a guide to a clause which could be interpreted very widely. It might well be prudent to ascertain carefully the requirements at the discharge port before loading (especially if discharging in a Hamburg Rules port) as the carrier may remain responsible for the cargo until delivery as specified above. Unlike the criminal law which assumes one is innocent until proved guilty, the liability of the carrier under the Hamburg Rules is based upon the principle of presumed fault. The carrier is liable for cargo claims resulting from loss or damage to the goods or for delay in delivery (if the occurrence took place whilst the cargo was in his care, and we have already seen that the scope of this definition has been widened) unless he, the carrier, can prove that he, his servants and agents 'took all measures that could reasonably be required to avoid the occurrence and its consequences' (Article 5). The carrier's defence of act, neglect or default ... in the navigation or in the management of the ship' does not exist, and the Courts will turn to what can (reasonably) be expected of a diligent carrier, having due regard to the circumstances of the case. This test is particularly applied in the case of delay in delivery if not effected 'within the time expressly agreed upon'. Failure to deliver within 60 consecutive days following expiry of the agreed time can result in a claim for total loss of the goods. There is a change in the burden of proof with regard to fire in that in this case the claimant has to prove fault or neglect on behalf of the carrier and a survey may be required to help determine this. As can be seen, especially when taking into account that the limits to liability are some 25% higher (Table 5.2 E), the carrier's liability and, consequently, his P&I Club's exposure, is substantially higher if the Hamburg Rules apply either by accident or design. Consequently, the International Group of P&I Clubs have drafted two clauses, namely Forms A and B. Form A applies to members who wish to adopt The Hague or Hague-Visby Rules, although this may 107

Form B applies

not prevent claimants bringing cargo claims in regimes where the Hamburg Rules apply. As noted, ports of discharge, even if optional, represent a significant widening of the potential application of the Hamburg Rules. when the carriage is between two States that are contracting parties to the Hamburg Rules, and where the Hamburg Rules cannot be avoided.

The future

In an endeavour to achieve uniformity in the application of law to the central document in most contracts for the carriage of goods by sea, we have achieved six alternative legal regimes: (1) Hague (2) Hague-Visby (3) Hague-Visby with SDR Protocol (4) Hamburg (5) Hague-Visby signatories who have introduced some elements of Hamburg (or ratified the Hamburg Rules and delayed their introduction-e.g., Australia). All of the above, as we have mentioned, are subject to national interpretation and only linked to the other major contract of carriage, the voyage charter, by the inclusion (or failure to include) of correctly worded clauses (see incorporation clauses section in this chapter). (6) National law in countries which are signatories to none of the conventions, (South America features quite strongly in this group). There is a general feeling that Hague-Visby does need a thorough overhaul or modernisation; after all, the marine adventure on which we embark today is very different from the marine adventure which our grandfathers and great-grandfathers faced. The alternatives seem to be straightforward acceptance of the Hamburg Rules or a new convention which would amend the Hamburg Rules and/or modernise The Hague-Visby Rules and/or combine the two regimes. Looking to the latter, the CMI will consider this at their Centenary Conference in Antwerp in 1997, but can make no progress unless UNCTAD and UNCITRAL are prepared to compromise. An industry-based compromise is being drafted in the United States by a Marine Law Association study group but, whatever the eventual outcome, the balance of power seems to be moving towards the shippers who are the customers. It could be argued that it is perhaps time that the practical mariner had a voice in these deliberations. In chapter six, when exploring the operational management of the various contracts of carriage, some of the practical aspects of the application of these Rules will be considered. One aspect which a new or modernised convention may wish to address is the relationship between bills of lading and charterparties and the way in which terms and conditions of the charterparty can relate to the receiver of a bill of lading.

General average and the York-Antwerp rules

Based on a principle which has been around over 2,000 years, it would be reasonable to expect that the rules of general average, sacrifice for the common good and the subsequent recovery from 'all parties to the adventure who benefited from the sacrifice', would be clear cut and universal. To give the legal world its due, even if the York-Antwerp Rules are not specifically incorporated in a bill of lading or charterparty, the principle is universally applied. However, there are areas where a degree of difference of interpretation exists between the formal application of the Rules, the ~general application of the principle of general average (in common law in England) and the approach to general average in marine insurance. To a great extent, this does not affect the master's actions when in a position where general average might be declared (except, sometimes, when clear, precise and seaman-like advice in needed). What is critical is that he keeps a very careful record of his action and the reasons for them, for the general duty of deciding whether a sacrifice is necessary rests with the master and not his owners or managers, even though modern communications can make them seem very close. Chapter eleven reviews a general average incident from the master's perspective and looks at how the various costs incurred are apportioned by the average adjuster. The current version of the Rules are the York-Antwerp Rules, 1994, which replace the 1974 Rules as amended in 1990. How the 1994 Rules came into being is explained in chapter four as an example of the way in which international governmental and non-governmental organisations collaborate to change or update international maritime practices. The spur to changing the 1974 Rules was the International 108

Convention on Salvage 1989 which introduced the concept of protection of the environment within the ambit of marine salvage. As salvage awards are allowable in general average. Rule VI (Salvage Remuneration) was amended by the CMI-the 1990 Amendment. However, it was accepted at the time that the amendment might not be adequate and a general revision was undertaken in preparation for the next CMI Conference held in Sydney in 1994 (see chapter 11). If the theme of the 1974 revision was a desire for simplification, the motivation for the 1994 revision was clarification with a strong lobby emphasising their wish that the scope of general average should not be expanded. The general format of the Rules has lettered Rules establishing how the general average is adjusted with numbered Rules (and a new clause paramount) setting out the detail. The 1994 lettered Rules are set out below with brief commentary aimed to aid the master navigate most effectively through the shoals which surround the declaration of general average and its subsequent adjustment. Changes and additions from the pre 1994 wording are shown in bold italics and enclosed in on the few occasions where words have been deleted. An example of a general average adjustment is contained in chapter eleven with the objective of highlighting the expenditure which can-and cannot-be included and, consequently, the areas which a master should be particularly careful to record-or avoid.

Rules of interpretation

In the adjustment of general average the following< lettered and numbered> Rules shall apply to the exclusion of any Law and Practice inconsistent therewith. Except as provided by the Rule Paramount and the numbered Rules, general average shall be adjusted according to the lettered Rules. The amended Rule has removed surplus words and includes the new clause paramount.

Rule paramount In no case shall there be any allowance for sacrifice or expenditure unless reasonably made or incurred. The first paragraph of Rule E establishes the onus of proof when claiming general average. This clause makes it very clear that, in the event of a dispute, the Courts will look at the actions of the master to determine whether they were reasonable in the light of the information available to him at the time. Included in this will be an assessment of the lengths to which the master went to ensure that he had to hand all available relevant information. As already noted, this will include consulting with owners/ managers, shore authorities and other advisors.

Rule A 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. General average sacrifices and expenditures shall be borne by the different contributing interests on the basis hereinafter provided. There are five words to concentrate upon in the first paragraph: 'extraordinary', 'intentionally and reasonably' (again) and 'common safety'. Thus, if there is no danger to the cargo but only to the vessel, any damage or expenditure falls to the vessel as particular average, including, in general terms, any consequential damage to cargo. The 1974 Rule B has been moved to Rule A (second paragraph) as a precursor to the expanded Rule B tug and tow provision.

Rule B There is a common maritime adventure when one or more vessels are towing or pushing another vessel or vessels, provided that they are all involved in commercial activities and not in a salvage operation. 109

When measures are taken to preserve the vessels and their cargoes, if any, from a common peril, these Rules shall apply. A vessel is not in common peril with another vessel or vessels if by simply disconnecting from the other vessel or vessels she is in safety; but if the disconnection is itse6(a general az~erage act the common maritime adventure continues. , This totally new wording addresses the increasing practice of deepsea commercial tug/barge operations and is based on the Rhine Rules. It does not address the situation where a tug engaged on a salvage operation breaks down (i.e., a general average within a general average) even if the salvor's tug is engaged on contractual as opposed to Lloyd's Open Form terms. For the York-Antwerp Rules 1984 and this Rule in particular to have effect, it is essential that the Rules are incorporated in the towage contract and the relevant contracts of carriage.

Rule C Only such losses, damages or expenses which are the direct consequence of the general average act shall be allowed as general average. In no case shall there be any allowance in general average for losses, damages or expenses incurred in respect of damage to the environment or in consequence of the escape or release of pollutant substances from the property involved in the common maritime adventure. Demurrage, loss of market, and any loss or damage sustained or expense incurred by reason of delay, whether on the voyage or subsequently, and any indirect loss whatsoever , shall not be admitted as general average. The first change to Rule C, paragraph three (old two) tidies up a commercial point by making it perfectly clear that loss of market is not compensated. The exclusion of 'losses, damages or expenses incurred in respect of damage to the environment, etc,' generated considerable debate and must be considered against Rule XI (d) which refers to the special skill or endeavours of salvors in preventing or minimising damage to the environment. What has been described as the 'pollution compromise' was extensively debated, with the insurers of ships and cargoes determined that they should not become liable for pollution through the back door, a determination resisted by the representatives of the P&I Clubs. The compromise is that, while pollution liabilities resulting from a general average act should, themselves, be excluded, the costs incurred by the parties to the adventure to prevent or minimise such liability should be included. This is an area which, considering the potential size of pollution liability claims, may well lead to litigation in the future and masters will be well advised to keep a good record of events relating to potential or actual pollution and/or damage to the environment and efforts to prevent it. A voluntary stranding on a coral reef off a popular tourist resort could well ensure that the vessel's name is quoted in case law for many years, even if the voluntary action was the 'reasonable act of a prudent mariner'.

Rule D Rights to contribution in general average shall not be affected, though the event which gave rise to the sacrifice or expenditure may have been due to the fault of one of the parties to the adventure, but this shall not prejudice any remedies or defences which may be open against or to that party in respect of such fault. There has been no change here, and this rule emphasises that the purpose of general average is to deal with the consequences, not judge the causes.

Rule E 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. All parties claiming in general average shall give notice in writing to the average adjuster of the loss or expense in respect of which they claim contribution within 12 months of the date of the termination of the common maritime adventure. Failing such 110

notification, or if within 12 months of a request for the same any of the parties shall fail to supply evidence in support of a notified claim, or particulars of value in respect of a contributory interest, the average adjuster shall be at liberty to estimate die extent of the allowance or the contributory value on the basis of the information available to him, which estimate may be challenged only on the ground that it is manifestly incorrect. The point relevant to the master is the importance of keeping a good record of events, not just formally in the vessel's logbook and official reports, but personally. With notice of a claim not being required for 12 months from the incident, any ensuing arbitration or litigation could well test the best of memories of a master who may well be serving, in this day and age, with different owners or managers on a totally different trade. This is, perhaps, a good place to remember the importance of how to handle personal notes and records of an event and of the doctrine of privilege. This is explained earlier in this chapter and in more detail in The Nautical Institute's publication The Masters Role in Collecting Evidence.

Rule F Any additional expense incurred in place of another expense which would have been allowable as general average shall be deemed to be general average and so allowed without regard to the saving, if any, to other interests, but only up to the amount of the general average expense avoided.

Rule G General average shall be adjusted as regards both loss and contribution upon the basis of values at the time and place when and where the adventure ends. This rule shall not affect the determination of the place at which the average statement is to be made up. When a ship is at any port or place in circumstances which would give rise to an allowance in general average under the provision of Rules X and XI, and the cargo or part thereof is forwarded to destination by other means, rights and liabilities in general average shall, subject to cargo interests being notified if practicable, remain as nearly as possible the same as they would have been in the absence of such forwarding, as if the adventure had continued in the original ship for so long as justifiable under the contract of affreightment and the applicable law The proportion attaching to cargo of the allowances made in general average by reason of applying the third paragraph in this Rule shall not exceed the cost which would have been borne by the owners of cargo if the cargo had been forwarded at their expense. Rule G addresses the basis of the values on which general average losses and contributions shall be calculated and, in two new paragraphs, clarifies the situation with regard to cargo forwarded to its destination, an occurrence increasingly common in the days of containerisation. The numbered Rules are set out in chapter eleven and. those aspects most relevant to the master when deciding upon the most appropriate course of action are discussed in that chapter.

Incorporation clauses

When a vessel sails on a normal tramping voyage, she will be the subject of at least two contracts which govern the conditions of carriage, the charterparty between charterer and owner and the bill of lading between cargo owner and shipowner. Since the cargo owner may change one or more times during the voyage and is frequently not the charterer, there is obviously room for conflict. The Incorporation Clause is designed to incorporate charterparty clauses into the bill of lading in order to resolve this potential for conflict. The issues are complex and have given rise to much litigation and considerable expense. It is also a matter in which the master, as signatory to the bills of lading, is very much involved. When considering an incorporation clause, the following factors need to be borne in mind: 111

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Which contract of carriage prevails? Which charterparty is being incorporated? To what extent can charterparty clauses be incorporated? Is the incorporation clause wide enough and do the incorporated clauses fit? What happens if there is a conflict of law? What remedies and courses of action are open to the master if the bill of lading presented for signing is incompatible with his charterparty? Assuming initially that there is only one charterparty, if the bill of lading is in the possession of a buyer who is not a party to that charterparty then the bill of lading contract of carriage prevails. These terms may be modified by the incorporation of charterparty clauses to the extent discussed below. A bill of lading in the hands of a charterer acts merely as a receipt (unless the charterer is an endorsee of a bill of lading). In this case the charterparty conditions of carriage prevail over those of the bill of lading.

When there is a chain, with, for example, the vessel on time charter and in turn subchartered to a voyage charterer, the bill of lading constitutes the contract of carriage between owner and bill of lading holder (who may or may not be the voyage charterer) (it is amazing how many lawyers have to draw diagrams somewhat similar to the one in Figure 5.1 in order to get the relationships right) effectively by passing the time charterer. The owner may be subject to two different contracts at the same time, the controlling contract depending upon the identity of the holder of the bill of lading. One of the resultant problems is that, should a cargo claim arise, a voyage subcharterer who is a bill of lading holder may be in a position to choose under which contractual terms he proceeds -i.e., either against the owner under the bills of lading or against the disponent owner under the charterparty. However, assuming a clause paramount incorporates The Hague or Hague-Visby Rules into both contracts and an effective incorporation clause is also inserted in the bill of lading, a high degree of compatibility can be achieved between the charterparty and the bill of lading. This raises two questions: which charterparty is incorporated and how can an incorporation clause be made most effective? All too frequently the incorporation clause in the bill of lading fails to identify the relevant charterparty Sometimes, its identity can be inferred from, for example, a freight clause which reads: Freight to be paid in accordance with charterparty dated 10February 1996. Under American law, if arbitration is in New York, a reference to an unidentified charter would be insufficient to incorporate any charterparty into the bill of lading. Under English law, the Courts assume the relevant charterparty will be the head charterparty to which the shipowners are a party, provided that it is a voyage charter. The law will then turn its attention to the extent to which the charterparty terms can be incorporated and will apply a two stage test defined by Sir John Donaldson MR in the Mirimar [1984] 3 LLR 1. The first question is, is the wording of the bill of lading contract wide enough to produce a prima facie, or a contingent or a tentative incorporation of the whole Or specific parts of the charterparty? The second question, and it only arises if the answer to that is Yes is, if so, do the tentatively incorporated parts have to be rejected as being unserviceable or inapplicable either because of their subject matter or because o their wording? Or, in words perhaps more useful as bills of lading are thrust under the master's nose as the vessel prepares for night sailing:, is the wording wide enough and if so, does it fit? A distinction must be made between clauses (in the charterparty) which are germane to the bill of lading's function as a contract of carriage; clauses relating to the shipment, carriage and delivery of the goods as Lord Denning described them in the Annefield [1971] 1 LLR 1, and other clauses such as the arbitration clause. Thus, a bill of lading which states on its face 'Freight and all other conditions as per charterparty' failed to incorporate an exception of perils which appeared in the charterparty but not the bill of lading. 112

The words: All the terms, conditions, clauses and exceptions contained in the charterparty, date 10 February, 1996, apply to this bill of lading and are deemed to be incorporated herein. is perhaps the most well known and effective incorporation clause. The second part of the test now comes into play; does the charterparty clause make sense in the context of the bill of lading? In 1971, Lord Denning, again in the Annefield, set out the ground rules: I would say that a clause which is directly germane to the subject matter of the bill of lading (that is, to the shipment, carriage and delivery of goods) can and should be incorporated into the bill of lading contract, even though it may involve a degree of manipulation of the words in order to fit exactly the bill of lading. But, if the clause is one which is not thus directly germane, it should not be incorporated into the bill- of lading contract unless it is done explicitly in clear words either in the bill of lading or the charterparty. The 'or the charterparty' might be considered a little surprising since what is being discussed is that which the holder of the bill of lading will see. The Courts are prepared to go some way in manipulating charterparty wording to make it fit into the context of the bill of lading but they are not prepared to go all the way. Thus, in the much quoted case, the Mirimar, an attempt, in the context of the wording charterers shall pay demurrage' to substitute 'consignee' for 'charterer' was considered a manipulation too far. One area of incorporation which causes endless problems relates to arbitration clauses. Shipowners who have negotiated a charterparty providing for arbitration under an acceptable legal regime, in the event of a dispute will be anxious not to have this changed by the bill of lading. However arbitration does not fall naturally within the general description of 'germane to the shipment, carriage and delivery of goods'. Therefore, if it is intended to incorporate the charterparty arbitration clause (or other clauses which do not deal with the shipment, carriage or delivery of the goods) they should be specified quite clearly, e.g. All other terms, conditions, clauses and exceptions including the arbitration clause as well as the negligence clause and cesser clause as per charterparty dated 10 February 1996 are deemed to be incorporated therein. A word here about the Cesser Clause which is intended to enable charterers to extricate themselves from the transaction once they have provided and loaded the vessel and ensured their profit. It may contain such wording as 'This charter being entered into on behalf of others, all liabilities of the parties to cease after shipment of cargo in consideration of which it is agreed that the payment of all freight, dead freight and demurrage, the said owner shall have an absolute lien and charge on the said cargo'. The shipowner's right to exercise a lien on the cargo in respect of outstanding freight is another contentious area. This is generally allowable under the charterparty, but the cargo on which the owner may wish to exercise the lien may not belong to the charterer but to the holder of the bill of lading. As seen, specific wording will be needed to incorporate this right (of a lien) and if the cargo is financed through a documentary credit, this may give rise to other problems. The Uniform Customs and Practice 500 states in Article 23 with respect to a marine/ocean bills of lading: a. If a Credit calls for a bill of lading covering a port-to-port shipment, banks will, unless otherwise stipulated in the credit, accept a document, however named, which, v. appears to contain all the of the terms and conditions of carriage, or some of such terms and conditions by reference to a source document other than the bill of lading (short form/blank back bill of lading); banks will not examine the contents Of such terms and conditions and vi. contains no indication that it is subject to a charterparty and/or no indication it is propelled by sail only. Article 25, Charter Party Bills of Lading, states: 113

a. If a Credit calls for or permits a charterparty bill of lading, banks will, unless otherwise stipulated in the credit, accept a document, however, named, which: i. contains any indication that it is subject to a charterparty. and Part b states that even if the Credit requires the presentation of a charterparty contract in connection with a charterparty bill of lading, banks will not examine such charterparty contract, but will pass it on without responsibility on their part. Receivers are driven by additional concerns over and above the need to ship the goods. The goods must be financed and probably resold on the basis of the bill of lading. They are, therefore, quite understandably interested in the bill of lading being as unencumbered as reasonably possible with additional clauses and references to other contracts. This raises the question of the extent to which charterers can oblige the master to sign bills of lading which are incompatible with the terms of the charterparty under which the vessel is operating. Time charters particularly, give the charterers express right to require the master to sign bills of lading 'as presented'! This obligation will not be removed by the additional wording 'without prejudice to this charterparty'. Indeed, it has been held that this wording works in reverse and protects the charterparty from any inconsistent terms in the bill of lading. This was partly redressed by Mustill L J in the Nogar Marin [ 1988] LLR 413: Where the master is expressly required to sign bills of lading as presented, and where the contract stipulates that the act is to be without prejudice to the charter the charterer's right to issue bills to suit his own convenience must be constrained by the need not to make the terms of the new contract which he thus imposes on the shipowner more burdensome than those which the owner originally contracted to assume in exchange for the freight. An example of an inconsistent term which the master has the right to refuse is a port of discharge outside the trading limits stipulated in the charterparty. In many time charters the charterer's right to demand that bills of lading are signed as presented are alleviated by a counter indemnity as per Clause 10 of the Gencon form: "Charterers shall indemnify the Owners against all consequences or liabilities that may arise from the signing of bills of lading as presented to the extent that the terms or contents 0J, such bills of lading impose or result in the imposition of more onerous liabilities upon the Owners than those assumed by the Owners under this Charter Party". or NYPE 93: ... shall be without prejudice to this Charter Party and the Charterers shall indemnify the Owners against all consequences or liabilities which may arise from any inconsistency between this Charter Party and any Bills of Lading ... This does not protect the master nor the owner from a failure to take proper care not to issue inaccurate bills of lading; bills of lading, for example, which incorrectly describe the condition or quantity of the cargo. There are a number of checks which a master can and should make, prior to the presentation of bills of lading, so that he is in a better position to know whether an incorporation clause is either essential or desirable. - Does the charterparty contain a clause paramount incorporating The Hague, HagueVisby (or Hamburg) Rules? By law, these Rules only apply to bills of lading. 114

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If on time charter, what are his obligations to sign bills of lading as presented and is there a strongly worded indemnity? - Are there exceptions in (any of) the charterparty (ies) which might not be included in the bill of lading and which might leave the shipowner exposed? - Is there compatibility between the arbitration or applicable law clauses? - Is the cargo being loaded, owned by the charterer (charterparty to prevail) or a third party or is the bill of lading to be endorsed to a third party (bill of lading to prevail)? - Is there an obvious need for an incorporation clause; what do the voyage orders and/or company policy state with regard to incorporation clauses? If the charterer resists the inclusion will you comply? (It is unlikely that you will be able to insist.) Should you be requesting instructions from owners and/or your local P&I correspondent? and finally, if you are inserting an incorporation clause: - Make it as wide as possible and ensure that, if possible, it incorporates the matter which you are endeavouring to address and do not forget to specify the relevant charterparty- e.g. All terms, conditions, clauses and exceptions (including the arbitration clause) as per charterparty dated ...

Limitation of liability

Like much of maritime legislation, limitation has commercial roots which are succinctly put in the preamble to The Responsibility of (British) Shipowners' Act of 1733. It is ... of the greatest consequence and important to this Kingdom to promote and increase the number of ships and vessels, to prevent any discouragement to merchants . . . which will necessarily tend to prejudice the trade and navigation of this kingdom. The concept has not always been popular and the US Limitation of Liability Act of 1851 was described as: An act which is vicious in its impact unconscionable in its results and outmoded in an age of institutionalised Protective insurance, if it cannot be repealed outright, (it) deserves only a narrow grudging and constrictive construction. Limitation of liability within the maritime world, a concept which sets shipping apart from other areas of industry and commerce, is found in both public and private maritime law (see Nautical Briefing). In general terms this divides into: - Claims brought against the shipowner as the result of a contract for the carriage of cargo which, not surprisingly, are mainly contractual dispute's and are governed by such private law conventions as The Hague-Visby Rules; and - Claims brought in the main by third parties who have suffered loss or damage as a result of the negligent navigation or operation of the vessel. These tend to be suits brought under the law of tort and could be governed by either the common law e.g. a collision case, or public statutory law e.g. pollution. (Tort in English law being any wrong, not arising out of contract, for which there is a remedy by compensation or damages.)

Cargo-related limitation

The starting point is the absolute liability of the common carrier for the safety of the cargo entrusted to his care under English common law. The carrier was exempt for loss or damage only if caused by Act of God, the Queen's enemies or as the result of an inherent vice of the goods. Increasingly, shipowners sought to limit their liability by adding protective clauses to charterparties and bills of lading and contractual terms began to displace the common law. This was possible under English law (as opposed to more codified law) due to the English law concept of 'freedom of contract'. Shipowners and cargo owners were free to contract on any terms which they deemed fit. This ultimately led to inequity in favour of the shipowner which was finally resolved by international convention; namely The Hague Rules. As the era of the merchant selling goods to a buyer, with the goods being transported by an independent carrier took over from the seagoing merchant trader, so the problems arose of the 115

buyer not being a party to the original contract of carriage between the seller and the carrier. This was eventually resolved by the introduction of the Bill of Lading Act 1855 (now replaced in England by COGSA 1992). It is The Hague and The Hague-Visby Rules (and more recently the Hamburg Rules) discussed earlier in this chapter, which establish, amongst other things, the extent to which the carrier can limit his liability. This made trade and trading risks much more quantifiable for owner, shipper, receiver and, importantly, insurer. It is also argued that it produced a downward pressure on freight rates, to the general benefit of international trade. Before being able to limit his liability, the carrier must meet certain obligations which, in The HagueVisby Rules, are set out in Article III: Rule 1. The carrier shall be bound, before and at the beginning of the voyage, to exercise due diligence to (a) make the ship seaworthy; (b) properly man, equip and supply the ship; (c) make the holds, refrigerating and cold chambers, and all other parts of the ship in which goods are carried, fit and safe for their reception, carriage and preservation. To invoke his right to limit his liability, the shipowner must be able to demonstrate that both he and bis servants exercised due diligence in the responsibilities set out above. A cargo owner, shipper or receiver, who has suffered loss or damage to his cargo can be expected to challenge the shipowner's right to limit his liability by proving that he failed to exercise due diligence in these matters. Thus, it is important that the master ensures not only that he and his crew do exercise due diligence to make the vessel seaworthy and the holds cargoworthy, but that he also can demonstrate this in the event of a dispute. This is best done through the production of contemporaneous records, many of which will be formal documents. Evidence is all important in these circumstances which may require the master to recall events which occurred several years before. As well as logbooks official, deck and engineroom-rough (scrap logs) are also considered important by Courts and arbitrators. Records of hose tests on hatches or maintenance on tank valves are all the sort of evidence which, together with records of routine maintenance, tests of bilge suctions, precooling for refrigerated cargo or checks on heating coils, can help prove that the vessel was both seaworthy and cargoworthy before and at the beginning of the voyage. Recently a case was lost (in the United States) because the master erased portions of the scrap log (with the best of intentions to improve legibility) instead of correctly drawing a line through the text. The master's actions resulted in the Court discounting his testimony as the judge considered that the master had acted dishonestly and hence his evidence could not be believed. A bulk carrier was fixed to load kaolin with very strict requirements for cleanliness. Holds were scaled and painted. On discharge it became apparent that the paint had contaminated some of the kaolin. The crew were able to prove that the paint had been correctly applied in accordance with the manufacturers' instructions, even down to a record of the size of the paint spray tips. The deck log recorded the weather conditions, including the humidity, and the use of hold ventilation was also recorded. It was held that due diligence had been exercised and that the owner was entitled to limit his liability. Article IV is the 'exceptions clause': Rule 1. Neither the carrier nor the ship shall be liable for loss or damage arising or resulting from unseaworthiness unless caused by want of due diligence on the part of the carrier, to make the ship seaworthy and to ensure that the ship is properly manned, equipped and supplied and to make the holds, refrigerating chambers and all other parts of the ship in which goods are carried fit and safe for their reception, carriage and preservation in accordance with paragraph I of Article 116

III. Whenever loss or damage has resulted from' unseaworthiness the burden of proving the exercise of due diligence shall be on the carrier or other person claiming exemption under this article. Rule 2. Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from: (a) Act, neglect, or default of the master, mariner, Pilot, or the servants of the carrier in the navigation or in the management of the ship. (b) Fire, unless caused by the actual fault or privity of the carrier (c) Perils, dangers and accidents of the sea or other navigable waters. (d) Act of God. (e) Act of war (f) Act of public enemies. (g) Arrest or restraint of princes, rulers or people, or seizure under legal process. (h) Quarantine restrictions. (i) Act or omission of the shipper or owner of the goods, his agent or representative. (j )Strikes or lockouts or stoppage or restraint of labour from whatever cause, whether partial or general. (k) Riots and civil commotions. (l) Saving or attempting to save life or property at sea. (m) Wastage in bulk or weight or any other loss or damage arising from inherent defect, quality or vice of the goods. (n) Insufficiency of packing. (o) Insufficiency or inadequacy of marks. (P) Latent defects not discoverable by due diligence. (q) Any other cause arising without the actual fault or privity of the carrier or without the fault or neglect of the agents or servants of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception to show that neither the actual fault or privity of the carrier nor the fault or neglect of the agents or servants of the carrier contributed to the loss or damage. This considerably widens the common law list of causes which enable the shipowner to limit his liability. Again, evidence is essential. It should be remembered that these Rules apply only to bills of lading by force of law and it requires a correctly worded clause paramount to incorporate them into a charterparty or other non-negotiable document of carriage eg a waybill. Article IV establishes the extent of the shipowner's reduced liabilities. Rule 5 (a) Unless the nature of value of such goods have been declared by the shipper before shipment and inserted in the bill of lading, neither the carrier nor the ship shall in any event be or become liable for any loss of damage to or in connection with the goods in an amount exceeding 666.67 units Of account per package or unit or 2 units of account per kilogramme -weight of the goods lost or damaged, whichever is the higher (b) The total amount recoverable shall be calculated by reference to the value of such goods at the place and time at which the goods are discharged from the ship in accordance with the contract or should have been so discharged. The value of the goods shall be fixed according to the commodity exchange price or current market price, by reference to the normal value of goods of the same kind and quality. (c) Where a container, pallet or similar article of transport is used to consolidate goods, the number of packages or units enumerated in the bill of lading as packed in such article of transport shall be deemed the number of packages or units for the purpose of this paragraph asfar as these packages or units are concerned. Except as aforesaid such article of transport shall be considered the package or unit. (d) The unit of account mentioned in this Article is the special drawing right as defined by the International Monetary Fund. The amounts mentioned in sub-paragraph (a) of this Paragraph shall be converted into national currency on the basis of the value of that currency on a date to be determined by the law of the Court seized of the case. 117

(e) Neither the carrier nor the ship shall be entitled to the benefit of the limitation of liability provided for in this paragraph if it is proved that the damage resulted from an act or omission of the carrier done with intent to cause damage, or recklessly and with knowledge that damage would probably result. The declaration mentioned in sub-Paragraph (a) of this paragraph, if embodied in the bill of lading, shall be prima facie evidence, but shall not be binding or conclusive on the carrier (g) By agreement between the carrier, master or agent of the carrier and the shipper other maximum amounts than those mentioned in sub-paragraph (a) of this paragraph may be fixed provided that no maximum amount so fixed shall be less than the appropriate maximum mentioned in that sub-paragraph. (h) Neither the carrier nor the ship shall be responsible in any event for loss or damage to, or in connection with, goods if the nature or value thereof has been knowingly mis-stated by the shipper in the bill of lading. As can be seen, there is a great degree of importance attached to the accurate description of the goods in the bill of lading. If the value of the goods is stated on the bill of lading (ad valorem bills of lading), owners (and the P&I Club) should be advised as it affects the level of liability and the owners cargo related, liability insurance. The monetary value of the liability of the carrier is calculated by reference to a package or unit or per gross weight, whichever is higher. Article III sets out how the cargo owne'r can claim against the shipowner for damage or loss. 6. Unless notice of loss or damage and the general nature Of such loss or damage be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods into the custody of the person entitled to delivery thereof under the contract Of carriage, or, if the loss or damage be not apparent, within three days, such removal shall be prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading. The notice in writing need not be given if the state of the goods has at the time of their receipt, been the subject of joint survey or inspection. Subject to paragraph 6bis the carrier and the ship shall in any event be discharged from all liability whatsoever in respect of the goods, unless suit is brought within one year of their delivery or of the date when they should have been delivered. This period may, however, be extended if the parties so agree after the cause of action has arisen. In the case of any actual or apprehended loss or damage the carrier and the receiver shall give all reasonable facilities to each other for inspecting and tallying the goods. Unlike English Common Law of Contract which provides for a six-year time limit, under The HagueVisby Rules a cargo claim becomes time-barred after one year of delivery. Rule 6 also obliges the cargo receiver to give immediate notice in writing of any damage to the goods unless the damage to the goods is not apparent in which case such notice must be given within three days of delivery. Failure to do so will give rise to an assumption that the goods were damaged after delivery. However, if the cargo receiver gives notice within time or the cargo has been the subject of a joint survey, then the Courts generally assume that any damage arose on board. It can be seen why cargo owners so often call for joint surveys. Despite all of this it is imperative that the master notifies his owners (or his local P&I Club correspondent) of any possible loss or damage to the cargo. This will enable the owners to arrange for the attendance of an independent surveyor whose evidence may prove crucial in refuting or mitigating the claim.

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Limitation against third parties

This is very much the area which sets shipping law apart and is sometimes referred to as open limitation. The ability to limit liability found within the cargo related conventions is confined to parties to a given contract- i.e., a contract of carriage, for which even the receiver voluntarily enters into the transaction. Significantly different is the concept of legislation which prevents innocent persons from gaining full compensation from the results of negligence by the servants of a shipowner. In the words of Lord Denning, when Master of the Rolls, it 'is not a matter of justice ... but has its justification in convenience'. The legislative origins of the right to limit are mentioned in the introduction. The basic principle is that if a vessel has caused loss or injury, then a total sum for which the shipowner is liable can be calculated. This sum, and no more, whether adequate or not in way of recompense, is divided amongst all who have suffered the loss or injury. This enables the owner to secure his insurance at a manageable rate since the underwriter can calculate the upper limit of his risk; thus demonstrating Lord Denning's 'justification in convenience'. Not surprisingly, injured parties may not be so pleased with this 'justification' and can naturally be expected to focus on the shipowner's detailed compliance with the legislation which enables him to limit and once again contemporaneous records and evidence are essential to the shipowner's case. There are two ways in which the total sum available for compensation can be calculated. The first is based on the residual value of the vessel, but this has a major flaw since it favours the owners and operators of old and poorly maintained (low value) tonnage and, furthermore if the vessel sinks eg after collision, there is no value left. (An example is the Titanic, whose pre-accident value was E1,500,000 which reduced, post-accident to $91,805-made up of lifeboats and advance passage money). The second system is based on tonnage and there have been three international conventions, in 1924, 1957 and 1976, dealing with tonnage limitation. The Convention relating to Limitation of Liability of Owners of Sea-Going Ships 1957 has some 50 signatories. The 1976 convention, which entered into force on I December 1986, has not totally displaced the earlier convention, but has done so in the United Kingdom since it was incorporated into Schedule 4 of the Merchant Shipping Act 1979. It is immediately noticeable that unlike most ship-related legislation, this convention focuses directly on the owner . Article I of The Limitation of Liability Convention provides that 'shipowners and salvors' may limit their liability and the owner is defined as the 'owner, charterer, manager or operator of a sea-going ship'. 'Seagoing ship' applies to vessels from the moment they are launched (even though not yet complete and capable of navigating). Floating oil exploration or production platforms are not included, but hovercraft have, within United Kingdom legislation at least, been included by the Hovercraft Act 1968. Referring back to registration in chapter twelve, it is the vessel's flag, not the owner's domicile, which governs the ability to limit liability. This becomes important as shipowning and operating companies become more diffuse and more widely located. The expression 'owner' can be taken to include any owner, whether legal, equitable or by demise, and the convention recognises also the charterer's ability to direct the master as to the navigation of the vessel. A mortgagee who has repossessed the vessel (chapter twelve) is included, but the lines are less clearly drawn when it1comes to managers or operators. A technical management company operating under a contract can expect to benefit from the cover and so may commercial managers but it might be interesting to speculate as to a crew manager who negligently fails to ensure that his sea staff actually have the qualifications and ability which they purport to have. Insurers of liability claims which fall within the scope of the convention can benefit from its protection if claims are subrogated to them and licensed pilots are brought within the concept, in the United Kingdom, by the Pilotage Act 1983. Article II sets out the claims which are subject to limitation and these are: (a) claims in respect of loss of life or personal injury or loss of or damage to property (including damage to harbour walls, basins and waterways and aids to navigation), occurring on board or in direct connection with the operation of the ship or with salvage operations, and consequential loss resulting there from;

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(b)claims in respect of loss resulting from delay in the carriage by sea of cargo, passengers or their luggage; (c) claims in respect of either loss resulting from infringement of rights other than contractual rights, occurring in direct connection with the operation of the ship or salvage operations; (d) claims in respect of the raising, removal, destruction or the rendering harmless of a ship which is sunk, wrecked, stranded or abandoned, including anything that is or has been on board such a ship; (e) claims in respect of the removal, destruction or the rendering harmless of the cargo of the ship; (l) claims of the person other than the person liable in respect of measures taken in order to avert or minimise loss for which the person liable may limit his liability in accordance with this Convention, and further loss caused by such measures.

(As a point of detail, claims under (d) can only benefit from limitation if a formal fund has been established to compensate the harbour authority for the additional expense and this is not common). In addition, the Merchant Shipping Act 1979 (Clause 18) removes the liability from the owner of a British ship for any loss or damage by reason of fire onboard except if it can be proved (in line with Article IV) that the loss or damage resulted from his personal act or omission, committed with the intent to cause loss, or recklessly and with knowledge that such loss would probably result. Exceptions are contained in Article III and these are: (a) claims for salvage or contribution in general average; (b) claims for oil pollution damage within the meaning of the International Convention on Civil Liability for Oil Pollution Damage, 1969 (or any Protocol thereto), claims subject to any international Convention or national legislation governing or prohibiting limitation of liability for nuclear damage. (c) claims against the shipowner of a nuclear ship for nuclear damage,(d) claims by servants of the shipowner or salvor whose duties are connected with the ship or salvage operations; For many years, and in the 1957 conventions, the term 'actual fault or privity' was used to establish whether or not the owner could benefit from the limitation of liability allowed by the convention. This application of the term to a specific incident was, not surprisingly, the subject of much legal argument and no strong consensus emerged as to its interpretation. The 1976 convention introduced a new concept; in order to break the shipowner's right to limit his liability, it must be proved that the loss resulted from: . . . the personal act or omission of the person seeking to limit, committed with the intent to cause such loss, or recklessly and with knowledge that such loss ... would probably result (Article IV). The burden of proof moves to the claimant and that means that, unlike before, if there is doubt (on a balance of probability) about the personal misconduct of the owner, he will be entitled to limit. In other words, the privilege has become a right, a quite 120

significant change and one which might have changed earlier legal decisions such as the Lady Gwendolyn [1965] LLR 294 had they been decided under the new convention. (This was a case of-the owner's marine superintendent failing to take positive steps to ensure that the master did not proceed at excessive speed during reduced visibility. It was held that owners could not limit their liability since their 'actual fault or privity' had contributed to the accident-a collision.) Nevertheless, a claimant can still be expected to scrutinise all available evidence in order to break' the shipowner's right to limit and masters and all on board need to be very careful when making statements or making records available. In chapter six reference is made to the privileged information and a claimant's right of discovery and the way in which it is possible to convey confidential information to a solicitor. In the event of any major incident, a master is well advised to: - Contact the local P&I Club correspondent and arrange for legal support; - Call a meeting of the ship's management team as soon as possible and clearly brief them on both to whom and who not to make statements, and how as well as how to handle surveyors and inspectors, lawyers and port and State authorities and what records, log books etc. may or may not be inspected or copied; - Ensure that the heads of department clearly brief their staff in terms which they will understand; - Set up a meeting room where the master will, unless a senior representative from the owner takes over, firmly chair all meetings, preferably with a Club representative at his side. It may well be found bencficial to have these meetings in a public room and preserve the sanctity and privacy of the master's or ship's own office. It may also be found beneficial to detail one officer-the second officer-to act as permanent secretary and keeper of the records. - Ensure that all visitors are met, their identity positively checked and that they are not allowed to roam unaccompanied around the vessel; - Decide who will deal with the media and how, if the incident is likely to attract this sort of attention (see chapter eleven). It might be wondered how the shipowner managed to convert his privilege into a right to limit his liability and the answer lies in his agreement to raise the level of compensation. Article VI addresses the limits of liability and these are calculated on the basis of the vessel's gross tonnage as established by the 1969 Tonnage Convention. The gross tonnage is multiplied by a monetary value which is defined by special drawing rights (SDRs) a unit of account whose value is determined daily by the International Monetary Fund based on a basket of currencies. If personal claims are involved, the SDR value is double that of the fund related to other claims not involving injury or death. Once the fund is established, it is then divided amongst the claimants, with the personal injury and death claims taking precedence. The claim fund is calculated according to the table on the previous page. Hovercraft have separate limits and there is also a separate limit of liability for claims by passengers against the vessel in which they are carried. (The expression 'open liability' was mentioned with respect to third party claims, with contractually based, cargo claims being considered closed. Passengers' claims are sometimes defined as partly closed.) The fund is calculated by multiplying 46,666 SDR by the total number of passengers which the vessel is certified to carry with an upper limit of 25,000,000 SDR. Although not addressed here, this might be modified by the Athens Convention 1974, which is calculated on the basis of passengers actually being carried. At the end of 1995, the US dollar stood at 1.48441 to the SDR, so typical limitation funds were:

Conclusion

Any oceangoing cargo vessel carrying cargo is involved with large sums of money and potentially large liabilities. Even if there is no damage to the cargo, the master, in signing bills of lading, has provided a document of title to the full value of the cargo to a consignee and the vessel and her owner are thereby linked not only to the contract of carriage but to the commodity value itself. These relationships are governed by the framework of international, and sometimes conflicting, conventions and national laws described in this chapter. It is virtually impossible to set out in precise, practical detail every circumstance which the master may face. The objective of this chapter is to explain the underlying principles in a way which may help the master manage those contracts of carriage for which he becomes responsible and which are discussed in more detail in chapter six. 121

ACKNOWLEDGEMENTS

MANY PEOPLE from London's maritime legal profession contributed to this chapter, and particular thanks are due to Charles Baker of solicitors Herbert Smith. A great number of papers and booklets are produced within the London maritime world and it is a pity that more is not seen of them by those who serve the industry at sea. This chapter has endeavoured to get at the trade which drives the demand for shipping and in this connection the assistance of Pamela Kirby-Johnson, Director General of the Grain and Feed Trade Association, Dalgety Agriculture, and traders Arcady and E. D. & F. Man must be acknowledged, together with rice trader Alan Harper, chairman of the Baltic Exchange.

REFERENCES

Subsequent Holders; The COGSA 1992. Paper December 1994: Graham Harris, Partner Richards Butler. From Hague to Hamburg. Paper December 1994: judge Anthony Diamond, QC. Incorporation of Charterparty Terms. Conference Paper December 1994: Charles Williams, Thomas Cooper & Stibbart. Rights of Suit in Respect of Carriage of Goods by Sea. Law Commission No. 196, HMSO HC250. Comparison; Hague, Hague-Visby and Hamburg Rules. Paper May 1995: John Culley, Thomas Miller & Co Ltd. The Hamburg Rules. Notice to Members September 1992: The International Group. Bills of Lading. Conference Paper December 1994: Charles Williams, Thomas Cooper & Stibbart. Limitation of Liability. Paper: Sonja Fink, Thomas Miller & Co Ltd. York-Antwerp Rules, 1994, An Analysis. Charles Hebditch and John MacDonald: Richards Hogg.

ANNEXES FOR CHAPTER 5

- The Grain and Feed Trade Association: general contracts. GAFTA sales contract No. 64; FOB terms for grain in bulk. Extracts from the GAFTA sampling rules No. 124. - Summary of sample oil contracts. Gas oil sale contract. Sale of Bonny light. - Extracts from the Hamburg Rules-articles 15 to 19. - Comparisons of Hague/ Hague-Visby and Hamburg Rules.

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Chapter 6

CHARTERPARTIES: THE MASTER'S ROLE AS MANAGER Voyage charter-dry bulk-liquid bulk trades-time charter-NYPE93. The project management period for a charterparty starts well before voyage orders are received and probably before the previous charter has finished. Chapter five described how brokers and the owners' operations department worked when actively searching for the optimum employment for your vessel's next voyage. As they make and refine a series of voyage calculations (see chapter three), a number of questions about, for example, steaming time or hold/tank cleaning will be fired in the master's direction. It is then that the master needs to start his planning in order to ensure that the requirements of the charter, reflecting a negotiated agreement between his customer and his owner, which he has to manage and execute, is co-ordinated with his longer-term requirements of managing and maintaining the vessel effectively. In this chapter, the intention is to analyse three commonly used charterparties and build up a logical format for a set of voyage orders. In doing so, the reader is invited to identify those areas where there are opportunities, through careful planning, to minimise risk and loss with the clear objective of providing the customer with a high level of service whilst at the same time maximising the bottom line for that vessel's operation in particular and the shipowner in general. WHEN RECEIVING QUERIES related to the next employment for the vessel, and if circumstances permit, time and energy may be saved by being proactive rather than reactive-e.g. by the master sending a message along the following lines: If planning another transatlantic round voyage and basis predicted weather and condition of hull, ETA (anticipated) load port at economical consumption of 23 tonnes/per day is (time and date). In view of weather, if required to clean holds (e.g., from coal for grain) will be unable to complete within ballast voyage and will require 18 hours in port/at anchor to complete prior to survey. Concurrent 12 hours required for repairs to ensure hatches 3, 5 and 7 watertight. Also plan to pull one cylinder liner and overhaul main engine fuel pumps. This important but not essential and will require approx. 24 hours alongside. Will require to stem minimum 750 mt HFO and 30 mt MDO in order to complete another round voyage. There are several benefits to such an approach - it looks efficient and is efficient. It is also good negotiating technique as the operations department is now responding to the vessel's agenda, rather than the vessel seeking to influence theirs, and this helps the vessel achieve its internal operational priorities (maintenance, etc.) whilst still meeting its overriding commercial commitments. It also helps them in pitching their opening bid for employment accurately and avoids nasty surprises. There are compelling arguments for providing the master and the vessel with the whole picture and delivering the charterparty to the vessel as early as possible. Unfortunately, this happens far too infrequently, sometimes because a certain laxness in the system means that the production of the formal written charterparty is not undertaken immediately on completion of the fixture. With current developments in the electronic production of charterparties, this is becoming less defensible. Masters should request a copy of the charterparty to supplement their voyage orders and should also build up a stock of charterparty forms on board, bearing in mind that an additional rider clause may change the import of some of the printed clauses. Voyage orders should, hopefully, address the voyage in a logical order, collating the clauses which refer to individual subjects (e.g., hold, tank preparation, arrival and NOR, etc.) and, most efficiently of all, in the order which they are likely to arise as the project-i.e., the voyage-progresses. Whether or not the charter-party is delivered, it is good practice to produce a project (charter) checklist which can be built up as information about the charter becomes available. This has the added advantage of indicating very quickly what (critical) information is not available. It is an ideal 123

and educational task for more junior members of the team who can be invited to present their analysis at the management meeting. The first two sections of this chapter work through two standard voyage charterparties, drawing together clauses into a logical sequence and exploring their implication much as if constructing a set of voyage orders. The two charter parties are the Bimco Gencon and the Shellvoy 5-copies of both can be found in the annexes. The third part of this chapter undertakes the same exercise for a time charter, in this case rising the New York Produce Exchange NYPE93. It might be asked what is so magical about this since it sounds much like normal practice? The answer lies in using the management tools set out in chapter two to approach the charterparty as a project affecting-and requiring the support of-the whole of the on board management team. Planning, prioritising and assessing risks and preparing contingency plans using the best input from the master's management team comes first. This is followed by decisions and the delegation of tasks, all to be communicated in a way which will motivate an enthusiastic and willing response. And the objective: the highest degree of customer satisfaction for the charterer achieved with the maximum degree of profit for the owner, linked, perhaps, to the master's own professional satisfaction. Certainly, if the management team and the management organisation are working well, the inevitable problems which occur will be handled more efficiently. In a similar way, forward planning and a common understanding of customer priorities and concerns, together with the confidence and willingness to discuss them, will make for a more effective operation.

Dry bulk voyage charter-Gencon

Gencon, the Baltic and International Maritime Council uniform general charter (as revised 1922, 1976 and 1994) was designed for trades for which no specially approved charterparty form is in force. As such, it is in fairly common use and is in Bimco's standard base format, in other words, the main variable details of the specific charter are inserted in numbered boxes in Part I while Part 11 carries the standard terms and conditions. A copy is contained in an annex to this chapter. Most other trade-related charterparties are set out in a format more akin to the Shellvoy 5 or N"YPIN3 and the order in which information is presented may vary quite considerably. Again, additional rider clauses will not necessarily be added in a logical order and, being, in theory at least, a direct reflection of the agreement between owner and charterer, should, in the case of discrepancy with the printed word, take precedence. However, as has been mentioned before, charterparties, both rate and terms, tend to be negotiated on a last done basis. It is noticeable that the recently introduced NYPE 93 is hardly being used. This is despite the fact that it was revised by people in the trade to take into account the thrust of many of the additional rider clauses which, added to the 1981 edition, were becoming standard. Nevertheless, brokers tend to go back to the last charterparty that they concluded for that trade, and negotiate as closely as possible to that format. This does mean that there can be conflict between the main body and the rider clauses-or even between some of the rider clauses-which may prompt a request for clarification at best and at worst result in litigation. Changes in the main body of the charter often reflect changes in the balance of negotiating power which, in turn, may reflect changes in supply and demand within the charter market. Thus, they can be important indicators of how the charterers will 'run' the charter and will usually relate pretty directly to either who pays for what or how much time is allowed for certain operations. Changes may be small-e.g., is the word 'not' deleted or inserted-and will need careful scrutiny. Charterparties, unlike a good novel, do not usually make good reading from beginning to end. An initial scan, is recommended to get an overview and to identify where, in the charterparty form, different subjects are covered. Hopefully, either a good fixture recap or a set of voyage orders will already have arrived and the main points of the contract should be set out in a logical sequence and cross-referenced to the charterparty form and its additional clauses. The first scan, however, should ensure that no factual inaccuracies have crept into the description of the vessel, especially with regard to lifting capacity (boxes 5, 6 & 7 and clause I refer). It is also important to know who is referred to as the owner (box 3 and clause 1), especially if the vessel is on voyage charter, as this will be the person or company to which the consignee looks if 124

he has a claim. Clause I also contains a very succinct summary of the voyage to be undertaken and clause 2 sets out the owner's responsibilities and includes any manager under this heading.

Charterer, shipper and freight

Charterer (box 4), shipper (box 17 & clause 6) and freight (box 13 & clause 4): here is stated the vessel's customer. It is essential that the charterer is correctly identified as this will be the person to whom the owner looks for the payment of freight and demurrage. However, unlike a time charterer, he is not placed in a position of being able to issue instructions to the master with regard to the navigation and the management of the vessel. He may or may not be the shipper (or receiver) and, although the shipper is not necessarily identified in the charterparty, he may well be in the resulting voyage orders. This knowledge can be important, for fraud does exist. Furthermore charterers can vanish more easily than vessels. Although it took place in 1980, many will still remember the case of the tanker Salem which sailed from Kuwait with a crude oil cargo worth US$ 56 million, bound for Italy. She diverted to South Africa where she discharged (in contravention of the sanctions which were then in force), proceeded round the Cape, was scuttled and sank. The crew, 'after heroically fighting an engincroom fire' were rescued clean and well dressed with suitcases and passports to hand but no logbooks. This is a classic example of maritime fraud involving deviation. The amount of this fraud has reduced since the high point of the early 1980s, partly due to changing economic and political conditions and partly due to the efforts of the International Maritime Bureau, (IMB, part of the International Chamber of Commerce). However, the incidence of documentary fraud is on the increase and it is, therefore, essential that masters are always vigilant in order to ensure that they are not unwittingly involved. Documentary fraud, in the maritime world, usually involves bills of lading and commercial invoices, or sometimes nothing more elaborate than a telex message. To quote from standard instructions contained in the voyage orders of one major international oil company: All messages sent to masters via brokers or owners (from the charterer) will end with (an agreed format) and request for acknowledgement of receipt. Such an acknowledgement when requested, must refer to (this format). Any message supposedly coming from (the charterer) but not ending with (the format) should immediately be brought to the attention of the charterer Several instances have occurred in cases related to cargo fraud where ship's masters have been requested to transmit messages on behalf of another ship or other persons ashore (usually on the excuse that the other ship's radio was broken down). Masters should refuse to send such messages and report the fact to owners/charterers. The best way to counter documentary fraud is knowledge, closely followed by awareness and caution. In an operation where a blank bill of lading can be transformed into a document of title worth many hundreds of thousands, if not millions, of dollars by the application of a locally purchased rubber stamp and a forged signature, it is amazing that more care is not taken with these documents. Especially if blank company bills of lading are entrusted to the master's safekeeping and they are not consecutively numbered, it is sensible to institute a discrete and unobtrusive numbering system and log. Knowledge of the charterer should start back at the owner's office, where the first line of defence is for the broker to ensure that he is proposing a fixture with a known and reputable charterer. In an industry where overseas representative offices and brass nameplates abound and where the vertical integration of trading companies has, like shipping companies, fragmented, many imposing but not necessarily substantial nor necessarily honest letterheads abound. However, the ultimate responsibility for ensuring that the proposed charter is of good financial standing, remains with the shipowner. A second step in the acquisition of knowledge can be undertaken by the master and this is particularly recommended if calling at a strange port.

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Club Correspondent

Although specific surveys and other work will, reasonably, be charged to the owner, support and advice from the local P&I Club Correspondent will generally come as part of the service. Since prevention is always better than cure, if the master has any real concerns about the cargo which he is about to load - or discharge (and he should be aware of and alert for potential problems) he must consult his owners. It is recognised that there can be real dilemmas here (see chapter 10, figure 10.2) - who is the 'owner' to whom the master should address his concerns? There may at this stage just be that worrying feeling that 'things are not quite right', a difficult message to pass through technical managers to an anonymous 'owner' but information which it is the master's professional duty to communicate. In case of real difficulty or an emergency, the master can always contact the local P&I Club Correspondent along the following lines (but bearing in mind that there may be a fee attached to the service): To UK Club Correspondent From master mv 'Carden' Due to berth at port of Bellosonja 0 700 Monday to load bagged rice plus one parcel lumber beha4f shippers XYZ. Our charterers are ABC and EFG have been appointed as agents. Please advise if above known to you and whether there are any special, local requirements with respect to anticipated cargo or loading operation. If you are in port area during our stay, would be delighted to welcome you onboard. Regards Don Ellen, master Hopefully this will not elicit a response to the effect that: Charterers unknown, shippers recently involved in attempted fraud, rice infested and poorly bagged. Lumber 's particularly troublesome. Last vessel with similar dimensions to yours at proposed berth touched bottom during springs. Appreciate your kind invitation, my colleague Mac will not fail visit you on arrival. However, it is better to know when you still have time to sort the matter out, consult your owners and appoint a cargo surveyor. Generally, it is the consignee who suffers at the hands of documentary fraud. If the shipper or charterer proves to be illusory, then, as previously mentioned (chapter five), the consignee will naturally look towards the vessel and the owner for a solution to his problems and compensation for his missing or under-delivered or off-spec cargo. It is not difficult to understand a consignee's concern as he pays for a cargo which he has never seen, against a description of quality and quantity on a bill of lading which may refer to a contract (the charterparty) to which he is not party and which he may well never see. However, the owner can also suffer, especially under a time charter. He may well be paid his first two weeks' charter hire in advance as is required, arrive, load and, perfectly legally, sign and issue bills of lading. The charterer collects these and passes them and thus evidence of title to the goods and the payment of freight, to the cargo owner in exchange for the entire freight. The charterer then 'disappears' leaving the owner with two weeks' charter hire and a loaded cargo to deliver under the bills of lading which have been signed by him or which have been approved by him for signature.

Warning signs

The IMB identify six clear warning signs which should put traders on their guard: The goods may be in strong demand or not readily available; Low prices may be quoted or the source of supply may be unusual; The method of payment may be unusual or it may be required to a third party or intermediary; The names used by companies involved may have an uncanny resemblance to those of well known business houses; - There may be pressure for fast acceptance or processing of documentary credits; - It may be proposed that the bill of lading is acceptable even though the goods are inconsistent with it. -

For the master, the rules of careful vigilance, maximum relevant information and good housekeeping in connection with bills of lading (and mate's receipts) apply. He should: - Ensure that the cargo signed for on the bills of lading is actually on board; 126

- Where practicable, sign bills of lading himself; - If possible, only release cargo against a duly endorsed bill of lading (see below regarding letter of indemnity); - And, furthermore, against a bill of lading signed by him or which has been approved by him for signature.

Arrival

Arrival, boxes 8, 9, 10 & 21 and clauses 1 & 9: Clause I requires the vessel 'as soon as her prior commitments have been completed: to proceed to the loading port (s) or place (s) ... or so near thereto as she may safely get and lie safely always afloat. . .'. This sentence summarises a number of concerns for both charterer and master. Estimated time of arrival, box 9 and clause 1: In chapter 5 the importance to both buyer and seller of knowing when the cargo is to be loaded became apparent, not least because at times the purchase price of the commodity is based on an international price index obtaining on the date on which the master signs the bills of lading. Whoever is responsible for loading the goods will also have to make a number of arrangements to bring the cargo to the loading berth in time for the vessel's arrival, but not so early that he becomes liable for unnecessary demurrage on rail waggons, trucks, silos or tanks. Nor does he want an opportunity for cargo to deteriorate or be pilfered. It is a sad, but perhaps not surprising, fact that many traders are convinced that owners and masters are unable to be less than economical with the truth when advising ETAs. Brokers, anxious to secure a good fixture, will also tend to err on the side of optimism, hence the proactive approach suggested in the introduction to this chapter. Although a vessel's operational details are no concern of the charterer, the master's advice of ETA to the agent is frequently the first direct contact between the charterer and the vessel which he has contracted. As such, it is the time to build confidence, not sow seeds of doubt. Neither the Gencon nor the Shellvoy 5 charterparty have a specific clause detailing the times when ETAs should be advised, although there will usually be an additional rider clause dealing with this. Tankervoy 87, in clause 20 requires the master to radio the charterers and the agents (at both load and discharge port respectively) advising the vessel's ETA: on sailing from last prior port; seven days, 72, 48 and 24 hours prior to the expected arrival time; any other time the charterers may so request; and promptly if there is an alteration of more than six hours to an ETA. This is a fairly standard requirement and, especially if performance is not quite what it should be, due for example, for a need for engine repair or maintenance, it is an area where the master may find himself under commercial pressure. Good voyage planning helps here bearing in mind that an ETA must always be given in good faith. The master's failure to do so could expose the shipowner to large claims. It is also an area where the master might find that the principles of (commercial) risk management, discussed in chapter ten, aid his decision making process.

NOR and cancelling date

Notice of readiness and cancelling date, box 21 and clauses 6 & 9: The cancelling date is critical since it is in the charterer's option. The charterers can effectively leave the choice as to whether they accept the vessel until it arrives and tenders notice of readiness. In reality, the charterer will be looking at the market to see if they can find a more cost effective solution to their transportation needs. If not, the charterer will probably accept the vessel late. However, if the charter market is falling, charterers may well decide to cancel her upon arrival which means that your vessel is released onto that falling market and, depending upon your geographical position, your owner may find himself in a very weak negotiating position. The movement of the charter market may not be the only factor concentrating the charterer's mind; his contract may be time bound for a number of reasons ranging from constraints on the buyer/seller's ability to raise finance to support the transaction to, as previously mentioned, the purchase price for the cargo being linked to a timerelated index depending upon the date on the bills of lading. Berth availability and the additional cost of demurrage on goods awaiting shipment in the harbour will also be on the shipper's mind as he constantly monitors his trading margin.

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Careful reading of the requirements for tendering notice of readiness (NOR) is essential. Little is gained by burning extra fuel only to find that NOR cannot be formally tendered until after the weekend. Conversely, if by burning extra fuel it is possible to berth before the weekend (or a holiday) and secure time alongside with no cargo work being undertaken, invaluable repair and maintenance time will have been gained. It is important that NOR is tendered in writing to the right persons (clause 6c) and it is essential to get a written confirmation that it has been received. It is recommended that vessels arriving during the night or during other non-working hours tender on arrival and if in doubt retender 'without prejudice to the earlier notice' at the commencement of working hours. It may be necessary to check with the agent prior to tendering NOR if there are any special, local 'customs of the trade'. It is also important that the vessel has arrived i.e. come to a stop at the correct position for tendering NOR. In other cases, the charterer may have negotiated for the vessel to be alongside a designated berth, in which case the mooring operation should be complete, before NOR can be formally tendered (berth charter). In all cases, the vessel when tendered, should be in all respects ready for loading. This means that the holds (or tanks) should be clean and prepared for the designated cargo and, if this is not so, the charterer can reject the notice of readiness. If the vessel is not accepted, it is vitally important that the master formally retenders notice of readiness in the method and to the parties stipulated in the charterparty. It is not sufficient to assume that an acceptance of the holds by the cargo surveyor and a quick telephone call to the agent will be sufficient and that laytime will commence to count. If, for some reason, the charterer is not ready to commence loading, he will be very happy to sit waiting'for a formal notice to be submitted, with the vessel at the owner s expense. For this reason it is important that a very careful record of events is kept. This is especially so when on a berth charter as delays due to berth unavailability are generally attributable to the charterer. Mention has been made of the whole team being involved in the execution of the charter and this aspect is a prime example. The third mate, or whoever is- designated, may well keep a movements log when entering port-a third mate who understands the relevance of the NOR, when it is to be tendered and what constitutes an allowable delay which may be claimed against the charterer, will be able to keep a much more useful movement log than a third mate who is just filling in numbers 'because third mates always do this job'.

Unsafe loading and discharging ports

Loading and discharging ports or places, boxes 10 & 11 and clause 1-unsafe ports: One matter which may concern the master as he approaches port is whether the port is a safe port and, since this is a subject about which the legal profession can debate at some length, only general seamanlike guidance can be given here. The basic test of whether a port is safe or not was set out in the Eastern City [1958]: A port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship. The first point to look for in the voyage charter is whether the port(s) are named or just stated as a range. If the port is named, it is unlikely that the charterer will be held to have assumed responsibility for it being safe. After all, a competent ship operator should be able to assess whether a given port is suitable and safe for its own vessels. Although the owner has accepted the named port as safe for his vessel it does not follow that he has accepted a named berth. If the master has any doubts about safety he should consult his owners or the local Club Correspondent. 128

If the port is un-named, and not readily recognisable from a given range of ports, the charterer has a responsibility to nominate a port which is 'prospectively' safe for the vessel in question at the particular time at which the vessel reaches it, uses it and departs from it. That means safe so far as the port's topographical, meteorological, political and other inherent features are concerned. Prospectively safe refers to the time at which the charterer orders the vessel to the port and this is an important matter for the master to record. If the port subsequently becomes unsafe, the charterer should give new orders (and the master will need to calculate any additional time and bunkers consumed). In assessing whether a port is unsafe, the master needs to consider three factors: - Is the port physically safe? - e.g., is there sufficient water depth, what are the anticipated weather conditions, has war broken out etc. - Is the basic set-up of the port safe? In other words, are the systems -e.g., aids to navigation, pilotage, available tugs, port control-of a satisfactory nature with respect to his vessel and, if so; - Can the event or occurrence which makes him consider the port unsafe be described as abnormal or could it reasonably be foreseen? If the master considers the port unsafe for his vessel, it is reasonable for him not to proceed, but he must consider very carefully what the law might interpret as the 'reasonable actions of a prudent (but experienced) mariner'. Above all, he must make his decision as early as possible and communicate it to his owners/managers supported by a well argued case for not proceeding. Then he must collect as much evidence as possible to support the decision this can range from local navigational warnings and meteorological forecasts to photographs and chart tracings. Whilst the decision as to whether it is clearly too dangerous to proceed must lie with the master, the level of risk which might be accepted by the prudent mariner, supported by his equally prudent owner, will generally be settled through negotiation ashore. The master's role then becomes that of the provider of evidence and he may find that some of the risk analysis techniques discussed in chapter ten help. Political risk is a particularly difficult problem to address, bringing as it does the risk of injury and of the vessel becoming delayed, blocked or entrapped. As in the case of the Saga Cob [1992] 2 LLR 545 entering Masawa. Although terrorists were known to be operating, their activities were concentrated in another part of the country, leading the charterers to conclude that the port was safe. Situations can, and do, change rapidly; sensing political benefit, the terrorists quickly transferred their activities to the region of Masawa and the vessel was fired on. In the case of unsafe ports, the facts and how they develop are all important. Meticulous and contemporaneous record keeping by the vessel is crucial and will form the foundation upon which any dispute is subsequently resolved. An accurate and relevant log of events can best be taken by an officer who understands what is important under a given set of circumstances. This in turn means that the master must understand the situation and the issues at stake and fully brief his officers. The annex to this chapter contains, a useful checklist.

Laytime and demurrage

Laytime and demurrage, boxes 16 & 20 and clauses 5, 6, 7 & 16: The detailed calculation of laytime is the subject of a number of excellent books and it is not intended to look in detail at calculations here. Rather the intent is to highlight some of the factors which the commercially astute master should be looking for in the charterparty, linking these with some of the ways in which he might conduct his vessel so that it results in maximum benefit to the bottom line of the voyage calculation. -, The areas to be addressed are: - When laytime starts; 129

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The calculation of laytime; The calculation of demurrage; The distinction between demurrage and damages for detention; and Recovering the money -liens and cessor clauses. Firstly, though, what is laytime and what is demurrage? Laytime is the contractually agreed time allowed to the charterer to load and discharge the vessel and whilst demurrage is sometimes considered as welcome additional income (especially on a falling market), it is technically damages paid to the shipowner in respect of a breach of the charterer's obligation to load and/or discharge the vessel within the laytime stipulated in the charterparty. It therefore relates directly to that elusive commodity mentioned in the section on voyage calculations in chapter three-namely, time or, more precisely, time when the vessel should be free of her current contract and already engaged upon her next business. A glance at box 6 in the Gencon charterparty will show that there are two ways in which laytime can be calculated, either as a separate and specific time for each operation of loading and discharging (option a) or as a combined time for the whole operation (option b), sometimes called reversible laytime.

When does laytime start?

Three criteria must be fulfilled for laytime to commence. The vessel must be: an 'arrived ship' at the load port; the vessel must be physically ready to load; and a valid NOR must have been tendered. Firstly, the vessel must be an arrived ship and, to a certain extent, this depends upon whether she is fixed on a port or berth charterparty. Thus careful reading is required, both of the relevant printed clauses and any additional clause (s) which may change or amplify this. A careful record of events needs to be kept if the berth is not immediately available. This is set out in lines 109-116 of the Gencon form and has been reinforced by a number of recent cases. In 1981, House of Lords ruled on the case of the Laura, Prima [2 Lloyd's Rep 159] in which the charter provided that: Cl. 6 Upon arrival at ... Port of loading... the Master ... shall give the Charterer... notice ... that the vessel is ready to load ... cargo, berth or no berth, and laytime . . . shall commence upon the expiration of six ... hours after receipt of such notice ... However, where delay is caused to Vessel getting into berth after giving notice of readiness for any -reason over which Charterer has no control, such delay shall not count as used laytime. The charterparty also stipulated that the berth shall be safe and: Cl. 9 ... reachable on her arrival ... designated and procured by the Charterer ... The vessel was delayed by congestion for 9 days 8 hours and 50 minutes, which was no fault of and not under the control of the charterer. Charterers paid a sum of $162,158.22 on account of demurrage but entirely without prejudice. The owners claimed a larger amount and this dispute was taken to arbitration where the charterers contended that they were protected by the last sentence of clause 6 for all but 15 minutes of demurrage, and thus claimed back all in excess of $341.78. The House of Lords upheld the initial finding that charterers were liable for demurrage since the berth which the vessel was prevented from reaching by reason over which they (the charterers) had no control was one which the charterers had a duty to have already designated and procured. One of the strong lessons emerging from this case was that related clauses should be read as a whole in order to understand their meaning. In the words of Roskill L.J. ... the case seems to have proceeded in the Courts below upon the footing that there was a conflict of interest between C1.6 and 9 which required reconciliation. With respect, I am unable to see any such conflict. Properly construed, in the manner which I have suggested, these clauses are in no way in conflict. I would regard them upon this construction as complementary one to the other

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It is interesting to reflect upon what the individual brokers felt that they were agreeing as they negotiated, perhaps against a deadline, to reach a compromise. Perhaps the real answer lies in which way the freight market was moving at the time. This case illustrates a legal solution to what was, and always will be, a commercial negotiation. That is the nature of shipping. The additional wording to Gencon clause 6 in the Lethero [1992] 2 Lloyd's Rep 109, well illustrates another point. Laytime can start and stop depending upon the wording in the charterparty and the course of events: Cl. 6 . . . Time lost in waiting for berth to count as discharging laytime, whether in berth or not ... Time to count from arrival Pilot station Bandar Abbas, except for actual steaming time to and from Bandar Khomeini which to be excluded from counting ... The second consideration is NOR and this has already been discussed. It is vitally important that NOR is tendered in the correct format to the correct person (shipper, charterer or, at the discharge port, receiver), and it is wise to copy it always to their agents. It may be profitable to give some consideration to the timing of NOR and the time from which laytime shall commence, which, in dry cargo trades, is generally a minimum of six hours after tendering (and possibly acceptance) and may be much longer. It is a common misunderstanding for masters to believe that the NOR has to be accepted to be valid. This is only true if the charterparty specifically requires acceptance of the NOR. When tendering NOR, the master is warranting that his vessel is ready to load-in other words, NOR will be invalid if the vessel is not fully ready to load and laytime will not commence. Even if anchored off the port awaiting a berth, the vessel should be in a fit state to load. If, for example, when the vessel does berth, there is a delay while she pumps ballast or has to re-clean her holds to meet surveyors' requirements, then there is a danger that NOR will be rejected and all the waiting time will be at owner's expense. Although 'ready to load' means that all holds must be passed before NOR is accepted, it is obviously sensible to concentrate first on those holds where loading will commence. And, if NOR is rejected, formally retender and keep retendering until it is finally accepted.

Calculation of laytime and demurrage

Laytime may be calculated In one of two basic ways, either by stating a specific time or by stating a loading rate against a given tonnage to load-or discharge. Either way, the calculation reduces to that most valuable of all commodities in shipping, time and who is going to pay for it. Within this general rule there are a wide range of variations, and for a start the master needs to know whether the laytime allowance is a separate item for the load port (or ports) and discharge port or combined in one overall allowance. In Gencon clause 6, for example, there are options for either arrangement. Although there are arguments for both options, split laytime at least means that the owner has the opportunity to secure any demurrage earned in the load port before the voyage ends. Although the charterer is generally responsible for payment of demurrage, recovery from the charterer, shipper or consignee after the cargo has been safely discharged may be a lengthy process. It is, therefore, a wise precaution for the master to keep his owners closely advised of the laytime situation at the last discharge port and the extent to which demurrage is building up. As is stated in every textbook, certain times are excluded from laytime and brokers enjoy developing acronyms for these: SHINC (Sunday and holidays included); SHEX (Sundays and holidays excepted) are-two of the most common but may be followed by EIIJ (even if used) or UU (unless used) - it is useful to have a glossary of chartering terms on board. The master needs to think about how laytime is calculated in conjunction with his arrival time; there is no need to increase speed and fuel consumption in order to arrive and tender NOR within working hours on a Friday (and note, of course, that 'Sundays' can vary in line with the national religion) if the waiting period before laytime commenced leads him into an excluded weekend or holiday period. This situation may change if the vessel needs a quiet period alongside for repairs or maintenance (but note that for NOR to be accepted, the vessel must be ready to load-the charterers may reject 131

NOR if the vessel spends the weekend cleaning, holds). Alternatively, if weekends are included (SHINQ but not usually worked, a vessel can gain useful alongside time which will justify additional bunker consumption arriving before the working week finishes. It is a commercial calculation. Within the days that are included in laytime, there may be certain exceptions. The days that are not excluded are working days and, unless otherwise stated, should be calculated over 24 hours from midnight. Only those days when weather permits (weather working days) may count towards laytime and this is obviously a matter of judgement, custom of the port, type of cargo and, in the last resort, negotiation. Whilst a shipper may be quite happy to pressure the master to continue loading in the rain, and he may well be supported by the port authority which wants to free the berth, the receiver may be less enthusiastic about receiving rain wetted cargo. Steel and rusting must immediately spring to mind in this context. A master who finds himself in such a situation should immediately contact his Club Correspondent. The master must weigh up a number of considerations here; who is paying for opening and closing the hatches, for example (see Gencon Clause 5(b)). Both the master and the chief officer need to have a very clear policy regarding stoppages for weather, for it is likely to be a young third mate who has to -understand their requirements and make the decision during the early hours of the morning. And it is not only rain which can cause a problem; high winds may well prevent containers being loaded. Whatever the cause, a careful record must be kept and the annex to this chapter contains an example of a statement of facts covering a vessel's port stay and cargo work. Since the Statement of Facts is the cornerstone of any laytime calculation, it must be accurate. However time pressed, the master should never sign a Statement of Facts unless he is certain of its accuracy in fact it is a golden rule that the master should never sign anything, no matter how busy he is, unless it has been checked and is correct. Good forward planning, delegation and the efficient use of his team can help the master achieve this.

Demurrage and damages for detention

The term 'once on demurrage, always on demurrage' is well known and, to a great extent, selfexplanatory. Exceptions to laytime do not constitute exceptions to demurrage unless expressly stated as in clause 8 of Asbatankvoy. If, however, demurrage shall be incurred at ports of loading and/or discharge by reason of fire, explosion, storm or by strike, lockout, stoppage or restraint of labour or by breakdown of machinery or equipment in or about the plant of the Charterer, supplier, shipper or consignee of the cargo, the rate of demurrage shall be reduced by one-ha4( of the amount ... The Charterer shall not be liable for any demurrage caused by strike, lockout, stoppage or restraint of labour of Master, officers or crew of the Vessel or tugboat or pilots, A stoppage or unexplained slowdown in loading should always be investigated, and this cannot be done from behind a desk on board the vessel. Just as a master may be loath to report a temporary breakdown and risk off-hire (under a time charter), so a charterer can be expected to pursue any, legitimate reason for not paying full demurrage. If the vessel is unable to load or discharge in accordance with her description in the charterparty, demurrage may also cease to accrue. If the problem is partial- e.g., one hatch cover isjammed or one of the vessel's cranes is not working-the situation becomes more complex. Obviously a careful record needs to be kept and the charterers encouraged to keep working where they can. The best result may prove to be a negotiated pro-rata solution which may be undertaken by the P&I Club under the owner's Defence Cover. These discussions would be based upon the vessel's records. The vessel may be subject to other delays which are the responsibility for the charterer, but which do not fall within laytime. For example, the charterer may have failed to procure a berth so that, under the terms of the charterparty, it is not possible for the vessel to become an arrived vessel and tender NOR. Or the charterer may fail to exercise his option to declare a discharge port and the vessel may consume time and bunkers during the waiting period. In fact, it is not unknown for a cargo owner to do this if prices for his cargo are fluctuating within a range of ports.

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In such cases, the owner's recourse is through a claim for damages for detention. The level of recompense will reflect the freight market at the time (and thus may or may not be at the same level as demurrage) and may also include the cost of bunkers consumed. Once again, the rule is keep a careful record of facts- e.g., exactly when was the discharge port declared and were extra bunkers consumed, and keep owners advised. Finally, a word about when laytime ends. This is generally when the cargo is loaded (and properly stowed) or the hoses are disconnected. If this occurs within the laytime allowed, then laytime ceases. If the charterer then delays the vessel's sailing while, for example, cargo papers are prepared, the owner has a claim for detention. If, for some reason, the charterparty is silent on the matter of laytime, then charterers should use all reasonable despatch to load (and discharge) the vessel and the master would be wise to make enquiries as to what is generally considered to be a reasonable rate of working in that port.

Seaworthiness, clause 2

Having arrived and presented his vessel for loading, the master should be confident that his vessel is seaworthy for the intended voyage. Clause 2, owner's responsibility clause in the Gencon charterparty, addresses this matter and aims to absolve the shipowner from all responsibility for loss, damage or delay unless ... caused by personal want of due diligence on the part of the Owners or their Managers to make the vessel in all respects seaworthy ...

The concept of seaworthiness affects many aspects of maritime commerce and law, from hull insurance to cargo claims. But seaworthiness can be an elusive concept; the Marine Insurance Act 1906 (section 394) states: A ship is deemed seaworthy when she is reasonably fit in all respects to encounter the ordinary Perils of the seas of the adventure insured. This definition understandably recognises that the vessel should be seaworthy when she sets out on the voyage, but that it may be impossible to maintain this absolutely throughout the voyage. In the words of Scrutton: The seaworthiness required is relative to the nature of the ship, to the particular voyage contracted for and the particular stage of that voyage being different for summer or for winter voyages, whilst loading in harbour, and when sailing and varies with the particular cargo contracted to be carried. From this it is obvious that the concept is relative but, in addition to being structurally sound and in good condition: - The vessel must have a competent master and crew, not just properly certificated but able to communicate amongst themselves and to the outside world and there should be sufficient personnel to work the vessel. Whether the reader considers that this test is always achieved may be a matter for discussion. Certainly the thrust of the International Safety Management Code is towards improving this area of operation. - The cargo must be both safe and safely loaded and stowed. - The vessel must have adequate stores and bunkers for the voyage or at least, the next stage of the voyage. If not, the vessel may have to deviate from the contracted voyage. The (effects of such an action are discussed below. - The vessel must be fit to carry the contracted cargo. - The vessel must take a pilot where required (and where voluntary, the onus will be on the master and owner to produce convincing arguments as to why no pilot was used) and charts should be corrected and up to date.

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The central concern is with seaworthiness, or the lack of it, and how it affects the contract between owner and charterer as well as those who stand behind the charterer and become contractually related to the owner through the bill of lading. Under English law, there is an implied and absolute undertaking in every contract of carriage to provide a seaworthy vessel-the common law position. Most charterparties, however, will incorporate one of the international conventions relating to the carriage of goods by sea, generally The Hague or Hague-Visby Rules and potentially, the Hamburg Rules. The Hague rules, as may be expected, ease the absolute obligation of the owner to provide a seaworthy vessel to the obligation to exercise due diligence. The burden of proving that a vessel was unseaworthy lies with the cargo interests. The Hamburg Rules, on the other hand, require the carrier to prove that he, and his servants and agents I took all measures that could reasonably be required to avoid the occurrence [purportedly arising out of unseaworthiness] and its consequences.' To pursue the definition of what is reasonable and to define due diligence is, perhaps, to pursue legal niceties and not the practicalities faced by the master. It is important, however, for the master to understand when, legally, his vessel must be seaworthy and this is clearly before and at the beginning of the voyage-it is not a continuing warranty. It also applies in stages so that the vessel need only be seaworthy relative to a port operation when initially presenting for cargo. In other words, she could be repairing a fault to her main engines or auxiliary machinery so long as the repair is complete at the time of sailing and she is seaworthy for the next stage of the voyage.

Looking for evidence

In the event of a cargo claim, cargo interests and their legal advisers will almost inevitably look for evidence that the vessel was not seaworthy at the commencement of the relevant voyage. Surveyors may well visit the vessel with this objective in mind. As with all surveyors, they should be accompanied throughout their visit and the crew, especially officers, should know their purpose on board and the danger of unguarded and illconsidered statements. Seafarers are, generally, polite and prepared to~ talk about their vessel. An unguarded comment by, say, an engineer to a cargo surveyor who has just POP ed down the engineroom, about the repair work undertaken at the load port and whether it was all complete on sailing can bring the gleam of the hunter who has just raised the scent of his quarry to a good lawyer's eye. If the dispute reaches Court or arbitration, the tribunal will want to know: - Was the vessel seaworthy? - If not, did the owners exercise due diligence to make the vessel seaworthy? - If not, did the unseaworthiness cause the loss or damage to the cargo? Hopefully the answer to these questions is yes, yes and no, in which case cargo owners or charterers are unlikely to be able to recover damages from the owner. If the answer to the first question is no, much argument will revolve around the answer to questions two and three. Since the loss or damage will inevitably occur after the time at which the vessel is warranted seaworthy i.e., at the commencement of the voyage-the answers to all the above questions will depend to a large extent on the evidence from the vessel. There will, almost inevitably, be some evidence of damage-say, wetting-or of loss. In the absence of evidence to prove that the vessel was well found, properly manned and seaworthy, the tribunal or Court might reasonably reach the conclusion that since the damage must have some cause, the most logical cause is unseaworthiness.

Contemporaneous records

The most important evidence is, not unnaturally, contemporary records from the vessel's logbooks and- as indicated above, the engineroom log may be as important as the deck log and official logbook. If navigation is an issue, the relevant working charts can be important, as can contemporary meteorological records, if heavy weather is claimed as a defence. Photographs or a video, especially with a camera which imposes the date on the negative, are especially valuable. A photograph of rain wetted cargo on the quay prior to loading or the 'seventh' wave breaking over number one hatch, will be compelling evidence to the tribunal, especially if accompanied by a 134

logbook entry (both deck and engine) recording a prior reduction in revolutions to case the vessel's passage. Subsequent reports, surveyors' reports and notes of protest are all important and, under the process of discovery of documents, will be scrutinised carefully by the opposition. Discovery of documents, found in many but not all jurisdictions, means that each side must disclose to the other all documents in their possession, custody or power which are relevant to the resolution of the dispute. The absence of what may be termed 'normal documentation' tends to make a tribunal or Court suspicious. However, the records disclosed should be matters of fact, not opinion or conjecture. If the master's opinion is requested, then it should be addressed in a letter to the owner's solicitors, not in a separate report which can be 'discovered' by cargo. Also, since in this day and age, crews tend to disperse at the end of a voyage much more frequently, a wise master ensures that he has a relevant statement of fact from those of his officers involved and, in most cases, the most important officer in cases of cargo loss or damage, will be the chief officer. If the incident is serious enough, the master might consider asking the local P&I Correspondent to arrange for a lawyer to be present when statements are taken from the crew. Finally, on this point, contemporary reports are generally valued more highly than subsequent recollections which, tribunals or Courts might consider, have benefited from the advice of -the owner's legal representatives. In general, the tribunal or Court will be interested in: - Evidence relevant to seaworthiness: this can range from the adequacy of the hatch covers or cargo lashings to the date of the latest chart correction or the performance of the radar. Under certain circumstances, the availability of essential back-up services in the engineroom may be relevant. - Evidence relevant to causation: a fundamental part of the duty of the cargo officer on watch is to monitor the condition of the cargo. Defects observed during loading should, naturally, be notified immediately to the shipper's representative and dealt with at the mate's receipt stage and before the bill of lading is presented. Even if apparently in good order during loading, the cargo should be monitored during the voyage. It may, for example, be sweating too much, or the appearance of insects or other bugs might give warning of infestation. Contemporaneous records, photographs and samples will all help to strengthen the shipowner's case. - Evidence related to due diligence: if the owner, through his and his master's actions, can answer yes to the second of the questions posed earlier, even a difficult situation can be retrieved. An argument by the shipowner that due diligence was exercised will almost certainly fail if it is not supported by well documented evidence from the vessel and, as stated in Article IV of the HagueVisby Rules: Wherever loss or damage has resulted from unseaworthiness, the burden of proving the exercise of due diligence shall be on the carrier and other person claiming exemption under this article. - Quantum: if cargo interest can prove unseaworthiness, then the owner loses his right to limitation under The Hague and Hague-Visby Rules. Again, evidence, records, photographs, preferably contemporaneous, are important-. This is not asking for anything unusual, just proper Watchkeeping Safety and Cargo Management In Port (see The Nautical Institute publication by Captain Peter Roberts). The ship's hull together with its hatch covers is, as the second mate explained to the examiner for master and mates, 'for keeping the water out'. On reflection, it is hard to think of a better definition: 'watertight' and 'fit for sea' are all important contributions to seaworthiness. Article III of The Hague-Visby Rules requires the carrier to: ... properly and carefully load, handle, stow [and lash], keep, care for and discharge the goods ... which are, as has been stated before, entrusted to the master's safe keeping by his customers. Even cargo stowed on deck 'at shipper's risk' is entitled to the due diligence of the owner and his master and crew.

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Cargo (boxes 7 & 12, clause 1)

A central theme of this book is to focus on the basic and fundamental reason why merchant vessels are built and bought and seafarers trained and employed. It is all too easy to say 'to carry cargo' and to begin to believe that the seafarer's prime function is to manage the ever increasing volumes of safety systems and regulations which characterise ship operations today. It is essential that the master does not lose sight of the importance of delivering an efficient and cost effective service to his customer, the international trader who wishes to transport goods by sea and thus commits them to our professional care, be he village headman or a multi-national corporation. Changes in the structure of many shipping operations in recent years has resulted in masters and officers changing trades much more frequently and, in many cases, facing the challenge of carrying a wider range of cargoes. Whilst improvements in communications have simplified the process of accessing up to date information, the highly competitive market in which vessels compete for employment can make it difficult to establish a dialogue between the master and the shipper of the cargo. A rice trader tells of a vessel, having loaded a part cargo of bagged rice in one Far Eastern port, arriving in Singapore to complete loading with a transhipment cargo of another grade of rice. Evidence of infestation in the first parcel caused the second shipper to reject the vessel. Partly because it was the first time that he had loaded rice and partly because he was receiving a great deal of conflicting advice with no clear lead, the master solved the problem by discharging the first parcel ashore and having it and the holds fumigated. Unfortunately, the bags were of poor quality and extensive rebagging was required causing more delays and expense to what was already becoming a very expensive operation. The rice trader, experienced in these matters, would have accepted his cargo being loaded on arrival against a firm commitment to fumigate properly the first parcel in situ on passage, a much more economical proposition. However, his reaction to his agent's report of the infestation was an initial (and understandable) refusal to load until the matter was resolved. The moral of this story lies in communication; not the quantity-the master has a thick file of messages and subsequent invoices to prove this-but the quality. In effect, no link was made between the person who knew most about the carriage of rice and what he would accept -i.e., the trader-and the person responsible for carrying out job, the master. Whilst it is easy to apportion a large part of the blame for such an expensive operation to the master, much of the problem frequently lies with the owner who has failed to establish a properly structured channel of communication with the master through which to address commercial matters. This can often be the case when the master's formal reporting channel is through technical managers, with a commercial operation which is somewhat removed, either physically or philosophically. This split can and does work well for a number of owners who locate their commercial operations in, say, London and their operational staff, typically, in Greece, for in these cases there is inevitably a very clear centre of authority and a close rapport between master and owner. If, however, a master finds himself working for an organisation where such a rapport and such lines of communication are clearly lacking, then it is suggested that he has a professional duty to try and establish them. It may not be possible to effect such changes single-handed but, in a case such as this, a proactive course of action is required: From: Master mv Basmati To: Operations Manager Proposed solution here is to discharge infested parcel, fumigate ashore and reload. This is obviously time consuming and bagging of first parcel of poor quality so suggest minimum handling. We can transfer Part parcel in No. 1 hold to No. 3 hold, fumigate Nos 4 & 5 and commence loading within 36 hours with etc etc. Proposed plan has been discussed and agreed with local cargo surveyor organised by Club Correspondent. Although shipper's local agent resistant, please formally ask shipper/charterer whether he will accept this alternative. 136

This may sound terribly obvious: except that the annals of P&I Club cargo claims prove that it does not happen as often-and as early in a developing situation-as it should. The art of negotiating, and this is a negotiation, is not to ask for instructions but to put forward a proposal and ask for approval or an alternative. This situation did happen and the master in this case did not act decisively in his owner's best interests.

Personal contact

Some thousands of miles north, a charterer recalls the master of a parcel tanker trading regularly to a private oil terminal in Scandinavia. The operation was initially beset by a multitude of minor problems and frequent shortage claims. The terminal manager, even after several voyages, knew little of the master who tended to remain on board, courteously if formally receiving visitors but not venturing on to the terminal. One trip, having damaged his ankle skiing on a Friday afternoon, the terminal manager asked the master if he would mind meeting in the terminal manager's office. Once out from behind his desk, a genuine rapport developed between the terminal manager and the master, who showed a lively, professional interest in the operation of the terminal. It would not be true to say that there were no more problems, operationally there always are, but generally they were settled there and then with the minimum of paperwork and without escalating into a dispute between owner and charterer. The moral is that masters should venture ashore as much as time and conditions allow and make contact with the next link in the transportation chain of which the vessel is but one part. Either the master or the chief officer should endeavour to find out, for example, what procedure is being used for weighing the cargo-modern conveyor, or a weighbridge that does not look as though it has been tested for years. A good photograph will doubtless interest the arbitrator in the event of a dispute. Who are the cargo surveyorscousins of the shippers? -and what does the cargo look like in storage or in the warehouse? Are there signs of wetting or vermin, does it all look to be the same grade and who is testing for quality and taking samples? Make an effort to meet the shipper and discover his problems-there may be mutual solutions. The most important point is to act as early as possible and gather as much intelligence as possible. Make sure that the chief officer has a good watch on deck and that the officer knows what he is watching for (again, The Nautical Institute's Watchkeeping Safety and Cargo Management in Port can give guidance to junior-and senior-officers). Check mate's receipts regularly, as they can be an early warning of impending problems. Once again, time is the potential problem, which means planning ahead is essential. On completion of loading cargo, the shippers and the port authority will want bills of lading signed and the vessel off the berth as soon as possible. That is not the time to start investigating or resolving a problem with cargo interests which could and should have been identified and addressed earlier.

Dangerous cargo

The mention of dangerous cargo immediately brings to mind the lMDG Code and its over 3,000 substances listed as hazardous to human life and/or the environment. The vast expansion of dangerous goods is quite staggering since the first legal mention of only three in the Merchant Shipping Acts 1854: aquafortis (nitric acid, used extensively for etching), oil of vitriol (sulphuric acid) and gunpowder. A master should know: what his charterparty says about dangerous goods and his contractual and common law position; whether the goods fall within the IMDG Code and require specified, special conditions of carriage -e.g., on deck-and, if not, whether there are other hazards, active or dormant, which require special carriage and/or may affect his crew or the fabric of his vessel. 137

The Gencon, being a charterparty designed for bulk cargoes, is silent on hazardous and dangerous cargoes, but a charterparty may contain a list of specific excluded cargoes or a general prohibition of 'dangerous' or 'unlawful' goods. The legal concept of dangerous in a contractual context can be both wider and narrower than the scientific definitions used by IMO. There is an implied common law undertaking imposed on shippers and charterers to give notice to the owner of any dangerous goods tendered for loading. The notice need not be in writing, but it must be adequate. A mere difference in degree of hazard will not make the shipper liable unless it is so great as to approximate to a difference in kind, so beware of being offered: ... a wet w4in dry sheep's clothing [where] there was nothing to put [the master] on notice that the cargo was something radically and fundamentally different from what it appeared to be. In the Amphion [19911 2 LLR 101, cargo was described under a voyage charterparty as 'antioxidant treated bagged fishmeal'. The cargo had not been properly treated and overheated, causing increased discharging costs. It was held that the cargo did not correspond with the contractual description and the charterers must bear the additional costs. - The burden of proving absence of proper notice is on the owners and, since the notice can be verbal, careful, contemporaneous records may be important in the event of a dispute. - It has been held that the master's consent to take cargo does not affect the owner's position since master '. . . has no authority to vary the owner's contract' (Chandris v. Isbrandtsen-Moller [ 1951 J IKB250). However, it must be expected that a professional master would consult with his owners (and the local Club Correspondent). The Hague Rules (article IV, rule 6) refer to the carriage of dangerous goods, giving the master the right that, if any such goods have been shipped without proper consent, they may 'be landed ... destroyed or rendered innocuous by the carrier without compensation' and at the shipper's expense. A properly worded Clause Paramount should incorporate all Hague, Hague-Visby (or Hamburg) Rules provisions from the bill of lading into the charterparty. Perhaps not surprisingly, the Hamburg Rules ease the burden on the shipper. Under Rule 13, the shipper remains responsible for marketing and labelling dangerous goods and for informing the carrier '. . . of the dangerous character of the goods and, if necessary, of the precautions to be taken.' The right to unload, destroy or render innocuous '. . . without payment of compensation' is there (but there is no reference to responsibility for associated costs) but it'. . . may not be invoked by any person if during the carriage he has taken the goods in his charge with knowledge of their dangerous character'. 'He' may be taken to refer to the 'carrier' (by whom or in whose name a contract of carriage has been concluded) or the 'actual carrier', which may well widen the scope to include the master as any other person to whom such performance has been entrusted'. Whatever the Courts eventually decide, and they will doubtless have the opportunity of doing so if the wider scope of the Hamburg Rules become more commonly used, it is unwise and, to a degree, unprofessional to rely on the exclusion of the master's responsibility in these days of improved communications and litigation.

Live animals and deck cargo

The Gencon charterparty (clause 1) stipulates that the vessel shall '. . . load a full and complete cargo (if shipment of deck cargo agreed same to be at charterer's risk and responsibility) . . .'. It is critically important that there is (written) agreement for the cargo to be carried on deck as deck cargo falls outside the provision of The Hague Rules. This means that the shipowner is unable to rely on the ability which the rules give him to limit his liability and, in the absence of an agreement, assumes the absolute common law liability for the cargo. Even if the shipper's agreement is given to load on deck, the master has a responsibility (to the receiver under the bill of lading-see chapter five) to ensure that the cargo is suitable for passage on deck, properly packaged and sufficiently lashed and that his vessel can be considered seaworthy. A set of photographs showing the stow and the method of dunnaging and lashing are highly recommended together with a reference to the vessel's stability and whether she was stiff or tender. Bills of lading must also be addressed. 138

'All on deck at shipper's risk' is often not adequate, and “carried on deck at shippers'risk without liability for loss or damage howsoever caused” is recommended. On voyages which involve the USA, the clause needs further expansion and the vessel's P&I Club should, in the absence of established company procedure, be asked to advise. The Hamburg Rules (article IX) entitle the carrier to carry goods on deck only if such carriage is in accordance with an agreement with the shipper or with the usage of the particular trade or is required by statutory rules or regulations. They also stipulate that the agreement to carry on deck must be inserted in the bill of lading. Whilst 'the usage of the particular trade' slips easily off the tongue, masters will be wise to enquire how 'usual' the usage is-such defences as usual custom and practice have a habit of dissolving under concentrated legal attack. Animals are excluded from The Hague Rules but are dealt with under article 5.5 of the Hamburg Rules: With respect to live animals' the carrier is not liable for loss, damage or delay in delivery resulting from any special risks inherent in that kind of carriage. If the carrier proves that he has complied with any special instructions given to him by the shipper in respect of the animals and that, in the circumstances of the case, the loss, damage or delay in delivery could be attributed to such risks, it is presumed that the loss, damage or delay in delivery was so caused, unless there is Proof that all or Part of the loss, damage or delay in delivery resulted from fault or neglect on the part of the carrier, his servants or agents. In the absence of such instructions, it is important to request, and, if necessary, demand them. In their continued absence, record this fact and advise the shipper how the vessel proposes to care for the animals. This will help to prove that the carrier took all reasonable steps to properly care for the cargo. Such authoritative publications as Thomas on Stowage provide guidance which will generally be accepted by Courts and arbitrators and it is an interesting project for a junior officer to research the next cargo and report his findings and recommendations for carriage to the management team.

Signing bills of lading (clauses 1 and 10)

An example of the Congen bill of lading form appears in the annex and compared with the liner bill it is a much simpler form. However, it does represent the contract between the vessel as carrier and the owner of the goods to be transported, the service for which the vessel, through the charterparty, has been engaged to perform. Furthermore, at some stage during the voyage, a third party, the receiver, is likely to acquire the bill of lading and ownership of the commodity within the vessel's holds, in exchange for a large quantity of money. His need to be able to rely on what is written on that bill of lading is understandable as has been discussed in chapters four and five. In preparing the bill of lading for signature, the master must consider what implications his entries, endorsements and signature have under the three familiar functions of receipt for cargo loaded; evidence of contract of carriage; and document of title. This may vary under the law of the relevant country (but here English common law is discussed); The Hague-Visby Rules, (with or without their amendments): and, increasingly, the Hamburg Rules. First, however, there are some practicalities which should become part of the operational procedure of the vessel and understood by, at least, the deck officers. Fraud: Much of modern international trade is conducted through documents (and, increasingly, electronically), with businesses far divorced from the loading operation making decisions worth many millions of dollars based on evidence provided by others. Central to this is the bill of lading, which, since it enables the holder to demand delivery of the cargo-of, say, a cargo of $20 million worth of crude oil-gives the person who controls the bill of lading the control of the flow of very substantial sums. Hence the potential for documentary fraud. The first rule is to know as much as possible about the people with whom you are trading. This is very much the owner's and broker's responsibility when first entering into the charterparty, although they may have little or no knowledge of the individual shippers. As mentioned earlier in this chapter, 139

the master can play an early and valuable role, often through the Club Correspondent, in finding out more about the shippers. Early action, even if it is just initiating a cautious enquiry as to identity and reputation, may prevent many problems later. One of the most common frauds is to use dummy or false bills of lading. This is nothing new. Long before the case of the Salem, in 350BC records show that a shipper Zenothemis, unfortunately in cahoots with Hegestratos, a shipowner, conned a buyer in Syracuse to lend money based on a non-existent cargo. The moral is, keep valuable, or potentially valuable, documents safe. The unguarded, if inadvertent, juxtaposition of even a blank bill of lading and a ship stamp is an open invitation to fraud. It is not always possible in the tramp trades to control the bills of lading which may well be produced by the shippers. However, it is good practice to endeavour to secure a draft copy early enough to read through it beforehand and bear in mind the advice of the Through Transport Mutual Club to its (liner) members which, paraphrased, is: (a) Treat all blank bills like blank cheques. Keep them locked away and try to keep track of them, for example by having them preprinted with consecutive numbers; (b) Never send blank bills or photocopies without having first defaced them; (c) Be suspicious of people, especially new customers, who demand copies of bills to, check that they are OK'; (d) Train your staff in the proper procedures; (e) Above all-don't trust anyone. Preparation: Anticipate problems and act as early as possible. The representative, especially in an oil terminal, who is sent to get 'clean bills of lading signed, and make sure that they are clean', just before the vessel sails is unlikely to have much authority to negotiate. Copies of the bills can sometimes be sighted earlier during the loading process and additional incorporation clauses or clauses relating to deck cargo or live animals agreed in consultation with his owners. It also gives the master an opportunity to check the Paramount Clause so as to ensure that either The Hague or Hague-Visby Rules have been incorporated. Standard Club cover is conditional upon the application of one of these conventions unless The Hamburg Rules apply by force of law (see reference to Forms A and B in chapter five). If the relevant conventions are not incorporated then the owner may have to buy additional insurance cover so he needs his master to tell him. It may be necessary to check which conventions apply (e.g., Hague, Hamburg, York-Antwerp) and agree, in consultation with the owner, which amendment should be included (see chapter 11, the general average settlement). With the chief officer and the deck officers constantly watchful of the condition of the cargo, with the mate's receipts being kept up to date with the progress of the loading, and with the knowledge gleaned from an earlier walk ashore by the master to view the weighbridge ('Tested, sir? Why this weighbridge is checked every week'- or 'Hasn't been looked at for 20 years') a much more confident stance can be taken if the shipper's -figures are disputed or the quantity of the cargo warrants clausing the bills of lading. Agents: It is always worth remembering that, although the agent may be appointed and paid for by the owner, they live and work subject to the pressures and influences of that port and may have much more contact with the shipper than the owner. This is not to say that the majority of agents are not thoroughly professional, but the master must establish a close liaison with the agent and should not be put off by an agent who appears less than willing to co-operate. Whenever possible, the master should sign bills of lading himself, although as can be seen from the Congenbill, 'the Master or Agent of the said Vessel . . .' may sign. Some companies have an established procedure for signature by the agent, but whoever signs, the basic information as to weight or quantity and condition must be as required by the master (if necessary in consultation with his owners). Instructions to the agents should be clear, concise and very definitely in writing. Furthermore, it is good practice to ensure that the agent promptly confirms that the bills of lading have been signed as agreed. A record of the exchange should be kept on board with the cargo papers. The bill of lading as a contract: Charterparties frequently require that bills of lading are to be signed I as presented' or 'to sign clean bills of lading ... without prejudice to this charter' as in clause 10 of the Gencon. The latter part of the clause means that the charterparty contract between owners 140

and charterers is not affected by the inclusion in the bill of lading of different terms (see chapter five: incorporation clauses.) Masters must take great care in clausing bills of lading as this may make them ineffective as a document of trade (e.g., unacceptable to a financing bank). Thus the clause 'Demurrage and deadfreight are claimed by carriers who may exercise their right to lien the cargo under Clause 8 of the Charterparty' in the Anara al Sabor [1980] 2 LLR 261 was considered unacceptable even though the cargo was substantially undershipped. As was stated in the case of the Nanfii [1977] 1 LLR 201: The issue of bills of lading in a particular form may be vital to the charterers trade. And although it is going too far to say that the charterer is always right, it must always be remembered that the charterer is the customer. If there is a genuine problem with the bills of lading as presented, the Courts have supported the master's right to decline to sign and delay sailing until the matter is resolved. In the Boukadoura [1989] the master declined to sign unclaused bills as the ship's figures showed a much lower quantity of oil loaded. As the vessel's figures were correct, the judge held that the master was entitled to refuse to sign an unqualified bill. Conversely, in the NogarMarin [1988] ILR412 the master had duly inspected the cargo of iron rods in coils and found some rusty. Nonetheless, he negligently failed to instruct the mate to clause the mate's receipts and so clean bills of lading were presented and signed. Owners were unable either to refute the subsequent claim from receivers or claim an indemnity from the charterers. The obvious lesson is that the master must have strong and valid supporting evidence if he is to refuse to sign unqualified bills of lading. If he does, he not only protects the shipowner from possible claims but also puts his owners in a strong position to claim damages for detention if the vessel is delayed while the matter is resolved. In the case of the Nogar Marin, claused mate's receipts and photographs of the rusty coils of iron rods would almost certainly be sufficient to support the owners' right to clause the bills of lading. Bill of lading as a document of tide: This aspect has partially been covered under fraud above and will be revisited in the section on delivery. At this stage it is sufficient to recommend that a proper record is kept of how many signed originals and non-negotiable copies are made for each parcel as well as noting who has received them. Positive identification should not be overlooked, even in the rush to sail. Bill of lading as a receipt: This is the aspect which will most exercise the master's mind at the time of signing. He will need to consider: weight and quantity of cargo; condition of cargo; quality of cargo; leading marks; date of bill of lading; additional clauses; and possibly letters of indemnity. Unfortunately, the legal position depends to some extent on the convention under which the cargo is being carried, whether it be Hague, Hague-Visby or Hamburg or indeed, possibly even the common law position at the load and discharge ports. Weight and quantity of cargo: Under common law, the bill of lading is prima facie evidence that the quantity of goods alleged to have been shipped has in fact been shipped, in other words, the burden of proof is on the owner to prove that the said quantity of cargo is not loaded. However, the owner will need powerful arguments to refute a. claim by a receiver who, the Courts reasonably consider, should b'e able to rely on a signed bill of lading (see also chapter five-the rights of consignees). The statement 'weight and quantity unknown' shifts the burden of proof on to the shipper to prove that the stated quantity was in fact shipped. Masters should, however, be careful about how and where they sign. In the Herroe and Askoe [19861 2 LR 382, the master signed in a second place and affixed the ship's stamp alongside the quantity (of 43,430 bags of potatoes) and above the wording 'quantity and weight unknown'. This was held effectively to remove the protection offered by that clause. Under The Hague and Hague-Visby Rules the shipper has the right to demand that a bill of lading be issued showing 'either the number of - packages or pieces, or the quantity or weight ... as furnished in writing by the shipper'. Furthermore, Article 111 (4) of The Hague Rules reads: 141

Such a bill of lading shall be prima facie evidence of the receipt by the carrier of the goods as therein described ... Article 111 (4) of The Hague-Visby Rules goes on to add: However, proof to the contrary shall not be admissible when the bill of lading has been transferred to a third party acting in good faith. There is, therefore, an important distinction between The Hague and Hague-Visby Rules. Under The Hague Rules the carrier may produce evidence to dispute the number of packages or weight of the cargo recorded on the bill of lading. The burden of proof will then be upon the carrier. Under The Hague-Visby Rules the quantities recorded on the bill of lading will be conclusive as against the carrier when confronted with a shortage claim by a cargo receiver or endorsee. Whether the drafters of the Rules intended this or not, the word 'or' between 'quantity' and 'weight' has the effect that only one need be conclusive evidence; the other can be qualified as weight, or quantity, unknown. The Hamburg Rules were introduced in chapter five and in the annex to this chapter, articles 15-19, are reproduced. It can immediately be seen from article 15 that the Hague-Visby 'either/or' has been removed and that there is a list of 15 items of information which must appear on the bill of lading. Without endeavouring to prejudge the Court's interpretation of the rules, the need to take early action if figures are in dispute is even more evident. Condition of cargo: If there is no statement as to the condition, do not add one unless it is necessary to record an unsatisfactory condition. Generally, bills will contain the wording 'shipped in good order and condition' or preferably 'shipped in apparent good order and condition' (Congenbill). Again this is prima facie evidence as to condition under The Hague Rules, and, especially under Hague-Visby, absolute proof with respect to receivers and enclorsees. The master is not expected to be able to see into a case or crate but the word 'apparent' is relevant as a Court or arbitrator may well consider that- stained or damaged packaging should encourage the master to enquire more thoroughly into condition than he otherwise might. If perishable goods are shipped, the master's need to ascertain the condition is increased and he must act diligently and explore beyond the mere external appearance. Again, a visit to see the cargo in the warehouse or prior to loading is advisable. As mentioned in chapter five, the quality of a cargo is distinguishable from its condition-a Rolls-Royce motor-car is still a high quality car, even if not in mint condition, whereas some cargo may be of low quality and yet still be in excellence condition. Quality of the cargo: The master is not generally competent to assess the quality of a particular cargo, and is not responsible for the shipper's description of that cargo's quality if, as in most cases, the bill of lading contains the words: 'quality and condition unknown'. The master should, therefore, always check that this wording is contained on the face of the bill of lading (it is usually in the printed text) If it is not, he should advise his owners and Club Correspondents but if this is not possible he is entitled to insert the wording as the bill of lading will still be 'clean'. Leading marks: The shipper can, under Hague-Visby, insist on the bill of lading showing the leading marks necessary for the identification of the goods'. However, the master must ask himself two simple questions: 'Are the goods marked in such a manner as should ordinarily remain legible until the end of the voyage?' and 'Are there reasonable grounds for suspecting that the information is not accurate?' If the answer is no and yes, respectively the master should take early action to resolve the matter with the shipper which may include remarking-and this should be done at shipper's time and expense. Date of bill of lading: This also impinges on the bill of lading's role as a document of title and the importance of, unless involved in through transport, issuing a 'shipped bill' (see also extracts from the Hamburg Rules in the annexes). Shippers and receivers in their guise as sellers and buyers may rely on the shipped date on the bill of lading to establish the date on which the value or quality of the goods is established. Conversely, under a contract of affreightment for a series of shipments, 142

there may be requirement to ship so many tonnes per month. On falling market, the late date of shipment may give receiver the excuse to terminate a valuable contract. Conversely, the temptation or urgings of a shipper to sign pre- or ante-dated bills of lading must be resisted. For example, in the Saudi Crown [1986] 1 LLR 261, a parcel of 4,500 tonnes of rice bran was sold under a contract which provided for that period of shipment to be 'as per bills of lading or to be dated 20june - 15july 1982 without extension, the bills of lading shall be dated when the goods are actually on board. Date of bills of lading shall be accepted as proof of date of shipment'. Referring back to chapter five, this is exactly the type of sale contract which neither the master nor owner usually sees but which is behind virtually every international shipment of goods. It is not unreasonable for the receiver to expect the cargo to be delivered in accordance with the contract which he has signed and as described by the bill of lading which bestows on him ownership of the goods. In this particular case, loading was not completed until 26 July, although the ship's agents signed and dated all the bills of lading showing 15 July. The bills were sent by the sellers to the buyers who duly authorised payment. It was not until after this event that the buyers realised that the delayed loading and departure meant that the cargo would not arrive in time for them to meet their commitments and they had to purchase a substitute quantity of rice bran elsewhere. The receivers successfully sued the shipowners for damages. Additional clauses: The desire for, or indeed insistence on, a clean bill of lading by shippers and charterers is well known. One definition by the International Chamber of Commerce in their Uniform Customs and Practice for Documentary Credits states that: A clean shipping document is one which bears no superimposed clause or notation that expressly declares a defective condition of the goods and/or the packaging. Banks will refuse shipping documents bearing such clauses or notations unless the credit expressly states clauses or notations which may be accepted. Thus, while the master is entitled to, and indeed should, annotate the bill of lading with clauses relating to carriage on deck or with regard to the carriage of live animals (sometimes also referred to as liberty clauses-the liberty to carry deck cargo may also appear on the reverse side of the bill of lading), there will be strong pressure not to qualify the quantity or the quality of the cargo. A further relevant clause is the incorporation clause and this was discussed in chapter five in conjunction with the limitation of liability. If the cargo does not fit with the shipper's description on the bill of lading, then the overall guiding principle is: (i) Clause the bill of lading with respect to condition or quality, advising the charterer of your reasons; and (ii) If he refutes your right to clause the bill, advise him that you will delay sailing until the matter is resolved; but (iii) Always ensure that your stance can be backed up by firm and comprehensive evidence recorded at the time. In this case 'comprehensive' means demonstrating that early action has been taken to avoid problems (e.g., cargo officers on deck, mate's receipts checked-for more comprehensive information see Watchkeeping Safety and Cargo Management in Port). The time at which the master should show interest in the bill (s) of lading which he will be requested to sign (or authorise) is at the beginning of loading, not the end. If problems are suspected, a word with the local Club Correspondent during the course of the operation may well be the best way to ensure an efficient operation and timely and trouble free sailing. Letter of indemnity: All too often, the master is offered a letter of indemnity to sign clean bills of lading. Do not accept it. If clean bills are issued for goods which the master knows to be defective, he is not only misrepresenting the condition of the cargo towards any endorsee of the bill but also laying himself and his owner open to the risk of allegations of fraud. Furthermore, in most jurisdictions the letter of indemnity will be worthless and the owner's P&I cover will be prejudiced. Indemnities for delivering without the presentation of bills of lading are covered under the heading of 'delivery' later in this chapter. 143

Finally, if the master is forced to sign a clean bill of lading when he considered that it should have been claused, he should immediately issue a protest, bring it to the attention of shipper and, if possible, receiver, and urgently advise his owners and his P&I Club.

The passage and deviation

There is an implied undertaking that the voyage will be undertaken with due despatch and this undertaking becomes particularly important when perishable products are being carried. Clause 3 of the Gencon charter allows the master a certain degree of flexibility in the prosecution of the voyage with respect to the rotation of ports, but the right to deviate is restricted to the purpose of saving life and/or property. Deviation from what may be described as the most direct route can prejudice the owner's right to rely on the limitations of liability and exceptions available to him under conventions such as The Hague-Visby Rules-not a course of action to be undertaken lightly. Deviation from the most direct course for good navigational reasons such as weather routeing or to avoid, or use, currents is naturally acceptable. However, caution should be exercised if weather routeing proposes a course which takes the vessel into the proximity of other navigational dangers such as crowded shipping lanes in poor visibility or close to ice floes. All weather routeing advice is issued with a strong disclaimer. Many vessels deviate to bunker, as did Consternation as described in chapter eleven. The voyage charter and, for that matter, that other contract of carriage, the bills of lading, should have a liberty to bunker clause incorporated within them. If this is not so, the master is recommended to raise the matter through his owner so that either explicit permission or additional P&I insurance (not a foregone conclusion or automatic right) can be arranged. If he does not, he may remove his owner's right to limit liability and rely on the exceptions contained within The Hague or Hague-Visby Rules. Cargo claimants often allege that damage occurs during the loaded passage and the master's responsibility is carefully to carry as well as load, stow and discharge. Proper records must be kept of the passage as it impinges on the cargo, and these records should include: - Bilge, ballast and bunker soundings and pumping records; - Cargo ventilation; humidity and temperature; - Weather conditions and precautions to avoid or alleviate bad weather; - Routine checks on hatches and lashings; - Temperatures in (heated) fuel oil under or adjacent to sensitive cargoes; - The compliance with special requirements of carriage such as heating or refrigeration. One vessel arriving in port with several feet of water covering a steel cargo in one hold which had entered through a small stress fracture in the hull was unable to rely on a defence of perils of the sea for the simple reason that there was no record of the crew sounding, or being instructed to sound, the hold bilges.

Delivery (box 12 clause 4)

The master has two overriding objectives at the discharge port(s): to ensure that the goods are delivered to the correct consignee; and to protect the owner's position, if necessary, with respect to the payment of freight and demurrage. The master always understands that cargo must never be discharged without the presentation of a bill of lading. This is the golden rule and like all rules, it is frequently broken in response to commercial pressures-most operations managers are aware of the call from charterers at 1630 hours on Friday, announcing that the bill of lading will not be available for the vessel due to discharge on Sunday. When presented with a bill of lading and a demand for the delivery of the cargo, the master's first duty is to confirm the identity of the presenter of the bill of lading. The system is not foolproof, but if in doubt the master should seek guidance from his agent, the port authority, his Club correspondent or ask his owners to contact the shippers. 144

This is particularly important if the master is instructed to retain one original bill of lading on board against which the cargo is to be delivered. If this is the case, the bill should be suitably claused and a recommended wording is: One original bill of lading retained on board against which bill delivery of cargo may properly be made on written instructions from shippers/ charterers. When preparing to release cargo, the master will need to know what kind of bill of lading he is dealing with. If the bill of lading states that the goods are only to by delivered to a named consignee, the bill is known as a straight bill. At the other end of the spectrum is the open bill which is made out in favour of the bearer, enabling the cargo to be claimed by whoever first presents a valid bill of lading. More usual is a negotiable bill of lading made out to a named consignee or order. This enables the consignee to endorse the back of the document in favour of a subsequent buyer of the cargo. A simple signature on the back of the bill, endorsed in blank, makes the document an open bill of lading whilst the addition of the words deliver to Company A makes it a straight bill. Alternatively, the consignee (or subsequent endorsee) may endorse the bill as delivery to Company B or order thereby allowing the cargo to pass from trader to trader (i.e. a 'string' is established as discussed in chapter five). When a bill of lading is presented and the master has satisfied himself that it is a valid original (no strange signs of alterations) and that the person presenting it is indeed the endorsee and rightful owner of the cargo, he in turn endorses the document. The word Accomplished together with the date, ship's stamp and master's signature is sufficient and prevents the bill from being further traded. At the same time any other originals become null and void. It should generally be retained with the ship's papers until further instructions are received from owners. If no bill of lading is available, the problem cannot be resolved on board and must be dealt with by direct negotiation between owner, charterer, receiver and Club. Since commercial operations and the delays of the international banking system demand a solution, most P&I Clubs have a standard form of indemnity which the owner will negotiate with the charterer / receiver, in many cases requiring it to be backed by a bank guarantee, which will replace the owner's P&I cover for misdelivery claims. The most foolproof method of proceeding is for the owner then to transmit to the master the full text of the negotiated letter of indemnity together with specific instructions to discharge without the proof of the bill of lading. Once again, the identity of the receiver is important, ideally the letter of indemnity should be signed by the receiver, the charterer and a first class bank. The owner should advise the master of the precise requirements. It is sensible practice to insist on written discharge instructions from the charterer or the receiver and on completion a receipt for the cargo.

Voyage charter-liquid bulk

The principles of voyage management remain essentially the same, although the nature of the bulk oil trade of necessity generates a number of operational changes. Intertanko (the International Association of Independent Tanker Owners) produces an excellent publication which analyses the six main tanker voyage charters: - Asbatankvoy was developed from the old warshipoilvoy and, although a basically sound and well balanced charter, it is, perhaps, in, need of updating. Consequently it carries an increasing number of rider clauses and in the past has tended to feature unduly in litigation; - Mobilvoy 80 (revised 1990), has been developed from the former Asba II with 30 printed clauses, is sometimes viewed as a charterer's charter; - Exxonvoy 90, Beepeevoy 3 & Shellvoy 5 are all reasonably recent revisions of long established voyage charters which are considered to have a reasonably fair balance between owner and charterer; - Tankervoy 87-Tankervoy 87 (produced by Intertanko) has not been used as much as it might deserve due to the attachment that the oil majors have for their own formats and the tendency for brokers to stay with what they know.

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The Intertanko publication Tanker Voyage Charters is recommended as guidance for all masters involved in the tanker trade as it clarifies, not only the specific clauses, but also explains the differences of detail between the major voyage charters. Shellvoy 5 is used here to illustrate tanker voyage charterparties and is reproduced in the annex for the simple reason that it is more frequently used than Tankervoy 87 and has a more comprehensive (or complex) bill of lading clause. The notes which follow should be read as an adjunct to the first part of this chapter and are intended only to highlight some of the major areas of difference between dry and liquid bulk cargoes. The first difference which springs to mind on a quick examination of Gencon and Shellvoy 5 is that in the tanker trade the charterparties are more uniform. This largely reflects the fact that the loading and discharge processes are much more standardised and so the charter negotiation tends to focus more around rates than laytime and demurrage. It is also true to say as well that oil cargoes tend to be traded on passage with even more regularity than dry bulk cargoes.

Condition and cleanliness (clauses 1 and 2)

A number of charterparties such as Shellvoy 5 use wording which is designed to increase the owner's (and therefore the master's) obligation in respect of the state of the vessel and her equipment, complement and fitness beyond the requirements of the Hague-Visby Rules. This generally takes the form of extending the requirement regarding fitness beyond the 'commencement of the voyage'. There are also differing approaches with regard to the requirements imposed by the charterer in connection with the cleanliness of tanks and pipelines. Whereas many charterparties require the owner to 'clean tanks, pipes and pumps of the Vessel to the satisfaction of the Charterer's Inspector' (Asbatankvoy), Shellvoy 5 imposes a heavier obligation 'Whilst loading, carrying and discharging cargo the master shall at all times use due diligence to keep the tanks, lines and pumps of the vessel clean for the cargo specified. . .'and 'It shall be for the master alone to decide whether the vessel's tanks, lines and pumps are suitably clean' As it becomes increasingly common for charterers to stipulate condition surveys, it is important that the master, and the cargo officers, know exactly where the final responsibility lies for passing tanks fit for loading.

Signing B/Ls and delivering cargo (clauses 33 & 42)

As with dry cargoes the problems associated with delivering cargo, i.e., requests from charterers for delivery without presentation of bills of lading or for a change of destination are a feature of the tanker trade. Furthermore, as mentioned above, oil cargoes are frequently purchased for the purpose of trading them en route, so that the end receiver may be two, three or even more transactions away from the shipper or charterer. Although the receiver will be aware of a charterparty operation somewhere in the background, his main concern is that the outturn matches what he has agreed to pay for. His transaction, having been made on the anticipation of a marginal movement in, say, the price of winter fuel oil, will be extremely sensitive, to price, time, quantity and, possibly, destination. Assuming a 1,000,000 bbl cargo is bought against an anticipated 5% rise in oil prices, a potential profit of $900,000 can be reduced by 20% by a I% shortfall in outturn. Clause 33 addresses the handling of bills of lading in much more detail than, for example, the Gencon charterparty, and with all the undertakings given by the charterers one might be forgiven for wondering how disputes can arise between the owner and the charterer. An indication, perhaps, is contained in sub-paragraph 5) and the reference to the section of The Hague-Visby Rules which deals with the description, quantity and condition of the cargo. The tail end of article III, rule 5 states that: ... The right of the carrier to such [charterer’s] indemnity shall in no way limit his responsibility and liability under the contract of carriage to any person other than the shipper In other words, the charterer does not indemnify the receiver. Instead the receiver will claim against the shipowner who in turn will bring an indemnity claim against the charterer. The master 146

needs to retain all his caution in order to protect his owner's position. Although the charterer guarantees the accuracy of 'the marks, numbers, quantity and weight of the goods furnished' and indemnifies the owner against inaccuracies, the following point must be kept in mind: - The third party's (i.e., the receiver's) redress is against the carrier who then has the problem of triggering the charterer's indemnity clause. The charterer and receiver may well be long standing trading partners; and - If the master issued a clean bill of lading knowing the figures to be inaccurate; then the owner will not succeed in his indemnity claim against the charterer. Changes to the nominated discharge port are quite common and must be treated with the same gravity as non-production of bills of lading-the procedure for establishing an indemnity is similar. But one caveat: when dealing with powerful charterers such as oil companies, it is all too easy to be pressured into complying with their wishes. The following true story commenced, as so many do at 16.30 hours of a Friday afternoon with a 100,000 ton tanker on time charter to the authors of one of the charterparties mentioned in the introduction to this section! Charterer As you know, we have fixed the vessel on voyage charter to (another of the oil majors appearing above). Unfortunately, the bill of lading will not be available for discharge on Sunday. Owner No problem, we have agreed the indemnity with our P&I Club. Insert the relevant details of this subcharter and send it to us and we will pass it on to the master with instructions to discharge. 1700 hours on Friday afternoon: Owner I've received the indemnity but it is not the one which we have agreed. Charterer No, it's the subcharterer's; you know them, there is no problem. Owner Good, then you accept their indemnity and we will accept yours. 1815 hours, several conversations later: Charterer All right, we will send you our indemnity as agreed. Owner So what was the problem? Charterer Our legal department don't like us accepting the other (oil major's) indemnity.

Freight and liens (clauses 5 & 42)

Freight is earned concurrently with delivery and, despite the wording of clause 42 it is exceedingly difficult to exercise a possessory lien against a quantity of oil disappearing down a pipeline into a tank farm a mile away. If in any doubt, check with the owner or time charterer that they are happy for discharge to commence on arrival.

Charterer's orders (clauses 10 & 26) The subject of damages for detention is addressed, as is the charterer's need to change orders as a result of changes in a volatile market. Careful records need to be kept in the form of a statement of facts covering times, distances and bunkers consumed, with particular attention to the time at which orders were received.

Loaded passage, speed and deviation (clause 3, 31 and part 1)

The charterer has a duty to nominate ports in sufficient time to prevent delay or deviation and once this has been done he has the right to expect that, the vessel shall perform her service with utmost despatch'. If a speed clause is incorporated in part I L-special provisions, utmost despatch' will be judged according to that clause. The liberty clause (clause 31) gives the vessel the liberty 'to call at any port or ports for bunkers'.

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ETA, safe berth and notice of readiness (clauses 4, 12, 13 & 28 and part 1) Once again, the importance of tendering NOR in strict conformity with the requirements of the wording of the charterparty must be stressed. Note that the liberty to tender NOR by radio requires written confirmation to follow as quickly as possible. The concept of a safe berth has already been discussed in some detail, although tanker voyage charters also include the right for charterers to specify transhipment at sea. Laytime and demurrage are specified at some length, and once again the factors which the master should consider (and record) include: - At what point will time start to count? - Will laytime start, or if started, will it be suspended if the berth is inaccessible? - How is congestion at the port treated? - How is time lost due to adverse weather, storms or swell to be treated on and off the berth? - Until when does time run? - Does 'all time used for charterer's purposes' count for laytime and demurrage? - How is delay after disconnection of hoses handled? - In transhipment at sea, are any delays other than those due to owner's or vessel's fault, exclude& - What is the effect of non-compliance with any of the owner's obligations under the charterpartye.g., is consequential loss of time for owner's account (if the vessel is ordered off the berth for example) - How are ballasting and deballasting handled-are they excluded from laytime only to the extent that they delay cargo operations? - How is shifting in port treated? - Who pays for delays arising from the port authority's orders? - To what extent does the wording of the charterparty, such as '. . . shall not count for laytime or as time on demurrage . . .' degrade the principle of once on demurrage, always on demurrage~ - What events, if any, give rise to half-rate demurrage? Masters may find that this checklist, extracted from a consideration of laytime and demurrage in Intertanko's Tanker Voyage Charterers acts as a useful teaching exercise for the officers in the deck department.

Condition and seaworthiness (clauses 1, 2, 16, 17 and part I)

In the tanker trades, the increasing level of inspection might derogate the owner's obligation to present a seaworthy vessel at the commencement of the voyage. It should not, for this requirement remains fundamental as discussed at the beginning of this chapter. An important aspect of this is 'fitness for purpose' to borrow a phrase from the quality manuals, or 'eligibility' as it is termed in some charterparties. The master should ask himself, as surely the charterer will: 'Is the vessel and her crew in every way fit for the intended voyage? This is particularly relevant 'before and at the commencement of the laden voyage'. In the words of Intertanko: 'The interplay of seaworthiness (and other) undertakings and exceptions is a matter which is inadequately addressed in some charters'. This is an area where clarity of expression is especially important but not always achieved. Some owners, either in an endeavour to secure business or through lack of awareness, give warranties of alarming width. An undertaking that a vessel is equipped for trading to all ports and terminals to which the charterer may lawfully send her, for example, means just that, even if the requirements are unusual or the regulations new. Again, if in doubt, consult your owners. There is a fine line to be drawn between being alarmist and being efficient and effective and commercially aware. A very good superintendent was once requested to undertake a marketing role. When asked why he had not known of a major chartering opportunity he replied that he had heard about it but as it was only a rumour he had not reported it. If, as should happen, the owner and the master develop an ongoing dialogue, many potential problems will never progress past the stage of being potential. Although it is properly the owner's responsibility to establish such a dialogue, there 148

is unlikely to be a clause in the master's job description which precludes him from taking the initiative. It is sometimes said that tanker masters make good surveyors because they have been inspected and surveyed so much themselves. Whoever is inspecting your vessel: - Establish who he is and what his authority is. - Establish what he wants or needs to see and what you are prepared to allow him to see. - Make sure that he is accompanied by a member of the ship's staff. - Brief (and debrief) that member of staff. - Ask for a copy of the report when available. - Try to arrange for a senior member of the ship's management team to see him before he disembarks.

Agents (clause 24)

Although appointed by the charterer, since employed and paid for by the owner, the owner becomes vicariously responsible for the acts of the agent. Since the agent may well receive the majority of his business from his appointment by charterers, owners and the master should bear this in mind. The prudent master should ensure that all transactions with the agent are on a formal basis, especially if the agent is to sign bills of lading on the master's behalf, and if in doubt should appoint his own husbanding agent-and contact the Club Correspondent.

Time charterparties

There are two distinguishing features of a time charter. The first, which has already been mentioned, is that it is a contract for the use of a vessel rather than just for the hire or space, hold or tank capacity, within the vessel. As such, it addresses subjects such as speed and consumption and bunkering which do not concern a voyage charterer (beyond his right to expect the owner to prosecute the voyage with due despatch). The second is that time charters also address the charterer's right, and indeed duty, to give instructions to the master with regard to the method of employment of the vessel. Since the employment may well engage fixing the vessel on voyage charters, the master becomes the servant of many interests: owner, time charterer, voyage charterer, shipper, receiver, all of whose interests he has both to serve and protect. He also, of course, has a vessel to run. Perhaps we should say, a multi-million pound investment to manage and take it as a compliment to maritime professionalism that in (too) many cases, the owner (as the person ultimately responsible for the vessel and the enormous liabilities which it is capable of incurring) does not feel it necessary to establish a personal relationship with the master. The New York Produce Exchange charterparty (NYPE 93), which is used as an illustration for this discussion of the management of time charters, is relatively recently revised. However, such is the innate conservatism of the shipping industry, the older version continues in use, bearing with it the many amendments and, sometimes contradictory, rider clauses which were the very reason for introducing the revised version. As with the voyage charter, it is recommended that the time charter is treated like a project to be addressed and understood by the whole of the shipboard team, not jealously guarded by the master amongst the ship's papers. Commercially sensitive information can, if necessary, be erased but it does no harm for the management team to be aware of the earning potential of their vessel and of the cost of lost time-especially if they are also made aware of the daily running costs (Chapter Three). The starting point, as with the voyage charter, is to work logically through the charterparty, gathering related information together under headings which are useful and relevant to the on board operationagain a possible task for a junior officer. It is important to incorporate any rider clausesalthough none is shown in the NYPE 93 contained in the annex-in the analysis and revert immediately to the owner if signs of a conflict of terms are found, as well they might be. 149

The charterer

It is hoped that the owner has been diligent in investigating the prospective time charterer since he is giving him the contractual right to give direct orders to the master. For his part the master should take such steps as are available to him to understand how the time charterer is organised, who will be dealing with his vessel at a daily operational level and with whom he should make contact in the event of a serious problem arising.

Description of the vessel

One of the first items to check is whether the description of the vessel is correct. If it is not, contact the owner immediately. If the time charter has not been sent, contact the owner and request it.

Delivery, re-delivety, hire payment and cancellation (clauses 2, 10, 11, 13 & 16)

The requirement to deliver, which is when the vessel comes on-hire, is usually fairly straightforward and may well happen at sea. In this event a good set of bunker soundings will be required and the master, as well as the chief engineer, will need to know exactly how much fuel oil is on board since the charterers will be working on the deadweight given in the description of the vessel which stipulates the ship's constant. Clause 13 re-emphasises the importance of this. The charterer will probably be expecting the vessel to meet his prebooked cargo contracts or fit into a schedule so that advice regarding arrival at the delivery port is important. If delivery is likely to be delayed for any reason, it is generally better to advise the time charterer early so he has some manoeuvrability to renegotiate his commitments. The relationship of trust or suspicion established at this early stage is likely to set the tone for the rest of the charter. A point to consider is how communications are to flow between master and owner and master and charterer (and subcharterer if fixed on voyage charter). Understandably, the charterer will want direct communication with 'his' master and will reasonably expect prompt responses and reports. If problems, of performance for example, emerge during the charter, the owner will, again not unreasonably, want to know about the problem first. Such problems have been known to lead to a system of double accounting which should be avoided. It is important to check and understand the cancellation clause, especially the circumstances under which the cancelling date can be extended and especially so in a volatile market. In fact, it will be helpful for the master to know whether the fixture which he is performing is above or below prevailing market conditions as this will, in many circumstances, determine the charterer's approach. Redelivery can become a very contentious matter since the period of the charter will not necessarily correspond with a natural break in the charterer's employment of the vessel. If time charter rates have moved against him, he will probably try and redeliver an 'expensive' vessel as early as possible. Indeed, he may actively look for reasons to cancel the charter. If, however, the market is in his favour, he will undoubtedly endeavour to fit in an extra voyage. This could result in a dispute between owner and charterer. The owner may instruct the master to refuse to comply with the charterer's orders if they suspect that the charterer is planning an illegitimate last voyage. Furthermore, the owner will require that hire be paid at the prevailing (higher) market rate. The master should be aware of possible problems as the time charter draws towards its conclusion and keep his owner closely advised of any relevant information about forward commitments.

On and off-hire surveys, seaworthiness (clauses 3, 6 & 7)

So far as time allows, the vessel should be prepared for the on-hire survey and the charterer's surveyor will reasonably expect to find a vessel which is '. . . ready to receive cargo with clean-swept holds and tight, staunch, strong and in every way fitted for ordinary cargo service . . .'. This raises the subject of seaworthiness but before moving to this subject, it is worth bearing in mind the off-hire survey even at this early stage. For a start, since the off-hire survey is conducted in owner's time, it needs to be fast and efficient. Bear in mind, too, that whilst the charterer may well send the same surveyor to conduct both surveys, a different master may be in command of the vessel at that time. The surveyor should be accompanied by the master or a senior officer who should keep notes and ensure that the on-hire 150

survey and supporting notes are clear and comprehensible in such a way that the off-hire master can effectively argue the owner's case. The on-hire and off-hire survey may be conducted by one surveyor actingjointly on behalf of both owners and charterers. Alternatively, the charterer and the owner may each appoint their own surveyor-again, check the wording of the particular charterparty. The owner has an obligation to keep the vessel in a seaworthy condition and this obligation extends beyond the fabric of the vessel to include the competence of the crew. Lines 33-34 and 81-82 of NYPE 93 amount to an express obligation to make the vessel seaworthy on delivery and this includes cargoworthy. However, the charter may be for a year or more and this raises the extent of the continuing obligation of seaworthiness. It is generally held that the obligation to maintain a seaworthy vessel 'for and during the service' is one of due diligence rather than being absolute. Thus the charterer can reasonably expect the vessel to be kept in class and properly maintained (by a competent crew) and, of course, the vessel should always be cargoworthy and, if applicable, this concept can be extended to include the proper working of the ship's cargo gear. Whilst the obligation to ensure a seaworthy vessel throughout the hire period may not be absolute, the time charterer presenting his (chartered) vessel for a voyage charter will be expected to present a seaworthy vessel as discussed at the beginning of this chapter. It is an essential part of the service provided under the charter that he is able to do this as otherwise it will prejudice both his and the owner's ability to limit their liability. Therefore, it may well be counter-productive to maintain a diplomatic silence over problems impinging on the seaworthiness of the vessel.

OwnersIcharterers to provide (clauses 6, 7 & 14)

These clauses bear careful reading so that accounting and disbursements can be organised from the outset in accordance with the terms of the charter. There is little point in the owner incurring costs which can reasonably be for the charterer's account. Certainly such clauses as 'charterers shall remove their dunnage and fitting at their cost and in their time' provides an opening for a mutually beneficial negotiation-or in some cases a firm insistence that the terms of the contract are stringently complied with. As well as setting out the way in which the (sometimes not inconsiderable) cost of agents, shore officials and stevedores meals should be dealt with, clause 14 introduces the concept of a supercargo, not possibly as common as yesteryear but not extinct either. The relationship between the master and the supercargo is one which perhaps finds a parallel with that of the master and pilot. Whilst the supercargo should be able to take a lot of weight off the master's shoulders with regard to dealing with stevedores, and should, hopefully, have expert knowledge of the cargo being shipped, the final responsibility remains the master's. Needless to say, the time taken to build a working relationship with the supercargo and to understand his requirements should pay dividends. The deck officers also need a clear understanding of who is controlling the loading; in the final analysis it is, and remains the master's responsibility to sign bills of lading or to authorise the agent to do so on his behalf. (A time charterer involved in a liner trade where the time charterer/liner operator has house agents in the port is naturally a different scenario as he may elect to be the carrier under the bills of lading.) Finally, it is worth bearing in mind the caveats about the value of indemnities with respect to signing clean bills of lading.

Safe berths, trading limits, sailing orders and liberty clause (clauses 5, 12, 15, 22 & 26)

The question of trading limits should be fairly straightforward unless the master becomes aware, possibly Shrough cargo being loaded, that the vessel maybe directed to a war zone or a port which he does not feel is suitable for the vessel. Owners should be advised immediately. The charterer's obligation to direct the vessel only to safe ports and safe berths is much the same as it is under a voyage charter. Clauses 15 and 16 reinforce the charterer's right and duty to direct the vessel, but make it very plain that the master remains responsible for the safe navigation and safe operation of the vessel. The liberty clause, it may be noted, does not refer to deviation for bunkers as this is the time charterer's concern. 151

However, if the time charterer subcharters the vessel to a voyage charterer it is prudent to ascertain the status of the liberty clause in the voyage charterparty. To deviate may result in loss of the ability to limit liability which has a nasty habit of passing through the time charterer and lodging with the owner. This is especially so when a claim is brought at the instigation of a receiver who is likely to pursue the largest and most visible asset-the vessel.

Cargo, cargo work, holds, claims and Hens (clauses 4, 8, 13, 23, 27, 28)

The charterer clearly has the right to use the 'whole reach of the vessel's holds ... reserving only proper and sufficient space for ... stores and fuel'. This means that, as mentioned previously, the chief engineer cannot have too much fuel up his sleeve, cutting out the charterer's cargo. The owner has a right to rely on the charterer complying with Clause 4 with regard to the carriage of lawful merchandise and the exclusion of certain goods. However, the master and his officers need to remain vigilant to ensure that these undertakings are not breached, inadvertently or otherwise. It is a little late to complain about a parcel of excluded cargo with pen poised above the bill of lading. Despite the charter's indemnity for deck cargo, the liberty to carry clauses should be added to the bill of lading in accordance with Clause 30 (c).

As indicated earlier, despite the charterer's right and obligation to perform all cargo operations (lines 103-105), the master's supervisory role may need some fine judgement and the wording of the clause, especially if amended, should be studied carefully. The NYPE 93 extends the charterer's obligations with regard to loading which, under common law (and subject to the custom of the port), are to bring the cargo alongside and lift it to the ship's rail where the master assumes responsibility. The charterparty seeks to shift responsibility of cargo handling on to the charterer, but this will not be the case with all time charter cargo clauses and, in any case, the master has a professional duty to ensure that the cargo is stowed in a safe manner. The problem areas are likely to centre around a master's request for cargo to be better . trimmed, stowed or lashed than charterer's local representatives consider necessary. The words and responsibility', may be added to the end of line 105 in an endeavour to shift more of the responsibility for cargo operations to the owner and master. In the Shinjitsu Maru [1985] 1 LLR 568, Neill L.J stated: ... I have come to the conclusion that the correct approach is to construe the words 'and responsibility 'as effecting a prima facie transfer of liability for bad stowage to the owners, but if it can be shown in any particular case that the charterers by, for example, giving some instructions in the course of the stowage, have caused the relevant loss or damage, the owners will be able to escape liability to that extent. Moral-keep records and take photographs. With generally smaller crews, it will be necessary for the chief officer to organise work schedules carefully if two- or three-shift cargo operations involve the use of ship's gear. In view of the potential off-hire penalties and liability for stevedores' standby costs, it may be a wise course to hire shore labour to assist the crew and relieve them of routine duties. The engineering department also need to be alerted to the need to keep the cargo gear operating at capacity. Clause 35 makes it abundantly clear that stevedore damage is the responsibility of the charterer. However, it is up to the master and his officers to react immediately, logging the event, getting, if possible, the stevedore's admission of liability and holding the charterers responsible for (prompt) repair. If the words '. . . and responsibility' have been added to clause 8(a), charterers may be able to deny liability which makes it even more imperative that the vessel takes prompt steps to hold the stevedores liable. Under NYPE 93, cargo claims are settled under the Inter-Club Agreement of 1970 and its subsequent amendments, the latest of which came into force on I January 1996. The agreement is drawn up by the International Group of P&I Clubs, who effectively insure cargo claims on behalf of 152

both owner and charterer. The objective is to replace expensive litigation by apportionment based on cause and relevant extracts from the Agreement appear in chapter seven. The Inter-Club Agreement is designed to operate on the basis of printed clauses in the NYPE93 (and Asbatime Form 1981) and material amendments such as the addition of 'and cargo claims' to clause 26 can affect the impact of the Inter-Club Agreement and increase the likelihood of disputes between owner and charterer. In such cases, it is essential that the master can provide contemporaneous records to support the owner in the event of arbitration.

Speed and consumption, bunkers (clauses 7, 8 & 9)

Line 100 requires the master to perform the voyages with due despatch which, in this context, means in accordance with the speed and consumption figures contained in the description of vessel-which is one good reason why this information should be carefully checked as soon as possible. Although Clause 19 states when the vessel was last drydocked, the charterparty does not provide a formula for addressing the inevitable fall-off in speed-or increase in bunker consumption-as time passes since the last time the underwater hull was cleaned. Speed and consumption clauses have provided a fertile area of dispute over the years, starting with an endeavour to decide whether the speed warranty applies at the date of the charterparty, at the time of delivery, or throughout the charterparty. The current situation appears to be that the warranty will apply at the date of delivery, and the warranty will not normally be construed as a continuing warranty throughout the charter period unless the charterparty specifies a continuing obligation (as in most tanker charters). However, if speed does fall off, charterers may well endeavour to prove that the fall-off is due to a breach in another charterparty clause such as the requirement to maintain the vessel properly (lines 81 & 82). Charterers may well insert a rider to the speed warranty to the effect that 'the vessel is capable of steaming and shall maintain throughout the charter ... a speed of . . .'. Many words and phrases decorate speed and consumption clauses, in an endeavour to loosen or tighten the interpretation of the clause: - About-although the general understanding is that this imports a margin of half a knot or 5% the Court of Appeal endorsed the arbitrator's conclusion in the Al Bida [1986] 1 LLR 142 that the word 'about' cannot be fixed by law. As the arbitrators concluded, 'about' must be tailored to the vessel's configuration, size, draught, trim, etc. 0 Max-with respect to consumption does set an effective upper limit and if the vessel burns more in order to maintain 'about' the charterparty speed, the excess consumption is for owner's account. - Average speed and consumption-there is legal precedent that the averaging should take place over the whole of the charter period, but charterers can be expected to challenge this vigorously. It is of little benefit to them if the vessel had the ability to overperform at some other period if she is jeopardising a current subcharterer by under-performing. - Sea and weather-again, in the Al Bida, the arbitrators expressed the view that'. . . such words as 'about 14.5 knots in moderate weather on a consumption of 35 m.t./day' (for example) have a straightforward commercial meaning. The owner (in such a case) is simply stating that if conditions were ideal (no wind, no waves, no swell, no current) then the vessel would achieve 14.5 knots at 35 m.t./day, but because those ideal conditions will not be met in practice he has to be given some margin-the speed will fall away (when the vessel is driven at the warranted consumption) because of the effect of the moderate weather'. One might feel inclined to speculate at the meaning of the word 'in' in the speed warranty. Frequently Beaufort Force 3 or less is taken as moderate weather, as opposed to Force 4 moderate breeze, or Force 5-moderate waves;' which all goes to show how easy it is to make the relatively simple moderately complicated. It is not unknown for the vessel to exaggerate the condition of the weather. They do so at their peril as modern technology is now coming to the not necessarily welcome rescue. Most mariners have battled against seasonally unusual adverse currents and contrary winds and seas whilst hoping that the charterer did not have another vessel in the vicinity. Be warned that meteorological satellites now transmit so much data that wind and sea conditions can, if required, be interpreted from archive data for much of the world's oceans. 153

Somewhere down the line, the master needs to start making a commercial calculation about the cost of underwater cleaning versus the potential for performance claims. The more astute might even persuade charterers to pick up half the cost if he can convincingly present the speed and consumption equation from the owner's viewpoint. The other side of the coin is bunkers and bunkering, and this is covered in chapter nine.

Charter hire, off-hire and withdrawal (clauses 10, 11, 17)

Since charter hire is the lifeblood of the shipowner's business regular payments of charter hire are important. In most but not all time charters, hire is payable either monthly or fortnightly in advance, either on a per day or per deadweight basis. Despite the wonders of the modern banking system, charter payments can take some time on their route from charterer to owner-and charterers have their cashflow problems, too. There is generally a grace period [clause II (b) commonly referred to as the 'anti technicality clause'] to allow for late payment but, especially on a changing market, the owner will be carefully considering whether to exercise his right to withdraw the vessel. Of course, the owner is in a difficult position if there is a cargo on board belonging to a third party since he still has an obligation to deliver the cargo under the terms of the bills of lading. Off-hire is covered in clause 17. There is little point in being off-hire if one does not have to be. For example, it can be argued that a stoppage on passage to effect a repair has little relevance to the charterer if the passage can be completed within the constraints of the speed and consumption clause. If the vessel does come off-hire, however, a careful record of bunkers used will be required and, if the chief engineer does manage to keep this amazingly low, ar least the charterer will gain from an increase in the vessel's 'whole reach and burden'.

Clause paramount and other protective clauses (clause 31)

Clause 31 sets out clearly a range of clauses which are designed to protect the carrier and which also need to appear in all bills of lading which the master (or agent under his instruction) may issue. The most common and probably the most widely known is the clause paramount which brings the time charter within the ambit of The Hague, or Hague-Visby Rules. In fact, the wording in line 323 '. . . of such other national legislation as may mandatorily apply by virtue of origin or destination of the bills of lading may well produce a situation which brings The Hague Rules and the Hamburg Rules into conflict, despite the endeavours of the P&I Clubs to introduce wording to prevent this.

Arbitration (clause 45)

This charterparty provides for arbitration to be either in New York or London.

Summary

It will be seen that, although based on standards documents, charterparties are essentially negotiated contracts. To manage them effectively, the master will need to: - understand basic chartering concepts and appreciate the meaning and impact of various clauses; - be aware of prevailing market conditions (chapter 2-know the business in which you operate) and be aware how this can result in apparently small adjustments to charterparty wording which may have major implications; - be able and willing to brief the vessel's management team; and - plan ahead and prepare early. In order to achieve this, the master needs to be fully briefed himself. This means that the shipowner, especially when vessel management has been contracted out, must himself take positive and decisive actions if loss prevention is to become part of his philosophy and not remain an initiative of his P&I Club.

ACKNOWLEDGEMENTS 154

AGAIN, many of those who contributed to the previous chapter contributed to this one, and to them I must add Graham Clarke, chartered shipbroker and maritime arbitrator. Thanks are also due to Paul Veldhuizen of Shell for permission to reproduce their Shellvoy 5 and together with a sample of voyage orders as well as BIMCO, the Baltic and International Maritime Council. Once again, the maritime legal fraternity gave generously of their advice.

REFERENCES

Unsafe Ports,- Unsafe Berths. Charles Baker, Partner: Herbert Smith. Practical Measures to Prevent Fraud. Paper: Richard Williams, Ince & Co. Signing Bills of Lading. Nautical Institute publication: The Mariner and the Maritime Law. New York Exchange Charterparty 1993. Conference Paper September 1994: Steven Baker, Holman Fenwick & Willan. Time Charterparties. Paper: Johnathen S. Lux, Ince & Co. Commercial Contracts. Conference Paper October 1994: Charles Debattista, Southampton University. Tanker Voyage Charters. Harvey Williams & Stan Bormick: Intertanko 1992.

ANNEXES FOR CHAPTER 6

- Sample charterparties. Bimco Gencon voyage charter plus Gencon bill of lading. Bimco/Fonasba standard statement of facts (short form). Shellvoy 5. NYPE 93. - Unsafe ports and berths claims-practical steps for masters.

155

Chapter 7

MARINE INSURANCE Hull and cargo insurance-Protection and Indemnity Associations. For many years 'don It worry, it's an insurance item I was the common response to mistakes and mishaps giving rise to damage. The world has changed: Insurers have re-imposed higher deductibles which means that shipowners are carrying much more of their own risk. At the same time, terms and conditions are changing. An increasingly litigious world, with the ever-present threat of pollution liability, means that liability insurance is adjusting to changing circumstances. In all cases, the master is the first on the scene and his handling of the incident and the way in which he gathers evidence will directly affect either the prompt settlement of a claim or the successful outcome of an arbitration or Court case which may not occur until some years later. This chapter is designed to provide a working knowledge of marine insurance without undue reference to case law, and focus on areas where the master's actions and the evidence provided by him and his crew can make a material difference. THE COLOURFUL HISTORY of marine insurance has been irretrievably intertwined with the development of international trade and the maritime adventure from its earliest days. Phoenician maritime practice and Rhodian law both contain references to the spread of different levels of risk and general average is a feature of maritime commerce which addresses how the common risk can be fairly shared. General average is, however, not insurance as such, but a risk that is normally covered by marine policies. Maritime insurance is seen at its most proactive in supporting and facilitating the growth of trade, as recorded in the preamble to the Elizabethan Marine Insurance Act of 1601: ... by means of which policy of assurance it comet to pass that upon the loss or perishing of any ship there followeth no/ the undoing of any man, but the loss alighleth rather easily upon many men than heavily upon few, and rather upon them that adventure not, than those that do adventure, whereby all merchants, especially the younger sort, are allowed to venture more willingly and freely. This chapter explores the three main areas of marine insurance: hull, cargo and liability (P&I) as well as touching very briefly upon additional areas such as war risks and loss of hire. The focus will concentrate upon how knowledge of the terms of the vessel's insurance policies can affect the master's actions and decision making and how his actions affect the settlement of claims. This will 'Include examining: - The fundamental principles behind hull insurance and the scope and operation of the Institute Hull Clauses and, to a lesser extent, the Institute Cargo Clauses; - The way in which claims are settled and the importance of the early actions taken on board by master and crew in ensuring a satisfactory settlement. This is linked to chapter II where three examples of a maritime accident are analysed. - Liability insurance and the P&I Clubs: the ways in which P&I Clubs can support the shipmaster over a wide range of problems from personal injury through cargo claims and charterparty disputes to pollution incidents. It is hoped that this chapter will help to clarify what MrJustice Buller, when referring to a (then current) policy of marine insurance in 1791, called 'an absurd and incoherent instrument.'

Hull and cargo insurance The markets

The major international insurance markets are London, the USA, Scandinavia and France, although the funds that finance the London market in particular are themselves international. France, USA and 156

Germany, for example, are significant players in the London market, which is by far the largest marine insurance centre with an annual marine premium income in excess of US $3 billion. These paragraphs concentrate on the way in which the London market operates, although it is quite possible for an insurance policy to have insurers from more than one market underwriting the policy with, say, 60% in London and 40% placed in the American or Scandinavian market. The London market itself is a participation market with a number of underwriters taking a share of the London order. The main objective is to achieve a keener premium rate, but care must be taken to ensure that the subsidiary market follows the lead market with regard to claims settlement. If this does not happen the master has to be particularly careful when gathering evidence relating to an insurance claim as he may well have to deal with two surveyors and the shipowner/ manager with two adjustments based on two different policies. Cover is nearly always placed in the London market through a marine insurance broker who provides a wide range of services for his client including claims collecting services. On first placing a risk, or as renewal approaches, the broker should discuss thoroughly with the owner how best his vessel or fleet can be covered, taking into account the past claims record and the risks inherent in the operation. The broker must then decide how to approach the market and who is likely to be the best lead underwriter for that particular business. The market consists of both Lloyd's of London, where independent underwriting syndicates compete for business and the Institute of London Underwriters, where the marine underwriting activities of the major insurance companies have their market. Both sections of the market are likely to participate on any one risk. To the user, the assured, all this should make little difference. The product of both Lloyd's and the ILU is the same in both policy terms and claims handling. Underwriting representatives from both organisations sit on common advisory bodies such as the joint Hull Committee which meets regularly to discuss matters of common interest to the market, such as ship safety and standard market terms and conditions. The use of the term 'market' is deliberate; it must always be borne in mind that underwriters compete for business. They require premium income, hopefully adequate for the risks accepted in the contract of insurance, but, perhaps more importantly, paid far enough ahead of any claims settlement so that it can be invested and generate both reserves and a profit. The market is, to a large extent, driven by supply and demand and this is one of the main reasons why the marine insurance industry has a problem with the suggestion that it should play a more central role in regulating the safety of vessels and their operation. Having said that, the market does take its safety responsibilities, which come with its dominant position, seriously even if it is not prepared to take over a regulatory role towards safety. This, the market would argue, should more properly lie elsewhere and not least with the self-regulatory role of the prudent shipowner. In selecting a lead underwriter for a specific risk, the broker will be aware of the preferences and expertise of the various underwriters; some may prefer to lead on dry bulk tonnage and spread their risk by following on tanker tonnage. Some may have a particular knowledge of the offshore industry or have a close relationship with a particular shipping community or be prepared to cover older tonnage. The broker should know whether the underwriter i; hungry for a certain type of business or whether he is not seeking that class of risk and is therefore likely to be expensive. The objective is to find an underwriter who will offer a competitive rate and who has enough authority or reputation in the market for other underwriters to follow his terms and conditions so that 100% of the London order will be covered. The lead underwriter may take, for instance, a 10% to 20% share of the risk. The broker must then complete his slip, with other companies and syndicates, some of them taking as little as 1.0% of the risk so that the number of companies and/or Lloyd's underwriters appearing on the placing slip (the working contract document used by the brokers when physically placing the insurance with all the participating underwriters) can often exceed 50. Figure 7.1 illustrates the development of the marine insurance policy and the central role played by the Lloyd's SG policy form for almost 200 years. Using language more suited to the Elizabethan definition of marine insurance than to today's world, the SG policy survived because it had the strength of precedent behind it.

Precedent and the law

Precedent and the law is initially established by custom and practice. This, in turn, is interpreted either by written or codified law after the fashion set by the Code Napoleon, or by unwritten law (common law) interpreted in accordance with precedent as is the case with much (but by no means 157

all) of English law. The United Kingdom Marine Insurance Act (MIA), enacted on 21 December 1906 '. . . by the King's most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled ... I did much to codify the law relating to marine insurance, but much still depended upon precedent and the interpretation of the various terms and conditions by the Courts, and this still holds good for the new clauses such as the 1995 Institute Time Clauses-Hull. There are two reasons why the previous decisions of Courts, are treated with respect-one psychological, one practical. The psychological reason is that, all judges are human and will, naturally, prefer to justify their decisions by what has been done in the past. The practical reason is that it is desirable that decisions should have as great a degree of uniformity as possible. Precedent is initially set by judges sitting in the High Courts-in the case of maritime law, either the Admiralty Court for technical shipping disputes (the Court of Admiralty originally dealt with criminal matters on board vessels on the high seas, commercial matters and the distribution of prize money) or the Queen's Bench for commercial disputes. A judge in the High Court is bound by the decisions of superior Courts but he does have a degree of flexibility with regard to previous decisions of other High Court judges. Above the High Court sit (usually three) judges forming the Court of Appeal, whose decisions are binding on the High Courts and upon its own judgements. To a great extent, the Court of Appeal is an interpreter of legal precedent rather than a judge of right and wrong. Above the Court of Appeal sits the House of Lords (or the Privy Council for overseas legal systems which relate back to the English system) as the highest Court in the land whose decisions bind all lower Courts. A degree of flexibility in a rapidly changing world was introduced in 1966 when it was agreed that the House of Lords may' depart from a previous decision when it appears right to do so'. The decisions of a Court which becomes the precedent for future cases appears as ratio decidendi which is the judge's pronouncement of law in relation to the particular facts before him. The judge may also make obiter dicta, pronouncements by the way, which, whilst not binding, may guide future judgements. The precedents of decided cases are, as the Elizabethan lawyer and writer Sir Francis Bacon so eloquently said, the 'anchors of the law'.

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By the late 1970s it was becoming apparent that the balance between the SG Policy, which originally contained the fundamental principles of marine insurance, and the Institute Clauses (both Hull and Cargo), which contained the practical requirements of the assured, were seriously out of balance. Following representations from, amongst others, UNCTAD, the London market introduced a new policy form in January 1982 and agreed to cease using the SG policy from 1983. The current Marine Policy used by both the Institute of London Underwriters and Lloyd's is based on a very different structural approach. The policy is, in essence, little more than a vehicle for identifying the Assured and the Insurers and for attaching the agreed range of clauses (some 'official' or Institute clauses and some 'unofficial' or bespoke clauses). An example of the format of the new policy is contained in the chapter annex, and the following points are worthy of note: (i) The insurance cover is very simply stated as against loss, damage, liability or expense, and the extent of this liability is established by the attachment of applicable clauses, many of which are standard Institute clauses. (ii) Each (insurance) company and/or Lloyd's underwriter who participates in the insurance, whether it be Hull or Cargo, is responsible only for their own proportion of the risk as established by the 'placing slip'. (iii) The March 1991 policy form corrected the earlier version by stating that 'This insurance shall be subject to the exclusive jurisdiction of the English Courts . - .'. The previous version only specified English law to apply, leaving its interpretation to the Courts in whichever country suit was brought. Inside is a schedule page containing the following information: (a) Policy number. (b) Name of assured. (c) Vessel. (d) Voyage or period of insurance. Insurance for hulls is generally effected for a period of 12 months, although, on some occasions, the policy may cover only a specific voyage. Cargo insurance, on the other hand, is always on h voyage by voyage basis. (e) Subject matter insured (Hull or Cargo). (f) Agreed value (if any). Usually policies are valued; if not, in the event of a total loss, it becomes necessary to establish the value of the vessel or item insured at the time of the loss (subject to the sum insured being the maximum recoverable amount). (g) Amount insured hereunder. The whole agreed value need not be insured (indeed, the insurance may be split between two different markets in which case settlements are made proportionately). (h) Premium. (i) Clauses, endorsements, special conditions and warranties. As described below, many of the clauses are organised in standard groups or ,sets', such as the already mentioned Institute Time Clauses Hull and Institute Cargo Clauses. Standard clauses, such as these have the advantage of facilitating the rapid placement of the insurance risks, as they cut down the amount of proof reading that the underwriters have to do. On the facing page of the policy document are set out the participating companies and Lloyd's syndicates. Here will be listed the percentage of the risk insured by each individual company or syndicate. The following are examples of the standard sets of clauses which can be attached to the policy. CARGO Institute Cargo Clauses (A) Cl 282. Institute Cargo Clauses (B) Cl 253. Institute Cargo Clauses (C) C1 254. Institute War Clauses (Cargo) C1 255. Institute Strikes Clauses (Cargo) C1 256. and of less relevance C1 257-260 covering sendings by post and air cargo. HULL Institute Time Clauses-Hulls Cl 280. Institute Voyage Clauses-Hulls Cl 285, This list is far from exhaustive. The demise of the SG form meant that the associated clauses had to be able to stand alone when used in conjunction with the new Policy form. The first set of stand alone ITC Hulls Clauses were introduced on I October 1983. These were replaced by a new set dated 1 November 1995. The new 160

clauses recognise many of the changes that have taken place in the shipping world over the previous 12 years and, in some areas of cover, they are more restrictive. The ITC Hulls clauses are discussed in the following section, with the relevant changes between Hulls 1/10/83 and 11/11/95 highlighted.

The Institute Time Clauses-Hulls (ITC Hulls)

The fundamental principles of marine insurance have not changed with the introduction of the new marine policy with attached clauses and their interpretation is still established by the precedents set by the Courts over many years. However, the structure has been somewhat simplified and it is possible to understand the policy by a systematic review of the 27 separate clauses which make up the full set of Institute Time Clauses (although only areas relevant to a master's actions, will be reviewed here). The aim in reviewing the policy and the clauses is to establish the background against which the shipmaster can make his decisions when involved in a situation which may give rise to an insurance claim. This may be as straightforward as heavy weather damage or as complex, and hopefully as rare, as a collision. In all cases, the correct handling of the situation and recording of the evidence can materially affect both the quantum of the claim and the speed of settlement. Masters should bear in mind, too, that in the event of a Court case, the evidence which they produce may well be examined in the cold light of a Court room, three to five years in the future, by people who know a lot about the law but possibly rather less about the practicalities of ship operations. What may seem crystal clear and obvious now, may not seem so at that future date under that type of interrogation. A picture may or may not be worth a thousand words; a photograph can certainly reinforce the argument of the man who was on the spot and remind him more clearly than a printed page might of the circumstances at the time. Details of the vessel's insurance cover should not be a taboo subject, known only to the owner or manager. The master is strongly urged to enquire about the terms of his insurance if the details are not already available on board. Although the ITC Hulls 1995 are the official face of London-based marine insurance, many companies or Lloyd's syndicates negotiate amended or restricted conditions. Some of the Institute clauses, although important, will only be touched on lightly here if their content mainly affects the shore management (e.g., renewals, premiums) but areas where on-board action can have a direct affect are explored in more detail. The clauses are discussed in groups under logical subject headings and are reproduced in full in the annexes. Firstly, however, it is necessary to establish who and what can be insured.

The assured

In short, whoever has an insurable interest in the marine adventure can be named as an assured. Starting logically at the beginning this is the shipowner. If, however, the vessel is on bareboat or demise charter, the terms of that contract will determine whether the owner or the charterer is to effect insurance. Frequently it will be the latter as it is the charterer's operation which determines the level of risk and consequently the premium. If-the owner has used debt to finance the purchase of the vessel (that is, if he has a bank loan) the lender will inevitably attach a mortgage to the vessel and as mortgagee, the bank will also' have an insurable interest (see Assignment), and banks may also place their own mortgagee interest cover. Shipmanagers, if used, may either place the insurance on behalf of the shipowner or be coinsured under the owner's policy. Co-insurance is an important matter and it is prudent for the master to know who else is named as co-insured on the policy for, in theory at least, they will have a common interest. Generally a time charterer will effect his own insurance to protect his interests, which may be different from those of the owner, but which still constitute an insurable interest. Three other terms are relevant in connection with the definition of an insurable interest: a defeasible interest, a contingent interest and a partial interest. A defeasible interest is rare but should a vessel be towing an abandoned vessel into port in the hope of salvage, the owner of that towing vessel has a defeasible interest which will either be confirmed if the salvage act is validated (is successful) or, if not (e.g., the salved vessel sinks), rendered defeasible (i.e., annulled). A contingent interest is more common. Several parties may, for example, have a contingent interest in the successful operation of laying or repairing an oil pipeline or submarine cable. 161

It is less common these days for a vessel to be owned by a number of parties each holding directly a number of 64th shares in the vessel-a partial interest-but more common for a person to have a lien on the vessel which, not amounting to the full value of the vessel, would be a partial interest. Finally in this section, when must interest attach for it to be valid? The assured must have an interest in the subject matter at the time of the loss, although he need not necessarily have an interest when the insurance cover is placed. This is common in cargo insurance when the cover is frequently assigned to the benefit of the consignee (see chapter four regarding the transfer of risk and title). Although less significant in these days of rapid communications, insurance cover is placed 'lost or not lost'; not surprisingly, knowledge of a loss precludes the placing of insurance cover although not its assignment. Insurance claims can, in some ways, be likened to tax forms where there is a fine but very definite line between tax avoidance and tax evasion. It is important for the master to present the evidence relating to a claim in such a way that the average adjuster or owner's claims manager can recoup the maximum possible under the policy. Knowing who is, or who might be, covered is important for the master if he is to gather and record evidence relating to a claim in such a way that the company's claims manager or an average adjuster can present the maximum justifiable claim.

The interest insured

Unlike the old SG policy, the interest insured is not defined within the clauses and it is the definition within-the Marine Insurance Act (1906) and its subsequent interpretation in the Courts which establishes this. As well as the vessel and, in the words of the old SG policy, 'Ordnance, Tackle, Apparel & etc . . ." freight disbursements, passage money, commissions and profit are all considered insurable interests, as are the master's and crew's wages and the potential liabilities to a third party that arise directly from an insured peril. The dividing line between third-party liability covered under the hull policy as opposed to protection and indemnity cover will be explored later in this chapter.

Utmost good faith

This is, perhaps, a relevant point at which to revert to one of the underlying principles of marine insurance, established in four sections (from 17-20) of the MIA (1906): A contract of marine insurance is a contract based upon utmost good faith, and, if the utmost good faith is not observed by either party, the contract may be voided by the other party. This includes both misrepresentation and nondisclosure and the duty of disclosure includes advising of material changes during the voyage as well as when placing or renewing the insurance. ,

Attachment of the risk

Probably the only time a master will be involved in the attachment of insurance cover is in taking over a vessel. In such cases, cover will be organised to attach at the earliest time at which the vessel is likely to be delivered but the actual time of attachment will be the time of delivery established on the protocol of delivery (see chapter twelve). Since physical delivery may well, and usually seems to, take place at night or close to a weekend or holiday, it may be two to three days before the time of attachment can be formally advised to the underwriter. In such cases, the insurance on the vessel is held covered by the underwriters. The period covered is usually restricted to 12 months or less.

The Clauses Continuation (ITC cl 2):

Subject to the assured invoking this clause by advising insurers prior to the expiry of the insurance, the period of cover can be extended on a monthly pro rata basis: (i) If the vessel is at sea and in distress, until 'arrival at the next port in good safety'; or (ii) If in port and in distress, 'until the vessel is made safe'. This narrows the 1983 wording to restrict continuation only to cover vessels which are in distress.

Classification (ITC cl 4): 162

Despite the introduction of condition surveys by the London Salvage Association, the underlying fabric condition of the vessel is still established by a classification society. Not surprisingly, the classification of the vessel has to be maintained and all class recommendations, requirements or restrictions have to be followed to the letter, or the insurance cover cancels automatically. Furthermore it is a condition of both class and the insurance cover that any incidents, conditions or damages for which the classification society might make recommendations for, have to be reported to class. In general, 'if an event occurs at sea which affects class, the vessel is held covered until the next port. If the damage is caused by an insured peril, insurers agree that, with class approval the vessel can continue her voyage to a suitable repair port. The ITC 1995 clause 5.1 (termination) also includes the circumstances where 'a periodic (classification) survey has become overdue' as an event taking the assured outside the terms of his cover, unless the classification society has specifically agreed to an extension. In the case of the Caribbean Sea (1980) the Court heard and accepted evidence from Bureau Veritas that the society's rules differentiated between 'the loss Of validity of the classification certificate which is an automatic consequence of the omission by the owner to fulfil his obligations towards the society and the withdrawal of class which requires a positive act from the society. 5 In the new regime, introduced by the IACS classification societies, class is automatically withdrawn as and when one of the periodic surveys become overdue (in certain circumstances class can be extended for up to a further 3 months if agreed by the society). Consequently, with this automatic withdrawal of class the insurance of the vessel lapses at the same time. This could have serious implications should a vessel, having suffered damage from an insured peril, be found to be behind schedule with the periodic surveys or the planned maintenance and survey schedules required under a continuous machinery survey (CMS) in order to maintain class. Much could rely on well kept and convincing ship's records.

Termination (ITC cl 5) (previously clause 4).

Termination has important implications, especially in this age of changing managers. Subclause 5.2 provides for an automatic termination of cover, unless specifically agreed to the contrary by underwriters in the event of a change of flag, ownership or management (or requisition which has a similar effect on the governance of the vessel). Although it is not the master's direct responsibility to correspond with insurers, a well turned message to the effect 'Please advise insurers that flag was changed to ... at 0700hrs, 27March 1995'is a sensible precaution. There are many cases when the official ship's time of an event is required and such a signal can be used for a little judicious nudging of unresponsive owners or managers. Clause 5 does not specifically mention a change of crew managers or change of crew composition (including nationality) under the same technical management. It may well be that the Courts will come to consider this a material change of similar import to a change of the technical manager as the ISM Code bites. If a vessel is put on bareboat charter, this is also considered as similar to a change of owner/manager although the standard Bimco bareboat charter allows for insurance to be effected by either owner or charterer.

Assignment (ITC cl 21: previous clause 5)

Although the MIA (1906) provides for a marine policy to be assignable, the provisions of clause 21 prevents this unless the agreement of the underwriter is secured. One of the most common forms of assignment is in favour of a mortgagee. The mortgagee will, as part of his loan agreement, require that the insurance cover is assigned in his favour and a dated notice of assignment will be attached to the policy. The practical effect of this is that total loss claims and any claims over a specified amount are collected by the broker in the normal way but paid to order of the mortgagee rather than the owner. This protects the mortgagee's interests in the event of major damage, or enables repayment of the mortgage in the event of total loss, but allows minor accident damage to be claimed and repaired as part of normal ship operations.

Scope of cover and navigation (ITC cl 1) 163

This clause covers three main points which relate directly to the master and the shipboard operation: i) Pilots: The master has the right to sail with or without pilots, but this right is naturally subservient to local bye-laws and regulations and the Courts will tend to look at what a prudent mariner would have done in the circumstance (although the policy provides cover for the assured in the event of crew negligence, including that of the master). Nevertheless, the old principle remains, the master is always in command and, therefore, responsible for the safety of the vessel and her navigation. After all, how could a pilot assume responsibility of someone who, in the words of the old SG Policy, is 'Master, under God'? The 1995 ITC clauses introduce two new clarifying sub-clauses: the first, a sensible recognition of the commercial facts of ship operations to the effect that cover shall not be prejudiced by liability exemptions in pilotage or harbour tug contracts if their agents accept or are compelled to accept such contracts . . .'; the second amendment allows for the use of helicopters for the transportation of personnel, supplies and equipment. (but see the 'due diligence' provision under section 5 (Perils covered). ii) Tow and assist: Basically the master is free to tow and assist (or be towed) in any situation where a vessel is in distress. This decision is the master's and reflects the very sensible view that he is, both through training and through being the person on the spot, by far the best person to make this decision. The policy does not call for the master to refer to class or to his owners, managers or insurers, but to act in order to save life, to save property and, increasingly today, to prevent pollution. In situations where assistance (to or by the insured vessel) is required but immediate danger is not present, insurers' prior permission to tow or be towed is required, unless towage is customary in the circumstances prevailing. Masters can assist in this process by giving a short and succinct description of the situation and their intentions. Towing under such circumstances can be subject to an additional premium (AP). A negotiation may be required to agree to which port a vessel is to be towed. However the policy wording refers to the first safe port or place, (when the vessel is in need of assistance) which, in practice leaves little latitude for serious diagreement although there may easily be four different opinions here: - The towed vessel: generally in the direction of her intended voyage; - The towed vessel's insurers: the nearest port where repairs can be carried out; - The towing vessel's insurers: the nearest safe port; and - The towing vessel's owners/managers: the best direction for the prosecution of the towing vessel's intended voyage. Again, a logical and well argued proposal by the master -i.e., the man on the spot-will carry considerable weight if owners wish to follow a difference course from the insurer. iii) Cargo loading/discharging at sea: If a vessel is employed in a trade which entails loading or discharging at sea into or out of another vessel, then no cover is in place for damage to the insured vessel or to the lightering vessel, unless underwriters have specifically agreed to the operation beforehand. If the master is being pressured into a loading or unloading operation which heightens risk, he should immediately advise insurers through his owners; it may be that ajustified additional premium can be passed on to the charterers.

Total loss (ITC cl 19)

This is unchanged from the old SG policy. The vessel is an Actual Total Loss where; i) The vessel has been destroyed; ii) The assured is irretrievably deprived of the possession of the vessel, or iii) The ship has been posted as missing or a Constructive Total Loss (CTL); iv) An actual loss appears inevitable; v) The vessel cannot be preserved from an Actual Total Loss without incurring an expenditure in excess of the insured value. In such circumstances the assured may abandon the vessel to the underwriters. In turn the underwriters will refuse to accept the abandonment, but will agree to put the assured in the position of having accepted the abandonment on that day if the vessel is subsequently assessed as being a 164

CTL. Underwriters' reluctance to accept abandonment is due to them not wanting to become involved in any legal requirement to remove the wreck. This is a risk covered under the P&I Club rules and not the hull policy.

Perils covered (ITC cl 6)

The ITC clauses cover damage or loss caused by named perils as set out in clause 6 and before loss or damage is accepted by underwriters it must pass the test of causa proxima non remota spectator (the proximate and not the remote cause must be looked for). This concept of the proximate cause is important if sometimes arbitrary and perhaps less than logical. It is well illustrated by a famous example given many years ago by Mr P.H. Carey, adjuster of claims to the London Assurance Corporation: We will suppose that Tommy is told by his mother to remain at home and mind the house while she goes out. Tommy has, like all boys, youthful propensities, and no sooner has his mother left the building by the front door than he goes out by the back door for a walk. During this walk he passes an orchard and, seeing some -ripe and refreshing fruit on the boughs of a tree, he climbs the tree to make a survey of the fruit. Seeing at the end of a branch some fruit which appears to be superfine ripe and refreshing, he clambers along the branch to sample this superfine -ripe and refreshing fruit, but being inexperienced and thoughtless, he does not wait to see whether the branch will bear his weight, with the result that Tommy falls to the ground and receives damage of a particular average character Tommy, so he explains, is an intelligent youth and of a legal turn of mind, and could well while away the time during his convalescence by reading Arnould's Marine Insurance with special reference to the subject of causa proxima. Should his mother remark on the awful results of disobedience, he would be able, with a view to minimising his own delinquencies, to answer his mother to the following effect. No, mother, my accident was not the result of disobedience. The causa proxima of my damage was the breaking of the branch. My disobedience was the causa remota, and was infact so remote that it had nothing whatever to do with the accident. Since the question of whether the loss is proximately caused by insured perils will be one of fact, the assured may well have to resort to the Courts to discharge his burden of proof. Initially, the onus of proof rests with the assured, but once a prima facie case has been established against the insurers, it is for them to show that the loss arises from causes other than those insured against. The insured perils fall into two groups, the difference being that the first group (cl 6.1) is not subject to the requirement that the loss has not resulted from want of due diligence by the assured, owners, managers or superintendents. The eight perils comprising clause 6.1 are set out below with brief comments, particularly designed to highlight areas where the master's actions are particularly relevant. 6.1.1 Perils of the seas, rivers, lakes or other navigable waters: These perils include heavy weather, sinking, grounding, stranding, ice damage and damages received in collision. The cover does not include the normal action of wind and waves (wear and tear) and the cause must always be fortuitous (see 6.1.7). 6.1.2 Fire, explosion: Damage by explosion, internal or external, is covered so long as the explosion is not caused by one of the perils excluded under cl.24 (war exclusion) or arson on the part of the assured. Fire damage is not extended to include damage caused by heating where no fire is involved. 6.1.3 Violent theft by persons from outside the vessel: The act must be violent, clandestine theft is not covered. 6.1.4 Jettison: If parts of the vessel's apparel are jettisoned to prevent a loss and there is cargo on board, then it will be necessary to declare general average so that cargo contributes. 6.1.5 Piracy: Unfortunately piracy is still with us. Piracy includes passengers who damage the vessel through a mutinous act as well as riotous act from ashore. 165

6.1.6 Contact with land conveyance, dock or harbour equipment or installation: It must always be remembered that the cover provided under the hull policy is for damage to the insured vessel; liability for damage to a third party caused, for example, by contact with a lock gate, is covered under P&I cover. Therefore, in such cases, two distinctly separate insurance incidents are involved with two distinct and separate insurers. The previous ITC 1983 cl.6.1.6 relating to nuclear propulsion machinery has been removed since it has not become an accepted means of propulsion. 6.1.7 Earthquake, volcanic eruption or lightning: All these are excellent examples of what can be described as a fortuitous event. 6.1.8 Accidents in loading or discharging or shifting cargo or fuel: The hull policy covers resultant damage to the vessel but not the, vessel's liability towards the cargo owner for any damage to the cargo. This peril was previously covered under section 6.2 and was therefore subject to the exercising of 'due diligence' by the shipowner. It has now been switched to section 6.1 in recognition of the fact that this is an area much influenced by the activities of third party shore-side operations. It is now considered unreasonable to demand 'due diligence' from the shipowner, where his influence is often minimal. The five perils covered under cl 6.2 are all subject to due diligence being exercised by assured, owners, managers or superintendents or any of their onshore management. Cl 6.3 makes it clear that, even if the master, officer, crew or pilots are also owners or part owners, their actions in their professional capacity are not included in the test for 'due diligence'. 6.2.1 Bursting of boilers, breakage of shafts or any latent defect in the machinery or hull: This provides cover for damage caused by the bursting or the breakage, but not the repair to the boiler or the broken shaft unless this in turn was caused by an insured peril -e.g., collision or grounding or crew negligence-in which case there would be a second, and separate, claim under the policy. It can be seen that to ensure prompt and efficient claims adjustments to be made a very careful record needs to be made by the master -e.g., (1) Grounding causes breakage of shaft-a claim can be put forward under insured peril 6. 1. 1. (2) Broken shaft causes damage within the shaft tunnel-a claim can be put forward under this insured peril (6.2. 1.) for the damage caused by the shaft but not the damage to the shaft. Note, however, that if two claims are put forward, underwriters will exercise their right to two deductibles. There is a story of a master, inspecting the vessel's hull with the hull underwriter's surveyor, after touching bottom during a passage up a river. Two indentations were found, one to port and one to starboard. Inquiring as to this, the surveyor was advised that the vessel had touched twice, some minutes apart, the first caused by an error in navigation by the master in coming to pick up the pilot and the second through a manoeuvre to avoid another vessel. One deductible or two? Clearly, if there are two causes there are two deductibles. Honest but careful wording of reports and logbook entries, backed by a knowledge of the terms of the policy, can help the owner or manager to present his claim most effectively. 6.2.2. Negligence of master, officers, crew or pilots. The continuance of this insured peril was under review, but has survived the 1995 amendments. It is an interesting speculation whether an accident caused by the negligence of a master or crew who are not sufficiently qualified and experienced (although meeting the documentary requirements of whatever convenient flag an owner may have selected to safely operate the vessel), could be construed as a failure to exercise due diligence by the owner or his managers, especially as the ISM Code comes into force. 6.2.3 Negligence of repairers or charterers provided such repairers or charterers are not an assured hereunder: Again, the cover applies to loss or damage caused to the vessel due to the negligence of the repairers but not the cost of making good the negligent repair (unless the damage itself was caused by an insurable peril). The negligence of the charterer relates to a situation where the charterer has authority to direct the master as in the case 6f a demise or bareboat charter. 6.2.4 Barratry of masters, officers or crew. This picks up wrongful acts 'wilfully committed' by the master or crew to the prejudice of the owner or, as the case may be, the charterer. As such it goes beyond negligence. 6.2.5. Contact with aircraft, helicopters or similar objects or objects falling therefrom. In the 1995 amendments this was imported from subclause 6.1 so that the 'due diligence' provision now applies and, furthermore, helicopters have been added. The reasoning behind this action is a realisation that many vessels now use the services of helicopters to transfer crew and supplies. 166

Underwriters are anxious to ensure that such operations are carried out with the utmost of care, and codes of practice, such as the ICS Guide to Helicopter/Ship Operations, are followed. Masters are therefore advised to observe this code, otherwise underwriters may have reason to question the payment of a claim ensuing from an accident caused by a poorly controlled helicopter supply drop. The main change to clause 6 is the inclusion of .superintendents or any of their onshore management' in the provision that the loss or damage specified under sub-clause 6.2 'has not resulted by want of due diligence by the assured, owners, managers or superintendents or any of their onshore management'. This wording has considerably widened the scope of the proviso and no doubt in due course the Courts will be called upon to decide how far down the corporate tree 'any onshore management' extends. This change closely follows the new regime brought into effect by the ISM Code.

Excluded perils (ITC cl 24, 25, 26, 27)

It must be borne in mind that the ITCs are interpreted against the MIA (1906) and the related body of precedent as well as the four paramount exclusion clauses. It has already been mentioned that the cause of the accident must be proximately caused by an insured peril and not be caused by the wilful misconduct of assured. Similarly, damage caused by wear and tear or rats and vermin is not covered. Nor is the breakdown of machinery unless proximately caused by an insured peril. Nor are the underwriters liable for increases in costs relating to repairs to the vessel caused by delay or for any expense related to that delay except that the expenses can be included if a GA claim is allowed. The exclusions which comprise the paramount exclusion clauses are: - CI 24 War exclusion. - CI 25 Strikes exclusion' including (for reasons best known to the drafters) terrorists. - Cl 26 Malicious acts exclusion. 0 Cl 27 Radioactive contamination exclusion. Generally, these risks (with the exception of the radioactive contamination exclusion) are covered elsewhere by specific insurances -e.g., war risks. Clause 27 has been extended in scope beyond weapons of war to include other man-made sources of harmful radiation.

Pollution hazard (ITC cl 7)

This clause was first introduced in 1973 following the bombing of the stranded tanker Torrey Canyon as a means to mitigate the effect or spread of pollution and the 1995 amendment has included the wording '. . . or damage to the environment . . .' but this extends only to damage to the vessel and not to any damage or liability caused by the vessel.

Minimising loss (ITC cl 11 -old clause 13) ... and in the case of any Loss or Misfortune, it shall be the lawful to the Assured, their Factors, Servants, and Assigns, to sue, labour, and travel for in, and about the Defence, Safeguard and Recovery of the Goods . . . whereof . . . to the Charges whereof we, the Assurers, will contribute ... The wording of the old SG policy is quite clear and the obligation to sue and labour is maintained in the new policy (cl 11.1). This obligation is particularly relevant to the shipmaster as the person generally able to take the first and most effective steps to minimise loss. The master should, therefore, keep a careful record of all endeavours and expenses in connection with his duty to sue and labour. How these are handled in the process of settling a claim is illustrated in chapter eleven, which covers the work of the average adjuster. Whilst it is recognised that the time immediately following a 'loss or misfortune' may well not be the time at which the master will want to be engaged in philosophical contemplation of the nuances of marine insurance law, he should be reasonably certain that the loss or misfortune is proximately caused by an insured peril and, his measures should at all times be construed as 'reasonable'. If a total loss seems inevitable, nice judgement is required in deciding what measures to take and expenditure to incur. The obligation to minimise loss is very clearand, indeed, if such steps were clearly not taken, subject to such protection as is given by cl 6.2.2 (negligence of master and crew), the underwriter may well have grounds to refute a claim. The insured, or shipowner in this case, is always expected to act as if uninsured and to take all actions expected of an uninsured person in 167

order to protect the insured vessel from loss, or further damage. The 1995 amendments 'excluding all special compensation and expenses referred to in clause 10.5 (q.v.)' reflect the hull underwriter's continuing determination not to become liable for pollution related liabilities. Sue and labour expenses are paid in addition to and separate from the loss or damage to the vessel and are limited to the value of the vessel. In theory the insurers could pay double the insured value; once for the vessel and once for the sue and labour expenses, although it is difficult to see just how such set of circumstances could prevail to produce such result!

General average and salvage (ITC cl 10.old clauses 11 & 13)

With general average we come to that unique strand of maritime practice and law which has its roots deep in maritime history. It is also an area in which the contract of carriage and marine insurance interact, through the application of the York-Antwerp Rules (1994) or other general average rule; as laid down in the contract of carriage. The YA Rules were examined in chapter five; here we are concerned with the hull insurer's obligations. It is necessary, firstly, to be clear exactly what losses may be involved. A general average loss is the result of a general average act which may be either: (a) A sacrifice of property which would include such acts as: (i) jettison of ship's gear or cargo; deck cargo being included only if normally carried on deck; (ii) Damage done to cargo by water or other agent in extinguishing a fire, (excluding damage to the packaging of the cargo on fire, this being a particular average claim); (iii) Damage done by cutting bulkheads or scuttling to extinguish a fire; (iv) Damage to engines in attempting to force a vessel off a strand; (v) Cargo burnt as fuel due to insufficient bunkers (although the reason for being short of bunkers in the first place will be closely examined); (vi) Loss of freight caused by general average sacrifice of cargo; or (b) Expenditure properly incurred in preserving the common adventure. Secondly, there is a general average act when, and only when, danger exists. This places a burden on the master to make a decision in circumstances which may be far from clear and highly stressful. In Watson v Firemen's Fund Insurance Co. (1922), the master quite reasonably but, as it turned out, mistakenly believed that there was a fire in the hold. He turned on steam drenching, causing damage to the cargo. As there was no actual fire, the damage to the cargo could not be recovered under general average. As well as a general average sacrifice, there is, in addition, likely to be either a particular average claim or a total loss claim. MIA (1906) defines thus in sections 56 & 64: A loss may be either total or partial. Any loss other than a total loss . . . is a partial loss [i.e., particular average] and a particular average loss is a partial loss of the subject matter insured, caused by a peril insured against, and which is not a general average loss. Again, the benefit of the master keeping a clear and comprehensive record of events (and expenditure) is clear, and, in chapter 11 the sequence of events involved in adjusting a claim is illustrated. It will be apparent that for there to be a general average act, more than one party must have an interest in the marine adventure. Thus, technically, the master of a vessel on ballast voyage and not on charter cannot declare general average. In practice, however, underwriters are prepared to make good a loss suffered by the assured in preserving the ship (cl 10.3) with certain exceptions, which include measures undertaken to prevent or minimise damage to the environment. Salvage charges are also recoverable under GA, and they are defined as the charges recoverable under maritime law by a salvor independently of contract. The expenses of services rendered by the assured (including master and crew), his agents or any person employed for hire by them (e.g., a tug under a towage contract as opposed to Lloyd's Open Form) are properly recovered under the sue and labour clause. Salvage is covered in more detail in chapter 11. The 1995 amendments also make it very clear that special compensation payable to a salvor under article 14 of the 1989 Salvage Convention or other expenses or liabilities incurred with respect to damage to the environment are not part of ITC Hulls cover (and properly fall under P&I insurance). This tracks previous market practice, as does the wording of clause 10.6 which extends the ITC to cover sums which the assured has to pay to salvors for their efforts to prevent or

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minimise damage to the environment as referred to in Article 13 paragraph I (b) of the same Convention. There is, however, a major deviation from previous practice, when hull underwriters always previously agreed to accept the provisions of the current York-Antwerp Rules. Hull underwriters, in their determination not to become involved in any form of pollution liabilities, have excluded from the cover they provide for YA General Average adjustments, all pollution expenses or liabilities. By doing this they have declined to cover the minimal exposures contained in the YA 1995 Rule XI section (d). This includes in a GA adjustment, the expenses incurred by the assured to minimise or prevent damage to the environment, which, if undertaken by a salvor'Would have been allowable in the GA adjustment. In addition, pollution prevention and control costs and expenses (such as the provision of pollution containing booms) necessary to bring a vessel into (and remain in) a safe port are included in the above mentioned Rule XI (d) but are not covered under the ITC 1995. This gap in cover has been left for the P&I Clubs to pick up unless the assured can persuade underwriters to provide him with the partial buy back as provided by the Institute General Average Pollution clause described later in this chapter.

Damage and its repair (ITC cl, 12, 13, 14,15, 16, 17, 18)

Whilst the MIA (1906) allows the underwriters to make a deduction under 'new for old', in effect they waive this right under cl 14. However, average adjusters will not waive the new for old reduction for GA sacrifice to a ship older than 15 years. Underwriters will normally cover the cost of temporary repairs but, the MIA (1906) and ITC c 118 allow the assured to claim a depreciation allowance for unrepaired damage, although the amount of the depreciation appears to be a matter of negotiation. Frequently, if a vessel is drydocked to repair bottom damage, it will be expeditious to take the opportunity to scrape and paint the underwater hull. Grit blasting and other surface preparations and priming of replacement plating is allowed in agreed circumstances for repaired bottom plating damaged by an insured peril. If the bottom damage is caused by stranding, underwriters are prepared to pay the costs of sighting the bottom, whether or not damage is found (cl 12. 1). In any of these circumstances, it is prudent for the master to ascertain from his owners or managers who will be paying for what work at an early stage. Under clause 13 underwriters also reserve the right to decide on the place of repair and any additional costs of removal to the selected port of repair will be covered. Furthermore, underwriters may require the owner to obtain a number of competitive quotations or tenders for the repair of the vessel, the owner being compensated for any delays caused solely by this process. The 1995 amendments increase the onus on the assured, owners or managers under 13.1 to give notice within 12 months of becoming aware of, or when they should have become aware of, a loss or damage recoverable under the policy. As an example of how this clause may operate in practice: - A ship may touch bottom. Divers are sent down and report no evidence of damage. Two years later in drydock extensive damage is found. The question arises as to whether the claim falls foul of the time limit. Based on the actual wording of the clause, it would appear that since the assured did not and should not have become aware of the loss or damage until the drydocking, time would not begin until the drydocking. It might be otherwise if the diver found minor indentations which it was thought would probably fall below the deductible. In that case, it would be prudent to advise underwriters since the loss or damage then found ,may' result in a claim on the policy of insurance. - A momentary loss of oil occurs from the stern seal or a brief rise in stern tube oil temperature is noted. This then settles down and no other abnormalities are noted. Many months later the vessel drydocks; and the tailshaft is drawn at which time the stern tube bushes are found to be wiped. This will be the first moment when the assured might know that loss or damage has been sustained, but underwriters may well argue that they should have been advised of the potential claim at the time of the initial loss of oil. There are bound to be difficulties in establishing what date the assured 'should have become aware'.

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To ensure that the assured does not fall foul of this clause, it would seem that the only sensible course is to notify underwriters of any incident in which loss or damage is found or suspected to exist and which may result in a claim on hull insurers. This is an extremely burdensome duty that falls upon the master and/or chief engineer. One of the skills of the insurance broker is negotiating the best claims settlement possible with the lead underwriter and then ensuring prompt payment. Time is important since the owner will want his vessel repaired and sailing as quickly as possible, whilst the underwriter will want to ensure that the work is undertaken under the most competitive tender and will want to see the repairs completed and paid for by the owner before he settles the claim. In formal terms, he indemnifies the owner for his expenditure resulting from an insured peril. There is an obvious cash-flow problem here for the owner (and perhaps more critically for a ship manager). A competent marine insurance broker with a good claims handling deparment, supported by clear and concise evidence from the master, can go a long way towards bridging this gap.

Deductible (ITC cl 12)

The policy deductible, which was introduced in its present form in 1969 and is a negotiable amount -and one which has increased considerably in recent years-applies to all losses covered by the policy other than total or constructive total loss. Thus it includes: particular average, general average sacrifice, salvage awards and contributions to salvage award, sue and labour charges, expenses related to salvage and claims under the collision liability clause. A deductible is applied to 'each occurrence' and it is, therefore, in the shipowner's general interest to keep the number of incidents to the minimum. Most masters will be well aware that deductibles have risen considerably in the last few renewals and $100,000 deductibles for panamax bulk carriers are not at all unusual. This means that the owner is self-insured for the majority of minor accidents. The sometimes heard 'never mind, it's an insurance claim' is very much a thing of the past, or should be. An important exception to the each occurrence rule is heavy weather damage (cl 12.2) where all damage incurred during a voyage between two successive ports-even if caused by separate incidents, e.g., a storm, and then some days later, by contact with floating ice-is treated as one claim with one deductible. Sensible thinking and good planning is necessary when at the repair yard. Inevitably work will be undertaken that is routine maintenance in addition to damage repair. Separate and precise accounts will need to be kept and it is much easier to organise this with the repair yard at the start rather than towards the end (see chapter eight).

Implied warranties

There are two major warranties that are implied in any hull time insurance but are not actually set out in words in the ITC but rely on the Marine Insurance Act for their legal effect. The first concerns the seaworthiness of the vessel. Logic dictates that an owner cannot warrant absolutely that at all times his vessel is seaworthy, especially when she is at sea. This is recognised in the case of a time policy; ... there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness. It seems slightly less logical that the warranty of seaworthiness does not become absolute at some suitable stage during the period cover. However, if the owners or managers are advised of the unseaworthiness [by the master] and fail to correct it, it could be held that by their privity they have negated the policy, assuming always that the proximate cause of the loss related directly to that particular unseaworthiness. The other implied warranty is that of the legality of the adventure and, with due deference to the Institute's membership, is hopefully not a matter of great relevance. 170

Express warranties: ITC cl 1.1 states that it is ……..warranted that the vessel shall not be towed ... etc' and ITC cl 3 states 'Held covered in the case of any breach of warranty as to ... I towage, salvage services …… & etc'. Express warranties are a bit like that; the important point for the shipmaster comes later in clause 3, the assured is held covered…………. Provided notice be given to the underwriters immediately…….’ The notice should be immediate and, preferably, before the occurrence. This is essential if, for instance, the master elects to breach a warranty, say, in regard to towage under contract. Although the owners or managers will be advising the underwriter and, if necessary, negotiating with him through their marine insurance broker, this negotiation can often be effectively assisted by a well presented statement of intent from the master. Unless the urgency of the situation dictates otherwise, the intent should always be 'subject to underwriters' approval' and should contain a brief sitrep (situation report) and include the master's reasons for selecting that particular course of action. Of the express warranties, the other most relevant to the master is the locality warranty or trading warranty. The ITC itself does not restrict the trading area of the vessel; however the policy would normally contain terms such as the Institute Trading Warranties clause or a bespoke clause setting out exactly where the vessel can trade. Underwriters must be advised as soon as practicable of any breaches of these trading warranties, and before it happens if possible. Underwriters can then charge an additional premium or amend the terms of cover. Again, the master should be aware exactly what the permissible trading area of the vessel is so that he can advise his owners/managers as soon as possible when he takes his vessel outside the trading area. If the information is not on board he should request it. Disbursements warranty (TLO): This clause allows the shipowner to insure an amount in addition to the agreed value of the hull and machinery for a variety of interests which are grouped under the definition of Disbursements. This only covers the vessel against total or constructive total loss and does not respond to partial losses. The maximum amount insured is limited to a sum equal to 25% of the sum insured on the hull and machinery and includes such interest as anticipated freight, time charter hire and increased values. This additional cover for total loss only (TLO), attracts a lower premium rate, and is strictly a policy proof of interest (PPI) cover which means that the shipowner does not have to prove the quantum of the amount claimed and, strictly speaking the assured does not even have to prove that they have a legal insurable interest. This is one reason why underwriters restrict its usage to an amount equal to 25% of the hull value.

Collision liability (ITC cl 8)

The interesting aspect of the cover provided for collision damage under Cl 8 is that, unlike the rest of the ITC (Hulls), which basically indemnify the assured for damage to his own vessel or property, the clause extends the scope of the policy to cover the assured's legal liability to a third party. (Salvage is also a third-party liability in respect of the salvor.) Known from the time of its introduction at the end of the 19th century as the running down clause (RDC), this supplementary insurance cover applies solely to circumstances where the insured vessel is in collision with another vessel. Physical contact must have occurred (i.e., if you alter course to avoid another vessel and run aground, you cannot claim on his RDQ and extends to: - Loss or damage to the other vessel or property on board the other vessel (this includes cargo and the personal effects of passengers and crew); - Expenses or losses incurred by the other vessel including loss of freight and financial loss suffered by the owners of property on board the other vessel; and - Liability of the other vessel for GA claims and/or salvage. Some aspects of an insurance claim involving a collision are explored in chapter eleven, where an incident is followed through from actual occurrence to final settlement, showing particularly the importance of the master's evidence and reports. It need only be noted here that the RDC excludes liability for: - Wreck removal; - Losses except directly related to the other vessel or property on the other vessel; - Cargo, property, etc., on the insured vessel; 171

- Loss of life or injury; or - Pollution (unless directly caused by the insured vessel to the other vessel or property/cargo on board that vessel); the 1995 amendments have extended this clause (8.4.5) to cover awards for the skill and efforts of the salvors in preventing or minimising damage to the environment. (Article 13, para. 1 (b) of the International Convention on Salvage 1989). When introduced, underwriters restricted their cover under the RDC to 3/4th of the legal liability of the assured as it was felt that it might make the assured and his servants more careful than they might otherwise have been. Although the cover can be extended to 4/4th, the last quarter is frequently picked up under the owner's liability cover with his P&I Club. Although the RDC is a very real extension of the hull underwriter's exposure-not only does he have his existing indemnity towards the assured, but he is exposed, separately, for as many collisions as the assured's vessel may have-it is limited to an amount equivalent to 3/4th of the value of the insured vessel. This can be much smaller than the claim made by the other vessel-for instance, in the case of a collision between a handy-size bulker and a large container vessel-and the owner must look in other directions to find his cover. However, the principle of crossliabilities does mean that, when both vessels are to blame, the difference between the two liabilities is settled on a single liability basis. This does not apply when either or both ships limit their liability. Limitation of liability: In the Nautical Briefing it was seen how much time has been devoted to the matters of collision and of the right to limit liability (Figure 1, the work of the Comit6 Maritime International). The right of a shipowner to limit his liability was established through international convention to encourage shipping interests which might otherwise be daunted by the onerous liabilities for loss of life or damage to property which can arise from the prosecution of a marine adventure. Even so, limitation will depend on the jurisdiction in which the claim is settled. Limitation in the United States is, for example, different in the detail of its impact from that under English law, even though covered by the same international convention. The right to limit liability is, currently, governed by the Convention on Limition of Liability for Maritime Claims (London 1976) sometimes called the London Convention, and which has had force of law in the United Kingdom since I January 1987 (see chapter five).

Sistership clause (ITC cl 9)

This clause simply allows for cases of collision or salvage involving vessels owned by the same body corporate to be treated as separate legal entities when settling claims.

Premiums and return premiums (ITC cl 23)

Little here directly affects the vessel or master except, perhaps, lay-up returns. A lay-up return is allowed (assuming the vessel is in an approved lay-up area) for a period of not less than 30 consecutive days, and will vary whether the vessel is under repair or not, so a log of repair days is always required. From an operational point of view, if a vessel is due to move to a load berth early on the 31st day and requires bunkers, the master will need to bear in mind that by moving to the bunker berth on day 30, he may have negated the benefit of the lay-up premium however operationally efficient this may be. However, underwriters are flexible, loading or discharging cargo is, for example, allowed although acting as a storage vessel is not. The joint Hull Committee UHQ have established a special returns office whose job is to accept or reject applications for lay-up returns. The answer is, if in doubt, state intentions and ask.

Additional or substitute clauses ITC Hulls-restricted perils

These clauses are a restricted form of the full ITC clauses as already described herein. The ITC Hulls and ITC Hulls Restricted Perils differ only in the wording of clause 6. The clauses are identical except that. (1) '. . . accidents in loading, discharging or shifting cargo or fuel' return to clause 6.2 where they were in the 1983 clauses. This makes them subject to the 'want of due diligence' proviso. (2) Also, 'Negligence of master officers crew. . has been excluded from 6.2.2. Whilst obviously significant, this is not seen as fatal to all claims involving negligence of the master and crew, only those claims where their negligence is the only proximate cause of the loss or damage. For instance damage done to the vessel in a collision, where the bridge officer was to blame, is still covered. 172

(3) 'bursting of boilers breakage of shafts' is dropped from the cover provided by this clause, leaving only 'latent defect in the machinery or hull'. This reflects underwriters determination not to provide machinery breakdown cover to certain fleets where they are uneasy about the owner's dedication to good maintenance.

Institute general average-pollution expenditure clause hulls

This is a clause that has been made available by underwriters (at an additional cost if they so wish) to fill the shortfall in cover for GA pollution as described earlier in this chapter. This additional clause is for use only with the Institute Time Clauses 1/11/95: In consideration of an additional premium to be agreed, where the contract of affreightment provides for adjustment according to the York-Antwerp Rules 1994 this is extended to cover vessel's portion of general average expenditure, reduced in respect of any under-insurance, which is allowed under Rule XI(d) of the York-Antwerp Rules 1994 and which would be recoverable under clause 10 of the Institute Time Clauses-Hulls 1/11195 but for clause 10.2 therein. This clause is subject to English law and practice. Clause 10.5.2. excludes expenses or liabilities incurred in respect of damage to the environment, or the threat of such damage, or as the consequence of the escape or release of pollutant substances from the vessel, or the threat of such release. Yet Clause XI(d) of York-Antwerp 1994 (qv) relates to pollution prevention and control costs and expenses (such as the provision of pollution containing booms) necessary to bring a vessel into (and remain in) a safe port. If owners take up this 'buy-back' clause, it is essential that they ensure that all bills of lading, voyage and time charterparties incorporate YorkAntwerp Rules 1994. A glance at chapter eleven shows how difficult this is and this aspect of Hull. Insurance must be co-ordinated most carefully with P&I cover.

The Institute cargo clauses

It is not intended to dwell long on cargo insurance, but just to give a general overview and highlight those areas where the master might become more closely involved with cargo underwriters. Obviously, when compiling any report, the master should bear in mind that it may well have a very wide readership. Figure 7.1 illustrates the development of the three variations of cargo insurance. After the major reorganisation of 1982 and the introduction of the new Marine Policy and Institute Cargo Clauses, there remain three alternative suites of clauses, A, B & C. The A clauses (cl 252) relate closely to the all risks form of cover introduced in 1963. The B and C clauses (cl 253 & cl 254), however, are different from the old FPA (free of particular average) and WA (with average) clauses in that they do not restrict particular average loss. The A clauses cover all risks of loss or damage as well as general average and salvage subject to the policy exclusions. The insurance is also extended to indemnify the assured against any claim under the contract of carriage both to blame collision clause. The B clause set out the risks covered as: fire or explosion; stranding, sinking, grounding, capsizing; overturning or derailment of land conveyance; collision; discharge at port of distress; earthquake, volcanic eruption or lightning (C); general average sacrifice; jettison or working overboard; entry of water, (not rainwater) (C); and total loss of cargo lost or dropped whilst loading or discharging (C). Those risks marked (C) are not included in the C clauses. Exclusions, apart from the usual selection of war, capture, seizure, strikes and lockouts, etc., arise from: wilful misconduct of assured; ordinary leakage, loss in weight/volume, wear and tear; insufficiency of packing; inherent vice; delay; insolvency of carrier; deliberate damage to cargo; use of atomic weapons. Unseaworthiness/unfitness is addressed in (exclusion) clause 5.: In no case shall this insurance cover loss or damage arising from: 173

unseaworthiness of vessel or craft, unfitness of vessel craft conveyance container or liftvan for the safe carriage of the subject-matter insured where the assured or their servants are privy to such unseaworthiness or unfitness, at the time the subject-matter insured is loaded therein. In this case, the 'assured or their servants' does not extend to include the shipowner as he is not considered to be the assured's (the cargo owner's) servant (unless directly controlled by him). Another point to note is that this exclusion applies 'at the time of loading' and not specifically at the commencement of the voyage. It bears note that the deterioration of cargo due to delay, even if that delay is caused by an incurred peril -e.g., collision-is not covered. It is not surprising, therefore, that the shipper expects the master to prosecute the voyage 'with reasonable dispatch in all circumstances'. Deviation is, however, covered if it is undertaken for good reason and with the intention of returning to the direct route. Clauses 15 and 16 relate directly to the contract of carriage between shipper and carrier. Like the cargo policy, this transfers at a specific-but possibly different-time to the consignee depending on the terms of trade used, as illustrated in chapter four. The international agreements regulating the Carriage of Goods at Sea (The Hague or Hague-Visby Rules, see chapter five) prevent the carrier from incorporating any clause in his bill of lading that gives him benefit of the cargo owner's insurance policy: Cl 15-This insurance shall not inure [come into use] to the benefit of the carrier or other bailee. International agreements also require the consignee to claim, in writing from the carrier, for apparent damage to the goods at the time he removes them (or before) or, if the damage is not apparent, ,within three days. (It can be seen immediately why the use of the correct Incoterm, described in chapter four, is so important in containerised through transport.) In the event of damage or loss to the cargo, the normal practice is for the cargo owner (shipper or consignee) to claim under the policy and for the underwriter, exercising his right of subrogation, to proceed against the carrier. In order to preserve the underwriter's rights, clause 16 requires the assured and their servants and agents to: 16.1 ... take such action as may be reasonable for the purpose of averting or minimising such loss the equivalent of 'sue and labour' under the hull polity, and 16.2 ... ensure that all fights against carriers, bailees or other third parties are properly preserved and exercised. The chapter annex illustrates a typical certificate of cargo insurance which would be part of the packet of documentation (including such papers as the certificate of origin, commercial invoice and original bills of lading) which would pass from seller (shipper) to buyer (consignee) via the documentary credits department of the confirming bank.

Summary As can be seen, the shipmaster must chart a careful course through the reefs and shoals of marine insurance claims. He has obligations towards more than one party and, indeed, may act on behalf of more than one party and yet find that party's insurers proceeding against him, or at least his owners. As the man on the spot his reports and logbook entries, together, it must be emphasised, with all rough logs and deck logs, will constitute prime evidence as to whether his actions were considered correct or justifiable. Poorly documented evidence presented in Court, three to five years after the event, does not cast the best light on the master's actions. The power of a well chosen photograph in helping recall is well known, especially if it is timed and dated and accompanied by notes made at the time settling out the circumstances and the reason why specific courses of action were taken. The big rock to avoid is, perhaps, the one marked 'wilful fault or privity' which enables the shipowner's underwriter to whisper gently in his ear 'you are on your own now'. The best pilot through these troubled waters is the one marked 'reasonable actions of a prudent seafarer'-and the best support may well be the local P&I Club Correspondent. 174

Protection and Indemnity Associations The P&I Club structure

The overall service which a shipowner receives from what is generally referred to as a P&I Club is made up of: the mutual association; the managers: and a network of independent Club Correspondents. The mutual association: The mutual association is at the heart of the services. Modern P&I Clubs are generally incorporated (as opposed to being partnerships) and, while the principle of mutuality remains, members (the owners with entered tonnage) contract with the corporation rather than with one another as is the case in partnerships. The constitutional affairs of the association are governed by articles or by byelaws while the scope of cover and other practical obligations of the Club and its members are set out in the rules. All members are entitled to attend general meetings (analogous to shareholders annual general meeting). In addition to the usual adoption of the annual report and accounts and other such corporate housekeeping, the business of such meetings includes the election of committeemen and amendments to the Club's rules. Frequently voting rights are allocated on a graduated system so that the owner of, for example, a single VLCC cannot outvote the owner of a large and active fleet of 'tweendeckers. During the second half of the sixties, many of the Clubs moved their corporate residences out of London to register offices offshore, Bermuda being a popular location. The relaxed tax regime was undoubtedly an important consideration; Clubs rely heavily on their ability to build up strong financial reserves. However, the impetus at the time was the inability to hold in the UK the range of currencies, especially US dollars, necessary to conduct the Club's international business. It should always be borne in mind that associations, although generally limited companies are limited by their guarantee rather than by shareholding; members are not shareholders, subscribe no capital and receive no dividend. Their overriding obligation is a mutual responsibility to contribute to the damages which may be suffered by their association through its obligations to insure any one of its members. The 15 leading P&I Clubs make up the International Group, most of whom participate in an agreement to pool individual risks between $5.0 million and $30 million (see Table 7.2). There is also a further pooling of risks to the extent that individual claims exceed the limits of the Group General Excess-Loss Reinsurance Contract. Below the general meeting are the committeemen, the old name for those members elected to what is nowadays known as a board of directors and who are today referred to as the directors of the club. As well as submitting and recommending matters for approval or consideration by the members of the general meeting, the committee or board: - Exercises discretion over accepting or rejecting claims which do not fall fully within the Club's rules (liability arising out of delivery of cargo without presentation of bills of lading could be such a case); - Monitors changes in the shipping industry and considering the need for amendments to the rules; - Fixes the amount of premiums and deciding on the closing of policy years; - Decides on reinsurance policy and reserve fund investment policy; and - Supervises the managers. In order to fulfil these duties, the Club's board will probably meet on a quarterly basis. The managers: The managers of many Clubs are a separate legal entity from the Club, although their legal residence may well be offshore and co-located with that of the Club which they serve. Often however, they operate through agents in London, which may be a subsidiary housing the full management team. The relationship between manager and association is close and usually of long standing. The managers are responsible for the day-to-day business of the Club and for advising the board in all of the areas mentioned above. They provide all the services offered by the Club to its members, including claims handling and legal advice as well as underwriting and fund investment. Since a claim may not be settled for two or three years or even longer after the incident, this aspect of the manager's duties requires skilled forecasting. A cardinal rule of all insurance is to ensure a spread of risks. Thus the managers will look closely at the Club's existing and prospective membership with particular reference to: - Type of vessel -e.g., tanker, container ship, bulk carrier, cruise ship, etc. - Trading areas and geographical spread (a concentration of vessels trading in the litigious environment of the USA might not be considered the best way of spreading risk); 175

- Operating and management philosophy and capability of existing and prospective members together with their claims record; and - The age profile of the fleet. Policing oneself and one's own membership can be a politically delicate and, contentious process, rather like blackballing a member of the local golf club. However, the introduction by many Clubs of condition surveys is one way in which they have addressed this problem. As well as their reactive role of providing insurance cover, some managers in recent years would argue that they and their Clubs are also playing a much more proactive role in improving safety and performance within the shipping industry. Loss prevention forms a large part of this activity and may include: - advice on documentation such as bills of lading and charterparties; - claims analysis to identify cause and possible methods of prevention - proactive claims handling; - raising the awareness of both seafarers and shore staff as to risks and potential risks (including information on the causes of claims); - controlling the quality of entered tonnage; and - ship inspections (generally brief inspections by Club staff) and condition surveys (thorough, two to three day inspections by independent surveyors). For the master, a condition survey is an important event, but one which can be handled slightly differently from statutory inspections. The condition surveyor is not surveying against a statutory specification (although he will check for compliance) and there is, generally speaking, more flexibility to work with the Club to achieve a mutually satisfactory solution which fits in with the vessel's trading requirements. However, an adverse report from a condition surveyor can result in cover being temporarily suspended, especially if specified repairs are not completed within the time allowed. The Club Correspondents: Club Correspondents are probably the master's main point of contact with his P&I Club. A Club will establish an extensive network of Correspondents, people with maritime-related legal or commercial skills located in ports throughout the world. The correspondents are not agents (either of the Club or its managers) but independent individuals or companies. A large Club may have over 400 Correspondents at over 350 ports worldwide. Indeed, many Correspondents arc used by more than one Club. Perhaps their greatest asset is knowledge of the local maritime trade coupled with a good understanding of how Club cover works. Although the Club Correspondent should formally be appointed and briefed by the Club, their role too is loss prevention. In such cases, early involvement of expert assistance is frequently the master's wisest course of action. However, he should bear in mind that they may be independent representatives, rather than agents. Even in relation to non -P&l matters, the Correspondent can be a useful source of information.

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In a similar way to its network of Correspondents, the Club will have a network of recommended lawyers and surveyors, cargo or otherwise, who will be available to act on behalf of the master and owner and, if necessary, the Club will despatch one of its own experts to assist the master. One Club's guidelines to Correspondents for appointing a surveyor or expert state that they will generally be appointed for the following reasons: - Preliminary investigation of any incident involving damage or loss caused by an entered vessel, or caused to cargo under a contract of carriage involving an entered vessel; - A thorough investigation of relevant facts and collection of contemporaneous documentation where the liability of an entered vessel may be involved; - Expert advice or opinion; - Preloading or discharge surveys when agreed beforehand by the Club (some Clubs insist on precautionary preloading surveys for such goods as steel); Club surveyors will not normally be expected to investigate damage caused to the entered vessel nor conduct supervisory work associated with the normal operational practice of a prudent shipowner. Having chosen a surveyor with the appropriate skills (and independence, an important aspect) clear and precise instructions must be given which: - Identify the party -i.e., owner or charterer-on behalf of whom the surveyor is retained; - Give an accurate outline of the facts as are already known; - Identify any precise points on which assistance, advice or action is required;

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- Specify appropriate reporting requirements such as: advice on the nature, extent and cause of the incident, loss or damage; a monetary estimate of the value of the loss or damage; and a recommendation for future handling. It is obvious, but cannot be stressed too strongly, how important it is that the master both provides clear and concise information which enables the Club Correspondent to instruct the surveyor and then that the surveyor and the master work together as a team.

Club income, reserves and reinsurance

Club income comes from two sources: premium income-the calls made upon members-and the investment return on that income. As a mutual organisation, Club finances obey the mutual equation: Calls + investment income = claims + expenses If more funds are needed to balance this equation, the directors are empowered to seek further calls from the members. Conversely, if there are surplus funds, calls may be reduced or refunded. However, shipping is a volatile business and Clubs employ a number of investment and reinsurance strategies in order to achieve stability and ensure adequate reserves.

The Group general excess loss policy is the largest single maritime reinsurance cover placed through London, and the combined Clubs' buying power ensures that they achieve competitive rates. However, the impact of liability claims in recent years renewed the debate about whether the Clubs should continue to offer unlimited cover or whether they should set a limit. One of the arguments against setting a limit has been that it could become a target for claimants. Over and above the excess loss cover, many Clubs take out additional catastrophe cover to meet their obligations in respect of overspill claims (i.e., a claim which exceeds the limit of the reinsurance cover). The sheer size of both marine and non-marine catastrophic claims in recent years has fuelled the debate about whether the Clubs will continue to offer unlimited cover. A compromise between the views of those Clubs who oppose a limit and those who support it, was agreed to take effect from 20 February 1996. The form of the compromise is to place a limit on each owner's liability to contribute to an overspill call and to limit the cover for such an overspill claim to the amount that can be collected by (limited) overspill calls levied in relation to all vessels entered by the Clubs participating in the International Group pooling arrangements. The limit on the amount of the overspill call liability for each entered vessel is equivalent to 20% of that vessel's property damage limitation fund under the 1976 Limitation Convention. Clubs set up contingency reserves to protect policy years which have been closed but which still have claims outstanding. Although many claims may not have been settled, the Club will aim to close a policy year about two and a quarter years after the end of that yaar, with any necessary contingency reserve in place. Annual calls (the insurance premium) are calculated to reflect as accurately as possible each member's anticipated exposure to the risks covered. Each entered vessel is allocated a premium rating, which is normally calculated by combining: - First the cost of a member's vessels under the pool's excess loss reinsurance. This is based on tonnage and varies for specific types of vessels, reflecting how the premium is charged by the reinsuring underwriters to the Clubs in the pool, - Next is added the estimated contribution that the Club will make to the unreinsured part of the pool together with an allowance for general administrative costs; - Finally, the element known as retained premium. This is the amount which it is calculated will be needed to meet the member's anticipated claims in the coming year, less the amount recoverable from the pool or its reinsurers. The manager's aim is to achieve a balance at the end of the policy years between a member's retained premium and unreinsured claims. To help monitor levels of premiums, a typical calculation might be: Acceptable loss ratio = Retained premium Total calls The ratio can vary quite considerably from member to member, and members can adjust the quantum of their retained premium by varying the extent of cover and the level of deductibles. The relationship between actual claims and total calls is called the actual loss ratio:

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Actual loss ratio = Actual claims Total calls As each renewal comes round, the Club can compare the actual loss ratio with the acceptable loss ratio and use this as a guide to adjusting a member's premium rating. A member may pay both an advance call and a supplementary call to his Club. Masters who are involved in their vessel's budgets will note that the advance call, a fairly high proportion of the total annual call, typically between 60% and 80%, is levied at the beginning of the policy year, although it will probably be invoiced in instalments spread over the 'P&I year' which commences on 20 February. About eight months after the end of the policy year, a supplementary call percentage for that policy year is decided by the directors, based on their estimate of the claims record for the year. If the initial estimates were right the supplementary call will equate to the balance of the member's total premium, but it may well be adjusted up or down depending upon the Club's overall claims record for that year.

The Club's cover

Class I cover: The main body of cover provided by P&I Clubs, sometimes called Class I cover, is set out in the Club's rule book which is reissued annually and should be found on board every entered vessel, together with a list of entered vessels and an address list for Club Correspondents. When joining a vessel, a wise master will check whether his vessel is entered for all or only some of the risk set out in the rule book. This information will be found in the vessel's certificate of entry and, in well managed companies, a copy of this will be found on board. The Club rule book is exactly what its title states; it contains the detailed rules governing the application of the insurance cover to the various risks included under Class 1. Most P&I Clubs are prepared to put together a range of cover which precisely matches a member's probable liabilities-and this can vary within different parts of a large fleet. The range of risks covered may include: - Injury, illness or death of crew, passengers and stevedores; - Repatriation of crew and substitute expenses; - Diversion and other expenses incurred in landing refugees, sick persons and stowaways; - Collision liabilities, including excess collision liability; - Pollution by oil or other substances; - Property damage; - Contractual liabilities, including those of customary towage; - Wreck removal; - Cargo loss, shortage and damage; - Unrecoverable general average contributions; - Special Compensation' paid to salvors under Lloyd's Open Form. - Fines; and - Legal and other costs incurred in dealing with these risks. The type and extent of cover offered under each heading is described below in general working language. Some Clubs issue similar user-friendly interpretations of their rules, together with a range of circulars and briefings on specific topics especially when changes occur. Other Clubs issue guidelines for Correspondents which, whilst not exactly in line with the master's needs, provide useful reference. If none of these is on board, it is well worth approaching your Club and requesting it. As usual, before relying on the benefits of membership, it is important to be aware of the obligations. There are not standard warranties, express or implied as in hull insurance, but a number of acts or omissions will prejudice Club membership. - Payment of calls-Clubs will not reimburse claims if calls are outstanding, although some Clubs have the power to set off unpaid calls against claims reimbursement. - Classification and statutory requirements-obligations in relation to class are strict and the effect of a breach of any of these obligations is that the member loses his entitlement to recovery from the Club for claims arising during the period of the breach (irrespective of whether the claims were caused by the breach), except to the extent that the directors otherwise decide. Typically a Club may require that:

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- Every ship in the Club must be classed with an approved classification society throughout its period of entry, except those few vessels (used only in-ports and harbours, not at sea) which are entered on terms that they are not classed at all. - Prompt reports are sent to the classification society of any incident or condition affecting the ship in respect of which the society might make recommendations. The obligation is not limited to matters within the member's personal knowledge, so a failure by a marine superintendent to report damage could result in a breach of this Rule. - The member complies in a timely manner with all rules, recommendations and requirements of the classification society. For example, periodic surveys are required by all class societies and often these will give rise to recommendations for repairs to be completed within a certain time; if the survey or compliance with the repair recommendations becomes overdue the member may be in breach of his cover. - The member agrees to authorise the classification society to disclose to the managers records relating to the maintenance of class of the entered ship, and authorises the managers to inspect such information. - Members are not permitted to avoid or delay compliance with obligations imposed by their class society by changing to another society. The member is therefore obliged to advise the Club managers of any change of classification society and any outstanding obligations at the date of the change. Many Clubs make it a condition of cover that the vessel complies with certain statutory requirements of the flag State, typically those relating to the construction, modification, condition, fitment, equipment and manning of the insured vessel. - Condition surveys-Clubs may well suspend part or all of a vessel's cover if a Club condition survey finds serious defects. Leaking hatch covers are a prime example of a condition which may prompt the Club to suspend cover until the defect is rectified. Such matters need the master's immediate attention. - Seaworthiness-as with hull insurance, the inability to impose an absolute warranty of seaworthiness throughout the voyage is recognised. Linked closely with seaworthiness is the vessel's fitness for purpose, especially in specialised trades such as refrigerated cargoes. As liability insurers the Clubs frequently pay cargo claims to which unseaworthiness is a contributory factor. However, a claim caused by unseaworthiness existing when the voyage begins and within the knowledge of the shipowner would be excluded from cover under most Club rules. The advent of the ISM Code should make it less likely that an owner, or at least responsible manager, can be unaware of such seaworthiness. - Trading limits-these are rare, but if they are imposed within the certificate of entry, written permission is required if they are going to be breached. - Non-admission of liability-this is naturally an important condition for the master to understand and remember. It is important, too, that members of the crew do not make statements which could be construed as admitting liability. It is very much the master's responsibility to ensure that the crew understand this and that they do not let strangers walk, unattended, around the vessel, especially if there has recently been an incident giving rise or likely to give rise to a claim. It is not unknown for the representative of a claimant in respect of cargo or injury to wander into the engineroom in an endeavour to elicit some extraneous evidence which he could use to support a claim that the vessel was unseaworthy at the commencement of the voyage. - Notification-the owner is under a strict obligation to notify the Club's managers of every casualty, event or claim liable to give rise to a claim. If the owner fails to notify the managers or to submit a claim, the claim may become time barred. - Indemnity-although often termed liability insurance, the cover provided is 'indemnity insurance' and as such, the Club indemnifies the owner for the amount of any claim for which the owner has not only become liable, but has actually paid -i.e., the Club reimburses the owner rather than settles the claim. This, as can be seen, can give rise to important cashflow considerations. - Obligation to sue and labour-this obligation may be specifically defined but the owner is always required to act as a prudent, uninsured owner would. The master should be aware of his duties under the relevant rule and should note that costs and expenses typically are only recovered if they are: extraordinary; incurred on or after the occurrence; incurred solely for the purpose of avoiding or minimising liability; incurred with the agreement of the Club. However, if the master considers that he needs to act promptly, this would probably override the fourth condition. It hardly needs to be added that the master needs to keep a careful record of his actions, his reasons for taking those actions and all of the costs involved. 180

Personal injury to or illness or loss of life of crew members

The shipowner may be exposed to such claims in tort or under statute law, although it is more usual for the claims to be made under the crew members' collective agreement or particular contract of employment. The cost of medical treatment and of repatriation is covered, as are the funeral expenses of dead seamen and also the cost of sending abroad a substitute for a seaman who is sick or injured or for a seaman who dies. Where there is a particular employment contract and this provides for unusually generous compensation in the event of death, injury or illness, the shipowner will normally be expected to have cleared it in advance with the Club so that his additional exposure under the contract can be taken into account in the assessment of his premium.

Personal injury to or loss of life of stevedores

This is a frequent source of heavy claims against shipowners particularly in US ports. However, the position was improved somewhat by the introduction of the 1972 Amendments to the Longshoremen's and Harbour Workers' Compensation Act which narrowed the circumstances in which the shipowner, as opposed to the employer of the stevedores, is liable for stevedore deaths and injuries.

Personal injury to or illness or loss of life of passengers and others

The shipowner may be exposed to claims in respect of passengers carried on board his ship in respect of injury, illness or death. These claims may in certain jurisdictions be defeated or limited in amount by the terms of the passenger ticket, but, whether this is so or not in the particular case, the shipowner is covered for this risk. He may also be liable in tort to persons other than crew, stevedores and passengers who come on board his ship for one purpose or another, including surveyors, Customs officials, pilots and so on. Cover in respect of liability to these persons can also be included.

Loss of personal effects

Liability of the shipowner to crew, passengers and others, in respect of loss of or damage to the personal effects of these persons, is also covered.

Diversion expenses

The shipowner may suffer losses through having to divert his ship in order to obtain treatment for an injured or sick person on board or for the purpose of landing stowaways. Although there is no liability here in the usual sense, the Clubs give cover to the shipowner in respect of the basic running expenses of his ship during the diversion, including port charges incurred solely for this purpose. Similarly, the cost of providing food and other necessities for stowaways may be reimbursed to the shipowner by his Club. Several Clubs extend the cover given to stowaways to include the like expenses in respect of refugees who have been picked up by the ship.

Life salvage

Claims for life salvage are rarely made. In order for a life salvage award to be made it is necessary not only for life to have been salved, but also property. In normal circumstances, the claim for life salvage will form part of the arbitrator's award for the property salvage. In the event that the life salvage proportion of the award is not recoverable from the owner's hull policy, the owners may recover from the Club.

Collision liabilities

One-fourth collision liability: The English form of hull policy requires the ship's hull underwriter to pay three-fourths only of the liability of the insured ship in respect of loss or damage to another ship or her cargo as a result of the collision (subject always to the maximum mentioned below). The remaining one-fourth of such liability is insured by the shipowner's Club. This one-fourth usually makes the Club the largest single insurance interest, and in practice the managers of the Club will usually be asked by the hull underwriters to handle the issue of collision liability with the other ship and her cargo on behalf of all the underwriting interests. It is also usual 181

for the Club concerned to give, on behalf of the insured shipowner, any necessary guarantees to the other ship and her cargo, the Club taking appropriate counter-security from the insured shipowner and also from the hull underwriters (or brokers) to the extent of their respective interests. Other risks excluded from the running down clause: There are a number of important exclusions from the liability of the hull underwriters in the running down clause (RDC). For instance, wreck removal liabilities are excluded, as is consequent damage to shore side structures or to the cargo in the insured ship herself and pollution from and loss of life or personal injury on board any ship involved. All those liabilities are insured by the shipowner's Club. The Club cover includes, and the hull underwriter's cover excludes, not only the wreck removal of the insured ship herself, but also the removal of the wreck of any other ship involved. The same is true of liabilities incurred by the shipowner not in tort but because of the existence of a contractual obligation, as the words in the running down clause 'pay by way of damages' have been interpreted as being restricted to payments in respect of tortious liability. Thus in Furness Withy v. Duder payments made by a shipowner for collision damage to a tug were held to be unrecoverable from hull underwriters where the collision was caused solely by the negligence of the tug and liability arose under the special terms of the towage contract. The shipowner may in such circumstances recover his payment from his Club (although in the case of towage other than ordinary harbour towage, by special arrangement only). It may be asked why the Club cover should include the insured shipowner's liability to cargo carried in his own ship, when the Club's cargo cover is conditional upon the The Hague or Hague-Visby Rules being included in the contract of carriage and these Rules exclude claims by cargo in respect of the negligent navigation of the carrying ship. In most jurisdictions it is indeed unlikely that the owner of cargo in the insured vessel could succeed in a claim against the owner of that ship in a collision situation. The cargo owner may make a claim against the non-carrying vessel in accordance with her degree of blame, if any, but cannot recover either from the carrying ship or from the non-carrying ship in respect of that part of the blame attributable to the carrying ship. However, in the US there is a well established principle, the 'innocent cargo rule', to the effect that cargo may recover from the non-carrying ship the whole of its loss, provided only that there is some degree of blame, however, slight, upon the non-carrying ship. The non-carrying ship is then entitled to recover over against the carrying ship in respect of the carrying ship's degree of blame for the collision. In this indirect manner the owner of the carrying ship may become obliged to pay part of the claim of the cargo carried on board his own ship. As the shipowner would be unable, because of the terms of the last sentence of the running down clause, to recover in respect of this payment from his hull underwriters, the Club cover fills that gap. Excess collision liability: Under the terms of the running down clause, English hull underwriters and those writing hull risks on similar terms are not obliged to make payments in respect of collision liabilities beyond a sum representing three-fourths of the ship's insured value under the hull policies. In certain countries, the extent of the hull underwriters' interest maybe even smaller where the insured vessel herself is also heavily damaged or lost, as the local policies do not follow the scheme of the RDC in establishing for collision liability a fund separate from the ship's basic fund, but instead provide that the hull underwriter may stop paying altogether when he reaches the insured value of the ship. The common theme, in any event, is that at some point the hull underwriter may limit his payments to the insured shipowner in respect of collision liabilities. The overspill beyond this limit is picked up by the shipowner's Club. In view of the possibility of a ship of low insured value colliding with one or more ships of very high value, this part of the Club cover is more important than it may at first sight appear. As the Club's cover under this head could be increased unfairly by a decision of the shipowner to insure his ship with his hull underwriters for an artificially low value, the Clubs provide in their rules that a claim in respect of excess collision liability can be reduced proportionately if, in the opinion of the directors of the Club, the ship has not been insured with her hull underwriters for her proper value.

Loss or damage to property other than cargo

The Clubs provide cover for damage caused by contact between the entered ship and property belonging to other persons, including docks, wharves, locks and so on. The shipowner will not need to insure with his Club for this risk where his hull policy accepts it, as is the case, for example, with the German and Scandinavian types of hull policy, although he may still wish to have Club cover for the excess above any limit imposed by the hull policy. 182

The Club cover also extends to damage caused by the entered ship to other ships and their cargoes without any actual contact, as, for example, by causing damage to a moored vessel by passing her closely at excessive speed.

Pollution

It is well known that there has in recent years been a massive increase in the exposure of shipowners to liability claims in respect of pollution caused by cargoes from their vessels, in particular cargoes of oil. Most such liabilities are imposed by international convention, domestic statute or common law, but some have been voluntarily assumed by shipowners in accordance with the Tovalop scheme. , All these liabilities are insured by the Clubs, although with a limit in respect of oil pollution claims which presently stands at US$500m each entered ship each accident or occurrence. This oil pollution limit does not apply only to claims that are made directly against the entered ship by those who suffer the oil pollution, but also embraces those which come indirectly, as, for example, those which form part of the collision claim of another vessel (see chapter eleven).

Towage contract liabilities

Clubs provide cover in respect of liabilities which may be incurred during ordinary harbour towage and may by special arrangement offer cover on appropriate terms for situations beyond harbour towage. They also give cover for liabilities under the terms of the usual contracts for towage by the entered ship of another ship or object.

Liabilities under contracts and indemnities

Shipowners are often required to give contractual indemnities in order to secure services required by their vessel such, for example, as the use of a floating crane. Cover in respect of any resulting liability can be obtained from the Clubs in most such situations provided that the Club has had the opportunity to review the contract it can extend the necessary cover or arrange additional cover for any resulting liabilities.

Wreck liabilities

The Clubs give cover for the liability which a shipowner may incur in respect of the raising, removal, destruction, lighting or marking of the wreck of his ship. From the cost of the operation will be deducted the value of the wreck or any part thereof that is recovered as a result of the removal operation.

Cargo liabilities

A very important part of the cover provided by the Club is that which relates to the liability of the shipowner under his contract of carriage to pay for any loss of or damage to cargo. Unless prior arrangements are made with the Club managers, this cover will be given on the basis that the shipowner's contract with the owner of the cargo is on terms at least as favourable to the shipowner as the provisions of The Hague or Hague-Visby Rules. The cover extends beyond the sea leg of the carriage and thus will protect the shipowner throughout a combined transport contract from an inland point to another inland point, provided only that the sea leg is performed by an entered ship. The shipowner may recover from his Club any additional cost incurred by him in discharging or disposing of damaged cargo. Club rules impose restrictions on the cover in respect of deviation from the contracted voyage (for example an unreasonable departure from the agreed itinerary or the shipment on deck of cargo with underdeck bills) and in respect of other departures from the proper carrying practice, such as the delivery of cargo without production to the master of the relevant bills of lading, or the issue of a clean bill of lading for cargo which is patently damaged (see chapter six).

Cargo's proportion of general average or salvage

As an extension of their cover for loss of or damage to cargo, the Clubs will pay to the shipowner contributions to general average, special charges or salvage which the shipowner would have been able to recover from cargo interests had he not disentitled himself from so recovering by committing some breach of his contract of carriage. 183

Certain expenses of salvors

Clause 1 (a) (ii) of the Lloyd's Standard Form of Salvage Agreement (1995) provides that in certain circumstances the owner of an oil tanker may be required to reimburse a contractor who attempts to salve that tanker for his '. . . best endeavours ... to prevent or minimise damage to the environment.' These expenses, in contrast with ordinary salvage awards made under the Lloyd's Form or under general maritime law, are not recoverable under hull insurance policies, and the Clubs have agreed to insure shipowners for them having in mind the interests of the Clubs in the avoidance of oil pollution incidents.

Fines

A variety of fines may have to be paid by a shipowner, either directly or because of an obligation to reimburse his seagoing employees in respect of fines levied on them within the scope of their duties. Most of these come within the cover of the Clubs.

Legal costs

The Clubs also pay for legal costs and similar expenses which a shipowner may incur in dealing with a liability insured by his Club. In practice, the defence to the claim against the shipowner is usually conducted by his Club's managers or correspondents, who engage any lawyers, surveyors and other experts who may be required and who are paid directly by the Club.

Omnibus cover

In recognition of the fact that the list of liabilities to which shipowners are subject is constantly increasing in unforeseen ways, the rules of the Clubs give their directors discretion to pass for payment certain claims that are not expressly covered by any of the heads of cover in their rules, provided only that they are within the general scope of what it is the Club's purpose to cover and are not expressly excluded elsewhere within the rules. This is a most unusual provision and is a reminder that the Clubs exist, not as profitmaking insurance companies, but as organisations for the benefit of the shipowners who are their members. The 'omnibus' rule gives the opportunity to the directors to move rapidly in response to the needs of the members, particularly where a new risk suddenly arises or when an exceptional case appears to fall outside the express provisions of the rules.

Inter-Club New York Produce Exchange Agreement

In chapter six, the analysis of the NYPE contained reference to the Inter-Club NYPE Agreement for the apportionment of cargo claims. This was revised and reissued in September 1996 and the following new features should be noted: The definition of cargo claim(s)-as 'claims for loss, damage, shortage (including slackage, ullage or pilferage), over-carriage of or delay to cargo . . .'has been broadened and now includes related Customs dues or fines, interest and certain costs. Claims arising under Through Transport or Combined Transport bills of lading are included but only when it is established that the cause of the loss or damage occurs between and including loading and discharge of the chartered vessel. Claims arising under other types of contracts of carriage, such as waybills and voyage charterparties are also included. The new time-bar provision also caters for the possibility that the Hamburg Rules will apply. It should be noted that the cargo responsibility clause in the charterparty should not be materially amended so as to '. . . make the liability, as between Owners and Charterers, for Cargo Claims clear'. Thus, the words 'and responsibility' in clause 8 of NYPE (or Asbatime), making the master responsible for cargo handling is not a material amendment although the addition of 'cargo claims' to clause 26 of NYPE (or clause 25 of Asbatime) will prevent the Inter-Club Agreement apportionment coming into affect even if the charterparty is made subject to the terms of the Agreement. Written notification of a claim must be given within 24 months of the date of delivery (or 36 months if the Hamburg Rules apply) or recovery under the Agreement will be deemed to be waived and absolutely barred. Cargo claims shall be apportioned as follows: (a) Claims in fact arising out of unseaworthiness and/or error or fault in navigation or management of the vessel: 100 % Owners 184

save where the Owner proves that the unseaworthiness was caused by the loading, stowage, lashing, discharge or other handling of the cargo, in which case the claim shall be apportioned under sub-clause (b). (b) Claims in fact arising out of the loading, stowage, lashing, discharge, storage or other handling of cargo: 100 % Charterers unless the words 'and responsibility' are added in clause 8 or there is a similar amendment making the Master responsible for cargo handling in which case: 50 % Charterers 50 % Owners save where the Charterer proves that the failure to load, stow, lash, discharge or handle the cargo was caused by the unseaworthiness of the vessel in which case: 100% Owners (c) Subject to (a) and (b) above, claims for shortage or overcarriage: 50 % Charterers 50 % Owners unless there is clear and irrefutable evidence that the claim arose out of pilferage or act or neglect by one or the other (including their servants or subcontractors) in which case that party shall bear 100 % of the claim. (d) All other cargo claims whatsoever (including claims for delay to cargo): 50 % Charterers 50 % Owners unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of the one or the other (including their servants or sub-contractors) in which case that party shall then bear 100 % of the claim.

Class H and other cover

Class 11: Class II cover or freight, demurrage and defence (F, D & D) cover is generally available from within the P&I Club against the payment of a separate premium or from an independent but related Defence Club. The benefits of entry into a Defence Club are twofold. Firstly, legal advice is provided and secondly cover is provided in respect of disputes in which no other insurer should properly bear the shipowner's legal costs, such as disputes with: hull and war risk underwriters; under charter parties (such as speed and consumption, freight or hire claims and, of course, demurrage); with agents; over repairs; and in connection with new buildings. War Risk Clubs: Class I P&I cover usually excludes war risks and consequently it is common for owners to attach to their war risk (hull) insurance policies a clause giving cover for P&I war risks. Alternatively, they may enter the vessel into a war risk club or with a P&I Club which offers a separate class of cover specifically for war risks. Strikes cover: May cover shore strikes or crew strikes or both and provides against loss of hire or, at a lower level, cover for daily running costs when vessels are delayed by strikes, lockouts, stoppages or restraints of labour. Loss of hire: Provides a similar cover for a vessel delayed or out of service as the result of a marine casualty. Charterer's cover: A time charterer can obtain cover under any of the categories listed above but may also take a special cover in respect of potential liability for damage to the vessel itself (e.g. damage caused by charterer's stevedores). Through-Transport Club (TTClub): This Club provides specialist cover for the NVOCCs (non-vessel owning common carriers), freight forwarders, port authorities etc in respect of their third-party liabilities.

ACKNOWLEDGMENTS 185

GREAT HELP was received in preparing this chapter from Derek Prince and his colleagues at Bain Hogg, as well as Christopher Barstow at Richards Hogg. Roger Nixon and Nigel Carden of the UK Club contributed significantly to the editing of this chapter.

REFERENCES

Analysis of Marine Insurance Clauses-ITC-Hulls. R. H. Brown, Witherby & Co. Analysis of Marine Insurance Clauses-ITC-Cargo. R. H. Brown, Witherby & Co. ITC Hulls 1/1 1195-Comparison with ITC Hulls 1983. C.J. Barstow, Richards Hogg Ltd. P&I Clubs-Law and Practice. Hazelwood, LLP. Chalmer's Marine Insurance Act. 1906. Butterworth & Co (Publishers) Ltd.

ANNEXES FOR CHAPTER 7

- ILU Marine Policy-March 1991. - Institute Time Clauses-Hulls 1/ 11/95. - Certificate of cargo insurance.

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Chapter 8

CONTRACTS FOR PURCHASING SUPPLIES AND SERVICES Purchasing stores and supplies-selecting a repair yard-management contracts. The introduction of on-board management is increasing the shipmaster's involvement in purchasing beyond the traditional requisitioning of stores. There is little doubt that an effectively run on-board purchasing system can improve both efficiency and job satisfaction while, at the same time, saving money. IT IS UNLIKELY that any vessel will be operating without having a purchasing system in place; whether the purchasing system is effective and user-friendly is a different matter. The intention in this chapter is to give a general description of how purchasing systems work, together with a brief overview of the law of contract as it relates to purchasing. The chapter will follow the natural progression of a purchase, starting with requisition and the request for quotations, followed by placing the purchase order (identifying the point at which an enquiry becomes a firm contract), and receiving the goods. The second part of the chapter addresses some of the considerations involved in negotiating and managing a supply contract. Using a repair contract as an example of one of the major contracts likely to be managed from on board, selection of the repair yard, some of the more important terms and conditions and the management of the contract are all explored.

Purchasing stores and supplies Purchasing contracts

Whilst the essence of all purchasing is similar, the detail differs according to the purpose of the transaction. A majority of shipboard purchases will be MRO purchases, that is maintenance, repair and operating supplies. These are typified by the very large number of individual items which make up the total stores stock. Excess items in stock represent dead money, funds that cannot be used for more pressing purposes-such as purchasing bunkers for the next positioning voyage without incurring an overdraft and the resultant interest payments. On the other hand, having to wait for essential spares to be delivered can result in off-hire and the consequent loss of income; in the extreme, it could cause a vessel to miss its cancelling date and lose a charter. It is, therefore, essential to know which stock parts are potential 'ship-stoppers' and which have long lead times or are difficult to source in certain parts of the world. Also important factors are the value of the item and its durability. Essential though an item may be, it is economically inefficient to hold more than the basic minimum requirement, especially if the item has a high durability. A ship's spare propeller is an excellent example of this area of decision making. Definitely a ship-stopper if it fails, unquestionably a long lead item but infrequently required and a lot of money to tie up. Hence the decision to be made: one spare propeller per vessel; one between sister ships; two in a three ship series; but what to do if you purchase a vessel second-hand without a spare propeller? The answer generally lies, consciously or otherwise, in the risk appraisal assessment for that vessel or operation. If the vessel is fitting into an highly scheduled service-for example, a ferry or container operation-the risk assessment (applied common sense plus a hard look at the finances) may well result in the decision to order a spare propeller; if a tramping bulk carrier, possibly not. Fortunately, spread across the wide range of a vessel's stock of stores and spares, the critical items tend, mathematically, to follow a standard Perato distribution. In other words, the items which the master, chief engineer and chief officer have to follow most closely are relatively few and can be depicted in Venn diagram form as shown here.

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A slightly different approach can be taken for general consumable stores which are more closely related to MRP or material requirements planning for production line manufacturing-and the purchasing, or at least the consumption of, catering supplies may sometimes make this comparison appear quite real! For the control of consumable stores, gross requirement (for the period under consideration), rate of consumption, free stock, stock due and net requirements are the terms which concern the stock controller. As mentioned in chapter 2, planning has an important role to play in achieving the most cost effective purchasing pattern and a lot of the requisite information can be generated from raw data input by an efficient management information system (see, chapter 3). For a simple example; consider a handy-size product carrier which has just traded trans-Pacific, mainly operating at a steady speed and on one generator and with a low lube oil consumption. Lube oil is relatively cheap in Singapore but what stock should be stemmed when the future trading pattern might change? A further few months trading across the Pacific would indicate a low stock purchase, conserving cash, whilst a change of trading area leading to a similar period trading from port to port during the winter in the Mediterranean could indicate a benefit from a higher stock intake. In a similar way, a large purchase of deck paint, just because it is storing time, may not be the wisest use of funds just before a winter season in the North Atlantic. Food can be considered in a similar way; a substantial purchase of light foods popular in tropical climates, even at extremely attractive prices, may not prove cost effective in the long run if the vessel is due to trade in a northern winter for the next few months.

Requisition

For many years it has been traditional for the control of the purchasing operation to be held within the head office. The vessel's role was reduced to submitting a requisition with little or no knowlecrge of the cost of the items involved. These requisitions were frequently checked against budget by a superintendent or purchasing manager and adjusted after careful thought and consideration so that the stores on board often failed to match needs and an elaborate game of '. . . if I double my order for this, will I get the amount I need?' resulted. It did not only happen at sea: a famous penny store was once reputed to have a 103-year stock of lime green zips; and the tragic 1995 earthquake in Kobe, Japan, illustrated one of the dangers of a one source just-intime policy for car parts or computer chips. The tighter margins under which shipping operates today, coupled with the much greater ease of communication, is pushing more and more of the purchasing responsibility towards the sharp end. In some cases, the vessel has an allowance for direct purchase of a range of consumable items, including galley stores and supplies. In other cases, and this is most prevalent on ferries operating 188

within a limited area, total purchasing responsibility, subject only to normal secondary authorisation requirements for high value items, has transferred, together with the operating budget, into the responsibility of the shipmaster and his heads of department. It is no longer somebody else's fault if you have 100 paint brushes and no thinners. The most effective person to initiate a purchase requirement is often the user, although a wise master will ensure that he has a back-up system and will keep a close eye on his ship-stoppers. One way of achieving this is to build a stores status item into the agenda for the regular management meetings. The person who requisitions stores may well not be the person who: 1. Has the authority to authorise purchase; 2. Knows where to make the purchase most cost effectively; 3. Will undertake the purchase operation (although he should be involved in checking receipt, quantity and quality); and 4. Is most unlikely to be the person who will effect payment for the transaction. Therefore, a system is needed to ensure that the best decision is made every time and all involved should know its basic principles and understand how it works. The first stage of the requisition process is to decide who is responsible for maintaining the optimum stock level of each particular item. The person concerned should also know the cost of the item(s) under his or her control together with an indication of the budget allocation or target consumption for the forthcoming voyage or budget period. This can also be an effective way of involving both junior officers and petty officers in the management of the vessel and, used properly, can result in useful ideas for economies. As already mentioned, it will be necessary to ensure that heads of department (HODs) keep a careful watching brief on the various stock holders within their department. All requisitions should be consolidated into departmental requirements at this level. Most companies will have their own stores requisitioning and purchasing forms, but a basic purchase requisition form can be a very simple document (figure 8.2). Due to the problems inherent in ordering stores for a moving vessel, it is important to indicate the level of priority of the requisition in a simple way. It may also be useful to add an additional column giving the budget price for the item.

Inviting quotations and selecting suppliers

In many cases, the vessel's owners or managers will have supply contracts in place for major or common stock items as these can ensure quality and availability as well as securing volume discounts. The next stage down from this is for the company to have two or more recommended suppliers. This means that, although it will be necessary to invite quotations, quality, contract and payment terms will be of less significance. Finally, there will be those, mainly locally sourced, items for which full competitive tenders are required. Victualling supplies and pantry stores, for example, generally fall into this category. The request for quotations can be sent directly to the potential suppliers (probably the best course of action) or through the agent, instructing him to secure, usually three, independent quotations. In planning a request for quotations, the golden rule is to set out your request clearly so that, so far as possible, all suppliers quote on a like-for-like basis.

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Full compliance is rarely achieved but a request for any special terms or variations to be quoted separately helps. It may also produce an interesting and cost effective alternative to your original request. Obviously delivery details are particularly important in the case of ship's stores: if the vessel's schedule is uncertain, it may be advisable to ascertain the latest date for a firm order so as to avoid the danger of cancelling charges. It is also important to ensure that the following are known: general and any special terms; terms and currency of payment; all delivery costs, if the stores are to be air freighted, this can be significant and is generally an item best handled by the purchasing team ashore; and any special taxes or export dues. Once the quotations have been received they will have to be analysed and a supplier selected. Whilst price is generally the main determinant, quality, availability and terms and conditions all affect the final decision. It is a good discipline to involve both your HODs and the crew member who originated the requisition and get them to state briefly the basis of their purchase decision.

Orders and contracts

Once the decision to purchase has been made, it must be authorised. Levels of authority for purchasing stores should be clearly stated and well understood. The ability to authorise expenditure to a certain level within his own area of responsibility can give a junior officer a great sense of job satisfaction. If this freedom of action is allowed, the shipboard control system must be effective and capable of ensuring that all purchases are recorded so that the vessel's performance against budget can be monitored (see chapter three, budgets and management accounts). For large value items it is not unusual for both the master's and the HOD's signature to be required and in some cases it may be necessary to refer back to managers or owners for confirmation. Great care must be taken when placing a purchase order to ensure that all requirements are stated clearly. The term 'as per quotation' must be used with great caution, and in many cases it is better to set out the requirements in full. If the order is the resuft of a hard negotiation on price, make sure you are ordering what you have negotiated; many suppliers have recovered their margins as a result of a carelessly worded purchase order. At its simplest, a purchase order should contain: 1. The words 'Purchase order' clearly stated; 2. The instructions 'Please supply' or 'Please supply the undermentioned; 3. Name of supplier with full address; 190

4. 5. 6. 7. 8. 9.

Name and address of purchasing organisation; Date of order; Full description of what is required, with reference to earlier quotations if applicable; Quantity to be supplied; Delivery date; Delivery address (which could be 'as per agent's instructions') together with the name and address of the port agent; 10. Price and discount. 11. Terms of payment and address for invoicing; and 12. The order number and a request for confirmation of order. One question remains: once the supplier has received the purchase order (as opposed to when the buyer has dispatched it), is a firm contract in place? This question, together with the general terms and conditions for purchase contracts are discussed later in this chapter.

Receipt of the goods

The golden rule when receiving and checking stores is: Always check incoming stores against the purchase order, never against the delivery note.

Quantity and quality should be checked so far as packaging and the availability of time and staff allow. For large orders, delivered during busy periods, it may be worth requesting a professional tally clerk from the agent to act on behalf of the vessel. The terms 'said to contain' and 'content and quality/quantity unknown' are often used. The follow-up after stores are received is easily overlooked, but is an important part of the purchasing process. If on-board budgets are being kept, a journal entry coding and covering the expenditure must be made in the management accounting system (or, in the absence of an invoice, an accrual-see chapter 3). Agents and/or owners/managers must be advised of the expenditure, together with any items that might be in dispute. Particularly good or bad service by a supplier should also be advised to owners/managers (and the local agent) and a record kept on board for future reference. Finally, consideration should be given to stowage. New stores should not be dumped at the most convenient point just inside the storeroom doors. Crew members should be made aware of the basic principles of stock control and it is interesting to note that the level 2 vocational qualification relating to the British EDH (efficient deck hand) contains elements of stocktaking.

Terms and conditions in supply contracts

For many items, suppliers have a worldwide network and volume discounts can be achievedlubricating oil and paint are examples-and a company contract will be in place. In such cases it may only be necessary to call off the required stock, although it is wise to state each time that this is done on the basis of the company's negotiated terms and conditions. Generally, a purchase will be contracted on the basis of suppliers' terms and conditions, although to be effective, these must be made known prior to contract, it is not sufficient for the suppliers to present them with his delivery note. This in turn raises the question of when the purchase contract actually comes into being. 1. 2. 3. 4.

A standard sequence of events would be: Vessel raises enquiry - An invitation to quote Supplier quotes An invitation to treat Vessel places order An offer to buy Supplier acknowledges and confirms A firm contract is only effected at this stage.

It is at stage 4, not stage 3, that the contract becomes legally binding. It is frequently difficult in these circumstances to ascertain exactly what the exact terms and conditions of a contract are and how they will be interpreted in the event of a dispute. A level of guidance can be gained from the International Ship Suppliers Association conditions, which, together with explanatory notes, can be found in the annex to this chapter. 191

Storing problems are not all one sided, as can be gathered from the ISSA's journal, and the amount of space devoted to the problems of arresting ships and the potential amendments to the International Convention for the Unification of Certain Rules Relating to the Arrest of Seagoing Ships 1952 (see also chapter 12 regarding liens, maritime and possessory). Looking at the problems from the ship suppliers' point of view, some of the more important issues are: - With whom should the ship supplier conclude the contract? For well-established liner companies, the supplier has no problem, but in the case of a vessel in bareboat, timechartered and sublet on a voyage charter, managed at arms length with a crew supplied by even if the agent places the stores orders, it is essential that he knows on whose behalf he is acting and, consequently, the master must be sure of his authority before placing an order. - How should contracts be formulated? Reference is again made to the ISSA conditions. As mentioned, a good measure is whether the terms are 'fair and reasonable' but, as will be apparent, there is much scope for variation within national interpretation. - What should the supplier do when the stores are physically delivered? The simple answer is get a legally binding signature. This is more difficult than it sounds, as the signature of the first engineer or third mate is of doubtful value except as proof of delivery. What the supplier will want is a declaration stating on whose behalf the stores have been ordered (and received). If the ship supplier comes knocking on the master's door at an inconvenient time for a relatively insignificant stores delivery which should have easily been dealt with by the duty officer, it is probably because the supplier is well aware that it is only the signature of the master that is legally binding on his principal. - Which rights, in addition to those in the contract, are granted by applicable law and/or international convention? Again this brings the supplier back to the chequered history of the convention relating to arrest and also to the 1967 Brussels International Convention for the Unification of Certain Rules Relating to Maritime Liens and Mortgages. Whatever help the supplier may receive from these conventions in the event of no payment, he is certainly contemplating a long and expensive process. - How should disputes be settled? There are a number of courses of action from full-blown Court cases to ADR or 'alternative dispute resolution' (a variation on arbitration which endeavours to reach a mutually agreed solution). Thus, the apprehensions regarding storing in a strange port are not all with the vessel. The supplier needs to know, and it is reasonable that he should, who is the principal on whose behalf the vessel (formally, the master) is ordering the stores. The supplier needs as much time as possible to organise the delivery-many are the stories they can tell of unnecessary last-minute panic deliveries-and he needs a clear specification. The master in turn needs clear statement of price against the stores specified, statement of any delivery cost or taxes and, importantly, the conditions in the event of cancellation. It is also worth ascertaining whether the supplier is a member of the ISSA.

Repair and other service contracts

Selecting a repair yard Although drydock and repair contracts are generally negotiated by superintendents or management staff, some companies have delegated this responsibility to the master, supported by the chief engineer. This includes both preparing the specification, issuing invitations to tender, analysing quotations and negotiating the contract as well as the overall cost and final settlement. Even if not involved to this extent, the master should, in conjunction with the assigned superintendent, project-manage the drydocking or repair. It is not a time to hand your vessel over to others.

Criteria involved

The selection of a repair yard will normally be made against the following criteria: 1. Technical ability Does the repair yard have sufficient technical ability to undertake the work specified in the repair specification? Is the vessel requiring, for example, extensive steel work and fabrication or is the main concern a high level of engineering capability? Repair yards can vary considerably at what they are good at and the availability of different trades at any one time. 192

2. Work period Is the work period quoted reasonable? Is it likely to be weather affected? What other vessels are under repair or due for repair? The arrival of a cruise liner or large tanker may well pull away resources allocated to your vessel if you are not careful. Your local classification society surveyor or agent may be able to give you some insight-but, remember, they want your work too. 3. Unit charge Is the estimate competitive-are you comparing like with like? For example, on a well found vessel, a quote for 'opening up, inspecting, overhauling and closing' deck valves may be satisfactory and reflect a competitive price. If the valves are known to be in a poor state of repair, much more needs to be known about the cost of stripping down, replacing parts, etc. It is vital to understand (or specify clearly) what lumpsum price covers. Does, for example, the cost quoted cover reinstatement to an acceptable standard? The cost calculations must also include auxiliary costs such as port dues, services and, if payable, taxes. If they are not included by the repair yard, ensure that the agent provides these costs and they are incorporated. Additional insurance costs are another potential extra cost. 4. Location Can the vessel be brought to the repair yard without undue deviation? What are the associated bunker costs? Hull underwriters, who may be paying for part or all of the repair, will be interested in all these decisions, as may a mortgagor.

Terms and conditions

As in all commercial negotiations, each side will endeavour to secure the contract on their own terms and conditions, and repair yards generally have their own contracts. Some of the points to bear in mind are set out below. Using common contractual terminology, the repair yard is referred to as the contractor and the owner/vessel as the company. 1. Clarity of wording The wording of contractual clauses must be entirely clear. If the meaning is not clear, a clause will be construed against the party seeking to rely upon it. This is particularly important in relation to a clause which seeks to restrict liability. If in doubt, always ask for clarification: 'I understand this clause to mean . . ., it that your understanding too?' orjust 'What does this mean in practical terms?' can save a lot of grief later; and do remember to keep notes of any meeting. 2. Incorporation of clauses If 'standard terms and conditions' are referred t6, it is vital that they are seen and understood before they are accepted and that they are properly incorporated in the contract. If particular additional clauses are negotiated, not only must they be properly incorporated but they must be consistent with the standard terms or it must be made clear which provision takes precedence. 3. Unfair terms Under English law, and it is important to know what law regulates the contract, it is not possible, by reference to any contract term, to exclude or even restrict liability for death or personal injury resulting from negligence. Furthermore, liability for any other type of loss or damage resulting from negligence may not be excluded or restricted unless the provision is 'reasonable'. The same applies both to any liability as a result of breach of any provision in a set of standard terms and conditions and to a provision restricting the time during which a claim may be made. Whether a term is 'reasonable' will depend on the circumstances. It is vital that clauses satisfy the 'reasonableness' test; if they do not, the entire clause will be ineffective. A clause which seeks to restrict liability to an unreasonable extent will therefore leave an exposure to unlimited liability. Whilst English law is frequently written into contracts, these factors do not have full impact where the only connection with English is the choice of law. It may, therefore, be prudent to seek advice through head office to check if there are any peculiarities in the law of the country in question, ahead of the negotiation. However, the best approach to negotiating a repair contractand to most contracts-is that of good commercial common sense tempered with reasonableness. 4. Availability Are there any subjects or escape clauses which could, for example, delay the drydock stem or the progress of work (if the contractor saw a more lucrative emergency repair coming over the

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horizon)? Labour may be drawn off, but this becomes more critical if your repair is dependent upon an item of specialist yard equipment. 5. Liability for consequential loss It is common to see clauses limiting liability for ‘consequential' or 'indirect' loss. Such clauses may be particularly important in the context of pollution or loss of profits incurred due to delays or negligent work. The vast majority of such clauses as currently worded do not have their intended effect. Very precise wording is required if liability for consequential or indirect losses are successfully to be excluded or restricted. 6. Time and liability for loss of hire Is the time quoted in running days, weeks-days or working days? What are the working shifts and the overtime rates? Claims for loss of hire can be substantial and the contractor will endeavour to protect itself. However, the usual clause excluding liability for 'consequential loss'. will not generally be enough to protect a contractor from such a claim. If the company is covered by loss of hire insurance, that may well be the company's first recourse and it is the insurer that will then seek redress from the contractor. Nevertheless, the master and the notes which he kept relating to the contractual negotiations and the facts at the time will form a prime part of the insurer's evidence (see subrogation, chapter seven). 7. Change orders and additional work These will inevitably occur and it is vital that they are carefully controlled and properly authorised. The contract must state clearly how additional work is to be authorised and charged and how the work will, or from the compatly's point of view should not, affect the overall contractual repair time. The regular daily meeting is a good time and place to clarify and agree extra work requirements, but there should be enough flexibility in the system for the night duty officer to agree minor amendment on the spot if necessary to maintain the flow of the work. 8. Subcontractors The terms and conditions under which the company's own subcontractors can undertake work need to be clarified. The contractor will require them to comply with the contractor's health and safety policy and the master/chief engineer have a responsibility to ensure that their subcontractors are aware of this. Similar considerations are relevant if the crew are to be allowed to carry out maintenance or repair work. The contractor's subcontractors are the responsibility of the contractor and they must operate within the terms and conditions of the main contract. If the contractor owns or subcontracts tugs, the tugowner may be able to limit liability to a much greater extent than envisaged under the repair contract-which is where the company should be able to turn for redress in the event of damage. 9.Costs and conditions of payment. It is important to ascertain the exchange rate which the yard is using if quoting in a non-national currency and the relationship of that currency to your operating or budget currency. Check whether -certain sub-contractors will expect payment in a different currency. Credit of up to 90 days can often be negotiated for part of the payment -e.g., 40% on completion; 30% after 45 days; 30% after 90 days. This has the dual benefit of providing an element of guarantee for the work done. The availability of credit will, to a great extent, reflect the perceived status or known payment record of the company. In any case the starting point is very much that he who does not ask, will not receive (note, however, the comments in chapter 12 regarding the repairers' right to a lien). Ensure that you understand how any dispute is to be handled. Since disputes are likely to be of a technical nature, it might be sensible to opt for arbitration rather than recourse to the Courts. However, some arbitration procedures are painfully slow and it might be wise to seek advice.

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10. Domestic facilities The cost and availability of all domestic facilities, ranging from shore electric supply to garbage removal, should be clarified at an early stage and included as part of the contract. 11. Health and safety It is the responsibility of the contractor to have an effective safety organisation. It is also the responsibility of the company to ensure that all their staff (and subcontractors) are aware of it and comply with it. Make contact with the contractor's safety manager, find out how the emergency services operate and ensure that the crew and all visitors are aware of the particular dangers of a vessel under repair and are wearing appropriate clothing. 12. Cancellation Stems for drydocking are, by the nature of a vessel's operation, initially made on a provisional basis. A good understanding of the terms and conditions relating to the firming of the contract and, if necessary, of cancellation procedures is important. 13. Reinstatement and regulations/responsibilities After any work, it should be the contractor's responsibility to ensure reinstatement to previous conditions within the requirements of class and relevant statutory regulations. 14. Trials Especially if major engine repairs are scheduled, the organisation, costs and requirements for seatrials must be clearly agreed. 15. Guarantees Usually difficult to secure, the best guarantee is frequently the deferred portion of the payment. 16.lnsurance Ensure that the contractor has adequate insurance in place and ascertain what it covers and, more importantly, what it does not cover. Advise, through your company, your hull underwriters, with a brief description of the work to be done and any gaps in contractor's insurance which you consider significant. These points are by no means exhaustive but are intended to put the master in the right frame of mind for a successful contractual negotiation with a supplier. Keep copies of contracts for future reference and endeavour to secure the contractor's contractual terms as early as possible before commencing the negotiation,

Placing and managing the contract

Chapter two contains some guidance on negotiating techniques and suggestions on organising the shipboard team for a project such as this which must be Properly planned and managed if maximum value for money is to be achieved. Time and care in preparing the specification is always well spent; the aim is to ensure that all contractors respond on a like-for-like basis although this is almost impossible to achieve fully. Start by grouping the repair items into natural areas of work, not forgetting the importance of ancillary costs and support services. The first review of received quotations, as well as discarding obviously non-competitive repair yards, should identify areas requiring clarification which will almost always be of the '. . . does this price include ... ?' variety, but may well also confirm, or otherwise, the availability of essential equipment and services. Once the master is satisfied, or as satisfied as he ever will be, with the basic information, a comparison table can be drawn up (the one shown in Figure 8.4 is based on a major refit for a Panamax bulk carrier) apply a risk assessment (see chapter two). Some of the tests which the master may wish to apply are: - Is a particularly low quote in one area likely to be maintained, is it genuinely based on low labour costs or efficient work practises? - Which has priority: time, cost or quality and how do you rank the repair yards against these criteria? - What currencies are involved, what is the potential danger from exchange rate fluctuations? - How precise have you been able to make your quotation, which repair yard is likely to be most flexible with respect to changed orders-and extended time in drydock? - What knowledge do you have and what is your assessment of the yard's terms and conditions? - Who on board (or on a sister vessel) has recent knowledge of any of the repair yards?

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Once the decision is made, and clear authority has been given by owners/managers if required, the contract can be placed, bearing in mind the sequence of events leading up to the placing of a firm contract defined at the beginning of this chapter. Remember the unsuccessful tenderers; they will have put in a lot of work responding to the enquiry and your company may need to use their facilities at some time in the future. An expression of thanks for their tender and, if possible, a brief explanation of why they were not successful will never go amiss.

In all contractual negotiations, never forget the importance of the validity date and time on an offer Well before arrival, the master should study the repair specification in conjunction with his HODs. Look for problem areas and bottlenecks. It may be useful to draw up a simple flow diagram as illustrated in figure 8.3, so that resources can be allocated to the critical areas. Consider how best to deploy staff, bearing in mind their individual attributes and strong and weak points-also bearing in mind that inevitably some will be relieved right in the middle of the most critical period. It is a sensible precaution to discuss this with the personnel on board and the personnel department ashore so that reliefs can be arranged at a convenient, not critical, point in the repair period. Establish how cost control is to be effected. If a superintendent is not in attendance throughout the repair period, it is essential to take responsibility for this item from the start as, once repairs are underway, it is very difficult to catch up and many repair yards will be 'More than happy to take the full responsibility for controlling costs. A simple spread sheet, as illustrated in figure 8.4, is sufficient. If a ready-made package is not available, it is sensible to keep overall control through separate spread sheets covering the different sections of the repair specification. These can then be easily overseen and a manual total achieved when necessary. The objective is a system that serves rather than one which diverts time and attention in an effort to keep it up to date. On arrival, the master (and chief engineer) should make an early effort to meet the general manager, ship manager for the vessel, relevant departmental managers-e.g., steel work, engineering, the safety officer and the account manager who will run the cost control, as well as the local classification society surveyor. Establish regular meetings, brief but structured, at which the day's (or night's) work can be discussed and agreed, priorities adjusted. Ensure that extra works are formally authorised in writing and added to the original contract price. It is impossible to over-emphasise the importance of keeping a constant control of costs (and savings-items can be cancelled after opening up and inspecting) and to compare the ship's running total with the repair yard's estimate at regular intervals. Finally, use the classification society representative as much as practically (and economically) possible. He will understandably have a close relationship with the repair yard. Take the time and effort to ensure (or remind him) that he is an important part of the owner's team; he will generally understand how the repair yard operates and how to get the best out of it. The master's objective, aided by an efficient cost control system, is to be able to arrive at the end of the repair period with a precise figure for expenditure. In many circumstances it may well be possible to arrive at an overall cost prior to the contractorwhich should put the vessel in a strong negotiating position for agreeing the final contract price.

Management contracts

Two other contracts which the master may have to deal with are technical management contracts, through which the owner engages a company to operate his vessels, and crew supply contracts. It is not intended to dwell long on these as they are many and varied, both in scope and wording, but a basic understanding of their contents is important.

BIMCO management contract

The scope of management contracts can vary from supplying superintendency services to full management, including part or all of the operational and commercial function. One aspect which the master will need to consider is any wording which gives him guidance as to who has the ultimate responsibility for his vessel-in other words, who are effectively his 'owners'. 198

The annexes contain a sample ship management agreement and although many management companies have their own, the Bimco Shipman covers all the main points. Like the Gencon (chapter 6), part I is a box layout, supplemented by more detailed information contained in part 11. The heart of the contract is established in boxes 5 to 14, supplemented by clause 2, Appointment of Managers, and clauses 3 to 12 which detail the specific duties of the managers under the following headings: - Crewing: including the optional requirement to undertake training. - Technical management. - Placing insurance. - Freight management. - Accounting. - Chartering. - Sale or purchase. - Provisions. - Bunkering: it is critical to ensure that the correct bunker specification is agreed-see chapter nine. - Operation: this is perhaps the most critical area with regard to good communications. Although box 2 states the owner's name, place of registered office and law of registry, the contract is perhaps less specific than it might usefully be on the relationship between the master and who has ultimate authority, which may well be different in a number of the management areas set out above. It will be interesting to see whether the wording of the contract changes in order to incorporate the ISM Code concept of a designated person (see chapter ten). Certainly the master could be receiving instructions and fielding enquiries from two or three legally different organisations, and that is just the home team before the charterer, sub-charterer and shipper/receiver are included in the equation. Clause 2 (appointment of managers) requires the managers to use their 'best endeavours' to provide the agreed management services, a fairly strict requirement. However, clause 18.2 (responsibilities) then endeavours to loosen the commitment by placing the managers under '. . . no liability whatsoever . . .' towards the owners unless it can be proved to have '. . . resulted solely from the negligence, gross negligence or wilful default of the managers or their employees or agents . . .' Should the occasion arise when there is a dispute between owners and managers, the master may well find himself in the very difficult position of having to respond to two masters.

Crew supply contracts

Crew supply contracts are perhaps even more varied and can be potentially more tortuous than management contracts. As with charterparties and other contracts, it is sensible to analysis them under the more important operational headings. Once this has been done, it should be possible to brief the officers on board clearly and succinctly regarding the important points and thereby avoid unnecessary misunderstandings. This analysis should also take into account the articles of agreement and thus two or more different legal regimes can, conceivably, be relevant to crew matters: the flag State law (articles of agreement), the nationality law of the seamen and the jurisdiction specified in the crew agreement. Hours of work, overtime and watchkeeping is one obvious area. Linked to this can be payments in event of short manning as well as the many and varied holidays to which they may be entitled. Discipline linked to the grievance procedure is another potential area of contention. A clear understanding between crew and master that there is both a requirement for discipline and, if necessary, a fair and effective grievance procedure should establish the ground rules for an effective working relationship. Perhaps the most important point to remember is that, despite being engaged for long periods, most of the crew have families who they miss and about whom they worry just as much as everybody else. One of the prime concerns is that allotments are getting through to the families and, since payment is frequently the responsibility of the manning agent, it is a difficult matter to check and generally a matter that has to be resolved through the manager's personnel department. Another area of concern, which sadly quite often comes to the attention of the International Shipping Federation, is the health and wellbeing of family and relatives, especially in countries where health facilities are not necessarily well developed. Here the master may have more opportunity to be proactive, working through the manning agent to arrange hospitalisation and/or hospital visits and milising the vessel's communications to ensure that the crew member has timely news from 199

home. The alternative, even if it is 'playing by the book', may well result in disputes and disgruntled crew members.

ACKNOWLEDGEMENTS

THANKs are due to Eric Welsh and his colleagues at Tees Drydock for their input into the section on drydock contracts, and to the International Ship Suppliers Association.

REFERENCES

Shipyards: Contractual Terms. Occasional Paper, November 1992: Chris Perrin et al, Clifford Chance.

ANNEXES FOR CHAPTER 8

- ISSA conditions and explanatory notes. - Standard ship management agreement: Bimco, Shipman.

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Chapter 9

MANAGING A TECHNICAL COST CENTRE The team and the hardware-team responsibilities-managing maintenance-bunkers and bunkering-constituents and quality-purchasing bunkers-taking delivery. Engineers in the Merchant Navy are, to use naval terminology, the vessel's userl maintainers. On the average Aframax tanker they generate enough power to supply a small town. They achieve this on a frequently unstable platform divorced from all the technical back-up which most power plants enjoy and using a fuel supply that may be far from consistent They are responsible for what is the highest cost element in most vessels, in terms of both capital and running costs and they hold specialist knowledge which is critical to the economic success of the venture. As such, they are essential participants in the master's management team. It is, therefore, important that the master thinks constructively about how he can establish a managerial and operational environment which both enables and encourages the technical department to deliver the vessel's propulsive and electrical power in the most efficient and cost-effective way.

The team and the hardware Team responsibilities

IN CHAPTER TWO, team management was proposed as the most effective method of achieving optimum efficiency with today's reduced crews. This means that there is even less place for the hierarchical two department approach which was, and in some cases still is, all too prevalent. The master who is not familiar with the engineroom of his vessel, either because he does not feel it is his concern or because he does not feel welcome in that part of the ship, negates part of his responsibility. That responsibility includes the overall safety and efficiency of the vessel as an operational unit and the ultimate responsibility of overall command in the event of an emergency. The master's relationship with the chief engineer is a critical one and one which the master may need to work at quite consciously if it is to be successful. It is important to realise that there will probably be differences of culture and perception between deck officer and engineer officer, arising from the inherited and developed characteristics which lead the individual to choose a particular career path. Engineers may, understandably, tend towards being inward looking and task oriented; the efficient operation of the engineroom being their prime concern, whether or not their approach fully supports the overall commercial objective of the voyage. At the same time, it must be recognised that there may be the occasional master who is not fully sympathetic to the pressures under which the chief engineer and his department have to operate. Therefore it is imperative that the master ensures that the chief engineer and his team feed into and respond to the prime objective of the venture, which, in most cases, will be to transport the customer's cargo safely and expeditiously. Routine repair and maintenance requirements need to be scheduled so that they fit round the changing needs of cargo operations. It is important for the master to realise that demands for efficient co-operation, when the recipient is frequently having to revise his planning to meet changing external requirements, can be frustrating. The division of responsibilities between master and chief engineer may or may not be established by a company's operating procedures. If not, or if they are not working effectively, it is up to the master to establish a satisfactory working relationship. There should be no doubt that the master has overall command and has, therefore, ultimate responsibility for every part of the vessel. Therefore, he needs to be familiar with every part of his vessel and he also needs to be able to understand any particular problems which the engineering department may face. Especially where increasing financial responsibility is devolved to the vessel, the master needs to work out a repair and maintenance strategy with the chief engineer. This will necessarily vary from vessel to vessel, depending upon the type, age and condition of the machinery, plant and other areas for which the engineers are responsible as well as the requirements of the vessel's trading pattern. This becomes even more important in circumstances where the responsibility for all maintenance, including that of the cargo equipment, has been transferred to the engineering 201

department. Even though this may lighten the deck department's physical workload, it can give rise to inter-departmental tensions where maintenance schedules and (possibly frequently changing) trading requirements clash. The place to resolve such conflicts is within the vessel's management team meetings.

True partnership required

At the other end of the scale, if total responsibility has been delegated to the on-board team-and this needs a true and effective partnership between master and chief engineer-the interrelationship must work on board and problems should not be passed to shorebased superintendents for resolution. As is, hopefully, clear from the theme of this book, the driving imperative is the efficient trading of the vessel. One of the master's primary functional roles is at the interface between the demands of the customer and the operation of the vessel, both in the short and the medium term. A good starting point may be to draw the chief engineer out on the concerns that are uppermost in his priority list. This is not to invite a liturgy of problems; what the master needs to know and understand is what conditions help and what conditions hinder the efficient operation of the propulsion plant. For example, the master may know that there are problem speeds for the main engine and will avoid those revolution bands and, if necessary, plan to avoid draughts and trims that reduce optimum performance. He also needs to understand that achieving optimum propulsive efficiency is more than adjusting the revolutions but requires a more complex balancing of main and ancillary equipment in order to achieve optimum thermal efficiency. Speed and consumption is an area where the knowledge of both parties can and should be pooled in a proactive way if the maximum benefit is to be achieved from every tonne of fuel consumed. Port stays, increasingly brief, are another area where the effectiveness of the vessel's management team will be tested, especially on tankers or general cargo vessels which impose a high ongoing load on the electrical plant and, possibly, on the staff for corrective maintenance (a term we return to shortly). At a time when the chief engineer, quite naturally, may want to focus his technical skills inwardly on his main engine maintenance schedule or essential repairs, his support and managerial skills may also be required to deal with such matters as surveyors or port State control inspections. In many cases, bunkering will impose another high priority demand which must be incorporated into the overall plan and this aspect is discussed in the second part of this chapter. An on-going requirement is the vessel's maintenance programme and, all too often, this is planned as a separate exercise which only connects with the vessel's trading demands at times when priorities conflict. Again, as proposed in chapter two, there should be a joint medium-term plan which is developed against a background of the vessel's known or at least a best guesstimate of the vessel's trading pattern. This section has tended to imply that engineers are, at times, inwardly focused rather than outwardly viewing the operation of the vessel in all its aspects. This is by no means meant as a criticism and many engineers could justifiably point to a total lack of understanding of their problems and priorities by the master and deck department. Nevertheless, masters may from time to time find that the management of the propulsion plant on their vessel is being undertaken with less than optimum efficiency whilst the entrance to the engineroom is, metaphorically, guarded by Cerberus. This is rightly a matter of concern for the master, and probably not one which can best be resolved by a frontal assault.

Management meeting

The master's most effective course of action lies in establishing effective team management, linked to a careful understanding of the chief engineer with regard to his dominant 'drivers' (see chapter two). The master may draw the chief engineer actively into the team through his position as vice-chairman of the vessel's management team. Playing second fiddle to the master during a management meeting may not strike a chief engineer as the best way of spending a forenoon when his priority is to be down in the engineroom trying to work out why the fuel slides are not working properly. This requires understanding and reasoned argument, not confrontation and the imposition of authority. The management meeting is where, except for exceptional circumstances, the chief engineer should be. Remember, the level of management training is in many cases, as lacking for engineering officers as it is for deck officers. Drawing the chief engineer and his department into the planning 202

process could be as simple as, by careful stage management, being absent so that he has to chair the meeting from time to time (a co-operative chief officer may be useful here). If the chief engineer finds that the management team is making the decisions that make his life easier, which it should be doing, he is much more likely to become a willing convert. Finally, the master may find that he has to appraise the chief engineer, a prospect which can be quite daunting. However, unless there are obvious shortcomings, it should not be the master's responsibility to make an in-depth appraisal of the person's technical skills. At this level, concentration is focused on managerial capability. The difference can be illustrated by looking at the senior and middle management's standards defined in the United Kingdom, for Vocational Qualifications within the Management Charter Initiative -i.e., the managerial equivalent to marine operations. Units from MCI are used to provide the managerial input into the marine VQS. Standards: Middle Management Senior Management NVQ Level 4 5 Managing operations Improving business process Managing finance Organisational development Managing people Individual & team development Managing information Human resources processes Despite the slightly less than user-friendly language, it can be seen that the appraisal is moving away from the technical (managing operations and [technical] information) towards the wider area of managing the business and its most important (human) resource.

Managing maintenance

This is not a technical book and the intention of the following comments on maintenance is only to provide a few concepts which may aid the planning process. Spares purchasing and the need for a wellbalanced inventory has been discussed in chapter eight. Even if a vessel has a lot of stores and spares on board, it is not necessarily efficiently stocked. The master should actively involve the chief engineer and his team, together with the chief officer, in analysing the current stock inventory and establishing the optimum stock of stores and spares. Not only will this provide a storing strategy, but it may well influence the maintenance programme and ensure that it fits, so far as is ever possible, the anticipated trading pattern. One of the easiest and least effective ways of using up a maintenance budget is by flying spare parts around the world. An inventory of the vessel's overall condition can also usefully be made and used to prioritise repair and maintenance requirements. This should be done on a whole-ship rather than a departmental basis and the whole of the resources on board, in terms of manpower and equipment, targeted where they will be most effective. This approach may not be greeted with universal acclaim but, with smaller crews and a future where more responsibility, and more control and authority, is being devolved to the vessel, it is becoming increasingly necessary that the vessel operates as one co-ordinated team rather than two competing departments. The use of computers and IT has an increasing role to play in this area and, if not already provided adequately by owner or manager, even the most non-computer-literate master may find a wealth of talent and enthusiasm within the junior ranks of his management team. Maintenance costs can amount to up to 25% of operating costs but, more tellingly, maintenance can amount to up to 60% of controllable operating costs. Off-service, or downtime, leading to a loss of charter hire (either directly as in the case of time charters or by extending the time element in voyage charters) is a direct consequence of the vessel's (or the owner/manager's) operating policy. This is a matter which should be very much to the forefront of the master's thinking at all times. Whilst the experience of the last two decades is likely to have made seafarers all too aware of the detrimental effects on efficiency and safety of a purely accountancy approach to such figures, maintenance is obviously an area where careful planning can produce substantial benefits. It is the

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longer-term or strategic planning which is going to produce the lasting benefit without compromising safety or efficiency.

The maintenance requirements of a vessel will depend upon its type, age, condition and, to a certain extent, its trade. Poorly maintained vessels will require considerable amounts of corrective maintenance, which tends to be short term in its benefit and, in the longer term at least, expensive in its application. As the material condition of the vessel improves, preventative maintenance will take over and at some stage for every vessel, there will be an optimum as indicated by figure 9. 1. All work on the vessel's hull or machinery, except the most immediate of emergency repairs, will contain an element of preventative maintenance. To attempt to identify precisely the optimum point on the cost curve would probably add a significant on cost in administration and overheads. However, it is suggested that this is a valuable area of strategic planning in which the master can profitably engage the chief engineer on a whole-ship basis. Even if little control has been devolved to the vessel, it will produce a coherent and logical argument which can be jointly submitted to managers or owners by the onboard management team. It is interesting to speculate how many times a visiting superintendent, marine or engineer, meets the vessel's two senior managers at totally separate times and how infrequently he is greeted by a joint, comprehensive and well argued plan focusing on the vessel's future requirements and immediate priorities.

Bunkers-the energy source

Hardly any seafarer has managed to complete a career without encountering some kind of problem associated with bunkers. Although primarily the responsibility of the chief engineer, as the source of energy for virtually all that happens on board, bunkers are far too important to be ignored by the master. If 'the Chief' has problems with his bunkers, then the vessel has problems as well. The master needs to know what quality problems might be associated with the bunkers which his vessel stems and how they might affect the vessel's performance and machinery. He increasingly needs to know how to order and ensure timely delivery of bunkers at the right price and the right specification. Then he needs to know how to ensure that the bunkers are stemmed in a safe and trouble free manner that disrupts a busy port routine as little as possible.

Constituents and quality

Before the effect of the various impurities which affect the quality of fuel oil can be understood, it is helpful to have a degree of understanding of what happens during the combustion process. Although this happens during a very short period of time as the piston is approaching TDC (top dead centre) and the fuel is injected into the cylinder, there are three distinct phases. - The first, referred to as the delay period, occurs as part of the fuel is injected into the cylinder. It begins to vaporise but not to combust. - Ignition initiates a period of uncontrolled combustion, during which time the fuel injected during the delay period is burned. - This is followed by a period of controlled combustion. Fuel is burned as it is injected into the 204

cylinder and this phase ends with the burn-out of the combustion residues. On ignition, the pressure in the cylinder rises rapidly and considerable stresses are imposed on the piston as it approaches top dead centre. Although the period of uncontrolled combustion is necessary to initiate the overall combustion phase, it is desirable to keep the rate of sudden pressure rise as low as possible. This can be achieved by ensuring that the minimum quantity of fuel is present in the cylinder at the commencement of combustion. This requires that: - The ignition delay period should be as short as possible; requiring - Rapid mixing achieved by vigorous air movement in the cylinder and good (fuel) spray distribution; and - High air temperature and pressure. This aids evaporation of the fuel droplets and their chemical oxidation; needing - The use of a fuel with the correct ignition characteristics. Both the physical and chemical properties of fuels have an influence on ignition and the most important characteristics are discussed below. Viscosity: This is a measure of the ability of a fuel to resist flow. It is stated in terms of time requirea for a given quantity to move through a standard capillary tube at a given temperature. CentiStokes (cSt) are now the common units of measurement. High viscosity affects atomisation and can hinder the fuel/air mixing processes. It can also give rise to the danger of fuel impinging on the piston crown and cylinder wall. Viscosities have risen as cracking technology and the economics of the petro-chemical industry have combined to wring more and more higher grade product from each barrel of crude. The trend seems set to continue, although there is a level (around 700 mm'/s) where the cost of adding the necessary dilutants starts to offset the benefits of cheaper higher viscosity base stock. Associated with viscosity is pour point. This defines the temperature below which the wax within the fuel will crystallise, thus preventing the oil from flowing or being pumped. Density: This represents a unit of mass per unit of volume (e.g., kilograms per cubic metre). However, it is increasingly expressed in terms of specific gravity (SG) and is the ratio of the weight of a volume of oil at 60'F to the international unit standard (SG 1.00) of fresh water. There are three important aspects to density. For a start, it enables calculations to be made regarding the storage space required for a given quantity of oil. Together with viscosity, it is important for the operation of centrifuges and it also relates to the energy content of the fuel. The energy content of oil is stated in either calories per gram or BTUs (British Thermal Units) per pound weight and is frequently referred to as the calorific value. Instability: The behaviour of an intermediate fuel if it disintegrates and decomposes during storage and/or the heating and purifying process. This is more common in blended diesel oils (as opposed to distillates) and may be caused by: incompatible fuels used for blending; insufficient blending methods; inhomogencous products; too high asphaltene contents without sufficient aromaticity. Aromatics is a name commonly given to a group of hydrocarbon derivatives of benzene which chemically belong to a closed loop class of organic compounds and thus have specific chemical characteristics. One of these is their typical odour. Asphaltenes are insoluble, solid particles which are combustible and contain a high carbon to hydrogen ratio. They entrap water, fuel ashes and other impurities. Sulphur: This occurs naturally in all crude oils but, because it is associated with higher boiling point compounds, the sulphur content of residual fuel oils will tend to be higher than that of distillates which boil off at a lower temperature leaving the sulphur to accumulate. The sulphur content can range from 1% to 5% by weight. Within the combustion chamber, sulphur oxides and sulphuric and sulphurous acids are formed. The acids especially can give rise to low temperature corrosion of cylinder liners, exhaust systems and exhaust gas boilers. To a certain extent this can be countered by the use of alkaline lubricants, and it is also important to ensure that the dewpoint of sulphuric acid is avoided by not over-cooling the fuel injectors, cylinder liners and exhaust system. However, the chief engineer has a fine judgement to make, as the overall thermal efficiency of the engine system depends upon the correct operating temperature. In general terms, high sulphur content fuels are bad news, not least because buying up to 5% non-energy-producing sulphur is a waste of money. Ash-forming deposits and contaminants: As with sulphur, ash-forming constituents of crude oil tend to concentrate in the residual fuel oils. The nature and amount of these constituents varies widely, dependent mainly on the source of the crude. 205

The main elements are cadmium, iron, nickel, silicon, sodium and vanadium. Of these, vanadium is probably the most troublesome and, together with nickel, is usually present in oil-soluble form, and thus there is no easy method of removing it. Dilution with vanadium-free distillates is one approach-in effect, a reversal of the distillation process which caused the problem in the first place. Normal vanadium concentration is 50-150 ppm, but in certain Venezuelan crudes the content can reach 500 ppm. Oxidisation of sodium and vanadium can, through a series of complex chemical reactions, form semiliquid, sticky, low melfing-point salts that adhere to exhaust valves and turbochargers in particular. The mixture will corrode steel and, if it forms a plastic layer on valve and valve seats, is particularly troublesome. Strict temperature control of the valves and valve seats is important in controlling the effects of vanadium-sodium deposits but, again, this has to be balanced against the overall thermal efficiency not just of the engine, but of the whole system. This can be taken to extend from the temperature at which the bunkers are introduced to the daily service tanks through to the exhaust gas turbocharger.

The natural sodium content of fuel oil can be increased by the presence of salt water, and similarly the iron content can be increased by deposits from rusty storage tanks or pipes. Other elements which may be present include silicon and calcium, as well as dusts and dirt from the atmosphere. All of these can form damaging ash residues in the heat of the combustion chamber. Burning low quality bunker fuel gives rise to unburnt carbon and other ash deposits, which not only affect the cylinder liner, valves and piston but may also form deposits on the blades of the exhaust turboblower. The effect of this is to reduce blower speed which in turn reduces the quality of combustion, giving rise to even more carbon residues and excessive exhaust gas temperatures. Unburnt ash and carbon nuclei can act as local centres of combustion, resulting in fierce localised heating giving rise to metal damage. Further damage becomes apparent through excessive liner wear, and this is especially so if lubricating oils are contaminated and piston rings begin to stick.

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The best method of minimising the downside damage of poor quality fuel and ensuring the maximum thermal energy per dollar is to order against the correct specification, and then to ensure that the fuel delivered meets that specification. Since. the constituent parts of residual fuels are dependent upon the origin of the crude and upon the refining process used, it is difficult to produce an exact universal specification. However, there are a number of recognised specifications and ISO 8217 (1987) CD 1994 sets out max/min limits covering the parameters shown in figure 9.2 for a range of fuel densities for the two main marine fuels. Additional information may also be provided by fuel advisory services such as FOBAS (Lloyd's Register's Fuel Oil Bunker & Advisory Service) or DNV Petroleum Services. These may include figures for sodium, iron, nickel, cadmium, magnesium, lead and zinc. The figures given above cover a range of four marine distillate fuels and 14 marine residual fuels (discussed below). This is because it is an ISO requirement that categories of any particular petroleum product are classified in a separate standard from the one containing their specification (a ruling arising from needs for lubricants). ISO 8216-1 is the international standard for the classification of marine fuels. The four classifications of marine distillate fuels (which are defined in ISO 8216, 1986) are: DMX Distillate. Used in emergency equipment, external to the machinery spaces. DNU Distillate. General purpose, shall contain no residuum (marine gas oil). DMB Distillate. General purpose, may contain a trace of residuum (marine diesel oil). DMC Distillate. General purpose, may contain some residuum (marine diesel oil). The much larger range of classifications for marine residual fuels (some 15 with esoteric designators such as RMAIO at the lighter top end and RML55 at the 1,010 kg/m, bottom end of the range) is there to accommodate the even larger range of marine diesel engines. Some of these were designed for fuels available 30 years or more ago, whereas modern diesels are capable, due to advances in centrifuging technology, of operating at the higher densities indicated. The two primary parameters which affect classification are density and viscosity. Viscosity brings its own problems since it is at times quoted at 100'C and 50'C, whereas density will be seen quoted at 15'C. The reason for using 100'C for assessing viscosity (an increase on the old 80'C) is because it gives a more accurate result. However, 50'C is the temperature at which both blend quality calculations and blending itself is carried out, and it is the temperature at which the bunker supply industry has continued to market and price marine residual fuels. This should give an indication of some of the problems faced by the chief engineer and technical manager in establishing a bunker supply policy for the technical classifications and specifications are still subject to grade availability. On top of this, bunker price will also have an effect on buying policy and, of course, bunker purchasing may well be undertaken at second, or even third, hand by a timecharterer's operations department with very different priorities. It is, therefore, essential that each vessel should select the appropriate classification of distillate and residual fuel for the machinery on board (with a tolerance range to take into account availability problems) and set the relevant specification when ordering bunkers or specifying bunker requirements in a time charter. Another dimension of the potential danger from below-specification fuel oil can be found in Lord Donaldson's report on the lossof the motor-tanker Braer in 1993 (Safer Ships, Cleaner Seas, HMSO) where, within the some 100 recommendations is included: The UK government should: (a) Ensure that bunker oil suppliers review their quality control systems with a view to identifying the sub-standard fuel before it is sold. (b) Encourage IMO to develop a system to eliminate the problems of contaminated fuel based on: (i) A certificate of quality which all suppliers would be required to issue on delivery. (ii) On board testing of the fuel supplied-most merchant ships should be required to carry a simple test kit. (iii) On-shore laboratory test of a sample of the fuel oil. and the Report states (section 7.7.3): As an operational unit a ship depends not only upon the reliability of a structure and machinery, but also upon a number of other vital elements. 207

Most importantly, the safety of a ship depends upon her crew and we discuss the 'human factor' in chapter 8. But it is easy to forget that other seemingly minor components such as fuel oil and lubricating oil play a vital role. A ship's engine may be well maintained and in perfect working order, but it can still fail if there is a problem with the fuel or lubricants. In a similar vein, IMO requested the International Organization for Standardization (ISO) to add to the existing clause 4.1 in IS08217: The fuel shall be blends of hydrocarbons derived from petroleum refining. This shall not preclude the incorporation of small amounts of additives intended to improve some aspect of Performance. The fuels shall be free from inorganic acid. and the recommendation that: The fuel should not include any added substance of chemical waste which can either: jeopardise the safety of the ship; adversely affect the performance of the machinery; be harmful to personnel; contribute to additional air pollution. All these are very laudable aims, but it is noticeable that they tend to be couched in general as opposed to specific (contractually enforceable) wording. Before leaving this general description of factors affecting quality, it is worth noting that there is a whole technology relating to lubricating oils and their role in analysing and improving engine performance. It is also essential to consider the vessel' ' s propulsive equipment as a whole from bunker tank through settling tanks and purifiers, through the fuel injection and combustion systems and out through the exhaust turbo-blowers, exhaust gas boiler and funnel outlets. A problem anywhere within this system can adversely affect the vessel's performance, either in terms of maintenance costs or that most critical measure of dollars per knot.

Purchasing bunkers

Generally, bunkers will be purchased either by the operations department ashore or the time charterers. However, it is sensible for the master and chief engineer to be aware of what is being contracted, what quality (if any) has been specified, and the general contractual terms of delivery. A good starting point is for the chief engineer and the master to have, and use, the optimum bunker specification for their vessel and the tolerance limits over which alarm bells should start to ring. Many owners and charterers will have a worldwide bunkering strategy which may depend upon discounts based on volumes lifted. They may also have quite complex hedges or swops or other financial instruments in place to even the variations in oil price, especially at times of high volatility, or international uncertainty. Despite this, the single most effective method of maximising dollars per knot is to organise a bunker strategy which enables the vessel to stem bunkers only, so far as possible, at ports where both the price and the specification is right. This requires a knowledge, or a guesstimate, of the vessel's future trading pattern and careful planning if freight paying cargo is not to be shut out by ostensibly cheaper bunkers. It is important that the chartering brokers include a good bunker specification in the time charterparty and that the chief engineer is aware of what has been specified. In the NYPE 93 (see chapter 6) clause 9 (b) sets out the requirements and gives the owners a degree of protection against the delivery by time charterers of unsuitable bunkers. The Bimco clause on bunker quality control takes this a stage further: The full test of the clause is: 1. The charterers shall supply bunkers of a quality suitable for burning in the vessel's engines and auxiliaries and which conform to the specification(s) mutually agreed under this charter 2. At the same time of delivery of the vessel the owners shall place at the disposal of the charterers, the bunker delivery note(s) and any samples relating to the fuels existing on board. 3. During the currency of the charter the charterers shall ensure that bunker delivery notes are presented to the vessel on the delivery of fuel(s) and that during bunkering, representative

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samples of the fuel supplied shall be taken at the vessel's bunkering manifold and sealed in the presence of competent representatives of the charterers and the vessel. 4. The fuel samples be retained by the vessel for 90 days after the date of delivery or for what ever period is necessary, in the case of a prior dispute, and any dispute as to whether the bunker fuels conform to the agreed specification (s) shall be settled 'by analysis of the sample(s) by ( . ) or by another mutually agreed fuels analyst whose findings shall be conclusive evidence as to conformity or otherwise with the bunker fuels specification(s). 5. The owners reserve their -right to make a claim against the charterers for any damage to the main engines or the auxiliaries caused by the use of unsuitable fuels or fuels not complying with the agreed specification (s). Additionally, if bunker fuels supplied do not conform with the mutually agreed specification (s) or otherwise prove unsuitable for burning in the ship's engines or auxiliaries, the owners shall not be held responsible for any reduction in the vessel's speed performance and/or increased bunker consumption nor for any time lost and any other consequences. Nevertheless, it has proved difficult for owners to succeed in cases against either bunker suppliers or time charterers for damage caused by off specification bunkers, especially since the additional wear and tear to the main engine may not become apparent for some months. In all cases it is essential to ensure that the chief engineer puts in hand plans to: - Load the fuel into separate empty tanks and to keep the fuel segregated so far as possible until its quality and compatibility are checked; - Take proper samples; and - Effectively check the quantity of bunkers actually delivered. These points are considered in more detail in the next section. Although BIMCO has produced a standard marine fuels purchasing contract, Fuelcon 1995, the strength of the bunker suppliers, many of whom are major oil companies, means that they are frequently in a position to impose their own contracts. The main points to be considered on board are summarised below. A point to remember is that the contracting parties (buyer and seller) may be many miles (and time zones) away from the physical delivery which in many cases is undertaken by a sub-contractor to the main supplier. Nominations: Probably ten days to contract a stem; the master should give two clear working days to the delivering company (Shell contract). 'The giving of notice to the delivering company under this subclause, and its acceptance, shall constitute a bunkering commitment' and 'If the vessel shall not have arrived at the delivery port within 14 days after the expected date of arrival . . If the buyer (the vessel) has already given notice ... then the buyer shall be liable ... for any expenses that the delivery company has incurred. . .' The Elf contract states: 'Upon arrival in port, the master or chief engineer (who should be acquainted with the terms of the contract relating to delivery acceptance and quality verification)*, should check with the local agents that all preparations for bunkers have been made'. This raises the important point that agents should be kept fully aware of the bunkering arrangements and the vessel should do this even if the owners/ charterers do not. -Owners please note, this is a contractual term. Risk and property: In general, this shall pass to the buyer when the fuel passes the flange connecting the supplier's hose to the vessel. Fuelcon 95 splits the passing of risk and title, giving the supplier a maritime lien until the invoice is settled. Quality: Not surprisingly, suppliers' contracts offer little more than they need to and, in the case of oil majors, may well just refer to their standard grades. Frequently wording such as 'commercial grades offered generally by seller' may be used and even '... nor does the seller warrant either expressly or by application, that the marine fuel will be suitable for any particular purpose . . .' Certainly, and reasonably, if the owner wants to ensure that the proper specification is delivered, he must ensure that a proper specification is given to the supplier. Quantity: If possible, the supplier will specify that their 'weights and measurements will be accepted as conclusive evidence of the quantities delivered . . .' Typically, 'the amount of fuels delivered shall be determined by measurements of shore tanks, lighters, or by meters, at seller's option, and buyer will be charged on the basis of these measurements. Buyer has the right to have its representative present during measurement. . .' 209

It is important, therefore, that the chief engineer or his representative gets ashore or down on to the bunker barge at an early stage of the operation. It may well be advisable to appoint a surveyor to monitor the bunkering process, and whoever is checking quantities must be aware of the tricks of the trade such as shortened sounding rods or 'adjusted' sounding pipes. If a shore gauge is being used it may be wise to request to sight its test certificate. Claims: Short delivery claims should be dealt with at the time and if possible noted on the delivery receipt. If this is not possible, it may be necessary to note protest. Quality claims are more difficult and there are three basic situations in which they may arise. - Upon or shortly after delivery the 'unsuitable' fuel is monitored or analysed. If so that fuel should, if possible, be discharged and exchanged without causing serious problems but loss of time may arise. - Well after bunkering the 'unsuitable' fuel is detected at sea without the possibility of avoiding burning that fuel. Loss of speed and machinery troubles may be encountered. An answer to the remaining quantities of 'unsuitable' fuel has to be found. - During engine repairs, machinery defects may be found which appear attributable to unsuitable fuels encountered during several voyages. Under these circumstances, it is probably advisable to use the engine manufacturer's technical staff to analyse the problem. In all cases the master has an obligation to take steps so far as possible to mitigate the potential damage. This includes taking steps to prevent comingling until it is known that the previous and newly bunkered fuel is compatible. Not only must the chief engineer be aware of this,- but so must the junior engineer officer who decides to top up the settling tanks in the small hours of the night. Mixing fuels from different-bunkering sources together in storage, settling or day tanks may give rise to reactions due to incompatibility. This can cause difficulties with transfer, high sludge deposits in tanks, inadequate purifying, high loading on pressure systems and a number of other ills. Incompatibility or instability (fuel disintegrating and decomposing) may also result from poor blending methods prior to bunkering intermediate fuels. Residual oils from cracking processes are frequently inherently liable to incompatibility. Despite sometimes being recommended, addition of MDO and mixing procedures by pumping as often increases the problem rather than curing it. Time bar: Shell's contract stipulates that in the event of a complaint, this must be made '. . . as soon as possible and in any event within three months of the date of delivery'. Some companies endeavour to reduce this to as little as 30 days.

Taking delivery

In chapter two the importance of teamwork and planning was emphasised. Bunkering frequently takes place during a busy port call and, indirectly, affects the whole routine of the vessel. It needs to be carefully and jointly planned and the correct resources allocated. A range of advice regarding bunkering procedures is available. These range from the IMO publication Manual on Oil Pollution, Section .1-Prevention through Club recommendations and guidelines to substantial volumes such as the Singapore Bunkering Procedure and also The Nautical Institute's bunkering checklists (pages 172-73) in Watchkeeping Safety and Cargo Management in Port. The European Harbour Masters' Association (EHMA) has produced an instructive examination of common causes of spills. These include: Inadequate pre-planning-do not leave things to chance, use checklists, agree procedures and brief all concerned. Bunker connections-not just caused by poor seals or improperly tightened bolts, but frequently by juryrigged adaptors, especially for general cargo and dry bulk vessels. Advise the bunker supplier of the on board bunker connection as early as possible. Inadequate scupper closing arrangements-so well known and still happening. Frequently a result of poor inter-departmental liaison. Lack-of save-alls under connections and vent pipes-review the facilities well prior to the bunker operation and, if not adequate, make or order replacements, Inadequate communications-engine room, bunker station, sounding pipes (or control room) and supplier's bunker barge or shore installation must all be in the circuit. Make sure that language problems are overcome prior to commencement and ensure that back-up communications are

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available. VHF or UHF handsets are virtually standard practice, but something as simple as a whistle makes ideal backup. Inadequate emergency stop arrangements-supply vessels should have centralised emergency stop facilities located in an accessible area of the tank deck, preferably adjacent to the transfer manifold. What is most important is that the supplying barge/vehicle/pipeline has a means to stop the transfer quickly and the receiving vessel knows how this can be activated. The wish to lift as much bunkers as possible-make sure that the officer responsible for bunkering knows what tank space is available and checks the ullages frequently. Supply vessel's tank capacity-the maximum and minimum transfer rates must be agreed by both parties prior to transfer commencing. Movement of small sea-going vessel-as well as sea-induced, these movements can be produced by loading and discharging operations, especially on small container/feeder vessels or during ballasting operations. Sampling is an essential part of the bunkering process. Fuel samples should always be: - Taken from the shipboard supply line on the vessel (not the bunker barge): NB. the point at which fuel samples are to be taken according to the contract may be different, nevertheless it is always good practice if possible to take a sample at the point at which the bunkers leave the supplier's control and enter the ship's system; - Representative of the full quantity of fuel taken (bunkers may stratify in a bunker barge or storage tank); - Be filled into galvanised or glass (not plastic) containers; - Be divided and scaled into three one-litre containers, one of which should be retained on board for a minimum of 30 days. Another is retained by the supplier while the third can be sent to FOBAS or another analytical chemist. Sampling systems are improving. If a normal sampling tube is used, it should extend into a turbulent oil flow at approximately one third diameter. Later designs of sampling equipment comprise sampler tubes fitted permanently into flange pieces which can be inserted between loading pipe and ships' connections and which can be set to draw off a pre-determined quantity from the given quantity of bunkers to be loaded. Do not let the chief engineer, or one of his staff if he is busy elsewhere, be hasselled out of taking samples, especially by claims that 'the supplier's samples are always used'. If necessary, get a surveyor or other independent party to witness the integrity of the samples taken at the flange, and this includes ensuring that the containers are totally clean at commencement.

ACKNOWLEDGEMENTS

THANKs are due to Douglas G.F. Barrow, founder chairman of the International Association of Bunker Suppliers, to FOBAS at Lloyd's Register for their help and for providing background material, and to Paul Russell, C.Eng, at the National Sea Training College.

REFERENCES

Development trends in marine bunker fuel properties and their impact on marine diesel engine performance. Paper: B. Heron and J.S. Mills, of Shell. Marine Fuel Quality, The FOBAS Approach. A.A. Wright, Senior Engineer Surveyor; Lloyd's Register Fuel Oil Bunker and Advisory Service. Bunker Operations, Examination of Common Causes of Spills and Proposed Port Regulations Regarding Bunker Operations. European Harbour Masters Association. Surveying Fuel Oil Claims. Hans-Otto Ebner, Elf. Singapore Bunkering Procedure. Port of Singapore Authority. Petroleum Products - Fuels (class F) - Specification of Marine Fuels. International Standard ISO 8217. Ongoing Development of the International Marine Fuel Standard. P.J. Newbury, CEng, FIMarE.

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Chapter 10

A CHANGING APPROACH TO SAFETY Safety and management-international Safety Management Code-revised STCW convention-risk management-accident investigation-the media. 'The soldier is the most conservative creature on earth. It is really dangerous to give him an idea because he will not adopt it until it is obsolete and then will not abandon it until it has nearly destroyed him. General J.F.C. Fuller HARSH WORDS, but the maritime industry is notoriously conservative and General Fuller's words hold more than a grain of truth for the way in which the industry regulates itself. Lifeboats should contain, amongst other things, a fishing line and a heliograph and a quantity of food designed to maintain life in the middle of an ocean. Is this really relevant to a coastal ferry or an offshore oil rig ?-is it cost-effective safety? For many years, maritime safety legislation has been both prescriptive and reactive. As far back as 1874 it required a reaction to Samuel Plimsoll's book Coffin Ships before the (British) Board of Trade started to prescribe load lines in 1876 (Nautical l3fie/ing, page 22). The Titanic, Torrey Canyon, Amoco Cadiz, Herald of free Enterprise and many other marine disasters all prompted revisions to safety legislation which prescribed a regulation to address the perceived cause of the accident. TO a great extent is was the review of the Piper Alpha fire which generated a sea change in thinking which was taken up in the UK by the House of Lords Select Committee Safety Aspects of Ship Design and Technology in 1992, under Lord Carver. This advocated a Safety Case approach based on the use of risk assessment techniques within an overall methodology of formal safety assessment (FSA). FSA has its roots in the nuclear industry where it was easily recognisable that there were a n umber of potential hazards which had to be identified and assessed before ways of reducing the risk associated with these hazards could be defined. The approach is used by a number of industries where hazardous plant exists, and the IMO is considering its viability as a tool for developing future maritime legislation. However well FSA enables legislation to be drafted, its effect will only be as good as the people who put it into practice. Safety should not be an addon, a template into which shipping companies squeeze their operational procedures so that a coveted certificate can be achieved. Safety should reflect the way in which a company works and thinks, from corporate strategy to daily operational routines, and it is a senior managerial responsibility to get this right and, on board, it is part of the master mariner's professional calling.

Safety and management

There are various ways in which companies can approach safety, short of totally ignoring it, which are closely linked with the quality of the end product, whether this is the result of a production or a service process, such as delivering a cargo 'on spec and on time'. At the bottom of the scale is management by carelessness, not necessarily deliberate but nevertheless careless. It starts with a few input checks into an unspecified process which has equally few checks on its output. It is typified by a 'Take it or leave it' attitude to quality, an 'I hope we've got enough cash' approach to financial planning, and an 'It's only a drop in the ocean' attitude to environmental pollution. In a commercial sense it can be found in the broker who fixes the seemingly highest paying cargo with little reference to the vessel's current operational programme and then hands its execution over to an operations department and loses interest feeling that his job is done. Consequently, there are no subsequent checks on customer satisfaction-and probably just as well. Then the finance department finds that it cannot finance the full bunker stem and unfortunately the broker has omitted to insist on a liberty to deviate clause ' - The vessel arrives at the load port with a quantity of dirty slops on board and finds no reception facilities. But never mind, 'It is only a drop in the ocean' and the problem is 'solved'. On the safety side, such carelessness reflects in few checks on employees or their health and little attention to the safety aspects of the work process. Even as technology changes the way things are 212

done indicating a need for training or retraining, an atmosphere of 'They should be able to look after themselves' pervades the organisation. New management takes over and introduces quality control. Checks are placed on the output to ensure that it meets specification. End testing rejects below-quality service or products. If the reject pile starts to grow, reactive (crisis) management takes over (although by now the bottom lineprofitability-is already suffering). A similar approach is taken to safety control, with accidents records and statistics meticulously analysing avoidable accidents. Consultants are brought in and quality assurance arrives. Input specifications are defined and the overall operational or manufacturing process is broken down into manageable quality control loops. This increases the proportion of the output which meets specification and quality is assured for the customer. The company learns to cope with large quantities of procedural paperwork and how to respond to non-conformity reports and proudly hangs an ISO 9002 certificate in its reception area. The chief executive tells his customers and competitors how marvellous their new quality system is and tries to sell their newfound expertise without really changing the way in which he works. Safety assurance is also introduced so that employees receive the training necessary to enable them to meet the qualification and knowledge required for their specified tasks. They work within the rules and regulations and comply with a safety policy designed to meet the demands of the operational or manufacturing process undertaken by their company. Systems are in place and levels of competence are defined and employees are monitored for health and fitness. The employees' safety is assured. This state can work very well except that, in too many cases, the rules and regulations and often copious procedures it introduces cause strain and frustration in the workplace. To a great extent, the problem is that safety imposes itself on the way in which the individual works while the objective is to achieve a state in which the individual naturally works in a safe manner, both for himself, his colleagues and the environment-a true safety culture. At the same time, the individual's objective is to achieve quality (or true professionalism) in the task or operation which is his or her personal responsibility within the wider context of the company.

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Figure 10. 1 demonstrates the parallel paths of total quality and total safety management. The critical area of achievement is in breaking down the overall process (or operation) into its constituent parts and ensuring that these all work to a common end in a way in whit the individual undertaking the work feels both comfortable and fulfilled. The internal customer (we all need support from our colleagues and need to support our colleagues) and job ownership ('I can work effectively this way') are both important aspects. 'We find that the quality control procedures are the most cost-effective way of keeping track of (for example) our ship's plans' and 'I work this way (safely) because it is the most effective way to work' are all signs that a company has got it right. It also means that there is, inevitably, a genuine commitment from the top-not just of money or time, but of philosophy and belief. It does take time to be safe-until it becomes second nature, the very way in which a person approaches and undertakes every task. The growing awareness of total quality and total safety management is finding an expression in three distinct strands of development in the maritime industry: - The ISM (International Safety Management) Code; - A competency-based approach to training incorporated in the recent revision of the Standards of Training, Certification and Watchkeeping Convention (STCW); and - The work on the introduction of formal safety assessment by the (British) Marine Safety Agency and presented to IMO in May 1996.

International Safety Management Code

The ISM Code will be a fact of life for all professional seafarers sailing in vessels of 500 gross tonnes or over, by the year 2002. Many companies have already introduced the code, either on a voluntary basis because they can see the benefits or to meet earlier deadlines for specific vessel 214

types. It is difficult to find better words to introduce the code than those used by the International Shipping Federation in its Guidelines on the Application of the IMO International Safety Management Code.

Background

The operation of merchant shipping is specialised and complex, governed by comprehensive rules and conventions developed by national and international authorities. Nevertheless, regulations of the technical aspects of shipping can only achieve part of the objective of safe and pollution free ship operations. In the final analysis, while the master is clearly responsible for the safety of the ship and her crew, the overall responsibility for the administration and safe operation of each ship rests with the owner, or any other organisation or person who has assumed the responsibility for the operation of the ship from the owner While statistical analyses suggest that around 80 % of all shipping accidents are caused by human error, the underlying truth is that the act or omission of a human being plays some part in virtually every accident, including those where structural or equipment failure may be the immediate cause. The task facing all shipping companies is to minimise the scope for poor human decisions which contribute, directly or indirectly, to a casualty or a pollution incident. One aim should be to ensure that staff are property informed and equipped to fulfil their operational responsibilities safely. Decisions taken ashore can be as important as those taken at sea, and there is a need to ensure that every action affecting safety or the prevention of pollution, taken at any level within the company, is based on a sound understanding of its consequences. The development by IMO of the International Management Code for the Safe Operation of Ships and for Pollution Prevention (the International Safety Management (ISM) Code) is the reflection of this objective on the part of governments. The ISM Code establishes an international standard for the safe management and operation of ships by setting rules for the organisation of company management in relation to safety and pollution prevention and for the implementation of safety management systems (SMS).

Safety management system (SMS)

The introduction of a safety management system (SMS) requires a company to document its management procedures to ensure that conditions, activities and tasks, both ashore and on board, affecting safety and environmental protection, are planned, organised, executed and checked in accordance with legislative and company requirements. An SMS is developed and maintained by people. It is important to recognise that the responsibilities and authority of the different persons involved in the system, and the lines of communication between persons affected by it, form its basis. Once defined and documented, the tasks and activities related to safety and environmental protection, both ashore and on board, are the backbone of an SMS. An SMS enables the company to measure its performance against a documented system, allowing areas for improvement to be identified and implemented.

Advantages of establishing an SMS

A structured safety management system enables a company to focus on the enhancement of safe practices in ship operations and in emergency preparedness. A company that succeeds in developing and implementing an appropriate SMS should therefore expect to experience a reduction in incidents which may cause harm to people, damage to the environment, or damage to property (such as the ship, its equipment and cargo). Experience from within the shipping industry and from other industries has shown that a company may benefit further in terms of. - An improvement in the safety consciousness and safety management skills of personnel, - The establishment Of a safety culture that encourages continuous improvement in safety and environmental protection; - Greater confidence on the Part of clients, and - Improved company morale. There is some evidence to suggest that, over time, commercial benefits may also flow from the general benefits, including: 215

- Cost savings resulting from improved efficiency and productivity (such as through the minimisation of disruptions to the operation of the ship that may cause delay);- Favourable insurance premiums relative to the market; and - The minimisation of exposure to claims in the event of a major marine disaster

Purpose

One of the great strengths of the code is that it recognises the importance of the relationship between head office and the master. Indeed, as well as defining, albeit in a rather general manner, the company: 'Company' means the owner of the ship or any other organisation or person such as the manager, or the bareboat charterer, who has assumed the responsibility for operation of the ship from the shipowner and who on assuming such responsibility has agreed to take over all the duties and responsibility imposed by the code.' It tightens this by specifying in Section 4,

Designated Persons:

To ensure the safe operation of each ship and to provide a link between the company and those on board ' every company, as appropriate, should designate a person or persons ashore having direct access to the highest level of management. The responsibility and authority of the designated person or persons should include monitoring the safety and pollution prevention aspects of the operation of each ship and to ensure that adequate resources and shore based support are applied, as required. This is intended to remove the situation depicted in figure 10.2 and the problems which it can produce for the master, not least in carrying out his commercial role. Indeed, if there wasp criticism of the ISM Code, it is that it stops one pace before the ultimate goal is achieved. It is possible to develop an argument that it should be the International Management Code and that safety is the inevitable result since it is the way seafarers are trained, think and act that is fundamental. This is illustrated by section 6.3 which requires that: The company should establish procedures to ensure that new personnel and personnel transferred to new assignments related to safety and protection of the environment are given Proper familiarisation with their duties ...

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The master at the very least should also be given proper familiarisation with their commercial responsibilities. However' the code is a great step forward and the master should make it one of his priorities, notjust to meet the designated person but to develop a rapport and, especially if new to the position or the company, an understanding of the company's ethos and its objectives. The master's responsibilities and authority are sensibly addressed in section 5, with the ultimate sentence of 5.2 going a long way to redress the erosion of the master's authority in which modern communications have played a large part: The Company should establish in the SMS that the master has the overriding authority and the responsibility to make decisions with respect to safety and pollution Prevention and to request the Company's assistance as may be necessary. The Code then addresses resources and personnel, requiring that: 6.1 The Company should ensure that the master is: .1 propfflyqualifiedfor command; . 2 fully conversant with the Company's SMS; and .3 given the necessary support so that the master's duties can be safely performed. This is partially done by ensuring that: 6.2... each ship is manned with qualified, certificated and medically fit seafarers in accordance with national and international requirements. This requires the company to consider the trade in which the vessel is engaged, the workload on the crew and the skills required for the tasks which they are expected to perform under both normal operating and emergency conditions. Although the code goes some way towards confirming the traditional authority of the master, it also requires from the master a management approach which, in the view of The Nautical Institute, reflects the team approach advocated in chapter two. The starting point for compliance with the ISM Code is, very sensibly, the company and it is required that: 13.1 . . . [every] ship should be operated by a company which is issued a document of compliance relevant to that ship. 217

Once the company's operating philosophy and procedures are established, then the audit process moves on to the fleet so that 13.4 A certificate, called a safety management certificate, should be issued to a ship by the administration or organisation recognised by the administration. The administration should, when issuing the certificate, verify that the company and its shipboard management operate in accordance with the approved SMS. The first part of the annex for this chapter, borrowing again from the JSF Guidelines, sets down a sensible approach to the development of an SMS system against which a master may well consider analysing his current company's operating procedures. The documents of compliance and the safety management certificates are issued under the authority of the relevant flag State against the audit reports of organisations recognised by the vessel's flag State. The persons undertaking the inspections should be properly registered auditors who have undertaken a rccogniscd quality audit course, supplemented by a maritime specialisation course which focuses the quality audit capability on the specific requirements of the ISM Code. The code also addresses the development of plans for shipboard operations, dividing these into special operations and critical operations as well as requiring the company to establish procedures '. . . to identify, describe and respond to potential emergency shipboard situations'. Although this is not the place to commence implementation of the code, the ISF guidelines offer an excellent summary of the operational areas which should be covered by the code and on which a master can start working independently of the code. These are set out in the annex for this chapter, together with some suggested subject matter for operations documentation and a useful summary of relevant international shipping conventions and recommendations. An approach to emergency planning can fie made using some of the disciplines described under formal safety assessment. A similar approach to commercial operations might also be an interesting exercise for the shipboard management team, drawing guidance from The Nautical Institute's Watchkeeping Safety and Cargo Management in Port.

Revised STCW Convention

In the words of the International Shipping Federation in the introduction to its guide to the 1995 amendments to the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW) 1978: is arguably the most important development concerning the improvement of maritime safety for over a decade. If effectively implemented, the new Convention should do much to increase safety of life at sea and the protection of oceans from pollution. The competence of seafarers is a critical factor in the safe and efficient operation of ships. A central aspect of the amendments has been to iocus on uniform standards for the attainment of competence in essential maritime skills. Competences can be described as all the individual tasks and skills required to operate a ship identified and grouped together to represent manageable, practical units of ability that can be readily assessed. For example, the competence of being able 'to plan and conduct a voyage and determine position', comprises tasks and skills using: - Celestial navigation. - Terrestrial and coastal navigation. - Electronic position fixing systems. - Echo-sounders. - Compasses. - Steering control systems. - Meteorological information. Functions identify more distinct groups of skills, abilities and responsibilities than those established by conventional departmental divisions which form the basis of the present convention. The convention defines standards of competence for seven functions: - Navigation. - Cargo handling and stowage. - Controlling the operation of the ship and care for persons on board. - Marine engineering. 218

- Electrical, electronic and control engineering. - Maintenance and repair. - Radio communications. The convention in section A:I:1 defines three levels of responsibility at which the competence to carry out these functions must be achieved: - Management level for masters and senior officers which requires them to be able to ensure 'that all the functions within the designated area of responsibility are properly performed'; - Operation level, corresponding to the watchkeeping or duty deck or engineer officer level; and - Support level. It can be readily seen that, with the breaking down of depaytinental functions in favour of overall operational functions, officers will require greater or lesser degrees of competence in all or most of the functional areas depending upon their responsibilities on board. This is reinforced under regulation I:14 by a requirement for the flag State to require every company to ensure (inter alia) that: .4 Seafarers on being assigned to any of its ships are familiarised with their specific duties and with all ship arrangements, installations, equipment procedures and ship characteristics that are relevant to their routine or emergency duties; and .5 The ship's complement can effectively coordinate their activities in an emergency situation and in performing functions vital to safety or to the prevention or mitigation of pollution. Indeed, professional seafaring and effective management require effective co-ordination of [their] activities under all circumstances, including those relating to the commercial performance of the vessel. From this brief description of the amendments to the STCW Convention, set in the context of the ISM Code, it is hoped that masters will reach a logical conclusion which leads them towards the team based management practices advocated in chapter two. There is no doubt whatever that an aspiring officer can best prepare himself for 'ensuring that all the functions within the designated area of responsibility are properly performed' than by an active participation in the management of the vessel as a whole rather than a concentration of the (arbitrarily) allocated functions of, for example, a second mate or third engineer.

Risk assessment

A risk-based approach has been used for a number of years by the nuclear, chemical and offshore industries, but formal safety assessment (FSA) differs significantly from the safety case regime in which a risk-based approach to safety management is developed on a case-by-case or plant-by-plant basis. Instead of applying these techniques to individual ships, the IMO are considering using FSA in an international context and at the development stage of the regulatory procedures that affect all ships. Thus, risk assessment can be applied at a number of different levels in the marine environment: potentially as an aid to the regulatory process (as in FSA), to the design process of individual vessels (especially complicated vessels such as cruise liners where safety case approach has a particular relevance in designing in optimum fire and safety precautions) and by the master and officers as a logical way of aiding the decision making process. Turning first to FSA, its potential benefits are seen as: (1) Enabling a consistent and comprehensive regulatory regime to be developed, which addressed all aspects of maritime safety in an integrated way; (2) Facilitating cost effective regulation, whereby safety investment is targeted into areas where it will achieve the greatest benefit; (3) Being proactive (rather than reactive) in its approach, enabling hazards that have not yet given rise to accidents to be properly considered; (4) Giving confidence that the system of regulation and control is risk based-i.e., that regulatory requirements are in proportion to the severity of the risks being controlled; (5) Providing a rational basis for assessing and controlling new risks posed by ever-changing marine technology. In the words of Captain D. Bell, of the MSA, whilst not being a panacea for all the problems of the world's shipping industry, when fully formed FSA has the potential to be:

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A tool which will help to develop a comprehensive risk management system for the (international) shipping industry. It will allow a systematic and proactive view to be taken of ship safety enabling informed decisions to be made based on the objective analysis ofrisk. It will deliver the maximum level of safety for a given level of investment; so it will not be a licence to spend more and more money on safety but a guide to ensure that money is spent in the most effective way. It will offer the opportunity to change, in the longer term: ... from the present reactive and largely empirically based system Of conventions and regulations to one based on scientific analysis and assessment which anticipates problems before they develop into catastrophies and it should help to lead to the change of safety culture advocated so powerfully by the Secretary General [of the IMO] For the purpose of the MSA assessment, FSA is divided into five systematic steps: Step One Identification of hazards. Step Two Assessment of risks associated with these hazards. Step Three Development of alternative ways of managing those risks. Step Four Cost benefit assessment of the risk management options. Step Five Decision between the options available. Whilst these five steps establish the base case, they do not formally incorporate the point at which a judgement of the acceptability of a level of risk is made. Nor do these steps include the monitoring and review loop that is essential for effective management. To an extent this is because the topdown FSA approach will be subject to a decision making procedure (as to acceptable risk) which will be negotiated at an international level. The commonly defined key steps in the safety management processes are: - Hazard identification. - Risk evaluation. - Development of risk management plan. - Implementation. - Risk monitoring.

Definitions

Before hazards can be identified, it is necessary to be quite clear about the difference between a hazard and risk. This is illustrated in figure 10.3, using a basic piece of electrical equipment as the hazard. In situation 1, with the vacuum cleaner safely stowed, there is little risk of any injury. In situation 2, with the vacuum cleaner left unattended, with a trailing lead, the likelihood of an accident increases-risk is heightened, although the consequences are not likely to be serious. In situation 3, with the flex stretched across the floor of a public area, the risk of an accident is higher and the possible injury more severe-a broken arm or badly twisted ankle. In situation 4, the flex leads across the steps down to the dining saloon and the potential seriousness of an accident is heightened, even to the possibility of death. If the cleaner is in this position as lunch is announced, the probability as well as the severity of an accident will be high-a high risk scenario. An approach to quantifying risk will be introduced later in this chapter; here the focus is on the hazard. There is little doubt that in scenario four; the vacuum cleaner is a hazard. It is the same vacuum cleaner, and the same hazard as in scenario one-it is the level of risk which changes. This understanding is critical when concerned with hazard identificatioil; it is all too easy to overlook a hazard because at the time of evaluation it is not posing a risk.

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As well as producing benefits for its owners and operators by transporting cargo or passengers, vessels have the potential to cause harm or loss, such as: - Injury or death to passengers and crew and, potential, shore-based personnel; - Damage or loss to the vessel and its cargo; - Pollution of the environment; and - Interruption of business for its operators, shippers, port authorities, etc. Physical situations which have the potential to cause such harm are known as hazards. Thus, a bow door is a hazard, because, if left open, it has the potential to allow water to enter the vessel. The floding would be known as a hazardous event. There is at this stage no assessment made of the likelihood or frequency of a hazardous event although the possible severity of the consequence might be taken into account, hence major or minor hazard. Accidents (events or incidents) are the realisation of a hazardous event-sudden, unintended departures from normal conditions causing harm or loss. Again, this may be quantified as to severity up to major catastrophies such as the Estonia or Herald of Free Enterprise. Risk is the combination of the likelihood and the consequence of a hazard causing an accident. The likelihood may be expressed as: the frequency-the number of events occurring per unit time; or the probability-the chance of the event occurring in specified circumstances. The consequence is the degree of harm caused by the event. Safety is the inverse of risk and, logically, the higher the risk of any level of harm from any activity, the lower is its safety. Conversely, the concept of 'safe' equating to zero risk is not tenable in an intrinsically hazardous activity such-as shipping. A more valid definition of safety may be the management of risk or the control of accidents. 221

Assessments can be made of- Safety-and if it is established in a structured and scientific manner it is sometimes referred to as formal safety assessment to differentiate it from a more subjective safety assessment which, at varying levels of consciousness and sophistication, is an inherent part of ship operations; - Risk-similar in many ways to safety but QRA (quantitative risk assessment) is a numerical approach incorporating analysis, methods of risk reduction and, possibly, cost benefit analysis. QRA is probably the most sophisticated method available to engineers to predict the risk of accidents and give guidance on appropriate means of minimising them. - Hazard-usually used to describe a range of many qualitative techniques which can help identify what - could go wrong, to gain an appreciation of the significance of such hazards, document safeguards and suggest whether these are adequate, without explicitly considering the likelihood of events occurring. Risk analysis is the process of quantifying risks based on identified hazards and incorporating an analysis of frequencies and consequences.

Five steps in risk assessment

Returning to the IMO con~sideration of the five steps involved in formal safety assessment, the aim is to achieve a systematic judgement and effective management of risk. Identification of hazards: A hazard has been identified as a physical situation with the potential for causing harm, to people, the environment or property. Hazards may or may not have already been realised as accidents and it is important to constantly monitor how changing technology and the influence of human factors may give rise to new hazards. Various techniques exist to assist with hazard identification (HAZID). (i)

Hazard and operability studies (HAZOP): this methodology involves a structured, systematic and comprehensive examination of installation/facility layouts and procedures, activity descriptions and/or process flowsheets. The study is usually undertaken by a multidisciplinary team who are familiar with the process under an independent chairman. HAZOPs have the benefit of being particularly appropriate for identifying hazards in 'soft' systems involving activities and operations. (ii) Failure mode and effects analysis (FAIEA): again a systematic approach, usually undertaken by small tcams, undertaking a bottom up process, beginning with a system component and looking at the effect on the overall system. This may well result in a range of possible effects from a single failure. Thus an FMEA may examine component failure in the cooling water pump and at a different stage, the effect of pump failure on the machinery plant. Above that there is the effect of machinery failure on the vessel as a whole. FMEA is mainly applicable to 'hard' (or hardware) systems and, as can be seen, can have a beneficial influence on the selection of spares as discussed in chapter eight. (iii) Structured what-if techniques (SWIFT): 'what if' is probably the most important question in the whole field of safety management. SWIFT is a group brainstorming based around a prepared hazard checklist, considering unplanned deviations from normal operations. Assessment of risk: There are both qualitative and quantitative methods of evaluating the risks posed by the identified hazards and the process involves considering the likelihood of occurrence in combination with their consequences.

(i)

Risk matrices: This is ajudgemental'and possibly subjective approach using qualitative scales (see table 10.4).

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Having defined the scales, a group of operators with relevant experience can be brought together to place judgemental rankings on the hazards and a typical matrix would appear as depicted above. (ii) Event tree analysis (ETA): These use inductive, forward looking reasoning commencing with an initiating event. Event trees tend to use a true/false logic and give a good pictorial display of event sequences. A range of outcomes can be accommodated on one event tree and a given outcome can be the result of more than one event tree sequence. (iii) Fault tree analysis (FTA): The basic process in the techniques of fault tree analysis is to identify a particular effect or outcome from the system and trace this back into the system along the logical routes to the prime cause. FTA works back-down after an accident or unwanted failure has been identified -i.e., EFFECT - CAUSE mainly using AND/OR logic gates. Thus it can be seen that ETA feeds forward from a given event whilst FTA works backwards from that event giving a detailed analysis of cause. 223

Development of alternative ways of managing risk: The risk management plan (RMP) requires a systematic evaluation of the identified risks in their order of severity-obviously events registering as frequent and catastrophic on the matrix are tackled first. The formal approach to RMP is: - Terminate-either by eliminating the potential for the event to occur or removing the exposed personnel; - Transfer-by taking out insurance to cover the potential losses, probably not a viable or tenable solution on its own; - Tolerate-by considering the risk acceptable if it cannot be reduced further in a cost-effective manner; and/or - Treat-by identifying reduction measures with the ideal being to lower the frequency of the accident first and to reduce the consequence second. To this, it is suggested, could be added mitigation. For example, is it better to increase the oil pollution clean-up facilities than to invest in double hull tankers? or invest much more heavily in training and standards? The formality of risk analysis will not only have revealed the hierarchy of risks, but should have indicated the relative importance of various contributory factors. Common factors are equipment reliability, procedures and human error. 'Hard' engineering failures may point to solutions incorporating redundancy, diversity or separation. 'Soft' operational failures may point to a need for improved procedures, additional training or, recalling the STCW amendments, a refocusing of competences. Other tools available to combat risk include both regulation (i.e., mandatory requirements to be complied with in every case-but remember the fishing lines and heliograph) and guidance (i.e., suggested arrangements or procedures, where the extent of compliance is at the discretion of the owner). Prescriptive rules may be more easily complied with and enforced, but can preclude technological progress or site based (safety case) approaches which may lead to more effective or more economical solutions. Equally, measures may be either active or passive, effective against only one hazard or many and effective alone or only in combination. Multiple barriers to prevent escalation may also be a necessary solution along an escalatory route identified by either fault or event tree analysis. A set of measures to reduce pollution from collision and grounding incidents involving large tankers is a prime example of the established process. The prescriptive route is to require all new tankers to have double hulls. The alternative is to set minimum acceptable levels for the leakage of oil into the environment as the consequence of a give fi seve-rity of accident. This may start to sound complicated, requiring a number of qualitative decisions. On the other hand, this approach could have been considered when prescribing double hulls and if this has been done, then the prescriptive regulation might have become guidance by the addition of '. . . or alternative measures of equal effectiveness'. This leads the shipowner into the presentation of a Safety Case much as is done in other industries and, for example, as is required in the provision of safety stand-by facilities for offshore oil installations. This also demonstrates the potential use of the tree analysis techniques. To What extent should investment be put into double hulls (or the equivalent) -i.e., 'hard' engineering solutions-as opposed to better training or operational procedures-i.e., 'soft' solutions designed either to prevent the incident or to mitigate its effects? Rigorous analysis using tested and consistent techniques can contribute significantly to finding the best, cost effective solution. The interesting and somewhat unique step which the IMO is contemplating is to go beyond the Safety Case approach and use FSA as the guidance and control mechanism for a supra-national regulatory environment. Cost-benefit assessment of the risk management options: It will not have been possible to identify the optimum risk controlling mechanism without involving a cost-benefit dimension. Although it may be emotive to put a price on human life or the protection of the environment, all effective risk management (and prescriptive regulatory regimes) must take into account that the funds available for allocation to safety are finite. If safety costs become too high (or become out of line with the perceived probability/ severity of loss or damage) then either the process becomes no longer economically viable or regulations are evaded. Cost benefit techniques are at work in a number of industries, if not yet fully developed in the maritime context. A guiding rule is consistency of application. The evaluation of benefit involves repeating step 2 of FSA to determine the new, lower level of risk and then assigning a monetary value to the change or risk. This is then compared with the costs which must include not only initial 224

and ongoing costs but also the costs associated with change and eyff-orcement. A complicating dimension is that the costs will not necessarily be borne by those benefiting most directly. The assessment of benefit, or at least its translation into a comparative monetary value, requires a degree of subjective judgement and it is here that consistency is particularly important. It is difficult enough to agree on the value of the environment in a single, relatively cohesive social group; it can be much more complex in a supra-national context where the value attributed to life and liberty may vary dramatically. In simple terms, risk can be expressed with respect to: - Individual Risk: Frequency with which a given individual may be expected to sustain a given level of harm from the realisation of specified hazards. - Societal Risk: The relationship between frequency and the number of people suffering a specified level of harm in a given population from the realisation of specified hazards. - Environmental Risk: Frequency with which a specified undesired environmental incident may be expected to occur from the realisation of specified hazards. This can lead to the concept known as ALARP or as low as reasonably practicable, illustrated in Figure 10.6.

This tiered system is employed by the UK Health and Safety Executive, amongst others, and involves an upper level risk target. Above this, continued operation is not considered acceptable whilst below a lower target level, risk is considered broadly acceptable. Between the two levels, in the ALARP region, 'reasonable practicability' needs to be demonstrated.

Decisions between the options available

One of the problems involved in selecting the best option is the importance of ensuring that all options to all relevant risks are being considered on a similar basis. This is not too difficult on a specific Safety Case basis but becomes more problematic in a supranational, industrywide environment. There is also the problem of drawing a boundary around the areas of consideration. To stretch the imagination: if the void space required between double hulls were increased or triple hulls were specified, there would come a time when it was uneconomical to transport hydrocarbons or at least the heavier fractions. The result of this could be to move refinery and manufacturing processes globally with unknown societal consequences. Another result might be to promote the development of environmentally friendly energy sources which do not add to the high atmospheric levelOf C02 or contribute to ozone depletion. Or it might vastly increase the use of nuclear energy. For an organisation such as the IMO, with its links through the United Nations to such bodies as the World Health Organisation and the organisation of the Rio Environmental Summit, the decisions could become as much political and philosophical as they are technical. Having followed the five steps of FSA then! are, as mentioned earlier, two which still need to be addressed: implementation, with its requirement for practicability and consistency; and monitoring, which is an essential element in the management of any process.

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Risk assessment at operating level

Does this brief review of the higher stratosphere " risk assessment and management have any relevance at an operational level on board? The answer must be yes, since risk analysis and decision taking is practised, consciously or otherwise, by masters and their officers on a daily basis as an integral part of their job. Indeed, it is used every time someone crosses a road (do we jay-walk across here or cross officially at the lights?) or decides whether to open the hatch and continue discharging in port on a wet Sunday afternoon. One aspect of risk assessment techniques which should be apparent is that it is a team activity in which combined knowledge and experience is used-and which can benefit from lateral thinking-which may not come most easily to those cast in a traditional mould. As such, it is a technique which a master can most effectively use in a team management environment and depends very much on his commitment to preplanning, logical thinking and anticipation. Below the IMO level, FSA related techniques are being used by an increasing number of shipping companies. It finds, for example, a valuable role in the early design processes of complex vessels such as cruise liners where such aspects as fire hazard analysis are of critical importance. One of its great strengths is that it brings designers and operators together in a common process at an early stage of the design when their conclusions can have a real and effective impact on the end product. It is always difficult to produce really realistic examples in a textual context but, in considering whether risk appraisal can be of value in a commercial environment: Engine trouble has delayed your arrival and you have 12 hours to enter port and tender notice of readiness. The port's only tug has broken down and the wind is increasing; the port is not closed but you are worried and not 100-% sure about the reliability of the main engine. The -risk is the main enginefailing on the way into port. If this happens, in the best case you anchor but probably block thefairway until main engines are repaired. Even then, without a tug, you might have to wait for wind and tide before you could safely weigh anchor-a delay of, say, six hours. In the worst case, you run aground possibly when transiting the narrow channel leading to the breakwater Taking the assumption of running aground,- tidal and weatherfactors indicate that it could befour days before you could be refloated at which time the -tug would be available. The sea bed is shingle so it is unlikely that there will be any damage requiring dry-docking but an underwater inspection will be required. You make an assumption of the likelihood of engine failure at one in five (20 %). The ,risk of proceeding inbound is: Four + days daily running costs $27,500 Bunkers used, domestic and refloating $1,800 Cost of tugs, Pilots, etc. $12,000 Cost of U/W inspection $3,000 Estimate for remedial work, next drydock $15,000 $2,000 Miscellaneous costs $61,300 Risk factor-20% Quantified risk $12,260 Failure to make Laycan will lead to a 70 % chance that the charter is cancelled resulting in a five-day passage to an alternative load port. The freight markets have fallen and, for a similar 25-day voyage, will probably be 5 % lower Five days DRC $27,500 Five days steaming bunkers $7,500 5 % reduction on $10, 000 pd $12,500 over 25 days $47,500 Risk factor- 70 % Quantified risk $33,250

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There may be a need to re-evaluate but at least the risk has been quantified and can be logically compared and costed using the best information available against comparative course of action.

Incidents, inquiries and investigations

Incidents is the neutral name for accidents and, as discussed, in a high hazard industry such as shipping, they cannot be totally eliminated. Two consequences of accidents will be touched on briefly here: enquiries and investigations and the media. The procedures discussed here relate closely to the approach taken in the United Kingdom. When considering inquiries or investigation, the master may need to keep in mind his relationship, both commercial and contractual, to a number of conflicting interests-owner, shipper, consignee, charterer to mention the four most obvious. He also needs to bear in mind the earlier comments made about the privity of information and the importance of gathering and presenting evidence. This aspect is covered more fully in The Nautical Institute's publication The Masters Role in CollectingEvidence. The fifth dimension is the response of the local regulatory authority, represented in the UK by the Department of Transport. Although based in a long tradition of accident investigation, the current investigatory regime dates from 1989 when the Marine Accident Investigation Branch (MAIB) of the Department of Transport (Shipping) came into existence. Modelled very much on the Air Accident Investigation Branch, the inception of MAIB was greatly prompted by the lessons learnt from the Herald of Free Enterprise accident and the rialisation that there can be conflicts of interest when accident investigation and policy and regulation are undertaken by the same body. MAIB's independence is reinforced by the direct reporting line from the chief inspector to the Secretary of State for Transport. The purpose of any investigation (whether at local level on board or at national level) can be to reveal one of three types of information: who is to blame; how the liability should be apportioned, and what is the cause. It is the third of these that is central to MAIB's function, although, in pursuing the true cause of an accident, aspects of blame and liability apportionment may be inevitable. Regulation 4 of the Accident Reporting and Investigation Regulations states: The fundamental purpose of investigating an accident under these regulations is to determine its circumstances and the causes with the aim of improving the safety of life at sea and the avoidance of accidents in thefuture. It is not the Purpose to apportion liability, nor except so far as is necessary to achieve thefundamental purpose, to apportion blame. It will be interesting to see how and if the aims and methods of MAIB adjust as and when FSA is introduced. At present these aims are: - To contribute to safety at sea by carrying out investigations to determine the cause of accidents; making recommendations which will result in improved safety; and increasing awareness of how accidents happen so as to encourage better and safer ship operation. - To satisfy the public in general, and the maritime community in particular, that marine accidents are thoroughly investigated. - To fulfil the requirements of the Safety of Life at Sea Convention to conduct investigations into marine accidents and to supply the ' International Maritime Organization with pertinen information about such investigations. There are three levels of investigation: -Inspector's inquiry. This is reserved for major accidents. On completion of an inspector's inquiry, the chief inspector must submit a report to the Secretary of State for Transport, which will be published unless a formal investigation is ordered. - Inspector's investigation and report. This is used in all cases where the accident requires full and detailed examination (except where an inspector's inquiry is called for). Submission of a report to the Secretary of State is not required and publication of the report is solely at the discretion of the chief inspector. A summary report may be released and made available to interested parties and the general public. - Administrative inquiry. Appropriate in less serious cases and conducted by correspondence. Most commonly, a report is requested from the owner or master or other relevant individual or agency.

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Merchant Shipping Notice No. M.1584 addresses accident reporting and investigations, requiring all accidents to be reported as soon as practicable and in any case within 24 hours of next arrival in port with an onboard investigation (by the ship's safety officer if carried) if personal injury is involved. Serious injury or dangerous occurrences should be reported within 14 days and there is no formal requirement to report (non-specified) hazardous incidents. However, near misses play a valuable role in improving safety and are encouraged by both the MAIB and The Nautical Institute through its confidential Marine Accidents Reporting System (MARS) which appears monthly in the Institute's journal Seaways. The MAIB also publishes regular summaries of investigations, which make worthwhile reading, especially as they contain a section in each investigation which comments, as opposed to formally recommends, on how the incident or accident might have been avoided. M. Notice 1584 defines: - Accident (a) Loss of life or major injury. (b) Vessel lost or presumed lost, abandoned or materially damaged. (c) Collision or grounding. (d) Causing loss of life, major injury or material damage or serious harm to the environment. - Serious injury basically means incapacity for three or more consecutive days, but below major injury level which equates to loss or dislocation of limbs etc. - Dangerous occurrences includes a range of occurrences from any person overboard through fire on board to unintended movement of cargo sufficient to cause a list. The inspector has the authority to: require any Person ... to attend before him, answer questions, and sign a declaration of the truth of his answers. As has been stated, the MAIB is not a prosecuting body and the declarations made to the inspector are not admissible in evidence at any inquiry or for the purpose of prosecution which may be instigated by the Marine Safety Agency or Treasury solicitor. The objective is for the person giving the declaration not to feel encumbered and to talk freely to the inspector in pursuit of greater safety. However, the course of MAIB investigation into cause may not all be smooth sailing. On occasions, especially in territorial or inland waters, there may be the death or other circumstance which prompts a police investigation or a Coroner's Court to examine the evidence. This can well delay and may easily hamper a MAIB investigation since the statements required by the different investigations serve different purposes; one to identify the cause and the other to allocate blame or at least to determine whether there has been a criminal act. The apportionment of blame has been known to impinge on accident investigations from other directions too. The evidence which an MAIB investigation may make public can also have ail effect on the progress of a commercial arbitration or Court case which is also looking at the same incident andat its commercial consequencesFinally, it may be a situation where . . . it appears to the Secretary of State [for Transport] that a formal investigation should be held and conducted in accordance with these [Merchant Shipping (Formal Investigations) Rules 1985 as amended in 19901 Rules by a wreck commissioner ... assisted by one or more assessors appointed by the Lord Chancellor The instigation of a formal investigation and the appointment of a Wreck Commissioner (usually a judge and not to be confused with a Trinity House Receiver of Wrecks) obviously widens and, inevitably, lengthens the whole scope of the investigation especially as the formal investigation may well make recommendations as to policy.

The media

The second aim of MAIB to satisfy the public in general . . .' indicates how important the handling of the public aspect of any accident has become. All seafarers must be aware of a public perception of the industry as polluters of the environment and the safety of roll-on, roll-off ferries is still an open question in many people's minds. One thing is certain, if the accident is likely to sell 228

newspapers the media will be there with some of the most effective communications and photographic equipment available. There are two things that the master must not do if the media appear; the first is not to feel that he can confidently face them without preparation and proper management of the situation, and the second is to endeavour to ignore their existence. One potential benefit is that it is relatively difficult for the media to access a vessel and, if in port, a good security guard on the gangway will help win time to enable a co-ordinated response to be made or for a company representative to take over. One advantage of a media-trained company representative taking responsibility for dealing with the media is that they are more likely to be detached. The emotional stress resulting from being involved in and responsible for the management of a crisis situation is not the best preparation for facing a trained journalist. Assuming it is necessary to deal with the media, plan and manage the situation so far as possible. Giving them controlled access will go some way to getting them to work with rather than against the ship team. If possible, establish a Press centre where the master can give an interview. Recalling chapter two, remember the importance of body language and, in such a situation, the possible benefit of being behind a desk or table. This adds formality to the interview, especially if a number of journalists are present, and lends time to the considered response. A short, prepared statement is a good first line of defence. This could be along the lines ofWe recognise the need to respond to the media. However, we are now working to ensure the safety of the crew, the ship and its cargo-and to limit damage to the environment. The company's emergency response plan has been activated. This plan includes environmental protection procedures. Specialists in oil spill containment and spill management are en route. The authorities have been notified and we are cooperating with them to handle the situation. You may direct your questions to the authorities. For information about [the company] you may direct your questions to [the designated company official]. They will be glad to assist you. Try and withdraw, bearing in mind that the media have well tried 'ambush' techniques. The quiet friendly word after the interview is over is one danger area as is the aggressive intrusion into an operational scenario or a subsequent call at home or in the office. 'No comment' or off the cuff responses arising from frustration, anger or tiredness are the stuff of journalists' sound bites. It is also important to remember that members of the crew are potentially even more vulnerable and should be shielded as much as possible and warned quietly not to make statements. Dealing effectively with the media needs training and practice (see references) but the best way to be believed by the public is to be honest, sincere and to display your real personality. DO - Be honest.

DON'T - Improvise or speculate.

- Stick to the main message. - Use plain language. - Dwell on negative - Admit you do not allegations. know the answer and - Use jargon. offer what information is available. - Say'no comment'.

DO - Correct mistakesstate that you would like to clear up confusion. - Stress heroic actions. - Emphasise corrective actions.

DON'T - Lie. - Stress negligence or individual errors. - Speculate on repercussions.

- Have factual information to hand.

- Assume you are ever off the record.

And, so far as time and the imperatives of dealing with the incident are concerned, it is advisable to record who has been spoken to and what has been said. Although formal safety systems make for better design, it is people who operate ships, and The Nautical Institute starts from the point of view that it is human to make mistakes. The problem facing the master is then how to manage the errors and ensure that the error or omission by one person will not compromise the safety of the ship or its commercial viability. To ensure safety the master must make sure that every critical operation can be checked and monitored and that all the sea staff are encouraged to check their own work and have it double-checked by somebody else. 229

This theme is developed more fully in The Nautical Institute's three publications Bridge Watchkeeping, Bridge Team Management an d The Management of Safety in Shipping.

ACKNOWLEDGEMENTS

THANKs are due to Jim Peachy of the Marine Safety Agency for access to their work on FSA and to advice and information from the Marine Accident Investigation Branch. Dr David Lawrence also contributed to the section on safety. Thanks are due to the International Shipping Federation for permission to reproduce extracts from their excellent guides.

REFERENCES

Guidelines on the Application of the IM0 International Safety Management Code. International Chamber of Shipping. The Revised STCW Convention. International Chamber of Shipping. Management of Safety in Ship Design. Paper, Aidan Holland DNV Technica: RINA Newbuild 2000. Formal Safety Assessment and the IM0. Report March 1995, Vince Jenkins: AEA Technology. Handling the Media. Videotel Productions. The Management of Safety in Shipping. The Nautical Institute. Bridge Team Management, Captain A. J. Swift. The Nautical Institute. Bridge Watchkeeping. The Nautical Institute.

ANNEXES FOR CHAPTER 10

- Extracts from ISF guidelines on ISM Code Special shipboard operations and examples of emergency situations. Suggested subject matter for operations documentation. Development of a safety management system. Major international shipping conventions and recommendations.

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Chapter 11

COMMERCIAL PERSPECTIVE ON EMERGENCIES Cargo claims and general averages-owner's negligence and limitation of liabilitycollision and salvage. With the vessel being one of the central characters in the chain of international trade and with the weather and the oceans still untamed by technological advance, it is not surprising that emergencies and other troublesome incidents continue to occur. All too frequently, the cause of these incidents is traced to human error and perhaps it is an accurate conclusion. Perhaps, though, our search for the responsible human stops too soon. Poor design, inadequate training, lack of motivation and mediocre management are all human errors which are not within the control of those who operate vessels at sea. This book is not able to change this, but one of the principles on which it is based is that the wider the master's knowledge of a subject, the better able he is to act effectively in a given situation. All incidents have a commercial implication and whilst a master's actions must be driven at the time of an incident by the imperative of safety-of life, the environment and his vessel and her cargo-this is done within the overall commercial context of the marine adventure. Very often, once the emergency is over, whether successfully contained or not, the master and his vessel are inundated with managers, superintendents, inspectors, surveyors, lawyers and media. It is very easy to let them take over when this is the very time that the master should be in command. Not only does he need to ensure that the incident is dealt with in a true seamanlike manner, but that a true and accurate record of events is made and that any commercially sensitive information is only available to those who have a legal right to it. This chapter explores two incidents and follows them through to their resolution some years later. Both are based on an amalgam of actual incidents which occurred within the last few years. In doing this, it continues the exploration of the York-Antwerp Rules commenced in chapter five and introduces Lloyd's Open Form and the International Convention on Salvage (1989).

Cargo claims and general average

THE MOTOR VESSEL Consternation is typical of many handy-sized five-hatch/five-hold bulk carriers built during the early part of the 1970s. With an LOA of 185m and a beam and depth of 27m and l5m respectively, she has a summer deadweight of 34,000 tonnes. Five 8-tonne cranes served her five holds and she is propelled at an economical 14 knots by a 12,000-bhp slow-speed diesel. Like many of her type, she has been sold a couple of times during her 20 years tip to the incident, but still retains her original class and is registered in Cyprus-although it could be any one of a number of different registers. She is owned by a single-ship company, Consternation Shipping Corporation, arid managed by Fibula Ship Management Inc, ostensibly on an arm's length basis. Classification, throughout her life, had remained with ABS. During the voyage in question the vessel was tramping under a Pool Agreement in accordance with the pre-1993 version of the New York Produce Exchange Form time charter (see also Chapter 6). Clause 19 of the time charter specified that: General Average shall be adjusted according to York-Antwerp Rules 1974, as amended 1990-or latest amendment, at such port or place in the United States as may be selected by the Owners. In Rider clause No. 51 it was further specified that: It is agreed to amend Clause 19 to the extent either YA.R. 1950 or 1974 or as most recently amended are al5plicable dependent upon the wording in the [voyage] Charter Party and/or Contract of affreightment ruling, for each voyage in question.

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She had been fixed for a typical voyage from South Africa to the Far East with parcels of mineral concentrates. The main parcel of 20,000 tonnes of copper concentrate was from Saldanha Bay, purchased by a major international trader in metals arid minerals arid onsold to receivers in the Far East for their manufacturing processes. As the vessel proceeded, further parcels, in smaller lots, were loaded of lead concentrate (three parcels) and silver/gold concentrate (one parcel). The vessel was contracted to carry the various parcels under individual voyage charters, signed by the respective shippers. Each contains a reference to York-Antwerp Rules. In the voyage charter for the main parcel of 15,000 tonnes of copper concentrate shipped by the trader, clause 13 read: Any averages occurring under this Charter to be adjusted in London, according to York-Antwerp Rules 1990 and any subsequent amendments, and according to English Law and practice. Other voyage charters referred to 'York-Antwerp Rules 1974 at and as supplemented by custom and practice at the Port of London'with or without the '1990 amendment'. The cargo was carried under a number of separate bills of lading, and the one relating to the major parcel of copper concentrate stipulated in clause 3 that: General Average shall be adjusted, stated and settled according to York-Antwerp Rules 1974 in London. This represents fairly typical example of the range (and potential conflict) of the commercial documentation relating to the carriage of, for many shipmasters, a fairly average cargo. They reflect the various underlying contracts negotiated by the traders (and discussed in chapter five) initially to buy and subsequently to sell on the goods, together with any financing arrangements made under a deferred credit scheme as described in chapter four. Certainly there will be banks in the background who, expecting a simple one-month transaction, are anxious for the cargo to be delivered and their obligation lifted. Cargo insurers are also more than a little interested, especially the Scandinavian underwriters who led the insurance on the parcel of copper concentrate on behalf of the trader. With cargo often being the main contributor to a general average claim, it is perhaps logical that the wording in the cargo documents related most closely to the cargo interests which suffered loss, will prevail. In this example, general average is adjusted in London in accordance with York-Antwerp Rules 1974-no amendments. At the end of this part of the chapter, the detailed numbered sections of the York-Antwerp Rules are set out with the latest 1994 version of the Rules with the amendments highlighted. Reading these in conjunction with the lettered section contained in chapter six, the reader might like to speculate whether the subsequent amendments (albeit mainly relating to pollution) might materially affect the settlement.

The incident

On completion of loading and lifting some 31,500 tonnes of cargo, the Consternation shifted berth in Durban for bunkers, to the account of charterers. Bunkered, she set course forJapan, keeping a rhumb line route in an endeavour to avoid higher latitude storms. Weather forecasts were studied but weather routeing was not used. Immediately on clearing the port the vessel met a heavy swell and rough seas with winds of Beaufort Force 5-6. Heavy pitching and rolling resulted in seas breaking over forecastle, main deck and hatch covers. The weather continued to deteriorate, reaching Storm Force 10 with the vessel proceeding at reduced speed. Manoeuvring to create a lee, the crew were able to inspect the fore part of the vessel. Sea water was found to have entered the forecastle spaces and both No. I and No. 2 cargo holds and there was some heavy weather damage on deck. The master altered course to make for a port of refuge. On arrival, the master, having already notified his owners and charterers, and accompanied by his local P&I Club correspondent, noted protest before the consul (or a notary). Although tempted to write extoded explanations of the events leading tip to his decision to alter course, the master remembered that the purpose of a protest is to note an event formally and reserve a position. He wisely elected to keep to the 'standard' version (to which he just needed to add the relevant details) and to which he attached either a typed or photocopied extract of the relevant log-book pages. A 232

protest can be noted before either a notary public (or his equivalent) or before the Consul representing the country in which the vessel is registered. MVConsternation Port of Refuge: Port Louis, Port of Registry: Mauritius Limassol On this (7th) day of (February) one thousand nine hundred and ninety (five) personally appeared before me (the Consull Notary) at Port Louis, (Horatio Horblower) master of the (Cypriot) flag ship (Consternation) of (Limassol) official number (3456) and (12,033) tons register which sailed from (Durban) on or about the (29th) day of (lanuary 1995) with a cargo of (mineral concentrates) bound JbT (Yokohama) and arrived at (Vort Louis) on the (7th) day of (February 1995) andjearing loss or damage owing to (heavy weather) during the voyage, he hereby notes his protest against all losses, damages etc., reserving the right to extend the same at time and place convenient. Signed by (Master) Subscribed and sworn before me (Consul or Notayy) on the (7th) day of (February 1995). Signed by (Consul/Notary) It is much better at this stage to be as brief and factual as possible and avoid, however tempting, such (subjective) statements as 'the vessel was in perfectly good/seaworthy condition on departure...' Protests may need to be extended in certain cases but this will usually be done under legal advice; it is important, however, to keep this option open when making the initial protest. Obviously the next two days were going to be extremely busy, with very many interested parties sending surveyors or other representatives, over and above the port authorities, to inspect the vessel and her cargo and to gather information. This is a situation which can easily get out of control unless the master takes positive steps to manage the situation. Fortunately, in this case he had time to start drafting his report on passage to the port of refuge. As a wise precaution the master discussed the contents of his report with the local Club Correspondent before making the formal report available. The report is accompanied by as many photographs as possible supporting the claim of weather conditions above and beyond the normalin other words, loss due to (an insured) peril of the sea. Arbitrators and average adjusters are, unfortunately, all too used to a'boisterous breeze'becoming a 'raging gale'. These days (following the case of the Miss Jay Jay) the Courts define heavy weather much more precisely and it is possible to correlate a vessel's logbook against historical satellite weather data which will give wave and swell height and direction over much of the ocean's surface. The report will be ongoing and it is good practice to keep it up to date on a daily basis. The report must remain factual because it can be inspected by all parties under the legal concept of 'discovery'. Any supplementary information or opinions which the master may have should be kept totally divorced from the formal paperwork. If the master needs to convey an opinion to his legal representative, this is best done within the body of a letter to the company's solicitors. (The Nautical Institute publication The Masters Role in Collecting Evidence expands upon this aspect.) The importance of keeping to factual information must be impressed on all officers on board, and, indeed, all the crew, for surveyors on behalf of cargo interests can be expected to show a lively interest in the condition of the hatch covers and the general seaworthiness of the vessel (see chapter six). All such queries should be referred to the master or a designated officer. If possible-and this is important enough to make it possible-the master should call a meeting of his management team, together with the Club Correspondent, and agree overall policy and allocate duties and priorities. Brief review meetings of the ship's management team (home team) are recommended morning and evening. This can also be a good time for the master to gather together information relevant to his report and to ensure that all work being undertaken has been duly authorised and that invoices and/or running timesheets are being provided. There is little chance of the master lacking either company or paperwork. Of the people he can expect to see passing through his office, over and above his home team, port officials and stevedoring and agency representatives are: 233

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Classification society surveyor; Salvage Association surveyor; (representing Hull and Machinery insurers); General average surveyor (required if there is a forced discharge of cargo); Cargo surveyors on behalf of owner's, time charterers and various cargo interests; Cargo analysts on behalf of owners and various cargo interests; Time charterers. Many of them may be expected both at the port of refuge and at the port of final discharge. General average is usually declared by the owner and does not require any specific act by the master (such as appearing before a notary) although there are circumstances under certain legal schemes where other interested parties can initiate a general average claim. The average adjuster is also generally appointed by the owner, possibly in consultation with his hull insurers through his insurance brokers; althoi*h appointed by the owner and entitled to full co-operation and support together with access to all relevant facts, it should be bourne in mind that the average adjuster must hold to a professionally neutral position. In this circumstance there is no immediate need for any general average security to be posted by cargo interests (which is either in the form of an average bond by receivers or an average guaranteesee annex 11.2-by the cargo insurers) to cover subsequent contributions. However, in the case of a container vessel or parcel tanker (or, for that matter, any vessel) declaring general average on arrival at a discharge port, prompt and firm action may be needed by the master to ensure that no cargo is discharged before he has confirmation from his owners based on advice from the average adjuster. As mentioned previously, liens on cargo are possessory not maritime. The average adjuster is responsible for calculating the contribution of other parties towards the extraordinary loss or expense suffered by the owner (or another party to the adventure). Although normally appointed by the owner, the master must remember that the average adjuster is bound to work in accordance with well defined principles under the York-Antwerp Rules. As such, neither he, nor the local surveyor appointed by him, are part of the home team in the same way as the Club Correspondent. All information provided by the master and presented to the adjuster must be factual and correct. The stage now comes when efforts must be made to reclaim as much of the cargo as possible and to mitigate loss, both to the shipowner and to the cargo owners. This calls for a plan which is, so far as possible, agreed by all parties concerned. It is contended that, in so far as he is the shipowner's senior representative, the master remains in charge of this operation although there will be many interests keen to influence his judgment in their favour. During the Consternation's stay at the port of refuge it was agreed with the owners of the copper concentrate that the salt water wetted cargo in No. I hold should be discharged into barges and regularly turned to aid water evaporation and drying. A particular complication was that title had by this stage passed from trader to the receiver, although the risk was still held covered by the trader's cargo insurance. Prior to discharge, various samples of cargo were taken by analytical chemists on behalf of both owner and cargo. Discharge revealed that the combination of copper and seawater was giving rise to galvanic attack on the steelwork of No. I hold. An analysis was undertaken on behalf of owners and, based on this information, it was the consensus of the interested parties that the best remedial action was pressure washing and coating the lower 5m. of No.1 hold with zinc rich paint. Representatives on behalf of the traders (shippers) request that wetted and dry cargo be kept separate. This was only partially possibleald attempts at separation eventually result in the cargo becoming partially contaminated with dunnage and plastic sheeting when reloaded into No. 1 hold. Since the vessel was called off the berth from time to time by the port authorities, the whole operation took 29 days. During this time the vessel suffered a certain amount of stevedore damage, for which the master issued formal notices of damage. Analysis confirmed that the average moisture level was above the transportable moisture levels (TML) of [he other concentrates. A similar solution for the wetted concentrate in No. 2 hold was found not to be feasible since there was perceived to be a real danger of environmental contamination. There were particularly strict environmental controls in the port of refuge and as no party was prepared to underwrite the possible fine and clean-up cost, an alternative solution was sought. Having skilfully managed regular meetings at which all interested parties were invited to attend, the master won the confidence of most involved and consensus was generally achieved. It was also 234

found that agreement could be reached on using one analytical chemist thus saving both time and money. The solution to the problem of No. 2 hold, which involves approval by Class and the local marine inspectorate, was to construct a dividing bulkhead by hammer driving interlocking steel plates into the cargo as the wooden separation was collapsing. The receivers of four bill of lading lots were involved in ihis decision. Forty days after entering the port of refuge, mv Cotisternation bunkered and sailed into gale force winds and heavy seas which promptly washed some 30 drums of sweepings off the weather deck, breaking the ship's railings at the same time. On arrival at the first discharge port, the ship's agents already had confirmation that an average bond and average guarantee had been posted. Prior to discharge of No. 2 hold, samples of the cargo were again taken for analysis. In this case, the analysis concentrated on determining the effect on the commercial value of the lead concentrate of saltwater. Discharge was slow due to the temporary bulkheads and crusting of the cargo. Competitive quotes were invited for the removal of the bulkheads. The master had to address similar considerations at the second discharge port where the copper concentrate was to be discharged. The mixing of wet and dry and the partial contamination by dunnage caused the receivers considerable consternation. Non-standard and consequently more expensive methods of discharge had to be employed. Although a majority of the cargo passed over a weighbridge, some of the crusted and contaminated cargo was piled in a warehouse for later disposal. Owner's cargo surveyors and the local P&I Club Correspondent were instructed to keep a record of what eventual tonnage was recovered, together with its condition as this would affect its market value. The voyage eventually completed just over four months from arrival at first load port.

The adjustment

The general average adjustment neared conclusion almost two years after completion of the voyage. It ran to some 200 pages of reports, findings and summary invoices with over 250 pages of accounts. If accepted, settlement will be made between the shipowners, time charterers and cargo interests. If not accepted, arbitration or a Court action may result with the possible requirement for the master to give evidence. Under such circumstances, comprehensive and obviously contemporaneous reports backed up with well kept logbooks will undoubtedly ensure that the master's evidence is given the credence due to the person who was on the spot. Despite the settlement, all parties will have suffered loss and the most damaging loss may be a loss of confidence in the vessel and her trading pool. This would be serious as the trader is an important charterer of bulk tonnage and the receivers are all major industrial concerns and both importers and charterers in their own right. Such an incident can easily leave an impression of a poorly maintained and inefficient vessel which should not be chartered again. Firm and decisive management of the incident by the master, effectively supported by his advisers and crew, went a long way towards leaving the impression of an efficient operation which encountered and successfully dealt with, one of the inevitable perils of the sea. The attached extracts from the general average adjustment are included to give an indication of the detail which needs to be recorded in the event of general average being declared. As can be seen, the costs fall into one of three pots: - General average, which is then apportioned between the various parties (vessel, cargo and time charterer's bunkers). These G.A. contributions are normally covered by their respective insurers; - Particular average, which the owner will expect to recover from his hull insurances, less any deductible; and - Remainder, which the owner must bear out of his own resources. It is important that the master sets up a system which carefully monitors and identifies expenditure. This will assist the average adjuster to determine whether costs should be regarded as either general or particular average-or whether they are not recoverable and must be borne directly by the owner. Although some running costs may be recovered such as wages, fuel and stores, the owner's cashflow will still be adversely effected by the lack of income. Even if the owner does have 'loss of hire' cover, it is likely to have a seven to fourteen day deductible before it starts paying. 235

Consequently, the master, in conjunction with the chief engineer and his management team, may need to review their future maintenance schedule and revise some of the priorities. In the following examples of the average adjuster's accounts, attention is drawn to the adjuster's notes and particularly those areas where costs are apportioned or allocated to the remainder column and where it might have been possible to argue for them to be included under the general or particular average columns. Other cases show where overtime is an allowed general average claim because it contributed to a reduction of the overall time/cost equation. In yet other cases, expenses or overtime are disallowed as sufficient evidence is not available to argue for their inclusion. The extent of the accounts (250 pages) demonstrates the critical importance of establishing a regime of good housekeeping and proper and contemporaneous records, co-operating fully with the surveyors appointed by owner's insurers. NOTE: The following are extracts only from a fictitious adjustment in which the ship and the cargo interests will be major participants. Readers are not recommended to try and follow the calculations in detail as they are incomplete. The intention is to reflect the range of relevant information involved and indicate how it is analysed and classified thereby demonstrating the essential need for detailed records and for the master to actively manage the operation in close co-ordination with the hull underwriters' surveyor.

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York-Antwerp Rules 1994 (numbered rules)

The numbered rules (which deal with fact) should be read in conjunction with the lettered rules (which appear in Chapter five, with changes made during the 1994 CMI Convention highlighted in the same way). Rule 1. Jettison of cargo No jettison of cargo shall be made good as general average, unless such cargo is carried in accordance with the recqgnised custom of the trade. As previously mentioned, 'recognised custom of the trade' is open to a number of attacks legally and masters should be certain to ensure that the bill of lading of any cargo carried on deck is properly claused (chapter 6). Rule 11. Loss or damage by sacrifices for the common safety Loss or damage to the property involved in the common maritime adventure by or in consequence of a sacrifice made for the common safety, and by water which goes down a ship's hatches opened or other opening made for the purpose of making a jettison for the common salety shall be made good as general average. Only a small technical point to note, 'property' has replaced 'ship and cargo' to forestall any possible allowances for pollution liability and loss has been included as well as damage. Rule III. Extinguishingfire on shipboard Damage done to a ship and cargo, or either of them, by water or otherwise, including deimageby beaching or scuttling a burning ship, in extinguishing a fire on board the ship, shall be made good as general average; except that no compensation shall be made for damage by smoke however caused or by heat of the fire. In chapter seven (General average and salvage) the case of Watson v Fireman's Fund Insurance was noted. In this case, the extinguishing damage to the cargo was not allowable as general average because the endorsee failed to establish that there had been an actual fire in the hold. Therefore, there had been no peril. However, damage caused in alleviating heating of cargo, before there is an actual fire, could be allowable as general average in terms of the lettered rules A and C. 'Heat however caused' has been changed into 'heat caused by fire' specifically to allow for occasions when it may be necessary to turn refrigerating machinery off in order to extinguish a fire. Damage to the reefer cargo from ambient heat is now allowable as opposed to heat damage caused by the fire. It will doubtless be thejoy of the average adjuster to apportion between the two. Rule IV Cutting away wreck Loss or damage sustained by cutting away wreck or parts of the ship which have been previously carried away or are effectively lost by accident shall not be made good as general average. If and when environmentally friendly sail power returns, this clause will regain much of its former relevance. Rule V Voluntary stranding When a ship is intentionally run on shorefor the common safety, whether or not she might have been driven on shore, the consequent loss or damage to the property involved in the common maritime adventure shall be allowed in general average. The reference to property is again to forestall any possible allowances for pollution liability. Rule VI Salvage remuneration (a) Expenditure incurred by the parties to the adventure in the nature of salvage, whether under contract or otherwise, shall be allowed in general average provided that the salvage operations were carried outfor the purpose ofpreservingfrom Peril the property involved in the common maritime adventure.

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Expenditure allowed in general average shall include any salvage remuneration in which the skill and efforts of the salvors in Preventing or minimising damage to the environment such as is referred to in art. 13 paragraph 1(b) of the International Convention on Salvage, 1989 have been taken into account. (b) Special compensation payable to a salvor by the shipowner under art. 14 of the said convention to the extent specified in paragraph 4 of that article or under any other provision similar in substance shall not be allowed in general average. This rule reflects the 1990 amendment to the 1974 Rules which introduced the concept of including 'the skill and efforts of the salvors in preventing or minimising damage to the environment'. As has been seen in the prior example, it is vitally essential that the master keeps a careful record of all expenditure whenever there is the possibility of a recovery under general average. Rule VII. Damage to machinery and boilers Damage caused to any machinery and boilers of a ship which is ashore and in a position of peril in endeavouring to refloat, shall be allowed in general average when shown to have arisen from an actual intention to float the ship for the common safety at the risk of such damage; but where a ship is afloat no loss or damage caused by working the propelling machinery and boilers shall in any circumstances be made good as general average. Any use of the vessel's machinery in such a case must be reasonable as specified by the Rule Paramount. If, for example, it is known that the cooling water intakes are, or are in danger of becoming, blocked so that the engines are unlikely to be able to operate long enough to make any effective contribution, their use might well be considered unreasonable and therefore not allowable under general average This will ultimately depend upon what alternative courses of action were available to the master, if any. Rule VIII. Expenses lightening a ship when ashore and consequent damage When a ship is ashore and cargo and ship's fuel and stores or any of them are discharged as a general average act, the extra cost of lightening, lighter hire and reshipping (if incurred), and any loss or damage to the property involved in the common maritime adventure in consequence thereof, shall be admitted as general average. Again the working has been adjusted to avoid any possible environment liability. This rule relates to the second paragraph of Rule C. Rule IX. Cargo, ship's materials and stores used forfuel Cargo, ship's materials and stores, or any of them necessarily used for fuel for the common safety at a time of Peril shall be admitted as general average, but when such an allowance is made for the cost of ship's materials and stores, the general average shall be credited with the estimated cost of thefuel which would otherwise have been consumed in prosecuting the intended voyage. The previous wording required that these costs would be included '...when and only when an ample supply of fuel had been provided...' The previous clause was drafted in the days of coal-burning ships and contained within it an element of fault-i.e. that the shipowner did not stem enough fuel. This is not strictly relevant to the numbered rules which deal only with fact-the fact being that there was'not enough fuel and stores or cargo had to be used. If there is fault in the under provision of fuel, and this may well be the fault of a time charterer rather than the owner, then this may become a matter for dispute under other contracts. The need to keep a careful and constant account of bunkers consumed is obvious. Rule X. Expenses at port of refuge, etc. (a) When a ship shall have entered a port offace of refuge or shall have returned to her port or Place of loading in consequence of accident, sacrifice or other extraordinary circumstances which render that necessary for the common safety, the expenses of entering such port Or place shall be admitted at general average; and when she shall have sailed thence with her original cargo, or 242

a part of it, the corresponding expenses of leaving such port or Place consequent upon such entry or return shall likewise be admitted as general average. When a ship is at any port or place of refuge and is necessarily removed to another port or place because repairs cannot be carried out in the first port or place, the Provisions of this rule shall be applied to the second port or place as if it were a Port orplace of refuge and the cost of such removal including temporary repairs and towage shall be admitted as general average. The Provisions of Rule IX shall be applied to the prolongation of the voyage occasioned by such removal. (b) The cost of handling on board or discharging cargo, fuel or stores whether at a port or Place of loading, call or refuge shall be admitted as general average, when the handling or discharge was necessary for the common safety or to enable damage to the ship caused by sacri/ice or accident to be repaired, if the repairs were necessary for the safe prosecution of the voyage, except in cases where the damage to the ship is discovered at a port or place of loading or call without any accident or other extraordinary circumstances connected with such damage having taken place during the voyage. The cost of handling on board or discharging cargo, fuel or stores shall not be admissible as general average when incurred solely for the Purpose of restowage due to shifting during the voyage, unless such restowage is necessary for the common safety. (c) Whenever the cost of handling or discharging cargo, fuel or stores is admissible as general average, the costs of storage, including insurance if reasonably incurred, reloading and stowing of such cargo, fuel or stores shall likewise be admitted as general average. The provisions of Rule IX shall be applied to the extra period of detention occasioned by such reloading or restowing. But when the ship is condemned or does not proceed on her original voyage, storage expenses shall be admitted as general average only up to the date of the ship's condemnation or of the abandonment of the voyage or up to the date of completion of discharge of cargo if the condemnation or abandonment takes place before that date. Only a marginal change was made in the 1994 redrafting. This rule is directly applicable to the case of the Consternation. Rule XI. Wages and maintenance of crew and other expenses bearing up for and in a port of refuge, etc. (a) Wages and maintenance of master, officers and crew reasonably incurred andfuel and stores consumed during the prolongation of the voyage occasioned by a ship entering a port or Place of refuge or returning to her port or place of loading shall be admitted as general average when the expenses of entering such port orplace are allowable in general average in accordance with Rule X(a). (b) When a ship shall have entered or been detained in any port or Place in consequence of accident, sacrifice or other extraordinary circumstances which render that necessary for the common safety, or to enable damage to the ship caused by sacrifice or accident to be repaired, if the repairs were necessary for the safe prosecution of the voyage, the wages and maintenance of the master, officers and crew reasonably incurred during the extra Pe7iod of detention in such port or place until the ship shall or should have been made ready to proceed upon her voyage, shall be admitted in general average. Fuel and stores consumed during the extra period of detention shall be admitted as general average, except such fuel and stores as are consumed in effecting repairs not allowable in general average. Port charges incurred during the extra period of detention shall likewise be admitted as general average except such charges as are incurred solely by reason of repairs not allowable in general average. Provided that when damage to the ship is discovered at a port or place of loading or call without any accident or other extraordinary circumstance connected with such damage having taken place during the voyage, then the wages and maintenance Of master, officers and crew andfuel and stores consumed and port charges incurred during the extra detention for repairs to damages so discovered shall not be admissible as general average, even if the repairs are necessaryfor the safe Prosecution of the voyage. When the ship is condemned or does not proceed on her original voyage, the wages and maintenance Of the master, officers and crew and fuel and stores consumed and port charges 243

shall be admitted as general average only up to the date of the ship's condemnation or abandonment takes place before that date. NB: Paragraphs of Rule IX(b) 1974 reordered (c) For the purpose of this and the other rules wages shall include all payments made to orfor the benefit of the master, officers and crew, whether such payments be imposed by law upon the shipowners or be made under the terms of articles of employment. (d) The cost ofineasures undertaken to prevent or minimise damage to the environment shalrbe allowed in general average when incurred in any or all of thefollowing circumstances: (i) as part of an operation performed for the common safety, which had it been undertaken by a party outside the common maritime adventure, would have entitled such party to a salvage reward; (ii) as a condition of entry into or departurefrom any Port or place in the circumstances prescribed in Rule X(a); (iii) as a condition of remaining at any port or place in the circumstances prescribed in Rule X(a) provided that when there is an actual escape or release of pollutant substances the cost of any additional measures required on that account to prevent or minimise pollution or environment damage shall not be allowed as general average; (iv) necessarily in connection with the discharging, storing or reloading of cargo whenever the cost of those operations is admissible as general average. The greater extent of what may be termed the vessel's domestic costs are covered under this rule. Again the comments about keeping good records obtain. The additional paragraphs under (d) relate to the 'pollution compromise' which was agreed between liability and property underwriters in 1994. In general terms under (i) if, for example, a load tanker is stranded and the shipowner hires equipment on a contractual basis both to refloat the vessel and, as a part of that operation, to prevent or minimise damage to the environment, then, subject to the 'reasonableness' required by the Clause Paramount, the cost of each of these measures will be allowable in general average (so long as they would have been taken into account in the reward to a salvor operating on the basis of a LOF type agreement). In a similar way, booms or similar equipment hired to prevent or minimise damage to the environment when lightening or transferring cargo will be allowed. Rule XII. Damage to cargo in discharging, etc. Damage to or loss of cargo, fuel or stores sustained in consequence of their handling, discharging, storing, reloading and stowing shall be made good as general average, when and only when the cost of those measures respectively is admitted as general average. The change from 'caused in the act of seen above has been introduced to narrow the scope of the wording of this rule. Rule XIII. Deductions from cost of repairs Repairs to be allowed in general average shall not be subject to deductions in respect of new for old where old material or parts are replaced by new unless the ship is over 15 years old, in which case there shall be a deduction of one third. The deductions shall be regulated by the age qf the ship from 31 December of the year of completion of ,construction to the date of the general average act, except for insulation, life and similar boats, communications and navigational apparatus and equipment, machinery and boilers for which the deductions shall be regulated by the age of the Particular parts to which they apply. The deductions shall be made only from the cost of the new material orparts whenfinished and ready to be installed in the ship. No deductions shall be made in respect of Provisions, stores, anchors and chain cables. Drydock and slipway dues and costs of shifting the ship shall be allowed in full.

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The costs of cleaning, Painting or coating of bottom shall not be allowed in general average unless the bottom has been painted or coated within the twelve months preceding the date of the general average act in which case one half of such costs shall be allowed. Rule XIV. Temporary repairs Where temporary repairs are effected to a ship at a Port of loading, call or refuge, for the common safety, or of damage caused by general average sacri/ice, the cost of such repairs shall be admitted as general average. Where temporary repairs of accident damage are effected in order to enable the adventure to be completed, the cost of such repairs shall be admitted as general average without regard to the saving, if any, to other interests, but only up to the saving in expense which would have been incurred and allowed in general average if such repairs had not been effected there. No deductions new for old shall be made from the cost of temporary repairs allowable as general average. The second paragraph has been the subject of considerable litigation as to the extent of the repairs allowable. A recent House of Lords decision, the Bijela [1994] A.C., endorsed the average adjusters' practice of allowing such temporary repairs. Rule XV Loss of freight Loss of freight arising from damage to or loss of cargo shall be made good as general average, either when caused by a general average act, or when the damage to or loss of cargo is so made good. Deduction shall be madefrom the amount of gross freight lost, of the charges which the owner thereof would have incurred to earn suchfreight, but has, in consequence of the sacrifice, not incurred. There have been no recent changes to this Rule; time charter hire is not allowable. Rule XVI Amount to be made good for cargo lost or damaged by sacrifice The amount to be made good as general averagefor damage to or loss of cargo sacrificed shall be the loss which has been sustained thereby based on the value at the time of discharge, ascertainedfrom the commercial invoice rendered to the receiver or if there is no such invoicefrom the shipped-value. The value at the time of discharge shall include the cost of insurance and freight except in sofar as such freight is at therisk of interests other than the cargo. Men cargo so damaged is sold and the amount Of the damage has not been otherwise agreed, the loss to be made good in general average shall be the difference between the net proceeds of sale and the net sound value as computed in thefirstparagraph of this rule. There is a problem inherent in this rule in so far as multi-modal (through) transport is frequently effected under one invoice from shipper to (inland) destination. It can, therefore, be difficult to ascertain the value 'at the time of discharge' from the commercial invoice. A number of delegates at the Sydney conference in October 1994 wanted to solve this by introducing the concept of value at time of final delivery. This proposal was, however, overturned and the controlling value remains the value at the time of discharge from the vessel. Rule XVII Contributory values The contribution to a general average shall be made upon the actual net values of the property at the termination of the adventure except that the value of cargo shall be the value at the time of discharge, ascertainedfrom the commercial invoice rendered to the receiver or if there is no such invoice from the shipped value. The value of the cargo shall include the cost of insurance and freight unless and in so far as such freight is at the risk of interest other than the cargo, deducting therefrom any loss or damage suffered by the cargo prior to or at the time of discharge. The value of the ship shall be assessed without taking into account the beneficial or detrimental effect of any demise or time charterparty to which the ship may be committed. To these values shall be added the amount made good as general average for property sacrificed, if not already included, deduction being made from the freight and passage money at risk of such charges and crew's wages as would not have been incurred in earning the freight had the ship 245

and cargo been totally lost at the date of the general average act and have not been allowed as general average, deduction being also made from the value of the property of all extra charges incurred in respect thereof subsequently to the general average act, except such charges as are allowed in general average or fall upon the ship by virtue of an award for special compensation under art. 14 of the International Convention on Salvage, 1989 or under any other provision similar in substance. In the circumstances envisaged in the third paragraph of Rule G, the cargo and other property shall contribute on the basis of its value upon delivery at original destination unless sold or otherwise disposed of short of that destination, and the ship shall contribute upon its actual net value at the time of completion of discharge of cargoWhere cargo is sold short of destination, however, it shall contribute upon the actual net proceeds of sale, with the addition of any amount made good as general average. Mails, passengers' luggage, personal effects and accompanied private motor vehicles shall not contribute in general average. Either a great deal or very little can be written about this rule; it is the time that average adjusters wrap a damp t I around their brows. The newly introduced las'twearagraph, although reasonable since a passenger does not generally insure against general average contributions, led to the logical conclusion that a passenger ferry full of private cars would be virtually unable to declare (effectively) general average. Normally, however, such general average contributions are covered by special clauses in the vessel's hull and machinery policy or the shipowners may choose to bear these costs themselves for commercial reasons. Rule XVIII. Damage to ship The amount to be allowed as general averagefor damage or loss to the ship, her machinery and/or gear caused by a general average act shall be as follows: (a) Men repaired or replaced, The actual reasonable cost ofrepairing or replacing such damage or loss, subject to deductions in accordance with Rule XIII; (b) When not repaired or replaced, The reasonable depreciation arising from such damage or loss, but not exceeding the estimated cost of repairs. But where the ship is an actual total loss or when the cost of repairs of the damage would exceed the value of the ship when repaired, the amount to be allowed as general average shall be the difference between the estimated sound value of the ship after deducting there from the estimated cost of repairing damage which is not general average and the value of the ship in her damaged state when may be measured by the net proceeds of sale, if any. Rule XIX. Undeclared or wrongfully declared cargo Damage or loss caused to goods loaded without the knowledge of the shipowner or his agent or to goods wilfully misdescbed at time of shipment shall not be allowed as general average, but such goods shall remain liable to contribute, if saved. Damage or loss caused to goods which have been wrongfully declared on shipment at a value which is lower than their real value shall be contributed for at the declared value, but such goods shall contribute upon their actual value. Rule XX. Provision funds A commission of 2 % on general average disbursements, other than the wages and maintenance of 'master officers and crew and fuel and stores not replaced during the voyage, shall be allowed in general average. The capital loss sustained by the owners of goods sold for the purpose of raising funds to defray general average disbursements shall be allowed in general average. The cost of insuring general average disbursements shall also be admitted in general average. Rule XXI. Interest on losses made good in general average Interest shall be allowed on expenditure, sacrifices and allowances in general average at the rate of 7% per annum, until three months after the date of issue of the general average adjustment, due allowance being madefor any payment on account by the contributory interests or from the general average deposit fund. 246

Rule XXII. Treatment of cash deposits Where cash deposits have been collected in respect of cargo's liability for general average, salvage or special charges such deposits shall be paid without any delay into a special account in the joint names of a representative nominated on behalf of the shipowner and a representative nominated on behalf of the depositors in a bank to be approved by both. The sum so deposited together with accrued interest, if any, shall be held as secutity for payment to the parties entitled thereto of thegeneral aver age, salvage or special charges payable by cargo in respect of which the deposits have been collected. Payments on account or refunds of deposits may be made if certified so in writing by the average adjuster Such deposits and payments or refunds shall be without prejudice to the ultimate liability of the parties.

Owner's negligence and limitation of liability

In chapter ten the challenge-and the opportunity-offered to the shipping industry and to the professional mariner was opened for consideration. Here that consideration is made against the shipowner's ability to limit his liability in the event of negligence by the master or crew. What the shipowner cannot do is limit the liabilities which arise directly from his own negligence. As the ISM Code comes into force, with its requirement for a 'designated person' and much clearer lines of communication between vessel and owner, it will be interesting to see what interpretation the Courts put upon the owner's responsibility to provide a crew that is trained and competent to operate a particular vessel in real, as opposed purely documentary, terms. This in turn will reflect on how various flag States implement the requirements of both the STCW Convention and the ISM Code and whether that (major) part of the shipping communitywho want improved standards are prepared to take decisive action to prevent substandard operations and substandard registrations. The incident which follows is based on an actual incident and is synthesised from a lengthyjudgment. It does not matter too much who it happened to or where it happened-suffice that it happened on a modern well found vessel. If there are any shorebased readers who appear in the list in the preceding paragraph, they might like to glance at Figure 10.2, the master's dilemma, before reading on.

The facts

The vessel is a handy-sized bulker less than six years old. She is: Owned by ABC Bareboat chartered to DEF Managed by CHI With crew provided by JKL Time chartered to NINO On voyage charter to PQR Flagged with STU And cargo owners are VWX The piece of paper which carried the title 'Minimum Safe Ma ning Certificate' was 'valid' and, indeed there were more bodies on board than stipulated, the officers with internationally 'valid' certificates of competency. Perhaps this is why the flag State never instituted a flag State inquiry. The vessel was seaworthy in practical terms and there were no mechanical failures; one of the two radars was in use at the time of the incident. The course recorder worked and would have recorded the courses if it had not run out of paper some days previously. The vessel had just completed a long ocean passage (plenty of time for chart corrections and voyage planning) and was to make landfall in an area known for its many reefs and small islands. The master had been employed by JKL throughout his seven years at sea. He had joined the vessel two weeks previously for his first trip as master, following four years as chief officer. Reports on him by other masters included the comments that he was inclined to be rash and needed to learn some serious judgement' and that with more experience he would make a good master but recommended that he be given a 'small ship' to command first. He had been interviewed twice by a clerk from managers GHI and met briefly by a marine superintendent. GHI's approval of his promotion and appointment was given 'on a chit signed by half a dozen members of senior management to whom the man was a stranger.' -

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The chief officer had served with the crew managers for a number of years but this was his first trip with these ship managers. He had neither met them nor been briefed, nor had he read their various instructions. The second mate was the same age as the master and had recently been working ashore for three years. He was neither interviewed by the managers nor had he read their various instructions. (Many seafarers will be aware of the volumes of operational, safety and quality standards which appear on board many vessels, setting out in frequently tedious and sterile detail, much of what could be more effectively imported through better-and ongoing-training, a consistant crewing regime with a career structure and a strong and clear company ethos.) The third mate had been on board for about six months on his first trip to sea after military service in the navy and graduation from a maritime university. The manager's marine superintendent had special responsibilities for all navigational publications for about 60 ships and was claimed to be a bulk carrier specialist with responsibility for about 25 Krulkers. He had visited this vessel about 30 months previously (to discuss de-ratting exemption!) and his ship visit ' schedule was traced from his expense account in the absence of visit reports. He held a master's certificate and had sailed as second mate. He reported to a marine manager, also a second mate but with a first mate's certificate, and he could produce no record of regular vessel visits or sea staff briefings and interviews.

The incident

The third mate was on watch when the vessel made landfall at 23:30. He handed over to the second mate at 24:00 on a DR position when a fix could have been obtained by radar. The master was not on the bridge for the landfall. The vessel stranded on a reef at 03:30. The owners and managers applied to limit their liability on the grounds of crew negligence, initially to $2.25 million as per the 1957 convention. However, between the incident and the Court case, the 1976 convention was promulgated into law in the local jurisdiction. Owners tried to have the cas~_ heard under this convention risking the higher limitation level but seeking the protection of the more onerous requirements. Both pleas were opposed by the cargo owners who sought to recover damages of $7.6 million plus interest and costs.

The analysis

A number of fairly forceful comments were made during the course of the case. Some of them are set out below and they illustrate the somewhat grey area where crew negligence (and incompetence) and the owner's and manager's responsibilities meet: - The master was criticised for his choice of route, which from the outset appeared intent on saving a few miles (about 40) by cutting in between the shoals and islands after making initial landfall. The owners were also criticised for failing to provide Ocean Passagaes and Routeing Charts. 'The passage ... is through an area without navigation lights, a maze of reefs and islands through which [the assessors] consider no competent mariner would surely seek to navigate and especially not at night. Any reasonable master would surely make a point of being on the bridge himself in such waters as a back-up to the crew at least'. - The failure of the owners to have full chart coverage of the whole voyage area, so that for a period of eight days the vessel navigated on plotting sheets, was criticised. - Charterer's agents' request that the master try and bring arrival time back from 07:00 to 06:00 to enable an 08:00 start to cargo work was considered as so general a request as not to constitute 'undue commercial pressure.' - US inspections had twice found the vessel to be deficient of charts but no action appeared to have been taken by owners or managers. - Quality of chart correcting was poor and checks on other vessels showed that the managers did little to ensure that charts were kept up to date. College training appeared to give little attention to the importance and practice of chart corrections and a cultural difference was noted where the senior or older officers were disinclined to teach junior officers their duties (return to chapter two). - There was judicial amazement expressed at the fact that a new master could be appointed without an interview with an experienced master and a briefing for the performance of his duties by the vessel's managers. The master was told by nobody (did he need to be~) that he was expected to monitor the duties carried out by the deck officers as he was responsible for their duties being 248

properly carried out. He regarded chart correction and navigational planning as being quite simply 'the 2nd mate's job'. - The standard of watchkeeping that allowed the vessel to navigate in such an area was criticised as was the failure of all on board to ignore the many warnings on the chart of 'dangerous to navigation', 'areas unsounded should be avoided' etc. The officers did not understand 'warningareas unsurveyed should not be traversed' and assumed areas with no depth soundings indicated deep water. - The master issued no standing or night orders and in fact imposed none of his own personality on those subordinate to him regarding the way in which he wanted the vessel to be run. He did not attempt to check on chart corrections or the officers in their duties.

Judgement

There was no question but that the master and crew were negligent, the burning question was did the fault go beyond those on board to the extent that the owners would not be able to seek protection under the appropriate Limitation of Liability Convention. As stated, the owners and managers applied to limit their liability on the grounds of crew negligence as defence against cargo owner's suit for US$7.6 million plus interests and costs. Their defence under the 1957 Convention, based on the concept of 'fault or privity', might be difficult but if successful it would limit their exposure to US$2.8 million. The burden of proof on the cargo owners (the plaintiffs) under the 1976 Convention to prove that the loss resulted from '. . . the personal act or omission of the person seeking to limit, committed with the intent to cause such loss, recklessly and with knowledge that such loss . . .' would probably result, is much heavier. As stated in chapter five, the level of limitation is commensurately higher (in this case US$6 million). It was observed that one of the manager's circulars stated that 'failure to correct navigational charts was the equivalent of abandoning the safety of the voyage' and yet they made no attempt to ensure that charts were corrected and up to date for the intended voyage. A salutary lesson for all was that the vessel's previous 2nd mate was called as a witness and spent many hours under cross-examination as the Court endeavoured to establish the status of the chart folios on the arrival on board of the sailing 2nd mate. The past, and the long arm of the legral system, can catch up with a former officer of a ship who thought that his connection with that vessel was long ended. The Court considered that '. . . one of the philosophies of proper handovers between officers is that a status report should be prepared for the incoming officer. . .'. If the hdndover information is wrong, the incoming officer should duly make his objections known-unless he wants to assume responsibility for the failures of others. It was established that both the master and the 2nd mate were incompetent and that the owners had not exercised due diligence in manning the vessel by leaving it entirely to the manning agents and taking little or no direct interest themselves. The owners could not limit their liability and were exposed to the full claims from the cargo owners. Whether the owners would have succeeded in limiting liability had the case been tried under the principles of the 1976 Convention is not known but opinion indicated that it would have been a very fine judgement.

Charges dismissed

To break limitation under the new convention (1976) requires the establishment of the appropriate degree of recklessness on the part of the owners, a more difficult concept to prove. It seems that in the case of the Herald of Free Enterprise manslaughter charges against the owners were dismissed because apparently nobody had perceived the risk of the vessel sailing with her bow door open. During some 5,000 voyages, no accident had occurred (as a result of open bow doors) and so no risk was 'recklessly' taken. In the case of the Bowbelle and the pleasure craft Marchioness (involved in a night-time collision on the River Thames, with the Marchioness sinking with considerable loss of life), the circumstances were different. There had been some earlier, similar collisions and the owners of Bowbelle had expressed their concern in writing to the port authority saying that '. . . now the summer was starting, the pleasure boats would be out and one day there was going to be a serious accident'. Thus the risk was identified but continued to be taken and could be construed as reckless conduct. More recently, the managing agent of the fishing vessel Pescado was held guilty of manslaughter of 'persons unknown' (one of the crew of six who all died when the vessel sank) on the grounds of a breach of the duty of care. The managing agent is appealing and it is noteworthy that he was 249

acquitted on six other charges of manslaughter which specified the crew members who died and alleged that the vessel was unseaworthy and unstable. The Pescado was converted by the managing agent to a scallop fisher and the prosecution contended that the result was unstable and that the vessel was sent to sea without a statutory safety certificate. It was known that the crew were inexperienced novices, that the radio did not work, there was no satellite alert beacon and the liferaft was useless. The vessel sank and although she was raised two years later as part of the resulting investigation, the exact cause of her sinking was never established beyond reasonable doubt.

Burden of proof

Although this was a criminal and not a civil case and so the burden of proof was raised to 'beyond all reasonable doubt', it does illustrate how difficult it is to bring a case against a manager or owner. An element of 'recklessness' must be present such as identifying the risk but continuing to take it. It also illustrates the critical importance of accurate and relevant evidence. If it is difficult to control owners, how much more so the authorities? One of the parties listed at the beginning of this section was notably missing from the Court room. The flag State did not even hold its own inquiry into the incident and a strong case can be made for the flag State being the prime defendant. Perhaps the expanding implementation of the ISM Code will help to focus attention, and perhaps penalties, on some new areas where, at the very least, a degree of fault or privity, and indeed recklessness, does lie.

Collision and salvage

The incident described below has been amalgamated from two cases.

The incident

The London Branch, a well-found multi-purpose 'tween decker of some 20,000 tonnes deadweight, had an uneventful voyage from north Europe to the port of Worstdreams, employed by her owners on a regular liner service. Proceeding towards her next port of call on a course of 124', visibility began to reduce considerably and speed was reduced to 14 knots at, according to the deck log, 11:15. At the same time, the Mars Disaster, a motor tankship of some 16,500 tonnes deadweight laden with a cargo of fuel oil, was proceeding at 13 knots on a course of 295'. This would have taken her past the London Branch at a distance of not less than two cables nor more than four cables. Each ship became aware of each other at a distance of six miles, corresponding to the range set on their radars at the time. When the vessels were not less than by 4miles apart and not less than three minutes before the collision, the Mars Disaster put her rudder 15' to port and thereafter hard a-port on sighting the London Branch. As a result of this action the Mars Disaster turned not less than 50' to port and this brought her right across the track of the London Branch. She was still turning to port at the time of the collision. The London Branch put her wheel hard a-starboard and her engines full astern immediately on sighting the Mars Disaster visually. The effect was that although the head may have fallen off a few degrees there was no reduction in her speed. The London Branch struck the starboard side of the Mars Disaster in way of her No. 4 cargo tanks at an angle of approximately 65-70' heading aft, with the result that the tanker was severed into two parts and a substantial quantity of her cargo of fuel oil was lost. The London Branch was also holed and took a list to starboard. Two containers were lost overboard and a number of others damaged. Because of the damage, two more containers were cut adrift and jettisoned and a small amount of bunker fuel escaped from a double bottom tank. The master's immediate actions included: sending an SOS; ascertaining if his vessel, and his crew, were at least temporarily safe; assessing whether it was possible to render any assistance to the Mars Disaster,- advising owners of the incident through a brief message with details to follow. Whilst picking up survivors from the Mars Disaster, the master had a moment to think through the vessel's predicament, plan his best course of action and decide upon priorities: - The second mate was allocated to keep a careful and continuous record of all events, making sure that only facts were recorded. The master made a mental note to call his management team together and brief them on their tasks and on what to say~ and what not to say~to the constant 250

stream of surveyors who could be expected as soon as port was reached and possibly even sooner. - Having received a report from the chief engineer and the chief officer that his own vessel was in no immediate danger, the master considered what assistance was required for his vessel, f-6,r the Mars Disaster, and to cope with the oil spill and four Oust) floating containers. He sent a supplementary message to his SOS summarising that information which might be useful to the shore authorities and potential salvors. - Using much the same information, he prepared a written brief which was sent to his owners advising that he was assessing whether he needed salvage assistance, or contract tow or whether they might be able to make port under the vessel's own power. - The second mate took a number of photographs of the damage, of the Mars Disaster, the oil spill and the jettisoned containers and commenced his detailed narrative. The third mate, who was on watch at the time of the collision, and the master made supplementary notes of what occurred and ensured that a copy was made of the radar plot. The master was aware that he was facing two serious circumstances which would, in the long run, be dealt with separately. The first was the collision and the second was a potential salvage situation; the master was mindful of the fact that general average would have to be declared and that the vessel's-and the cargo's-insurers would become involved. It was a potentially complicated situation. To an extent, the master was quite correct for as Donaldson J (now Lord justice) said in the case of the Playa de las Nieves [1974] (in relation to a protest that the Institute Time Clauses-Freight were a trap for the unwary): Marine insurance is a technical matter and marine insurance policies on large commercial vessels are not intended for do-it-yourself enthusiasts. Those effecting such policies may be expected to have skilled advisers. Since the master was fortunate enough to work for a company that was organised in such a way that the ISM Code requirements were little more than a reflection of the way in which it already operated, he was confident that the necessary back-up would be forthcoming. This would come primarily from: - The owner's P&I Club (see chapter seven) who would be lead underwriters with regard to the collision (since covering 25% of the risk under the 3/4 RDC clause) and who would mobilise legal advice and a surveyor to be on hand as soon as he arrived in port; and - An average adjuster. In London and many other insurance markets, the owner traditionally has the right to appoint the adjuster of his choice; sensibly the appointment should be made in consultation with the Club and the hull underwriters. There are advantages in having adjusters involved right from the start of any incident as they have a valuable contribution to make over and above producing the final adjustment. Although appointed by the owner, the adjuster has a professional duty to remain independent and his assessment of the claim should always be impartial. Nevertheless, it will be part of his role to give practical advice on such matters as: (a) General average (it is not necessary under English law for the owner to make a formal declaration. However, in some countries it is necessary and there are certain formal requirements, advice on which should be sought from the average adjuster). The most important action is to ensure security is obtained for the cargo's contribution before the cargo disappears ashore-see the annex for an example of an average bond); (b) Particular average claims against the hull insurers (reverting to the calculations earlier in this chapter, the smaller the amount allocated to the remainder column, the happier the shipowner will be: to some extent, this depends upon the records and the quality of the evidence provided by the crew); (c) Collision (where one of the priorities is to protect one's position in respect of the colliding vessel and this relates very much to the initial statements of master and crew and, again, to the quality of the evidence provided by the vessel); (d) Salvage (where advice as to the appropriate actions in engaging a salvor can be provided assuming that there is time for such discussions); (e) Payments on account and average bond; (f) Constructive total loss (see chapter seven and the underwriters' probable internal action in rejecting the owner's claim of CTL). 251

In all circumstances, the back-up response will only be as good as the briefing about the incident which comes from the master. If poor, inadequate or insufficient information is communicated by the master, then he and his owners should not be surprised if they receive inappropriate advice in return. Since the master's initial attention will be concentrated on operational matters and dealing with the incident, his reporting may well have to be graduated. If there is a little time to give more detail than the position and type of emergency, advise the owners and other receivers of the S.O.S. message that A may be an hour or more before it will be possible to send further details and make an assessment of the type of assistance needed. When making the follow-up report, set out the priorities and intended course of action based on the knowledge and evidence to hand-recall one of the principles of communication set out in chapter two; don't just send what you know, concentrate on sending the information which the recipient needs to know. Thus, from a vessel aground '. . . unable to take soundings -round the vessel until daylight in approximately two hours and even then, sea state (2.5 m waves) will preclude accurate readings or ability to launch lifeboat. Vessel appears slightly trimmed by the head and has 3' list to port. Next HW here at 1230Z- and springs in two days' conveys both competence and a lot of information whilst reducing the need for frequently timeconsuming requests for clarification or more information. However complicated the legal-and commercial-situation may appear, a master can do little wrong if he acts as if uninsured and follows the dictates of good seamanship which the incident and operational aspects demand. Whilst this may sound tedious obvious, it is also apparent from conversations with many who are involved in providing shorebased back-up, that the quality of information coming from the casualty is often less than professional. It is important to bear in mind that the shore based support team is trying to make an assessment of the situation based on very limited information. Whilst the recording of evidence does need to be set down in chronological order as in a logbook, this approach is often not the best way of passing important information successfully. Priority headings-status of own vessel, condition of injured persons (if any), weather conditions-prevailing and forecast, options for port of refuge and recommendations if any, summary of assistance needed-should be set down in numbered paragraphs. The message can then be built up as information becomes available and supplementary information sent in subsequent messages can easily and clearly pick up the same numbering system. Having dealt with the immediate priorities, the master must next turn his attention to the need to get his vessel to a place of safety and the need (or otherwise) for salvage. If salvage assistance is on its way, there are a number of aspects which will engage the salvors' attention: the need to salve the hull of the tanker; the need to minimise pollution damage; the potential for salving the London Branch; and the possibility of recovering the jettisoned containers. These may or may not be the same as the master's priorities. In these circumstances, the master may identify three possible solutions to his current predicament. He can: endeavour to make port under his own power; engage salvors under Lloyd's Open Form (LOF or similar); or engage a tug under a normal contract of towage. Calling his senior management team together, he can apply a simple version of risk assessment to assist his decision making process: 1. The wind is rising and the fog is clearing, weather reports indicate that winds will increase to force five or more over the next 24 hours. The vessel has a hole below the waterline and is leaking oil. Several of the containers on deck are only secured by badly strained lashings and the chief engineer is concerned that salt water has got into the fuel system within the engineroom and cannot guarantee the main engine's reliability. 2. Logically, therefore, the vessel needs the assistance of a tug, but at the present moment the vessel is in no immediate danger. If the master were to engage a tug on contract at between $5,000 and $7,500 per day, even despite the increasing wind, the vessel should make port within four days-a cost of $30,000 maximum. 3. To engage a salvor under LOF would probably result in a settlement of four or five times this amount as, although the task would not be different, the value of the salved property would be taken into account. Arbitrators are generally fairly generous to salvors, since they consider that it is important to encourage the salvor's voluntary provision of service. 4. In addition to the need to reach a port or place of safety, the management team need to consider the requirement to minimise pollution damage from the leaking double-bottom tank, the danger to navigation from the jettisoned containers and the worsening weather forecast. 252

5. Consequently, the master advises his owners that he considers it necessary to engage a salvor under LOF, adding that, although his vessel is not in any immediate danger, he considers this is the correct and prudent course of action. The next decision is likely to be which salvor to accept, assuming that more than one offer their services. The simple answer is the most capable, but frequently more information is needed about this aspect from the shore back-tip team, including the average adjusters.

The salvage

Shipping has changed out of all recognition since the Brussels Convention on Salvage 1910 came into force and one of the main changes is the industry's ability to cause major environmental pollution. The concept of environmental protection was first introduced into LOF 1980 by the inclusion [in clause 1 (a)] of what became known as the safety net provision. This was limited to services to a 'tanker laden or partly laden with oil' and entitled salvors to an award against the owners in connection with their endeavours to prevent or minimise pollution, even if the salvage services were not successful. This was a fundamental breach of the 'no cure-no pay' principle, since it was based on an increment (of up to 15%) on reasonably incurred expenses. However, it had little impact and there were only three safety net cases in the ten years after it was introduced. The long awaited International Convention on Salvage (1989) changed the ground rules much more significantly. The major changes were incorporated in LOF 90, published in September 1990, although the convention, still required ratification by 15 States (and then a period of one vear) before entering into force. The grounding of the motor-tanker Braer on 5 January 1993 prompted a more rapid response from the British government and the convention was enacted under British law by the Merchant Shipping (Salvage and Pollution) Act 1994 which came into force on 1 January 1995. A new Lloyd's Open Form (LOF 95) was introduced on the same date which reflected in detail the provisions of the 1994 Act. In an interesting departure from previous practice, relevant extracts from the Act are reproduced at the end of LOF95. These are: - Article I Definitions. - Article 6 Salvage contracts. - Article 8 Duties of the salvor and of the owner and master. - Article 13 Criteria for fixing the rewards. - Article 14 Special compensation. LOF95, including the attached articles, is reproduced as an annex to this chapter and is a fairly straightforward contract. Unlike a charterparty, it is not a matter of negotiation or amendment and requires the minimum of factual detail. Article 6 of the Act clearly states that the '. . . master shall have authority to conclude contracts for salvage operations . . .' and that this includes binding the owners of property aboard the salved vessel. It is worthy of note that both LOF 90 and LOF 95 require that the salvor (the contractor) shall use his best endeavours' both to salve property and prevent or minimise damage to the environment (clause 1). 'Best endeavours' is considered to be more onerous than the obligation contained in article 8 of the Act to owe a duty ... to carry out the salvage operations with due care'. In some ways analogous to that of a pilot, the relationship between master and salvor is a delicate one. So long as he remains aboard his vessel, the master remains in command. If he does remain in command he must quickly establish an effective working relationship with the salvage master and he should be sure in his own mind that the actions of the salvors are in the best interests of property (the vessel and cargo), the environment and, most importantly, the lives of crew and any passengers onboard. Article 8 of the Act, clause (2a) and clause 3 of LOF(95), formally require the master to co-operate fully with the salvor but clause 1 (d) of the same article gives the master the right to reasonably request the salvor to accept the intervention of other salvors. LOF 95 also allows the contractor to make reasonable use of the vessel's 'machinery, gear, equipment, anchors, chains, stores and other appurtenances' (clause 3) and (clause 4) gives, the owner the right to terminate the salvage operation, although the master would need to be very sure of his ground before recommending this course of action. An overriding requirement throughout the whole salvage operation is to keep a careful log of all that is happening. The salvors will, minute by minute, and this is frequently the reason why their version of events appears to take precedence over that of the vessel when the case comes to 253

arbitration. Whilst on passage to port, the master needs actively to plan and discuss with the shore-based team how he will handle the first few critical hours alongside and he will need the full support of his ship's management team. Concerning the salvage, it will be essential to ensure that security is received from the 2,000-odd bill of lading holders whose cargo is on board the London Branch. Whilst this will inevitably be handled by his owners in conjunction with the average adjusters, the master must remember that no cargo should be discharged until he has received specific clearance from his owner. A large number of people, including port authorities, surveyors and solicitors, will want to board the vessel to make inspections or to take statements, both in connection with the collision and the salvage. The media may also be in attendance. A first priority for the master is to establish a firm guard on the gangway and ensure that the first people on board (subject to port officials) are the home team led by the local P&I Club Correspondent. If possible, the Club's appointed solicitor should take the first statements from the master and all members of the crew. He should also advise the crew how to respond to other questioning and, if possible, be in attendance if solicitors acting on behalf of the Mars Disaster come on board. Although a general condition survey will be undertaken (probably by a Salvage Association surveyor), cargo interests and other vessel's surveyors will also require access to the vessel and cannot reasonably by refused. However, agreement on what may be sighted or inspected must be reached first. It is, therefore, important that the surveyors should be accompanied by an owner's surveyor or a ship's officer. The accompanying officer must be briefed to make no statements which could be construed as admitting liability. The master must also be careful not to sign any papers or make any agreement which could prejudice the right to adjust or otherwise deal with claims in the owner's preferred jurisdiction. During all this time, the detailed ongoing record of events must be maintained. The eventual settlement and apportionment of the general average claim will not differ from the approach illustrated in the earlier part of this chapter.

The collision

The collision will be resolved in the Admiralty Court and, again, the quality of evidence provided by the vessel will be relevant in influencing the judge with the advice of his two assessors in reaching a decision. In this case, two of the considerations which were taken into account were that: - Both vessels were at fault for proceeding at a speed substantially in excess of a safe speed and both vessels were at fault for allowing a close-quarters situation to develop. When asked by the judge, the assessors concluded that a safe speed under these conditions for the London Branch and Mars Disaster was 8 knots and 6 knots, respectively; and - Both vessels were at fault for leaving their radars on the six-mile range without scanning ahead. Of particular interest is the way in which the judge compared the evidence provided by each vessel in order to reach a conclusion with regard to the inevitable conflicts in their evidence. In short, the Court had to consider the questions: (a) whether the documents produced from the Mars Disaster had been fabricated to establish a false case; and (b) whether the radar observations made on board the London Branch were so reliable that they could be accepted in preference to the evidence of the master of the Mars Disaster The evidence from the Mars Disaster presented a number of problems: - The initial statement of speed was changed from 8 knots to 5V2 knots, although it was apparent that the true speed was 121/2knots; - The master's statements of the bearing of the London Branch were concluded to be a 'fabrication showing a complete disregard for the truth': - The scrap log aroused suspicion because undoubtedly certain entries in it had been erased and the condition of the working chart gave cause for suspicion that alterations had been made in order to conceal the truth. Nevertheless, both vessels were found to be guilty of serious faults in navigation, which were similar in character until the Mars Disaster turned to port. This was regarded as totally inexcusable 254

and the most serious of all faults committed. But against it, in part must be set the failure of the London Branch to react to it. The judgement allocated to the Mars Disaster two-thirds of the blame and to the London Branch onethird. The apportionment might have been much closer if the London Branch had not been able to provide convincing evidence which materially helped the judge and his assessors to view the evidence of the Mars Disaster for what it was.

ACKNOWLEDGEMENTS

LLOYD's LAw REPoRTs were read for the background from which some of the incidents were developed.

REFERENCES

York-Antwerp Rules: An Analysis. Richards Hogg Average Adjusters.

- Lloyd's Open Form 1995. - Average guarantee

ANNEXES FOR CHAPTER 11

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Chapter 12

RENEWAL-SALE, PURCHASE AND FINANCING Purchasing a vessel-finance and the vessel as collateral-the legal framework. All shipping companies need to buy new ships and sell off old ones-or in some cases, buy old ones and dispose of even older ones-and this seems a logical place to round off an examination of the commercial contribution which the master can make to his company, The contracting, supervision and delivery from a shipyard of a newbuilding is a long-term project which usually only involves the master and senior officers in the completion, trials and delivery phase. In this case, the master will be operating under clear instructions from the owner or manager and it is not intended to explore this aspect further. With some 70,000 commercial vessels of over 100 grt and something like 10,000 owning companies, a sale and purchase broker may have 2,000 or more vessels on his files as actively for sale at any one time. The decision in principle to buy or sell will usually have been made as part of a medium-term strategy. However, the specific decision to act can be triggered with little or no apparent warning, especially to those on board, in response to actual or perceived movements in the sale and purchase market which, at times, can move with remarkable volatility.

Purchasing a vessel Negotiation and inspection

THE SALE AND PURCHASING TRANSACTION is invariably negotiated on the basis of, to give it its full title, the Norwegian Shipbrokers' Association's Memorandum of Agreement for sale and purchase of ships. This was adopted by Bimco in 1956 and the current edition of Saleform 1993, frequently just referred to as 'the MOA', is reproduced in the annex. Following initial contact between the two principals' brokers, a firm offer may be made, usually, but not always, by the buyer responding to one or more of the vessels proposed by his broker (the usual negotiating terminology is buyer and seller as in 'Buyer offers firm . . offer valid until . . .1 and subject to following terms . .' Time is always critical in any transaction and a broker (or anyone else involved in a contractual negotiation) must never forget to add a validity time and date to his offer or counter-offer (the simple words 'Firm offer valid until 120OZ, Tuesday 2 May 1995' are sufficient). There is a true story of one of the world's largest shipping companies, negotiating for two second-hand container ships, through one of the largest brokers in the world. They were less than three minutes late in responding to a counter offer and during that time, the vessels were sold to a competitor. There are also many brokers who have woken in the middle of the night hoping that they remembered to include a (short-term) validity to an offer, as the market rate starts moving away from the position which they recommended their principal to take. So: NEVER FORGET VA LIDITY ON A FIRM OFFER One of the major subjects which will involve the master and the vessel, is 'subject inspection' which is covered in clause 4 of the MOA. The first thing a buyer will want to do is inspect the vessel's classification records, which may be done by his superintendent or an agent if the classification society's head office is abroad. The inspector will be concentrating on three aspects: - Any history of a recurring fault such as excessive wear oti stern tube bearings, indicating the possibility of shaft misalignment; - Any evidence of serious damage such as collision or (and especially) grounding; and - Outstanding conditions of class and/or memoranda. This inforniation will enable the physical inspection of the vessel to be focused on the most critical areas. Buyers should note that the information contained in the classification society's main records is only as tip to date as the latest survey returiis-there may be some information still being prepared at the local survey office. Since the buyer's surveyor will inevitably concentrate on any areas 256

highlighted by the inspection of records, it follows that the master, chief officer and chief engineer on the vessel being sold should also have these areas in their mind. It is sensible to run through the likely items together and have an agreed explanation which is obvious, honest, but offers no more information than is requested and certainly does not enter the realms of conjecture. After the inspection it is good policy to summarise any areas on which the buyer's surveyor seemed less than satisfied and report back to the vessel's owners. The physical inspection may occur before or after the price has been agreed or the purchase may, in some cases, be on an as is, where is' basis, in which case the master's responsibilities are much reduced. The timing of the inspection is essentially a function of- The market-i.e., whether it is rising or falling; - The vessel's location-con tracts can be concluded while the vessel is on passage; and - The vessel's status-e.g., whether tanks/holds are full or are available for inspection. Sellers may well arrange for a superintendent or other head office representative to accompany the buyer's surveyor(s). If the owner has not decided whether or not he is a seller (butjust wants to test the market without disturbing the crew) or if the vessel is under offer for, for example, a time charter, the buyer's surveyors may well arrive in the guise of prospective charterer's representatives. The main conditions of the inspection are contained in clause 4: - There should be no undue delay to the vessel; - The vessel will be inspected without opening up and without cost to the sellers; and - The vessel's deck and engine logbooks, current and previous, must be available for inspection. One aspect which will be of particular interest to the buyer's surveyor is an assessment of the vessel's actual speed and consumption and all on board should be prepared for some close questioning on this subject. It is a sensible precaution to find from the owner (seller) what speed and consumption has been given in the sale offer and to what extent this has been related to state of hull and weather and sea states. Within these constraints, the buyer's surveyor should have full access to all the vessel but should be accompanied by a (suitably briefed) officer at all times. As already mentioned, as representatives of the sellers you have a (legal) duty to the buyers to answer their queries honestly as well as a duty to your owners (the sellers) not to offer unsolicited information nor make conjectures which might adversely affect the sale (in spite of the fact that the sale may well inificate the end of your and your crew's current employment). The Saleform inspection clause will frequently be expanded by additional clauses requiring the vessel, for example: to open crank case doors for inspection; open up one main engine and/or auxiliary diesel cylinder head; make the logbooks available for photocopying (get your own agent to arrange thisit ensures the timely return of the logbooks); or open up one or more ballast tanks (frequently including fore and after peak). Some thought and planning needs to go into this. If possible, ensure that the work involved fits in with the vessel's planned maintenance. Finally on this subject, make sure that all the vessel's certificates are available for inspection and that a list of any equipment that is leased or rented rather than owned is available (again, it may be sensible to have a set of trading certificates already copied so that no originals need go out of your possession). During the course of the negotiations, both buyer and seller will be calculating the actual, as opposed to the negotiated, price of the vessel. The cost of either completing outstanding repair and survey work, in the seller's case, or repairing and bringing the vessel up to their operating standard as well as what nasty surprises they may find when they have taken over and the vessel is all theirs, in the buyer's case, will be uppermost in their minds. The completion of the current voyage and the ballast voyage to a suitable drydock and delivery port are also important considerations and figure 12.1 shows a typical sale calculation. Part one of the calculation sets out the various costs associated with meeting the contractual obligations of the MOA, including a repair covered by insurance but carrying a $50,000 deductible. Part two compares the expected result with predictions of market value (the uplift of $1,000,000 has probably prompted the sale) and the written down book value after allowing for annual depreciation (see chapter 3). In this case the owner has made a book profit of £3,075,974, and if he is in the wrong tax regime for a shipping company, he will pay corporation tax on this profit; and cash profit of £3,659,226 after paying off the outstanding shipbuilding loan. Again, prepayment penalties and the loss of subsidised interest, if any, should be taken into account to achieve the net cash surplus. In the case of a vessel being sold for demolition , the procedure is different. Here there is rarely an inspection. The vessel is sold for so much per tonne lightweight with particular attention being paid 257

to the more valuable of the non-ferrous metals such as the propeller and spare. The buyer is also particularly interested in equipment and machinery that can be onsold in a working condition.

SALE ONE m.v. JULIANS PRIDE DATE OF SALE 01-Mar-96 Net Price Calculation Price: 3% Commission Price Less Commission Less Following Expenses: Stamp Duty: Crew Costs (inc. Notice & Repat) Port-/Canal Expenses Mobilisation Expenses 2 Days @ $5,340 60 Mts Fuel & $94 20 Mts G.O. 9 $145 Repair expenses in connection with delivery: Drydocking Survey Works Damage Works Various Repairs Vessel Expenses 3 Days 9 $5,340 32 Mts Fuel @ $94 20 Mts G.O. @ $145 Extra Spare Parts Delivery Spare Parts Sundry Total Expenses Insurance Reftind for Average Damage The Sale is Netting Exchange Rate PDS/$ $1.50 The Sale is Netting

Estimate $11,500,000 $345,000 $11,155,000 $0 $32,000 $15,000 $10,680 $5,640 $2,900 $72,000 $50,400 $73,000 $18,000 $16,020 $2,820 $2,900 $9,000 $1,800 $27,000 $339,160 $23,000 $10,838,840 £7,225,893

Figure 12. 1a Sale calculation-net proceeds SALE ONE (cont.) m.v. JULIANS PRME DATE OF SALE 01-Mar-94 Assumed Sale in Gibraltar after ballast voyage from S. Atlantic. Key Figures Built 2/1982 Class/S.S. Due 2/1996 Owners Institutos Nautical Estimated Market Value Per 01-Mar-94 $ 10,500,000 Estimated Sale Price $ 11,500,000 Net Sale Price (See Calculation) £ 7,225,893 Depreciated Value Per 01-Mar-94 $ 4,150,099 Outstanding Loan Per 01-Mar-94 £ 3,366,667 Newbuilding Price $ 13,888,889 258

Newbuilding Price Written Down 6% pa 10 Years Exchange Rate for Calculation Book Profit or Loss on Sale Cash Profit or Loss

$

£

5,555,556 1.5 £ 3,075,794 £ 3,859,226

Figure 12. 1 b Sale calculation-cash and book profit

Delivefy

Delivery will usually take place immediately following the sale dryclocking, safely afloat and at a safe berth. It is not usual, if buyers want to undertake further work, for buyers to take delivery in drydock. This is usually agreed at the time, but must be done formally by an addendum to the MOA signed by both parties. The chief engineer and chief officer are professionally bound to make a very careful bandover to their reliefs, who will be new to the vessel, of all matters relating to bunker and ballast disposition and stability. However, the addendum should make clear that undocking becomes the full responsibility of the buyer's crew. This is so, even if one of the seller's officers has been retained for a voyage or a fixed period in an advisory capacity. Care must be taken to ensure that no liability can be attached to the officer and he must be covered by either the buyer's or the seller's P&I Club. An alternative is for a buyer's representative, usually a senior engineer, to sail with the vessel for a period prior to the sale. Clause 6 of the MOA sets out the drydocking procedure, although this may be modified by additional clauses. Even from a cursory reading it will be apparent that a comprehensive breakdown of costs and times will be required and this should be organised with the agent and the drydock company at an early stage. A considerable amount of brinkmanship is exercised at delivery dryclockings and the buyer's representatives may be adept at securing every advantage which they can. Conversely, seller's representatives may be equally adept at being more than economical with the truth with regard to the condition of the vessel. Somewhere in the middle is the classification surveyor. Until delivery, his client is the seller, but his prime responsibility is, or should be, to his own professionalism and the integrity of his classification society in his role as arbiter of what work is required and, consequently, of where the major cost of dryclocking will fall. Be aware that the surveyor, often remote from his office and support staff, involved with a vessel has has never seen before, can be put under tremendous pressure from both sides. This may be particularly true if the buyer has a substantial fleet entered with his society. As the date and time of delivery approach, attention will focus on bunkers remaining on board (ROB), which must be paid for by the buyer. The actual transaction of delivery normally takes place in at least two places (physical and documentary delivery) and sometimes more. Almost inevitably, the physical and the documentary delivery will take place in different time zones and, as documentary delivery must take place during banking hours (and preferably banking hours in New York for reasons that will become apparent) physical delivery frequently takes place at totally inconvenient times when the dock offices are closed and few telephones are available. Satellite communications have eased these problems greatly~except in cases where the equipment is leased and is removed from the vessel at the end of the working day three hours before delivery is due to take place. Obviously, this is an area which requires the master's attention in good time. Both buyer's and seller's representatives will require, and have the right to, good communications and the prudent master will ensure that he has a back-up system too. To a great extent, the master's end of the business should be almost concluded by the time of physical delivery-, - The vessel should be safely afloat, safely moored at the agreed place of delivery (or in drydock with all the necessary stability information handed over); - Stores and spares inventories should have been completed and signed by both parties; - Owners and leased equipment should have been landed, with logbooks to follow; - Non-essential crew and crew personal effects should have been landed;

259

- Estimated bunker ROB should already have been agreed between buyer and seller in sufficient time for the buyer to arrange for payment on delivery (if a weekend intervenes, this could be four or more days); and - Authenticated copies of the vessel's trading certificates valid for, usually, a minimum of, six months. Figure 12.2 sets out typical instructions to a master and figure 12.3 depicts a standard protocol of delivery which he only signs, in duplicate, on direct, clear and authenticated instruction from his head office or the company's commercial representative conducting the documentary delivery. His duties are outlined below and there should be a great rapport and understanding between him and the master. The seller's commercial manager probably left London at the end of a busy day finalising documentation, with at the very minimum: - A power of attorney authorising him to act on behalf of the seller; - An original bill of sale, most probably notarially attested, preferably only one original but frequently three or more; - A clean transcript of the register as proof that the vessel is free of all mortgages, liens and encumbrances; - An invoice for bunkers ROB, based on the preagreed quantity and price and including the quantity and cost of unbroached oils and greases; - Two protocols of delivery; - An irrevocable undertaking to delete the vessel from the current national ship register within, say, 30 days; - A letter to the deposit holding bank authorising them to transfer the deposit monies to the seller's bank account and release interest earned to the buyers. In return he will, again at the minimum, require: - A similar letter of release for the deposit monies (this 10% has been held in an interest-bearing escrow account since the time of signing the MOA and can only be moved with the agreement of both parties); - A banker's draft for the remaining 90% of the purchase money; - Preferably a banker's draft in respect of payment for bunkers and lubricating oils; and - A copy of the buyer's representative's power of attorney or similar authority. (Full and effective payment is quite convincing if a PoA is not available, but short of cash, full payment is quite difficult to confirm until the 'value' has been confirmed by seller's bank which may take some hours or even a day-often, transactions are completed on trust on the basis of the fac& value of the banker's draft. Nevertheless, this can be quite a tense period for the commercial manager.) On the morning of the day, of delivery, the seller's commercial manager will meet a lawyer and possibly a banker, both of whom are probably strangers. They will be representatives of his solicitor's and bank's corresponding firm in New York. Together they will proceed to the agreed place of delivery, usually a bank, where they are shown into a small conferenje room where they sit, in potentially adversarial confrontation, across a table from the buyer and his advisors. Powers of attorney are exchanged and buyers examine photocopies of the bill of sale and the copious amount of additional documentation which they have requested. In the meantime, the seller tries to establish contact with the master on board. This is eventually achieved just as the buyer asks to examine the original bill of sale (the document of title). As the seller hands the buyer the BOS, the buyer's on-board representatives decide to announce that they dispute the bunker figures or some other feature relating to the contractually-agreed condition of the vessel. A mini-renegotation ensues whilst the BOS lies on some invisible demarcation line along the centre of the negotiating table and contact is lost with the vessel. Understandably, an equally tense situation may develop on board. Eventually all is resolved, the lawyers and the bankers pronounce that the buyer's drafts appear to represent good value. Procotols of delivery are signed and hands are shaken. The master and his team leave their home for the last six months, wondering why the whole transaction took so long and blaming each other for having forgotten to order a taxi. The seller's commercial manager heads for the airport with that slight feeling of anxiety which will last (all through the weekend) until he hears that the buyer's bank draft has proved good for value. On board, the new master wonders where to find the bridge kettle. And why did the transaction involve New York? All large dollar amounts arc physically cleared through corresponding New York banks. The fact that these sums can circulate in the banking 260

system for 24 hours or more is, of course, nothing to do with the fact that the banks can earn overnight interest on them, and such unfounded rumours should be ignored as totally scurrilous. But it does explain some of the reasons for the tensions which can be felt on delivery and which may transmit to those on board. On a demolition sale delivery, the master faces different problems. In many cases, the delivery site is a remote beach where the master is expected to do the unthinkable, drive his ship ashore. Once this has been done, the seller's negotiating position is understandably weakened and it is only good practice to have ensured the documentary delivery is proceeding smoothly before succumbing to inevitable pressure from buyer's representatives to beach the vessel. Finally, for those who have already read: Chapter 3-as indicated in figure 12.1, a project budget is essential for this transaction. Although it will be constructed at head office, much of the input will , come from the vessel end. It is good practice to fill in the actual figures after the transaction and check where the variances occurred. Chapter 2-a ship delivery is an obvious example of where planning and team-work prove invaluable, even if only to make sure the taxi is on the check-list! For a takeover crew, the same applies and planning should start well before arrival on board-at the very latest at the hotel or agent's office on the day before delivery. ATTENTION OF CAPTAIN CHISHOLM, SALE OF M.T. PLUM RIDGF AS YOU ARE AWARE, THE SALE OF YOUR VESSEL HAS BEEN AGREED TO NAUTICUS SHIPPING COMPANY, NICOSIA, CYPRUS, A COMPANY CONTROLLED BY LAMBETH SHIPPING, LONDON. MOST OF THE PREPARATORY WORK FOR THE SALE HAS ALREADY BEEN UNDERTAKEN BUT WE MAKE THE FOLLOWING SPECIFIC POINTS BASED ON THE MEMORANDUM OF AGREEMENT, A COPY OF WHICH WILL BE BROUGHT ON BOARD AT DELIVERY 1. TIME AND PLACE OF DELIVERY CLAUSE 5 IT HAS BEEN AGREED THAT THE VESSEL WILL BE DELIVERED AT HER PRESENT ANCHORAGE AT SINGAPORE AT 1000 HRS NEWYORK TIME ON THURSDAY 27 OCTOBER 1994 (2300 SINGAPORE TIME). PLEASE KEEP US ADVISED OF YOUR EXPECTED SCHEDULE SO THAT NOTICE OF READINESS CAN BE TENDERED AND NOTE THAT BUYERS CAN CANCEL IF THE VESSEL IS NOT IN ALL RESPECTS READY FOR DELIVERY BY 0800 SINGAPORE TIME 3 NOVEMBER 1994. 2. BUYER'S REPRESENTATIVES CLAUSE 15 BUYERS ARE ENTITLED TO HAVE TWO REPRESENTATIVES ON BOARD ONCE THE DEPOSIT IS LODGED WHICH WE ANTICIPATE WILL OCCUR TODAY. THESE TWO REPRESENTATIVES WILL BE ON BOARD THE VESSEL FOR THE PURPOSE OF FAMILIARISATION AND AS OBSERVERS ONLY, WITHOUT THE RIGHT TO INTERFERE WITH THE RUNNING OR THE NAVIGATION OF THE VESSEL AND ALWAYS UNDER THE MASTER'S DISCRETION. THEY WILL BE ON BOARD AT THEIR OWN RISK AND EXPENSE AND THEY TO SIGN USUAL LETTER OF INDEMNITY PRIOR TO BOARDING THE VESSEL. YOU ARE REQUESTED TO RENDER EVERYASSISTANCE TO THESE REPRESENTATIVES WHO WE EXPECT TO BOARD AT COLOMBO. 3. CLASSIFICATION AND TRADING CERTIFICATES CLAUSES 4,8 & 11 CLASS RECORDS HAVE BEEN INSPECTED AND ACCEPTED. NATIONAL AND INTERNATIONAL TRADING CERTIFICATES ARE TO BE VALID FOR A MINIMUM OF SIX MONTHS ON DELIVERY. PLEASE MAKE NECESSARY ARRANGEMENTS TO RENEW YOUR DE-RAT CERTIFICATE ON ARRIVAL. 261

4. INSPECTION CLAUSES 4 & 6 CLAUSE 6B APPLIES AND BUYERS ARE ARRANGING FOR AN UNDERWATER INSPECTION UPON ARRIVAL. YOU ARE TO GIVE THEM EVERYASSISTANCE WITH THIS, ALTHOUGH IT IS AT THEIR EXPENSE AND MUST NOT DELAY YOUR PREPARATION OF THE VESSEL FOR DELIVERY. NOTE THAT THE DIVER'S INSPECTION IS TO BE IN ACCORDANCE WITH CLASSIFICATION SOCIETY RULES AND, UNTIL DELIVERY IS EFFECTED, THE CLASS CONDITION OF THE VESSEL IS SELLER'S RESPONSIBILITY. SHOULD THE DIVER'S INSPECTION INDICATE A NEED FOR DRY-DOCKING, YOU ARE TO CONTACT US IMMEDIATELY WITHOUT MAKING ANY COMMITMENT TO BUYERS. IT WOULD BE PRUDENT IF YOU ENQUIRED DISCREETLY THROUGH THE AGENTS/CLASS SURVEYOR OF CURRENT DRY-DOCK AVAILABILITY. 5. SHIPS EQUIPMENT, SPARES AND STORES CLAUSE 7 ALL EQUIPMENT NOT INCLUDED IN THE SALE, VIZ DECCA NAVIGATOR, UNITOR BOTTLES AND NORTH SEA RADIO EQUIPMENT IS TO BE LANDED TO THE AGENTS TOGETHER WITH THE S.E.S. LIBRARY. THE SHIP'S BELL HAS BEEN EXCLUDED FROM THE SALE BUT IT IS NOT INTENDED TO REMOVE THIS, THE VESSEL'S NAME SHOULD BE REMOVED. ALL BROACHED AND UNBROACHED STORES ARE INCLUDED IN THE SALE AND IT IS INTENDED TO LEAVE LINEN AND CROCKERY ON BOARD. ANY ACCOMMODATION PAINTINGS OR PHOTOGRAPHS OF GOOD QUALITY ARE TO BE RETURNED TO COMPANY STOCK VIA ANTWERP AGENTS. 6. BUNKERS CLAUSE 7 AS YOU HAVE ALREADY BEEN ADVISED, BUNKERS ARE TO BE CHECKED AT 1000 MONDAY 23 OCTOBER 1994 BY A CALEB BRETT SURVEYOR. THESE FIGURES WILL CONSTITUTE THE DELIVERY TONNAGE AND YOU SHOULD KEEP YOUR DOMESTIC CONSUMPTION TO A MINIMUM. LUBRICATING OIL AND GREASES ARE INCLUDED IN THE OVERALL PRICE. 7. SHIP'S PAPERS CLAUSE 7 THE FOLLOWING DOCUMENTS ARE TO BE PACKED AND RETURNED TO COMPANY: -ALL CAPTAINS, ENGINEERS AND CATERING CIRCULARS AND CIRCULAR LETTERS. -ALL OTHER INSTRUCTIONS ORIGINATING FROM THE COMPANY. -ALL INSURANCE AND P&I DOCUMENTATION. -LIST OF SUPPLIERS AND GUIDELINES FROM NAVIGATORS. -DECK, ENGINE AND OFFICIAL LOG BOOKS FOR LAST THREE YEARS (BUYERS MAY PHOTOCOPY DECK AND ENGINE LOGS). -UNUSED NATIONAL AND COMPANY FLAGS, USED FLAGS BEING DESTROYED. THE FOLLOWING DOCUMENTS TO BE HANDED TO THE COMPANY REPRESENTATIVE OR RETURNED TO THE OFFICE BYYOU AFTER DELIVERY: -CERTIFICATE OF REGISTRY. -RADIO LICENCE. -CERTIFICATE OF SAFE MANNING.

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-CERTIFICATE OF FINANCIAL RESPONSIBILITY (US WATER POLLUTION); THIS CERTIFICATE IS TO BE DATED AND ENDORSED BY YOU TO THE EFFECT THAT THE VESSEL HAS BEEN SOLD TO NAUTICUS SHIPPING CO., NICOSIA, CYPRUS. ALL OUTSTANDING WORK LISTS TO BE CANCELLED AND DESTROYED TOGETHER WITH VESSEL STAMPS, UNUSED FORMS AND CORRESPONDENCE FILES ETC. INVENTORY FORMS FOR DECK, ENGINE AND PANTRY STORES AND ARRIVAL FLUSHING/ANTWERP TO BE HANDED TO COMPANY REPRESENTATIVE AND VICTUALLING AND BOND ACCOUNTS COMPLETED IN THE NORMAL MANNER. 8. COMANY LIVERY CLAUSE 12 BUYERS HAVE UNDERTAKEN TO DELETE FUNNEL MARKING AND VESSEL NAME PRIOR TO DEPARTURE FROM PORT OF DELIVERY. IF POSSIBLE YOU ARE REQUESTED TO REMOVE FUNNEL MARKINGS PRIOR TO DELIVERY. 9. MASTER'S ACCOUNT, SHIP'S CASH, SAFE KEYS WHEN HANDING OVER SAFE KEYS, ENSURE YOU GET A RECEIPT; MASTER'S ACCOUNT AND SHIP'S CASH TO BE RETURNED VIA COMPANY REPRESENTATIVE. 10. GENERAL WE WILL TELEX YOU ADVICE REGARDING ANY CHANGES IN THE TIME OF DELIVERYWHICH MUST BE UNDERTAKEN DURING LONDON BANKING HOURS. YOU ARE TO ENSURE THAT GOOD COMMUNICATIONS ARE ESTABLISHED VIA THE AGENTS AND YOU AND BUYER'S REPRESENTATIVE ARE TO ADVISE WHEN YOU ARE READY TO DELIVERY THE VESSEL. ONCE THE PROTOCOL OF DELIVERY AND ACCEPTANCE SET OUT IN THIS LETTER (TWO ORIGINALS) HAS BEEN SIGNED, THE VESSEL AT BUYER'S EXPENSE AND RISK. AT THE SAME TIME YOU ARE TO ENDORSE THE VESSEL'S CERTIFICATE OF REGISTRY TO THE EFFECT THAT THE VESSEL HAS BEEN SOLD TO NAUTICUS SHIPPING COMPANY, NICOSIA, CYPRUS. YOURS SINCERELY B. RYAN FOR AND ON BEHALF OF BAILEY SHIPPING LIMITED. Figure 12.2 Master's delivery instructions M.T. PLUM RIDGE PROTOCOL OF DELIVERY WE THE UNDERSIGNED NAUTICUS SHIPPING COMPANY, NICOSIA, CYPRUS, DO HEREBY ACKNOWLEDGE RECEIPT OF THE MOTOR TANKER PLUM RIDGE, WHICH HAS BEEN DELIVERED TO US BY THE SELLERS AT B. RYAN SHIPPING LIMITED, LONDON, AT HOURS ON THE DAY OF AT SINGAPORE. THE VESSEL HAS BEEN DELIVERED IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THE MEMORANDUM OF AGREEMENT DATED 6 SEPTEMBER 1994 AND THE RISK AND RESPONSIBILITY HAS THEREFORE PASSED TO US AT THE ABOVE TIME AND DATE. FOR SELLERS: BAILEY SHIPPING LIMITED LONDON FOR BUYERS: MESSRS. NAUTICUS SHIPPING COMPANY NICOSIA, CYPRUS NOTE: BUNKER AND LUBRICATING OIL STATEMENT AS ATTACHED. 263

Figure 12.3 Protocol of delivery

Registration

Registration determines the laws, rules and regulations under which a vessel will operate. Even in the event of international conventions such as The Hague-Visby Rules, it is the flag State which converts these into applicable legislation for its own vessels (through the Carriage of Goods by Sea Act in the case of a British vessel). It also establishes the statutory legislation covering such matters as loadline certificates as well as manning requirements, including the required nationality of master and certain senior officers. In a similar way, registration requirements stipulate the qualifications for ownership within the flag State and for better or for worse, the stipulation for both qualifications for ownership and command are tending to become less nationally based. Insurers and, particularly, lenders will be interested in the flag State and the applicable mortgage laws as discussed in the following sections. Registration following purchase is an important aspect as a lender will require prompt registration so that a mortgage can be attached. However, it is not always possible to complete these formalities on a back-to-back basis and provisional registration may be used for the first few months or weeks. Prior to any sale, the buyer will require a clean transcript of register which should confirm that no current mortgages attach to the vessel and, as required by the wording of the bill of sale, that the vessel is free from encumbrances. The register will not, of course, prove that no maritime liens attach (see below), the buyer must rely on the declaration in the sale form and the terms of the sale contract for that assurance. The buyer will also require from the seller an undertaking that, within a given period of time, say, three weeks, he will produce a closed transcript of registry proving that the vessel has been removed from that ship's previous register. Details of national registration procedures and requirements vary and must be ascertained in detail prior to any transaction. Within the United Kingdom the law covering registration is contained in the Merchant Shipping (Registration, etc) Act 1993 and the Merchant Shipping (Registration of Ships) Regulations 1993. For the purpose of registration, ships are divided into 64 shares-harking back to the days when it was common for a group of individual merchants, including probably the master, to combine to finance a maritime adventure. Any share may be owned by up to five people but they can only speak with one voice. British citizens and persons who are nationals of a European Economic Area (EEA) country and who are established in the UK may register a commercial vessel. Being established means making an economic contribution to the UK by being the proprietor of a business in the UK. Such people are termed qualified persons and at least 33 of the 64 shares must be owned by qualified persons. If none of the qualified persons are resident within the UK a representative person must be appointed who is an individual resident in the UK or a company incorporated in one of the EEA countries with a place of business in the UK. If the vessel is owned by more than one qualified person (and no representative person has been appointed) one of the qualified owners who lives in the UK must be appointed as the managing owner. Registration is valid for five years and although it establishes nationality and tonnage, it does not prove ownership or show mortgages (which are registered at the Registry of Shipping and Seamen). The annex for this chapter contains a British bill of sale and form of mortgage.

Finance and the vessel as collateral

An integral part of purchasing any vessel is raising the necessary finance. This can be done in a number of ways which are touched on below but, if borrowing is involved, the lender will require security. This introduces the concept of the vessel as collateral for a loan and the use of mortgages to establish and secure the collateral. Since the mortgage must be formally registered, so must the vessel be registered within a national framework of laws which will operate, to a greater or lesser extent, within the overall framework of international maritime conventions. Finally, there needs to be a way in which a lender can realise the value within the security he has been given if loan repayments are not being made. This introduces the need to be able to arrest a vessel and, if necessary for the Courts-in the United Kingdom, the Admiralty Courts through the Admiralty Marshal-to sell the vessel and divide the proceeds between the mortgagee (s) and any holders of a lien on the vessel, possessory or maritime.

Raising the purchase price 264

When an owner considers purchasing one or more vessels, he may be: replacing ageing or technically outdated vessels to maintain or expand his fleet presence (very much, but not exclusively, the approach of liner-type companies); making an entry into a new sector of the market where he considers he has an operational advantage or where he perceives trading demand will expand ahead of vessel supply; making a capital investment with the objective of securing capital appreciation against a (hopefully not too distant) future increase in the value of that class of vessel. This third alternative is not the exclusive preserve of financial institutions, although New York has been an active centre for fund raising against future vessel appreciation, especially based on the belief that ageing VLCCs 'must' appreciate in value at some stage. Success has been mixed and perhaps the most successful proponents of trading operations have been the Greek shipowning community. It is very much an attitude of mind, but, if a VLCC can be bought for US$5 million on an upward cycle, traded profitably and sold for US$20 million on a market peak, the carefully invested capital will fully finance an investment in, for example, Panamax bulk carriers if the next cycle is predicted correctly. International shipping is one of the most competitive of all businesses and is apparently driven by perennial optimism that the next upturn in the freight rate cycle (which drags vessel prices along with it) is the beginning of a golden age of high freight rates and if an owner does not buy now, then metaphorically, he will miss the boat. Figure 12.4 shows the reality with respect to VLCCs and Panamax bulk carriers over the past 20 years. Over the period since 1985, for example, a five year-old Panamax could be bought for anything between US$5,000,000 and $14,000,000. Even the $4,000,000 spread over the cycle of the last six years can add $500 or more per day in additional interest charges and a further $1,000 per day in loan repayments (on an 80% by eight year loan) for the owner who has bought at the top of the market. Since the capital cost, once the vessel is bought, is difficult to change, it explains, perhaps, why some owners are attracted by the thought of saving $500 per day on manning costs! If the owner is a cash buyer, there is little need for security but, in many cases the owner will have to present his case, that is his business plan, to a bank or other financial institution, often a merchant bank with a specialist shipping department. Within the bank, the manager responsible for shipping will present his client's proposal to the bank's credit committee who will take many of the following factors into consideration when deciding whether or not to advance a loan: - Owner's equity: the proportion of the overall purchase price covered by the owner's own funds. This may be cash from accumulated reserves or the sale of another vessel or it may be a direct input of shareholders' funds through a rights issue. It could also be financed by an overdraft from the owner's trading bank as opposed to the specialised lending bank which he has approached or by floating a speculative investment bond.

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- Bank's lending policy: the debt-to-equity ratio, with debt representing the amount of the purchase price borrowed, will vary with the bank and the banking community's perception of shipping as an investment. Theoretically financial institutions manage a balanced portfolio of carefully considered investments in a range of industrial and commercial ventures. In reality, there is generally a market perception against which banks expand or contract industry sector investment portfolios. Since the perception is common and the economic assessment of future trade growth and thus ship demand is far from an exact science, the availability of investment funds to the shipowner is also cyclical. The bank will also have a policy as to whether to carry all the lending or to syndicate it. This means that once the loan agreement is in place they have the right to reduce their exposure by inviting other banks and institutions to take a portion of the lending. In general, owners and borrowers tend to resist this as it makes life more complicated if a change or rescheduling is required during the life of the loan. Certainly when negotiating a loan the owner will want to insist that all such negotiations are only with the lead lender. - Owner's reputation: this is an important factor and in today's world may also include the reputation of the beneficial owner's shipmanager and even his crewing policy. Owners will, in general, want to build up a track record with one or two prime lending banks. Technical specifications of the vessel may be presented in great detail, supported by expert survey and inspection reports and the loan agreement will cover a wide range of eventualities in great legal detail. The business plan may be calculated on the most powerful of computers and cast and recast in a multitude of different ways, using the best tax and accountancy advice available. At the end of the day, however, the success of the venture will depend upon two variables, the chartcr-ratc which the vessel can command and the number of days of the year on which she is actively earning. - Security: it is sometimes said that 'the best lending is unsecured' and 'never lend against security'. In other words, lending should be made against the belief that the asset is being purchased at a realistic price and the skill of the owner and his operation will enable him to repay the loan and related interest. Nevertheless, the lending bank can be expected to request as much 266

collateral security as it can whilst the owner will argue to keep his assets as free as possible. If the loan is agreed by the credit committee the bank will draw up a facility letter, which may either set out the overall terms of the loan in considerable detail or just establish the main points, leaving the detail for subsequent negotiation of the loan document. The main points which will be covered in the facility letter will include: The borrower: this is the formal, corporate body -i.e., the legal entity which is responsible for repayment of the loan. The lenders will want to ensure that the borrower is properly constituted to enter into the proposed venture and will at the outset require to see the following documents: (a) Memorandum of association: this defines the objectives of the company and in one important clause sets out its aims. These may be quite wide and cover the purchase, ownership, management, chartering, trading of ships etc. However, if the company was established to act as a road haulier and decided to buy a roll-on, rolloff ferry to expand its business, it may first have to go back to its shareholders and acquire their formal agreement to an expansion of the aims of the company. At the same time it may be necessary to increase the company's authorised share capital. The MOA will also define the company's powers to borrow and to pledge its assets. (b)Articles of association: these set out the rules under which the company operates and the powers of the directors to borrow and the extent to which they can borrow, guarantee and charge as a multiple of capital reserves, as well as stipulating how many directors are required to make a board resolution. The AOA must comply with the strict regulation of the Companies Act in whatever jurisdiction the company is domiciled. The loan: the type, amount and period of the loan will be specified. Most common are term loans which specify a fixed amount repayable over a set period. Normally there will be one drawdown and equal repayments of principal will be made every three or six months. Sometimes an initial grace period will be allowed when only interest is paid as this eases the operation over what may be a high cost start-up period. Alternatively, repayment installments may be reduced and the balance will form a balloon at the end of the loan period. This may then be refinanced or paid off against the sale of the asset. Residual values of vessels at the end of the loan period are an important consideration in this context and range from a conservative scrap value to wildly optimistic assessments of appreciated assets. Sometimes a mortgage-type repayment may be agreed in which case the regular repayments of principal and interest will be constant. However, this tends to delay the repayment of the loan principal, while the asset ages and thus is not so common. Closely akin to mortgage type loans is lease financing, which may be linked to complicated tax leverage constructions-double dip leases were popular at one stage for financing semisubmersible drilling rigs, using complementary tax breaks in two different countries. Whilst offering a potential for reducing the overall cost of finance, such arrangements are notoriously difficult and frequently expensive to unscramble should the owner wish to sell the asset within the period of the loan. Using tax in a different way, the Scandinavian K/S schemes enable individuals to offset their personal tax against depreciation in a ship. The downside for the shipping industry can be that the vessel exists as vehicle for tax gains rather than being generated by real demand for tonnage. As banks reduced the proportion of their overall debt lending against owner's equity portion, so mezzanine finance became more popular. Put simply, this is higher risk lending from specialist institutions, which commands higher interest rates and frequently the right to profit share or equity participation. The mezzanine lenders' security is subordinate to the principal bank borrowing or senior debt. The period of the loan will depend upon negotiating power and the business climate at the time of the loan negotiation but will generally fall somewhere within a five- to eight-year period, although there are always notable exceptions and lease financing is generally over a longer period. Finally, loans, especially, but not exclusively for new buildings, may be government subsidised in line with guidelines from the Organisation for Economic Co-operation and Development, the so-called OECD Loans of 80% of the building price repayable over eight years from delivery at 7.5% rate of interest, although these loans are in the process of being phased out. Interest rates: these may be fixed or, more commonly, floating and the general benchmark is the London Interbank Offer Rate or LIBOR, basically the rate at which banks lend between themselves in whatever currency in which the loan is made. The general rule is to borrow in a currency which matches one's main income, although complex multi-currency facilities are available. Much of the borrower's skill and credibility will be devoted to reducing the margin of interest he pays over and above the LIBOR rate. For prime borrowers this can be as low as an additional one-quarter 267

per cent whilst spreads of 1.5% to 2.5% are not unusual. For mezzanine finance, the spread can be ten times as much. Security is an important aspect, and is discussed in the next section. The lender will also want to see a formal board resolution, approved by a quorum of the board, authorising the proposed borrowing and stipulating the reason for the borrowing. Under the AOA, the board may issue a power of attorney and indeed, under certain circumstances, the master may be empowered to act for the company under a power of attorney. These are very powerful documents as they authorise the named person to act with the full authority of the board of directors and, indeed, the holder of a power of attorney may be able to sign documents and make contractual agreements which, under the AOA would normally require the signature of two directors. Powers of attorney must be formally notarised by a commissioner of oaths or notary public and are usually registered with the consul of whichever jurisdiction in which the PoA will be used -e.g. the country of registration of the vessel. They should be kept in the safe along with other commercially valuable documents such as bills of sale (and, as is suggested in chapter 6, unused bills of lading). It is good practice to make photocopies of documents such as these so that interested parties to a transaction can be given a set of proforma documents to check prior to the actual transaction without the provider having to worry about the custody of the original. The holder of a PoA will need to provide positive proof of identity and either return the PoA when the transaction is complete or record who holds it. They should be drafted so that when a transaction is complete or a certain date is passed, they no longer have any validity. Although there are always exceptions to the rule, loan agreements are complex documents which will generally follow the following format: Clause 1 Definitions and interpretation. Clause 2 The loan and its purpose; usually couched in standard banking terms, but the bank will want to ensure that its loan is used for the purpose intended and not to support the company's general operation in the f6rm of working capital. Clause 3 Conditions precedent and subsequent, covering a wide range of requirements including the documentation-bills of sale, certificate of class, board resolutions, etc.-which the owner must provide Clause 4 Representations and warranties: usually general warranties relating to the corporate status and absence of any insolvency proceeding, etc. Clause 5 Repayment and prepayment: the owner will usually want the right to prepay the loan without any penalty should he wish to sell or refinance the vessel (the latter not, naturally, being popular with the lender). Clause 6 Interest: this may include a mechanism for increasing the margin (over LIBOR) if a default occurs. Clause 7 Flag: the lender's interest in the flag is mainly related to knowledge of the legal regime under which his mortgage will be secured. Clause 8 Fees: in addition to the spread over LIBOR, banks will want to charge as many additional fees as they can; commitment, management and termination being three of the most common. Clause 9 Security documents: including assign ments and mortgages. Clause 10Covenants: as well as defining the financial covenants (effectively undertakings) of the borrower this clause may cover major covenants with regard to the vessel. Typically this will include an undertaking that the outstanding loan is never more than a certain proportion of the value of the vessel as formally established by a sale and purchase broker's valuation. Usually the percentage is between 120% and 150% (or conversely it may be stated that the outstanding loan should not be greater than 60% to 70% of the open market value of the vessel, assuming in the terms of the S&P brokers' profession I willing buyer, willing seller'). If the loanto-value ratio is too high, additional security may have to be provided. Clause 11Event of default: unless the loan is repayable on demand, most term agreements contain a comprehensive list of events which constitute a default. These range from failure to make due payment of interest or loan instalments to the vessel becoming a total loss. However, other events, more in the domain of the master, can also constitute a default such as failing to maintain class or trading outside insurance warranty limits. Clause 12Set-off and lien: mainly relating to the bank's right, in certain circumstances such as in the event of a default, to place a lien on other property or assets of the borrower. 268

Clause 13Assignment, syndication and subparticipation: by the lender as already mentioned. Clause 14 Payments: a variety of housekeeping arrangements with regard to repayments and setting interest rates-e.g. the time at which LIBOR is fixed for each payment of interest on a floating interest loan. Clauses These may cover the way in which formal notices are given, Miscellaneous points, 15-19 the law andjurisdiction of the agreement and how disputes are resolved; a reference, headings and contents page and a copy of the offer or facility letter. In addition, there will be a number of appendices: Appendix A: Form of drawdown notice: as mentioned earlier in this chapter, when a vessel is purchased, many events have to occur often in different parts of the world (and consequently in different time zones). Primarily, the bill of sale, representing title in the vessel will be exchanged for documents representing the full purchase price (plus the agreed cost of bunkers and lubricating oils). Probably the largest part of the purchase price will be the loan and the buyers will need to make it available to the sellers on delivery. At the same time, the lender will require his loan to be secured by, amongst other things, a mortgage registered with the (new) flag State of the vessel. Thus, the form of drawdown notice plays an important part in the mechanics of ship purchase and finance. Appendix B: Form of mortgage: this is covered in the next section. Appendix C.- Form of deed of covenant: this deals with the undertaking of the borrower to do certain things, the main one being to repay the loan in accordance with the agreed schedule. The covenant also covers such matters as the undertaking to keep the vessel insured, classed and properly repaired. Under English law, at least, it should be sufficient, since by the nature of the transaction there is adequate consideration moving both ways e.g. a vessel in exchange for cash, for the agreement to be a valid contract. However, based on the principle that if it does not cost more to have beit and braces (since the borrower pays the, not insignificant, costs of establishing the loan) the lender may execute the loan agreement in the form of a deed, which gives the lender some extra degree of security and also gives rise for the legal need for a covenant. Appendix D: Forms of assignment: of insurance and, if unavoidable, earnings; and Appendix E: Form of guarantee: which is covered in the next section.

Securing the loan

As mentioned earlier, the objective for a bank should be to lend against projects which have the strength of the business plan and a positive cashflow able to service the loan and interest payments on their due dates. It is not the objective to have to realise the various securities in order to repay the loan for, even if this is achieved, the lender's profit lies in the steady repayment of interest at the agreed spread over LIBOR. Nevertheless ' the lender will require security and will negotiate for as much as possible. This will include all or some of the following: - A first-priority mortgage (FPM): discussed later. - Assignment of insurances: as mentioned, the insured sum stipulated will be well in excess of the loan amount. Very often the lender will require any insurance amount over, say, US$100,000 (although it may be less), to be paid to their account, allowing the owner's normal operating procedure to deal with the small repairs. The effectfrom the master's point of view is that the lender may require his own set of accounts and reports with regard to repairs covered under insurance. - Assignment of earnings: owners will try to avoid earnings being paid into a designated account in the lender's bank in which he may be required to hold a certain balance which can adversely affect his cashflow. - Assignment of any requisition compensation. - A personal or company (bank) guarantee or indemnity. 269

- A charge or pledge over borrower's shares: this becomes more common if the borrower has to resort to the use of mezzanine finance. A mortgage is, for the lending bank, usually the central and most important part of its security~ the essential features of a ship mortgage are that: - It gives the lender in rem rights against the mortgaged vessel (i.e. rights against the vessel itself and notjust against the owner); - It gives security (i.e., priority over) against unsecured creditors; - It enables the lender (the mortgagee) to take possession of the vessel in the event of a default by the owner (the mortgagor); and - It allows the mortgagee to sell the vessel to raise funds to satisfy his debt. Under English, and consequently most Commonwealth, law, a statutory mortgage is used (see annex to this chapter). The form and function of the registered ship mortgage is prescribed in the regulations made under the Merchant Shipping (Registration, etc.) Act 1993. There are two forms, 'principal sum' and 'interest and current account, etc., and other obligations'. The latter is the most commonly used as it widens the scope of the security to include other sums such as ancillary costs, insurance premiums paid or due to be paid by the mortgagor which the mortgagee will want secured. A standard form of mortgage also tends to be used in Scandinavian and a few other countries, although they are longer and more detailed. However, in many countries, and notably Liberia and Panama, there is a much wider scope for parties to dictate their own form of mortgage within the general framework of the regulating legal system. Although the English system has the benefit of simplicity, the practice has grown of expanding the effect and scope of the mortgage as an instrument of security by including a deed of covenant (as mentioned above) in the loan agreement. If the covenant includes an actual charge over the vessel, it must be formally registered (in the United Kingdom, in accordance with the Companies Act 1985). In any case, to have full effect, every mortgage, statutory or preferred, must be registered with the flag State's relevant ship registry.

Mortgagee

A mortgagee acquires certain rights under the mortgage, but, to a great extent, they represent fairly drastic courses of action which will result in the termination of the very maritime adventure for which the loan was advanced. If the mortgagee finds that the owner, the mortgagor or borrower, is entering areas of default under the loan agreement, he must consider his best course of action. The default may be because the owner is failing to keep the vessel insured or classed in accordance with the agreement either because of a rise in costs or because of a need for repairs which he cannot meet. It may be that the owner is falling behind in interest or principal repayments as freight rates fall (or, frequently, fail to rise in line with an over-optimistic business plan). If the vessel's earnings have been assigned to a bank account over which the mortgagee can exert control, he can, as a first step, ensure that freight or charter earnings are directed to the benefit of the mortgaged vessel and not other company expeAses. Many loan agreements stipulate that the first priorily for a vessel's earnings are towards essential trading and operating costs. If operating under such constraints, a master must consider what is essential as against merely important. He and his team on board need to set a careful course to help the owner navigate out of the impending shoals of bankruptcy. A general but little used right of the mortgagee is to inspect the vessel. Whilst the concept of yet another inspection is unlikely to be greeted with tremendous enthusiasm on board, it can, in fact, offer the master a unique opportunity. It is, perhaps, unlikely that an owner will advise the master that he is in default under his loan agreement, but a commercially aware master should know that his vessel is mortgaged and, for example, section 110 of the relevant Liberian regulations require the mortgagor to '. . . retain one copy [of a preferred mortgage] on board the mortgaged vessel and cause such copy and the document of the vessel to be exhibited by the master to any person having business which may give rise to a maritime lien or to the sale, conveyance, or mortgage of the vessel. The licence of a master who wilfully fails to exhibit such documents and a copy of the mortgage may be susspended or revoked'. It will undoubtedly be apparent to him by the time a Mortgagee's inspector arrives on board, that cash flow is tight. Rather than letting the inspector depart with a depressing Picture of a 270

vessel deteriorating under a lacklustre crew, much better that he should depart with a well conceived plan and set of priorities as to which areas the reduced funds available should be directed in order to ensure maximum operational efficiency. After all, who should know this better than those on board. It also illustrates the importance of a master ensuring that he knows who is visiting his vessel and why and then making appropriate Plans. It is not an inconceivable scenario for the chief officer to be walking up the port side of the foredeck with a charterer's surveyor showing him the newly chipped and painted hatch covers or tank lids, whilst the master, on the starboard side impresses on the mortgagee's representative the importance of releasing funds for a new set of hatch or tank seals. In association with an inspection of the vessel, the mortgagee may enter negotiation with the owner about rescheduling the debt repayments. If the freight market has fallen both borrower and lender have a responsibility for finding a solution, since both parties accepted the business plan. Furthermore, there is generally little benefit of selling a perfectly good asset on a falling market. It is done though-to the benefit of alert and cash-rich shipowners.

Possession

A mortgagee also has the right to take possession of the vessel and either dismiss or instruct the master. Undoubtedly, the master will require clear and concise instructions from his owners, assuming he is clear as to who his owners are under these circumstances, before responding to mortgagee's instructions. The old adage that possession is nine tenths of the law does tend to apply and a master remaining, physically, on board has a much better chance of protecting not only the position of the owner but also the rights of himself and his crew. Generally, however, a mortgagee will hesitate to take possession of the vessel as he then assumes responsibility for all trading and operational costs, debts, liens and other obligations. One course open to him, however, is to put the vessel under the control of a competent shipmanager who has the resources to bring a run-down vessel back up to operational efficiency. Nevertheless, there will be circumstances when the mortgagee decides to realise his security. He may issue orders directing the vessel to the nearest place for the vessel to be arrested and subsequently sold either by a Court or at auction (with or without judicial supervision) or by private treaty. Such unilateral action has a significant downside for the mortgagee as he becomes mortgagee in possession and consequently and instantly liable for all debts of the vessel subsequent to taking possession and any maritime liens may follow the vessel into its new ownership. Under most circumstances, the mortgagee will prefer to co-operate with the judicial system and, if possible, achieve the co-operation of the Courts. The regulations relating to the arrest and sale of a vessel vary and circumstances arise where the mortgagor endeavours to trade his vessel only in countries with restrictive rules on arrest, whilst the morWragee tracks that vessel or a sister vessel to a port with a more benign legal regime for his purpose. Obviously an unsuspecting master can get caught up in this game of cat and mouse and should be very clear as to the origin of his sailing orders and other instructions (note the requirements for the authentication of trading messages in the voyage orders in the annex to chapter six). If the vessel is sold through a properly constituted judicial sale, usually an auction, the purchaser will have the knowledge that all debts and liens will be lifted from the vessel. It also avoids, for the mortgagee, any danger of a claim by the owner for damages for failure to obtain the best price possible. A mortgagee's rights to the net funds from the sale of a vessel only extend to the extent of the owner's indebtedness, the balance, if any, is the property of the owner.

Liens and other encumbrances

As well as second mortgages (a lender may have a first preferred mortgage on the subject vessel and a second mortgage on other vessels within a fleet if those other vessels are also carrying first mortgages), liens may also attach to the vessel. These will be one of two kinds: - Maritime liens: technically, these liens work in rem-that is, they attach to the vessel itself and follow it, unless lifted by due legal pi;ocess, even through changes of ownership. Consequeritly, in most regimes, the debts which may be secured by a maritime lien are limited (although the United States of America has a slightly more liberal approach). Under English law, the list is restricted to: 1. Damage done by the vessel; 271

2. Salvage; 3. Wages of the vessel's master and crew; 4. Master's disbursements and 5. Bottomry and respondentia-slightly archaic devices by which the master could pledge the vessel in order to raise funds to progress the maritime adventure. - Possessory liens: these depend upon the lienor retaining possession of the vessel until the indebtedness is settled and which are referred to as working in personam. In certain circumstances it may give the possessory lienor the right to apply for the vessel to be arrested and judicially sold. The two principal possessory liens are those which may be raised by: 1. A shiprepairer in respect of work undertaken and 2. A port in respect of unpaid port dues. The possessory lienor loses his lien once he has lost possession of the vessel or the subject of the lien (although he retains his basic legal right if he can find an effective jurisdiction under which he can serve his claim). This matter of physical possession is important in another context. The owner has the right of a possessory lien over cargo against unpaid freight. As mentioned in the Nautical Briefing, it is difficult to claim a possessory lien if the cargo is disappearing up a pipeline into the receiver's tank farm. However, there are circumstances where the master may find it necessary to discharge cargo before freight is paid so that he can proceed with his voyage. In such cases he needs to discharge the cargo into the care of an individual or organisation which can retain a possessory lien on behalf of the owner. The master will doubtless need the assistance of his P&I Club's local Correspondent in such circumstances. The ranking of liens, possessory or maritime, and mortgages, is not handled consistently from country to country and attempts at achieving an international consensus through convention (principally in 1926, 1967 and 1993) have not been notably successful. An example of this is the case of the Halcyon Isle, where the priority between a registered mortgage and a lien was disputed by an action in rem in Singapore Courts by American shiprepairers. The American repairer relied on the fact that a repairer's lien in America is held to be maritime rather than possessory. However, as the case was brought in Singapore, it passed to the Privy Council in London on appeal. Here it was held, but only by a majority of three to two, that the shiprepairer was not entitled to assert a maritime lien and by then, of course, the shiprepairer had long lost possession and his right to a possessory lien. It is obviously not possible for a master is make a 'legal' judgement under such circumstances, but an appreciation of legal framework will help him steer a prudent course which will, so far as possible, protect his owner and his vessel.

Arrest

Obviously, the shiprepairer mentioned earlier should have commenced the action in a port within a legal regime more akin to the American legal system. This divergence of the local interpretation of laws which are, in theory at least, following the guidance of international convention, makes arresting a vessel in default as much of an art as a science. Mortgagees will, although their power is limited, endeavour to resist the creation of liens without their consent. If they do have to arrest the vessel, they will wish to know: - Can the arrest be accomplished quickly and easily? - Are the procedures for arrest expensive and can they be recovered? - How quickly can the sale or auction be undertaken? - Will the funds be held safely and distributed quickly? - What is the likely ranking that the Court will give to their mortgage with respect to other mortgages, debts, lien or encumbrances? It is worth noting that there will probably be no sign of a maritime lien attaching until the lienor commences an action in rem (technically the term is 'inchoate'). Under the International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-Going Ships, 1952, the scope of maritime liens is wider than that commonly held under English law and includes certain items which would there be held to be possessory liens. The list includes: (a) Damage caused by any ship either in collision or otherwise; (b) Loss of life or personal injury caused by any ship or occuring in connection with the operation of any ship; (c) Salvage; 272

(d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n)

Agreement relating to the use of hire of any ship whether by charterparty or otherwise; Agreement relating to the carriage of goods in any ship whether by charterparty or otherwise; Loss or damage to goods including baggage carried in any ship; General average; Bottomry; Towage; Pilotage; Goods or materials wherever supplied to a ship for her operation or maintenance; Construction, repair or equipment of any ship or dock charges and dues; Wages of master, officers, or crew; Master's disbursements, including disbursements made by shippers, charterers or agents on behalf of a ship or her owners; (o) Disputes as to the title or ownership of any ship; (p) Disputes between co-owners of any ship as to the ownership, possession, employment or earnings of that ship; (q) The mortgage or hypothecation of any ship. The Convention (which is due to be revised) gives contracting States the right to arrest vessels flying the flag of one of the contracting States in any contracting jurisdiction in respect of the above maritime liens only. Other vessels under the same ownership may be arrested instead, with the exception of liens arising under (1), (o), (p) or (q) above. All matters of procedure shall be governed by the law of the contracting State in which the arrest was made. By this stage of the proceedings, matters will have passed out of any direct control of the master. However, he remains 'in possession' of the vessel on behalf of his owner until relieved and, as initial Court judgements may be overruled on appeal, he should not be too quick to surrender 'possession'. He may also be the only person who is available to initiate an action in rem in order to establish a maritime lien on behalf of his and the crew's wages and, perhaps disbursements owed for stores, supplies and services rendered in good faith. In closing, it can only be hoped that this section is of academic interest only.

ACKNOWLEDGEMENTS

RODERICK O'SULLIVAN recommended references and made the library of Holman, Fenwick & Willan available for the section on finance, loans and liens. Gerry Donker of Howard, Houlder & Partners, checked my slightly rusty knowledge of sale and purchase.

REFERENCES

Shipping Finance. Stephenson Harwood: Euromoney Books. Arrest of Ships. Francesco Berlingieri: Lloyd's of London Press. Shipping Review & Outlook. Philip Wake, MNI: Clarkson Research Studies.

-

ANNEXES FOR CHAPTER 12

Memorandum of agreement: Norwegian Saleform 1993. Bill of sale: Department of Transport form ROS 20 1/94. Mortgage of a ship: Department of Transport form ROS 25 1/94. Particulars of vessel.

273

END WORD The meaning of commercial management

THIS BOOK has ranged widely over many subjects which a reader may not have expected to find. There is no apology for this; the book is written with the premise that the shipmaster is a professional and, as such, he should have an understanding of all aspects of his trade-even including an awareness of how his vessel is financed, an area seldom introduced to seafarers. Chapter 12 together with the chapter on budgets may give some understanding of the financial pressures which face shipowners and technical managers and to which, sadly if understandably, the response has too often been cheaper crews. There is a commercial aspect to virtually every action taken or decision made by a shipmaster, just as there is a safety aspect and a technical aspect. The more these three aspects can be brought into harmony, the more effective and successful the operation. This is not always easy as there may be tension or lack of understanding between technical and commercial departments ashore, with an aggressive commercial department frustrated by a cash-constrained technical operation-the master may well have to resolve conflicting demands emanating from elsewhere in the company, although the ISM Code should help to improve the ship-shore interface. A wide understanding of all aspects of the business of shipping is essential under these circumstances. This book is designed to illustrate four key principles: 1. Shipping exists because there are customers who require our services. Like all customers, they are always searching for value for money and the focus of that search ranges between the lowest cost of transportation available and reliability and quality. The charter market for ships is truly international and highly competitive. It is very difficult for a charterer to pay an extra 10 cents for a vessel (even if he was paying $10 more last voyage) unless he can see that the service he received from the vessel compensates for the extra charter rate. This then is the first challenge for the master and his vessel, for if the service is good, the charterer will come back. 2. It is often asked how an owner can entrust an investment of many tens of millions of dollars to the hands of a master he has never met and does not know. Although in a strange way this is a compliment to our profession, hopefully the ISM Code will help to change this and there will be more stability in the area of manning. Nevertheless, a major -shortage of qualified seafarers is approaching and shipowliers must look seriously at their training commitment. Of all the many items which go to make up the cost at which the owner can present his vessel, very little is variable. The capital cost is set when the vessel is bought and financed and many of the other costs, subject to a small negotiating market, are similar for all owners. It is a sad fact that over the past ten years or more, the cost of crewing has been seen as one of the few areas where costs can be cut. Especially on a well maintained vessel, changes of crewing policy can deliver immediate and substantial savings and it can be some time before a drop in maintenance standards shows through. But effective management can deliver quality at a competitive cost and this is the second challenge for the master. 3. Communications, together with other advances in technology, have made it easier for managers ashore to believe that they can economically manage ships from the office, directing masters who are encumbered with untrained and sometimes incompetent crews. The vast increase in safety legislation is a measure of the failure of this approach. The ISM Code addresses the ship-shore interface quite directly, but change will be slow and difficult if the master remains reliant on office instructions and convinced that he is only there to take the vessel from port to port. The third challenge for the shipmaster is to convince the shipowner that the master's role should incorporate the management as well as the driving of his vessel and this is an area where The Nautical Institute is playing an increasing role. 4 Not only has manning changed but so has the technical complexity and pace of marine transportation. The resources available to the shipmaster today are now quite different, with an often ill-conceived mixture of 'cheaper' crew and 'labour saving' devices. Innovation in shipping also means that organisations and working practices have got to adapt to the new technologies. Better and different ways of improving management and working practices are most likely to come from interaction and discussion between all people working in 274

an organisation. The old, hierarchical methods of management, suitable for a different age and a different set of circumstances, must change. To achieve this is the fourth challenge facing the master.

ANNEXES Annex No. 2.1 2.2 2.3 3.1 3.2 4.1/2 4.3 5.1 5.2 5.3 5.4 5.5 6.1 6.2 6.3 6.4 6.5 6.6 7.1 7.2 7.3 8.1 8.2 10.1

11.1 11.2 12.1 12.2 12.3

Sample job description for the master Self-assessment and goal setting; some questions Self-assessment and goal setting; activities /learning area matrix Correlation of income statement; balance sheet and cash flow Reconciling the cash and accrual basis Bill of lading/waybill Bill of lading terms and conditions GAFTA sales contract no. 64; FOB terms for grain in bulk Extracts from the GAYTA sampling rules no. 124 Summary of sample oil contracts-gas oil sale contract-sale of Bonny light Extracts from the Hamburg Rules-articles 15 to 19 Comparisons of Hague/Hague-Visby and Hamburg Rules Sample charterparties Binco Gencon voyage charter plus Gencon bill of lading Bimco/Fonasba standard statement of facts (short form) Shellvoy 5 Particulars of vessel NYPE 93 Unsafe ports and berth claims-practical steps for masters ILU marine policy-March 199 1: Institute Time Clauses-Hulls 1/ 11/95 Certificate of cargo insurance ISSA conditions and explanatory notes Standard ship management agreement: Bimco Shipman Extracts from ISF guidelines on ISM Code Special shipboard operations and examples of emergency situations Suggested subject matter for operations documentation Development of a safety management system Major international shipping conventions and recommendations Lloyd's Open Form 1995 Average guarantee Memorandum of agreement: Norwegian saleform 1993 Bill of sale: Department of Transport form ROS 20 1/94 Mortgage of a ship: Department of Transport form ROS 25 1/94 Extracts from Nautical Briefing. The Development of Maritime Commercial Practice

275

Chapter 2

SAMMPLE JOB DESCRIPTION FOR THE MASTER

Annex 2.1

Job Descriptions of sea staff

Before producing detailedjob descriptions, a company should be clear as to the role which the various seastaff are expected to fulfil. This is especially important if the crew is engaged through a crew supplier rather than being directly employed. The ISM Code reinforces the need for all seastaff to be competent and properly qualified for the vessel on which they will be sailing. As described in chapter two, the master's role, and to a great extent that of the chief engineer, is to plan, delegate, supervise and develop the talents of their staff. Only when absolutely necessary should the master be involved in doing the task. The attached extracts from a company's standing instructions sets out the roles which the company expects its masters to undertake. Master Title Purpose Reporting to Liaison with

Captain Management of all shipboard affairs Fleet manager Shipboard management team

Duties and responsibilities 1. To initiate and co-ordinate plans to meet operational objectives. 2. To involve and familiarise the ship's complement in the formulation and execution of those plans. To plan shipboard training. 3. To act as personnel executive to the ship's company and to promote their welfare. 4. To participate as a member of the ship's management team. Control 1. To monitor own performance. 2. To monitor and control expenditure according to agreed procedures. 3. To ensure compliance with the law, company policies, regulations and instructions. 4. To appraise the performance and potential of ship's staff according to agreed procedures. Leadership I To command the confidence of the ship's bompany by firm guidance, exemplary personal conduct and by fostering a congenial working and social environment. Special responsibilities To provide at all times for the safety of the ship, personnel and cargo. To promote safe working practices and procedures among crew-members with the objective of preventing personal injuries and financial loss. To avoid pollution by strict compliance with Marpol regulations. To ensure the successful prosecution of the voyage. To take charge personally in emergencies. To ensure that the vessel is fully equipped in all respects to proceed to sea bearing in mind the projected voyage, and is in all respects seaworthy and remains so. To familiarise himself with all aspects of the vessel and her equipment. To keep abreast of maritime developments. To attend to the welfare of the ship's company, to assume overall responsibility for medical services and to ensure that all documentation associated with medical treatment is completed; this latter task being normally delegated. To ensure the security of confidential material. To ensure compliance with law. To monitor and control the use and disposition of provisions, stores and cash. To co-ordinate training practices and procedures on board the ship. To ensure a high standard of communication within the ship and between ship and shore. To maintain discipline on board. To maintain and foster an awareness of the budgetary control system and costs. To undertake all formalities in connection with the ship's articles of agreement. To regulate cash issues and maintain records and accounts in accordance with agreed procedures. To establish and maintain vessel security by ensuring that only bona fide visitors are permitted on board the vessel. To ensure security and control of bonded stores and shop items and to assume overall responsibility for stock. To allocate accommodation. Together with the chief engineer officer, ensure that the vessel is maintained to a satisfactory operational standard. 276

To ensure the vessel's certificates are in force, and to notify the company when surveys are required. Notes Responsibility The ultimate responsibility for the safety of the ship and crew rests with the master and nothing herein is to be construed in any way to relieve him of his full responsibility for the safe navigation of his ship and the efficient organisation on board. The master is responsible for the implementation of the company maritime safety policy on board his ship and he will be accountable for any failure to comply with correct operating procedures. In matters of safety the master has discretion to take whatever action he considers to be in the best interest of his ship, those on board and the cargo. Should an emergency situation develop, the master must take such immediate action as he considers necessary, and keep the company informed of the situation. The master is responsible for ensuring that before proceeding to sea the ship is fully equipped and safe for the intended voyage. The requirements as regards stability, ballasting and stowage of cargo are to receive his careful attention. The master is to exercise overall control and guidance to ensure the efficient maintenance and operation of the ship and the overall welfare, discipline and training of the ship's company. Changing of command When a change of command takes place, the master must hand all papers and documents concerning the ship's business to his successor. If the master is incapacitated, the chief officer will assume command. This is to be recorded in the official log book and the company informed as soon as possible. If, however, by the virtue of the master's incapacity he is unable to relinquish command then the chief officer, after consultation with the chief engineer, will assume command and make an entry into the official log book. The company is to be informed as soon as possible. Standing orders On taking over command, the master is to issue his own standing orders and instructions to supplement company regulations.

277

Chapter 2

Annex 2.2

SELF-ASSESSMENT & GOAL SETTING QUESTIONS: THE I I QUALITIES OF A SUCCESSFUL MANAGER Quality 1. Command of basic facts

2.

Relevant professional knowledge.

3.

Continuing sensitivity to events

4.

Problem-solving, analytical, and decision/judgement-making skills

5.

Social skills and abilities

Indicative questions -How much do you know about what's going on in your organization? -What are your sources of information? -How extensive are your contacts? -How many people do you know in your organization? -What do you know about the way other people feel about your organization? 'Other people' should include those superior to you, at your own level, more junior to yourself, owners, management, and workforce; customers, consumers, and clients. -Can you think of some recent examples of occasions when you needed to know more basic facts? -How much do you know about your organization's policies? -How much do you know about your organization's medium- and long-term plans? -What do you do to keep informed about all these things? -What do you do to keep up to date with new techniques and with the latest thinking in your area? -How much time do you spend reading specialist journals? -How do you get guidance on technical or specialist aspects of your job? -How well-informed are you about possible legislative, governmental, and international changes and the effect these might have on your organization? -What do you do to make sure that you are tuned in to what's happening in a given situation? -How sensitive are you to the way other people are feeling, or to the way in which they are likely to react? What steps do you take to develop this sensitivity? -How perceptive are you? -How do you make sure that your assumptions about what's going on are correct? -What types of situation do you find hardest to weigh up? -What do you find most difficult about making decisions? -How,do you feel about having to make judgements in situations in which ideally you would have more information? -What range of decision-making techniques do you have available to help you when appropriate? -Can you think of some recent examples of good and bad decisions you made? -In general, how confident are you in your decision making abilities? -How much difficulty do you have with other people? What types of such difficulty do you have? -What do you do in situations involving inter-personal conflict? -Can you think of some recent examples of situations in which you needed to use social skills? What happened? -How much do you know about what other people think and feel about you? 278

6.

7.

8.

9.

10.

-How do you respond to anger, hostility, suspicion? -How do you try to ensure that other people understand you when you communicate with them? How do you ensure that you understand others? Emotional resilience -How do you cope with feelings of stress, tension, anxiety, fatigue? -With whom do you discuss your worries and anxieties? -Think of the most tense, stressful situations that you have been in recently. How did you behave? -What do you do when you become emotional? -How do you behave in situations of great ambiguity? (i.e., when you don't know what's going to happen next, when everything seems very uncertain). Can you give some examples? -What do you do to make sure that you neither become thick-skinned nor over-affected by emotions? Proactivity-inclination to respond -What steps do you take to ensure that you're in control purposefully to events of your own behaviour, rather than allowing yourself to be controlled or manipulated by others or by situational pressures? -In which situations do you tend to be independent and proactive as compared with situations in which you tend to be dependent and reactive? -How good are you at taking the initiative? -To what extent are you thrusting, active, self-starting, rather than sleeping, passive, following9 Creativity -How easy do you find it to come up with new ideas? -How do you feel when all the well-tried solutions to a problem have failed? -What do you do to try to see new ways of doing things? -How often do you try out new methods, approaches, and solutions to problems? -What are the most creative things you have done in the past 12 months? -How often do you get seemingly crazy ideas which, on further development, turn out to be good and useful? Mental agility -How good are you at coping with several problems or tasks at the same time? -Can you think of a few examples of situations in which you really needed to think quickly? What happened in each case? -How often do you get sudden flashes of insight, in which all the pieces seem to come together' to solve a problem? Can you think of some examples of this? -How do you feel when faced with the need for rapid thinkine. -What do you do when faced with seemingly contradictory information, data or ideas? Balanced learning habits -How good are you at relating theory and practice in and skills management? -Can yo~L think of examples of occasions when you were able to draw general conclusions, or generate mini theories, from your own practical experiences? -Can you think of examples of occasions on which you (a) preferred to rely on the guidance of an expert rather than trust your own judgement? and (b) preferred to trust your own judgement rather than rely on the guidance of an expert? 279

11. Self-knowledge

-What do you do to ensure that you use a balanced range of learning habits? -What do you do to increase your level of self-knowledge? -Can you give examples of instances when knowledge or understanding of how you were feeling or behaving affected what you were doing? -To what extent are you consciously aware of your own goals, values, beliefs, feelings, behaviour? -How often do you stop to consider your own behaviour, its causes and its effects?

These indicative questions help you to give yourself a self-rating on the 11 qualities of an effective manager.

280

281

282

283

284

285

286

287

288

289

Chapter 5

Annex 5.2

Extracts from the Grain and Feed Trade Association GAFTA sampling rules (No: 124) (Effective for contracts dated from 1 July 1994) 1. 1.1 1.2

1.3

General For the purpose of these Rules, the words "Buyers" and "Sellers" shall be deemed to be the parties to the contract and their respective superintendents at the port where the cargo is loaded and/or discharged, and/or transhipped. The word "sealed" shall mean jointly sealed by the Buyers and Sellers or their superintendents. Samples shall be sealed in such a manner as to prevent any access to the sample without breaking or removing the seal. The seal's mark should be clearly identifiable and clearly visible. Sample labels Every sample shall be sealed and shall bear the name of the ship, the quantity represented by the sample and the date the sample was sealed, and any other pertinent information which may be required on the label as follows:Sender....................................................................................................................... M.V............................................................................................................................ From.......................................................................................................................... To.............................................................................................................................. Commodity.................................................................................................................. . ............................................................................................................................ . Bags/Bulk................................................................................................................... Marks ........................................................................................................................ Shipper/ Seller/Buyer ............................... …………………………………………………………………………….. Set No . ................................................. Sample No. ………………………………………………………… Date Sealed ........................................................................................................... Quantity represented by this sample .............................................................................. . ............................................................................................................................ . Part Total Quantity of.................................................................................................... Purpose of Sample ....................................................................................................... *Arbitration (Quality/Rye Terms), N. Weight/Analysis ....................................................... * delete as appropriate D/O Receiver Quantity B/L No. . ............................................................................................................................ . . ............................................................................................................................ . . ............................................................................................................................ . . ............................................................................................................................ . . ............................................................................................................................ . Seals.......................................................................................................................... Labels may be purchased from Gafta.

1.4

1.5

If one of the parties is not represented for sampling or refuses to draw and/or seal samples as called for under the contract, the other party shall under advice to the defaulting party call in a competent organisation at the port for the appointment of an independent superintendent to act on behalf of the defaulting party to draw and/or seal samples according to these Rules. Extra expenses incurred in this connection shall be borne by the defaulting party. For parties who have contracted in long tons, samples should be drawn for every 500 long tons, and for parties who have contracted in metric tons, samples should be drawn every 500 tonnes. 290

2. 2.1

Method of drawing samples General Samples shall be taken as required by the contract in accordance with the following provisions of the Rules, during the discharge, and/or loading and/or transhipment operations. In the event that the operations preclude access to the hold or a mutually agreed acceptable point, the superintendents may stop the operation in order to draw samples as required by these Rules. The parties are deemed to have agreed to this procedure. If samples are to be drawn outside of natural daylight they must be drawn under full and properly adequate ship's lighting and/or installation lighting. Irrespective of the time or place of sampling, the quartering, classification and sealing of contractual samples shall always be carried out in daylight or, in artificial light if considered adequate and mutually agreed by the superintendents. Sampling points Sampling points have to be carefully selected, and agreed by the superintendents, at a point where the samples drawn are representative of the goods loaded/discharged. Increment samples According to the rate of discharge /loading, increment samples shall be taken uniformly and systematically in order to achieve a representative sample of the consignment, and placed in mutually agreed suitable container(s). As many increment samples as practically and physically possible shall be taken in relation to the discharge/ loading, and where possible, each increment sample should not exceed 1 kilogram. For contractual tonnage over 500 tonnes a minimum 20 kilogram bulk sample of increments shall be taken for each 500 tonnes, but if the contractual tonnage is less than 550 tonnes, the bulker sample of increments drawn shall be not less than 40 kilograms.

2.2 Bags 2.2.1 For goods in bags samples shall be drawn from original bags which are clearly identifiable with the appropriate markings. a) for up to 100 bags, not less than 20 of the bags shall be sampled; b) for up to 1000 bags, not less than 50 of the bags shall be sampled, and c) over 1000 bags, not less than' 3% with a minimum of 50 of the bags shall be sampled. Samples shall be drawn uniformly, by a piercing spear from the top, middle and bottom of each bag. If it is not possible to efficiently draw a sample by spear, then the original bags may be opened to sample by hand scoop. So far as is possible samples shall be drawn from the ends and middle of, the bags in rotation. 2.2.2 Bags-for cutting and starting-where goods are loaded from bags into the vessel, samples shall be taken at the nearest point to the hold, either in accordance with Rule 2.3. 1 for goods in bulk, or if not possible, samples shall be drawn from the bags as provided in Rule 2.2.1 for goods in bags. 2.2.3 Slab Cakes in bags; one cake to be taken from each of a number of bags selected at random but not less than five (5) bags per 100 tonnes. Each cake to be broken into eight pieces of about equal size. Each sample shall contain equal portions from each part of the cake. 2.3 Bulk 2.3.1 For goods in bulk at loading; increment samples shall be drawn uniformly and systematically, concurrently with loading at the nearest practicable point to the vessel. If samples are drawn from conveyor, or ex-vehicle, or ex-silo overside to vessel, samples shall be drawn from a moving stream. If loading is by grab, samples shall be drawn from the quay or barge from the bulk, excluding the run. Where samples are required to be taken from rail wagons or vehicles, the increment samples drawn shall be taken from not less than 3 sampling points from each wagon or vehicle. Increment samples shall be taken by ordinary hand-scoop or by other mutually agreed equipment throughout loading. 2.3.2 For goods in bulk at discharge; increment samples shall be drawn uniformly and systematically, concurrent with discharge, from various parts of the hold in a fair proportion, excluding the run. If for any reason samples cannot be drawn from the hold, increment samples shall be drawn uniformly and systematically, concurrently with discharge, at the 291

nearest practicable point to the hold, preferably from a moving stream when discharging overside, or to silo, to craft or other means of transport. Increment samples shall be taken by ordinary hand scoop or by other mutually agreed equipment throughout discharge. 2.3.3 Slab Cakes in bulk; five cakes to be selected at random for each 100 tonnes. Each cake to be broken into eight peices of about equal size. Each sample contain equal portions from each part of the cake. 2.3.4 Where goods are loaded, shipped or delivered in containers, in bulk or bags; samples shall be drawn at the stuffing and unstuffing of the container, whatever is appropriate in accordance with the contract, by the most practical means possible agreed by the superintendents. 2.4 Security At any cessation of work, and when full, the containers containing the increment samples must be sealed by the superintendents, and for safe custody, placed in a mutually approved secure place. 2.5 Dividing/quartering Upon completion of sampling the increment samples in the mutually agreed suitable containers shall be emptied on to a well cleaned and flat surface (or for PP/PE bags into the approved mechanical division system-see Rules 3.3), in an area free from any possible contamination. The increment samples representing the total contractual quantity shall be thoroughly mixed into a bulk sample. The bulk sample shall then be divided, quartered and reduced to the required quantity needed for the contractual samples. 3. 3.1

3.2

3.3

4. 4.1

Sample bags and sample containers CB. (Containing bags) " CB " means the containing bags shall be new, made of non-toxic, odourless, unglazed, insewn, man-made or natural fibre or a mixture thereof, sufficiently tightly woven to retain all dust and/or foreign matter and prevent the moving apart of the warp and the weft of the material. They shall be tightly filled and securely tied before sealing. MPC. (Moisture proof containers) "MPC" means the containers shall be bottles, jars or tins with close fitting lids, or strong polythene of a minimum 250 gauge bags securely tied, and that such containers are labelled and shall be sealed, and if required by either superintendent, enclosed in sealed cotton bags. PP/PE. (polypropylene/polyethylene) When the Council of GAFTA has given prior approval in writing to an operator to use an electrical/mechanical system for quartering down, packing and sealing samples, bags of sufficiently ventilating foil of PP/PE polypropylene/polyethylene material may be used in place of CB referred to in 3:1 above, or bags of non-ventilating foil of PP/PE polypropylene/polyethylene material may be used in place of containers MPC referred to in 3.2 above.

Official samples required for analysis tests and arbitration purposes Official sets of samples are required for every 500 tonnes, or for any balance or contract for a lesser quantity, except where such balance does not exceed 50 tonnes, in which event a further sample is not required and this shall be recorded on one of the sample labels. All official samples (except for natural weight tests, See Rules No: 65) for any purpose shall be not less than 1 kilogram. 4.2 Grain, fertiliser, pulses, seeds andyice Unless the contract stipulates otherwise, sets of -samples are required as follows:4.2.1. For Grain, Fertiliser, Pulses, Seeds &- Rice, except Malting Barley I set of samples consisting of the following:CB-arbitration CB-analysis MPC-moisture when required by the contract CB-FAQ standard CB-Natural Weight Tests-See Rules, Form No: 65. These samples to be sent to the offices of GAFTA without delay, unless otherwise stated in the contract, and shall be mixed and quartered as required by the Association's analysts or arbitrators. 4.2.2 For malting barley 292

4.3

4.4

4.5

2 sets of samples are required, to be marked "Set I" and "Set 2" respectively, and each set shall consist of the following:CB-arbitration CB-germination/admixture MPC-moisture/protein/ calibration or screening CB-varietal purity In addition 1 set only is required for the FAQ Standard-CB. Both sets of samples and the FAQ standard sample to be sent to the offices of GAFTA without delay, unless otherwise stated in the contract, and shall be mixed and quartered by the Association's analysts or arbitrators. All contracts-goods sold tale quale Where goods, or part thereof, under a tale quale contract, are damaged by water, oil and/or other liquids, and where no payment is to be made for increase in weight by water, oil and/or other liquids, at the request of either party one sample shall be taken for each of the following: MPC-Sound Goods MPC-Water/Liquid/Oil damaged goods. These samples shall be sent to the offices of GAFTA, or local public or independent analyst to be mutually agreed, for the determination of excess water, oil and/or liquids, the cost to be shared equally by Buyers and Sellers and the result to be final and binding. All contracts-goods damaged or out of condition other than rye terms Seller's Superintendent at Buyers' request shall jointly seal samples of goods damaged or out of condition, but without prejudice to Sellers' rights and responsibilities under the contract. Each type of damage shall be sampled separately. Lumpy goods if in bags shall be sampled by cutting from top to bottom and withdrawing samples by hand, if necessary. The sealed samples shall be a fair and true indication of the degree of damage and the sample labels shall show the proportion of the tonnage so affected. 1 sample to be taken for each classification as follows: CB-Sound Goods-For Buyers CB-Sound Goods-For Sellers CB-Lumpy/Damaged Goods-For Buyers CB-Lumpy/Damaged Goods-For Sellers MPC-Liquid and/or Chemical Damaged Goods-For Buyers MPC-Liquid and/or Chemical Damaged Goods-For Sellers All contracts--goods damaged or out of condition traded on rye terms Goods arriving damaged or out of condition, shall be sampled on board the vessel at time of discharge, but in cases where both parties agree that it is not practicable for the classification and sampling to be carried out on board, then goods damaged or out of condition shall be landed on the quay or discharged to lighter for the purpose of such classification and any sampling shall take place within the port area as soon as possible after the damaged goods are landed or discharged into lighter, always provided that all the damaged or out of condition and sound goods be classified. In the event of such agreement not being reached, either party or both parties shall, after giving notice to the other party, apply to a competent organisation at the port for the appointment of an independent superintendent to act on behalf of the other party and samples shall be drawn jointly under all reserves. 1 sample to be taken for each classification as follows: CB-Sound Goods-For Buyers CB-Sound Goods-For Sellers CB-Damaged/Out of Condition-For Buyers CB-Damaged/Out of Condition-For Sellers MPC-Liquid and/or Chemical Damaged Goods-For Buyers MPC-Liquid and/or Chemical Damaged Goods-For Sellers The samples (held by the Sellers and held by the Buyers) shall be forwarded to GAFTA within 7 consecutive days of discharge from the vessel or on completion of classification and sealing, whichever happens later. The expenses incurred in sealing and forwarding of classified samples of damaged goods shall be paid half by Buyers and half by Sellers. Should Buyers incur additional lighterage or other expenses in the application of this Clause, Sellers shall refund to Buyers the whole of such proportion as may be recovered from the ship or 293

underwriters. In the event of it being proved to the 'satisfaction of the arbitrators that one set of sealed samples, in part or whole, has been lost, damaged or destroyed prior to the expiration of the period for forwarding permitted under this clause, or that the said set having been forwarded in accordance with this clause has been lost, damaged or destroyed during transit, then either party shall be entitled to proceed to arbitration on the other complete set of sealed samples. 4.6

Feedingstuffs sold on GAFTA contracts nos. 6, 8, 15, 22, 95, 96, 97, 98, 99, 100, 100A, 101, 102 and 103. Unless the contract stipulates otherwise, samples of each parcel shall be drawn in accordance with these Rules, sealed in not less than a set of 6 samples as follows: A set consists of the following: MPC-Ist analysis and where moisture is guaranteed CB-for castorseed and/or castorseed husk, sand and/or silica analysis *CB-2nd analysis CB-3rd analysis CB-2nd castorseed and/or castorseed husk, sand and/or silica analysis CB-Arbitration purposes For marine and animal products, all the above samples shall be contained in Moisture Proof Containers. *In the event the General, Belgian or French Standing-in-Clause applies, the 2nd analysis sample shall be in a MPC. 4.6.1 First Analysis Test The sample(s) for the first analysis shall be drawn in moisture proof containers and the analysis result for moisture from this sample will be reported on the certificate of analysis and used as the calculating factor for a second and third analysis test. If required by Buyers, the sealed samples in a MPC shall, within 14 consecutive days of sealing be despatched to: AGER, Bologna or to Arbitrage-en Verzoeningskamer voor Granen en Zaden van Antwerpen/ Chambre Arbitrale et de Conciliation de Grains et Graines d'Anvers, or to Institute Europeen de FEnvironnement de Bordeaux (I.E.E. Bordeaux), or to LabCo, Rotterdam, or Salamon & Seaber, London, for analysis. In the event that this option is not decided at the time of the contract, the choice of analyst shall be that of the instructing party. Within 14 consecutive days of receipt of the certificate of analysis of this sample, Buyers shall send a true copy thereof to Sellers stating whether they accept this analysis or whether they require a second analysis. 4.6.2. Second analysis test Sellers have the right, within 14 consecutive days of receipt by them of the true copy of the certificate of analysis, to give notice to Buyers that they require a second analysis. If a second analysis is required another of the sealed samples shall be despatched without delay to Dr. Bernard Dyer for analysis. The mean of the two analyses shall be accepted as final if the variation does not exceed 0. 5%. 4.6.3 Third analysis test If the variation stated in Rule 4.6.2 above does exceed 0. 5% then at the request of either party, made within 14 consecutive days of receipt (by them) of the true copy of the certificate of the second analysis, and on notice being given to the other party a third sealed sample shall be despatched without delay to Dr. Aug. Voelcker for analysis, and the mean of the two analyses nearest to each other shall be accepted as final and binding on both parties. 4.6.4 Arbitration sample Any one of the sealed samples shall be retained for arbitration purposes if required. 4.6.5 Despatch of samples and instructions The party requiring any of the respective analyses shall be responsible for the despatch of the relative sample(s) and shall give directly, or through an agent or representative acting on their behalf, to the analyst concerned, instructions specifying what analyses are to be carried out, both to be done within the time limit stated hereinbefore, and shall send to the other party a true copy of the relative certificate of analysis within 14 consecutive days of receiving it from the analyst. 294

Should the Buyers or any representatives acting on their behalf fail to both despatch samples and to instruct the analyst within 14 consecutive days of their sealing as above provided, or fail to forward the certificate in the said 14 days, then any claim for rejection or for an allowance in respect of any matters dealt with under the contract shall be deemed to be waived and absolutely barred. Should either party require further analysis but fail to make application therefor and to send samples within the time limit as above, then the analysis or the mean of the two analyses then existing shall be deemed to be final. 4.7

For feedstuffs sold on GAFTA contract nos. 1, 9 and 43 Unless the contract stipulates otherwise, samples of each parcel shall be drawn in accordance with these rules in moisture proof containers MPC. Buyers may accept Sellers' analysig but if required by Buyers, any one of the sealed samples shall within 14 consecutive days of sealing, be despatched to Salamon & Seaber, (or to analysts to be agreed by the Parties), to whom samples and instructions should be sent. In the event that this option is not decided at the time of arrival, the choice of analyst shall be that of the instructing party. This analysis shall be final and any claim arising from it shall be made within 24 consecutive days of the date thereof, accompanied by the certificate of analysis or a true copy. 4.8 For feedingstuffs sold on GAFTA contracts nos. 109, 113 and 119. One set of samples in containing bags (CB), shall be drawn, for analysis by Salamon & Seaber. For marine and animal products or where moisture is guaranteed, the samples shall be in moisture proof containers (MPC). 4.9 For ex-store contracts no. 109 and no. 110, the following shall apply: The party landing the goods shall appoint and instruct an independent superintendent to draw and seal fully representative samples. Such samples will be drawn during the discharge of the importing vessel at the port in the country of the delivery place named in the contract. Every sample shall be sealed and shall bear the name of the ship, quantity represented by the sample, together with the total quantity of which each sample forms part, the date the sample was sealed, a statement that the samples were sealed and taken in accordance with these Rules for analysis under contract No. 109 or No. 110 and any other pertinent information which may be required, in accordance with Rule 1:3. The laboratory shall record this information on the analysis certificate. 4.10 For feedstaffs sold on GAFTA contracts nos. 10, 104, 112 and 118. The provisions of Rule no. 4:6 applies, except that samples shall be sealed in a set of 5 samples, and the first analysis test shall be carried out by Salamon & Seaber, the second analysis test by Dr. Bernard Dyer and the third analysis test by Dr. Aug. Voelcker. In addition, Buyers have the option of requiring all 3 tests (2 tests for castor seed and/or castor seed husk) for all or any of the contractual warranties at the same time. In which case they shall be responsible for forwarding samples and giving the instructions to the analysts within 14 consecutive days of sealing of samples), in which event costs including analyses costs shall be for the account of the Buyers. Buyers shall send a notice to Sellers, at the same time as sending instructions to the analysts, that they have called on the analysts for all three tests at the outset. 4.11

Analysis for castor seed and/or castor seed husk. For goods sold to/discharged at ports in Belgium, France, Germany, Italy, Netherlands, Norway, Sweden and Denmark, the first analysis for Castor seed and/or Castor seed husk shall be made by: For goods discharged at Belgian Ports-Arbitrage-en Verzoeningskamer Voor Granen en Zaden, at Dutch Ports-LabCo, at French Ports-Institut Europeen de L'Environnement de Bordeaux, at German Ports-Institut fur Angewandte Botanik, at Italian Ports-AGER, at Norwegian, Swedish or Danish Ports-Steins Laboratorium As, Agro Division. Within 10 consecutive days of sealing, one of the sealed samples shall be despatched to the appropriate analyst. If a second analysis for castor seed and/or castor seed husk is required 295

4.12

4.13

4.14

such analysis shall be made by Salamon & Seaber on the sample already in their possession for test of oil and protein, but if a sample is not in their possession, on a sample sent to them without delay after receipt of the analysis certificate in respect of the first analysis for castor seed and/or castor seed husk. For goods discharged at other ports the first analysis for castor seed and/or castor seed husk shall be made by Salamon & Seaber on one of the above samples, which shall, within 10 consecutive days of sealing, be despatched to the analyst and which shall also be used for other analyses if required. If a second analysis for castor seed and/or castor seed husk is required, such analysis shall be made by Dr. Bernard Dyer. If a sealed sample is not in the possession of Dr. Bernard Dyer's laboratory when a second analysis is required one of the other sealed samples, which shall also be used for other analysis if required, shall be sent to Dr. Bernard Dyer's laboratory within 3 business days, after receipt of the analysis certificate in respect of the first analysis for castor seed and/or castor seed husk. Analysis for sand and/or silica For goods discharged at ports in Belgium, France, Germany, Italy, Netherlands, Norway, Sweden, Denmark, the first analysis for sand and/or silica shall be by the same laboratories as provided for the determination of castor seed and/or castor seed husk. One of the sealed samples shall, within 10 consecutive days of sealing, be despatched to the appropriate analyst. If a second analysis for sand and/or silica is required such analysis shall be made by Salamon & Seaber on the sample in their possession for the test for oil and protein but, if a sample is not already in their possession, on a sample sent to them without delay after receipt of the analysis certificate in respect of the first analysis for sand and/or silica. If a third analysis for sand and/or silica is required, such analysis shall be made by Dr. Bernard Dyer. If a sealed sample is not in the possession of Dr. Bernard Dyer's laboratory when a third analysis is required one of the other sealed samples, which shall also be used for other analyses if required, shall be sent to Dr. Bernard Dyer's laboratory within 3 business days, after receipt of the analysis certificate in respect of the second analysis for sand and/or silica. For goods discharged at other ports the first analysis for sand and/or silica shall be made by Salaman & Seaber on one of the above samples, which shall, within 10 consecutive days of sealing, be despatched to the analyst and which shall also be used for other analyses if required. If a second analysis for sand and/or silica is required one of the other sealed sainples, which shall also be used for other analyses if required, shall be sent to Dr. Bernard Dyer's laboratory without delay after receipt of the analysis certificate in respect of the first analysis for sand and/or silica. If a third analysis for sand and/or silica is required such analysis shall be made by Dr. Aug. Voelcker. If a sealed sample is not in the possession of Dr. Aug. Voelcker's laboratory when a third analysis if required one of , the other sealed samples, which shall also be used for other analysis if required, shall be sent to Dr. Aug. Voelcker within 3 business days, after receipt of the analysis certificate in respect of the second analysis for sand and/or silica. Sampling and analysis of feedingstuffs and cereal by products in bulk discharged at Rotterdam and Amsterdam For analysis of feedingstuffs and cereal by-products, in bulk, discharged at Rotterdam and Amsterdam, samples for standing-in purposes shall be forwarded to LabCo, who will divide, quarter and reduce them. Samples for other purposes may also be submitted to LabCo to be divided, quartered and reduced. The resulting sample(s) will be forwarded to the analyst in accordance with the provisions in these Rules. Bags/Sacks If Buyers so request, Sellers' superintendent shall seal sample(s) of bags/sacks considered by Buyers' superintendent to be unsuitable and/or torn, but without prejudice to Sellers' rights and responsibilities under the contract. Samples of empty bags/sacks shall be sealed in 4 categories:- sound, lightly damaged, medium damaged, and heavily damaged. One sample bag to be selected to represent each category and the percentage of each category to be agreed by the superintendents and stated on the label(s). 296

Chapter 5

Summary of Sample Oil Contracts

Annex 5.3

A: Sale of Gasoil. To: XYZ Oil--Corporation From: Fearless Oil Co. Ltd. Date: 9th October 1995 This is to confirm the following transaction Seller: Fearless Oil Co. Ltd. Buyer: XYZ Oil Product: Gasoil Volume: 25,000mt plus or minus 10 percent seller's option Type of Sale: CIF Copenhagen, Denmark Quality: Specific Gravity 0.850 max Diesel Index 53 min Distillation FBP 370 deg. C. max CFPP -11 deg. C max Cloud Point -2 deg. C max Flash Point 66 deg. C. min Sulphur 0.2 percent WT max Colour 1 max Kin visc at 20 deg. C 6 max Water & Sediment 0.1 per cent wt max Period: Arrival Copenhagen 23-25 October 1995. Price:

Laytime: Demurrage: Payment: Inspection: Duties: Other T&G:

The CIF Copenhagen price will be Platts high quotation for gasoil 0.2% sulphur cargoes CIF NWE basis ARA valid on the b/l date plus US$5.00/mt if no quotation published for b/l date the first preceding date to apply. Price is based on b/l quantity and is on an EEC duty-paid basis. 6 hours NOR plus 36 hours Shinc, pro rata for part cargo. At charterparty rates By irrevocable 1/c issued by 1st class bank acceptable to seller confirmed and payable in London within 2 days of completion of discharge or 4 days after tendering notice of readiness of discharge which ever is the sooner. Inspectors to be appointed b buyer, and paid for 50/50 by seller and buyer. Findings to be binding on both parties Product is on an EEC duty-paid basis. All other local taxes for buyer a/c. Mobile latest GT and 0 CIF sales.

B: Nigerian Bonny light sale to A33C oil. major 1 October 1995 Good afternoon this is Fearless oil Our Tlx Nr 700. To: ABC-New York Attn: 0. Cody With reference to our recent discussions. We are pleased to confirm herewith the terms and conditions of the crude oil purchase/sale between us. Part I-Specific provisions 1. Parties: Fearless Petroleum Inc 1820 44nd Street New York, NY 10020 ABC International Trade Inc.-Buyer 2200 Eastlines Avenue Black Hills New York 10850 297

2. 3.

4.

Period: 1-10 November 1995 FOB Bonny Terminal Nigeria Both dates inclusive. Quantities and qualities: To be sold and delivered or caused to be sold and delivered by Fearless to ABC and to be purchased, received and paid for or caused to be purchased, received and paid for by ABC: Bonny Light Crude Oil, 900,000 bbls +/- 5% operational tolerance. Price: The price to be paid for 37.0 +/- 37.1 degrees API Gravity Bonny Light shall be the average of the mean of Platts quotations for dated Brent published from 18-25 October 1995 inclusive, plus 50 cents/bbl. The foregoing price does not include the Nigerian harbour dues which are for ABC account. Such price shall increase or decrease by US dollars 0.003 for each tenth degree by which the gravity of the crude oil actually loaded is respectively, above the lower end or below the upper end of the base specified.

5.

Payment terms: In the event that any payment falls due on a day when the designated bank is closed, such payment shall be made on the last banking day before the non-banking day. Payment by ABC to Fearless for Bonny Light crude oil sold and purchased hereunder shall be made in US Dollars by telegraphic transfer of immediately available funds not later than 30 days after the Bill of Lading date to the bank and account number as designated by Fearless. Payment shall be made against the presentation of a commercial invoice, Bills of Lading, and other normal shipping documents. In the event that Bills of Lading have not been presented at the time of payment, ABC will accept from Fearless a letter of indemnity in a form satisfactory to ABC. Fearless, pursuant to the provisions hereunder, represents and warrants that at the time of loading it will be the owner of the crude oil sold hereunder and for which the Bills of Lading will be issued.

6.

Delivery: Delivery by Fearless to ABC will be FOB Bonny Terminal. The cargo shall be supplied in one lot in the date range 1-10 November 1995 inclusive. This date range shall be narrowed to a 3 day lifting range by Seller notifying Buyer of such lifting range not later than 13 October 1995. This delivery period is a material provision of this agreement. Title: Crude Oil shall be pumped aboard the Buyer's vessel at the Seller's expense. Delivery shall be deemed completed and title shall pass as the crude oil reaches the flange connecting the Seller's or the Seller's supplier's pipeline or hose with the Buyer's vessel intake pipe at which point the Seller's and the Seller's supplier's responsibility shall cease and the Buyer shall assume all risk of loss, damage, depreciation, or shrinkage of the crude oil so delivered.

7.

Part II-General provisions 1 With respect to Bonny Light crude oil sold and purchased hereunder, the Nigerian Petroleum Company's general conditions of sale (of Nigerian crude oils), PART II shall govern. 2. Wherever PART II is at variance with the provisions of PART I hereof, the provisions of PART I shall govern. We are pleased to have completed this arrangement with you and would appreciate your confirmation of the foregoing at your earliest convenience. Best Regards, John Thomas

298

Chapter 5

Annex 5.4

Extract from the Hamburg Rules: Articles 15 to 19 Article 15-Contents of bill of lading I The bill of lading must include, inter alia, the following particulars: (a) the general nature of the goods, the leading marks necessary for identification of the goods, and express statement, if applicable, as to the dangerous character of the goods, the number of packages or pieces and the weight of the goods or their quantity otherwise expressed, all such particulars as furnished by the shipper; (b) the apparent condition of the goods; (c) the name and principal place of business of the carrier; (d) the name of the shipper; (e) the consignee if named by the shipper; (f) the port of loading under the contract of carriage by sea and the date on which the goods were taken over by the carrier at the port of loading; (g) the port of discharge under the contract of carriage by sea; (h) the number of originals of the bill of lading, if more than one; (i) the place of issuance of the bill of lading; (j) the signature of the carrier or a person acting on his behalf; (k) the freight to the extent payable by the consignee or other indication that freight is payable by him; (l) the statement referred to in paragraph 3 of Article 23; (m) the statement, if applicable, that the goods shall or may be carried on deck; (n) the date or the period of delivery of the goods at the port of discharge if expressly agreed upon between the parties; and (o) any increased limit or limits of liability where agreed in accordance with paragraph 4 of Article 6. 2. After the goods have been loaded on board, if the shipper so demands, the carrier must issue to the shipper a "shipped" bill of lading which, in addition to the particulars required under paragraph I of this article, must state that the goods are on board a named ship or ships, and the date or dates of loading. If the carrier has previously issued to the shipper a bill of lading or other document of title with respect to any of such goods, on request of the carrier, the shipper must surrender such document in exchange for a "shipped" bill of lading. The carrier may amend any previous& issued document in order to meet the shipper's demand for a "shipped" bill of lading if, as amended, such document includes all the information required to be contained in a "shipped!' bill of lading. The absence in the bill of lading of one or more particulars referred to in this article does not affect the legal character of the document as a bill of lading provided that it nevertheless meets the requirements set out in paragraph 7 of Article 1. Article 16-Bills of lading: reservations and evidentiary effect 1 If the bill of lading contains particulars concerning the general nature, leading marks, number of packages or pieces, weight or quantity of the goods which the carrier or other person issuing the bill of lading on his behalf knows or had reasonable grounds to suspect do not accurately represent the goods actually taken over or, where a "shipped" bill of lading is issued, loaded, or if he had no reasonable means of checking such particulars, the carrier or such other person must insert in the bill of lading a reservation specifying these inaccuracies, grounds of suspicion or the absence of reasonable means of checking. If the carrier or other person issuing the bill of lading on his behalf fails to note on the bill of lading the apparent conditions of the goods, he is deemed to have noted on the bill of lading that the goods were in apparent good condition. 3. Except for particulars in respect of which and to the extent to which a reservation permitted under paragraph 1 of this article has been entered: 299

(a) (b)

the bill of lading is prima facie evidence of the taking over or, where a 'shipped' bill of lading is issued, loading, by the carrier of the goods as described in the bill of lading; and proof to the contrary by the carrier is not admissable if the bill of lading has been transferred to a third party including a consignee, who in good faith has acted in reliance on the description of the goods therein.

A bill of lading which does not, as provided in paragraph 1, subparagraph (k) of article 15, set forth in the freight or otherwise indicate that freight is payable by the consignee or does not set forth demurrage incurred at the port of loading payable by the consignee, is prima facie evidence that no freight or such demurrage is payable by him. However, proof to the contrary by the carrier is not admissable when the bill of lading has been transferred to a third party, including a consignee, who in good faith has acted in reliance on the absence in the bill of lading of any such indication. Article 17-Guarantees by the shipper 1

2.

3.

4.

The shipper is deemed to have guaranteed to the carrier the accuracy of particulars relating to the general nature of the goods, their marks, number, weight and quantity as furnished by him for insertion in the bill of lading. The shipper must indemnify the carrier against the loss resulting from inaccuracies in such particulars. The shipper remains liable even if the bill of lading has been transferred by him. The right of the carrier to such indemnity in no way limits his liability under the contract of carriage by sea to any person other than the shipper. Any letter of guarantee or agreement by which the shipper undertakes to indemnify the carrier against loss resulting from the issuance of the bill of lading by the carrier, or by a person acting on his behalf, without entering a reservation relating to particulars furnished by the shipper for insertion in the bill of lading, or to the apparent condition of the goods, is void and of no effect as against any third party, including a consignee, to whom the bill of lading has been transferred. Such letter of guarantee or agreement is valid as against the shipper unless the carrier or the person acting on his behalf by omitting the reservation referred to in paragraph 2 of this article, intends to defraud a third party, including a consignee, who acts in reliance on the description of the goods in the bill of lading. In the latter case, if the reservation omitted relates to particulars furnished by the shipper for insertion in the bill of lading, the carrier .has no right of indemnity from the shipper pursuant to paragraph 1 of this article. In the case of intended fraud referred to in paragraph 3 of this article the carrier is liable, without the benefit of the limitation of liability provided for this Convention for the loss incurred by a third party, including a consignee, because he has acted in reliance on the description of the goods in the bill of lading.

Article 18-Documents other than bills of lading Where a carrier issues a document other than a bill of lading to evidence the receipt of the goods to be carried, such a document is prima facie evidence of the conclusion of the contract of carriage by sea and the taking over by the carrier of the goods as therein described. Article 19-Notice of loss, damage or delay 1. Unless notice of loss or damage, specifying the general nature of such loss or damage, is given in writing by the consignee to the carrier not later than the working day after the day when the goods were handed over to the consignee, such handing over is prima facie evidence of the delivery by the carrier of the'goods as described in the document of transport or, if no such document has been issued, in good condition. 2. Where the loss or damage is not apparent, the provisions of paragraph 1 of this article apply correspondingly if notice in writing is not given within 15 consecutive days after the day when the goods were handed over to the consignee. 3. If the state of the goods at the time they were handed over to the consignee has been the subject of a joint survey or inspection by the parties, notice in writing need not be given of loss or damage ascertained during such survey or inspection. 300

4. 5. 6. 7.

8.

In the case of any actual or apprehended loss or damage the carrier and the consignee must give all reasonable facilities to each otheiV for inspecting and tallying the goods. No compensation shall be payable for loss resulting from delay in delivery unless a notice has been given in writing to the carrier within 60 consecutive days after the day when the goods were handed over to the consignee. If the goods have been delivered by an actual carrier, any notice given under this article to him shall have the same effect as if it had been given to the carrier and any notice given to the carrier shall have effect as if given to such actual carrier. Unless notice of loss or damage, specifying the general nature of the loss or damage, is given in writing by the carrier or actual carrier to the shipper not later than 90 consecutive days after the occurrence of such loss or damage or after the delivery of the goods in accordance with paragraph 2 of Article 4, whichever is later, the failure to give such notice is prima facie evidence that the carrier or the actual carrier has sustained no loss or damage due to the fault or neglect of the shipper, his servants or agents. For the purpose of this Article, notice given to a person acting on the carrier's or the actual carrier's behalf, including the master or the officer in charge of the ship, or to a person acting on the shipper's behalf is deemed to have been given to the carrier, to the actual carrier or to the shipper respectively.

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Chapter 6

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Annex 6.4

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314

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316

317

318

319

320

321

322

323

324

325

326

UNSAFE PORTS AND BERTH CLAIMS PRACTICAL STEPS FOR MASTERS

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331

Chapter 6

Annex 6.6

UNSAFE PORTS AND BERTH CLAIMS PRACTICAL STEP FOR MASTER (By Kind Permission of Charles Baker of Herbert Smith) 1.

Introduction This guide lists the main steps which masters and watch officers should consider taking when faced with potential or actual danger when calling at or leaving a port or berth. Its purpose is to ensure that contemporaneous evidence will be available to assist owners and insurers to recover in arbitration or court proceedings in the event that the vessel suffers damage and/or delay as a result of complying with charterers' orders to proceed to a particular berth or port.

2.

General Remarks In almost all unsafe port cases, the crucial issues are: i) was the port/berth unsafe for the particular ship at the particular time? ii) if so, was the effective cause of the damage or delay which occurred (a) the unsafe features of the port/berth or (b) the master and crew's failure to handle their vessel with reasonable skill and seamanship? If it can be shown that, despite making prudent enquiries, the Master was not given adequate advance warning of hazards, the arbitration tribunal will be much more willing to overlook errors made on the vessel's side in reacting correctly when in the grip of an unexpected danger. In most cases, legal "unsafety" lies not so much in the mere presence of one or more hazardous characteristics in a port, but in the failure of the port to possess an adequate system whereby dangers are clearly identified and vessels given sufficient information and means to avoid them.

3.

The Approach Voyage Charterers' safe port promise also applies to any necessary route to (or from) the port, e.g. via a river. Details of up-to-date information supplied to river pilots by the pilotage or port authority should be requested and any refusal or inability on the part of the pilot to share such information routinely noted in the log book. □

4.

Pilots An error of navigation by the pilot does not mean that the port is unsafe. However, if the pilots are not provided with accurate hydrographic information, navigational aid updates and pilot's charts, then the pilotage system operating at the port may well be 'unsafe' in the context of a charterparty safe port clause. The same will apply if pilots are inadequately trained or experienced. If an accident occurs while the ship is under pilotage-or waiting for a pilot to take her out-details should be sought concerning the following points (where relevant): i) names of pilots on duty; ii) berthing procedures; iii) call out procedures; iv) date of latest hydrographic survey; v) names of other vessels in port and where berthed, together with traffic movements; vi) pilots' log books.

5.

Weather Services In Port: Details of the following should be obtained: 332

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port information booklet;

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port weather service;

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local radio;

4)

warnings provided by port authority to vessels and/or agents; any specific advice on arrival about local weather characteristics;

6)

storm signal-where sited?

On 1) 2) 3) 4) 5) 6) 7) 8) 9) 6.

Board: ALRS Volume 3-Radio Weather Services; NP283a-Weather Reporting and Forecast Areas; weather facsimile-working? performance? stations used? radio officer's watch keeping schedule; radio log; log book or other record of weather, swell, barometric pressure, etc; communications with port authority, agents, pilotage authority, other vessels; weather charts and messages received; anemometer-where sited?

Tugs 1) number of units available; 2) horsepower/bollard pull/propulsion; 3) where stationed; 4) call-out procedure; 5) communication facilities /radio watch; 6) duty roster/crew lists; 7) operational limits; 8) tug owners /authority.

7. Moorings On Board: 1) sketch of mooring arrangements identifying station, material, size and securing system; 2) anti-chafe measures; 3) mooring rope/wire details-purchase date, invoices, test certificates, repairs, when first used; 4) storage details; 5) winch details; 6) mooring watch details; 7) damaged/parted rope/wire-where parted, which station/fairlead/ drum and/or bitts, how secured; 8) number of lines on board; 9) mooring advice from pilot, berthing ma:ster, port authority, etc; 10) photographs, samples. Ashore: 1) bollards-type, distance apart, etc. 2) mooring line lead; 3 mooring gang; 4 mooring arrangement approval by port authority/terminal. 8.

The Berth 1) design/construction details; 2) fender type-sketch or photographs; 3) sketch or photograph of fender positions along ship's length; 4) condition of fenders at time of berthing; 333

5) 6) 7) 8) 9)

advice from agent, pilot, port authority; communications with agent, etc about missing or defective fenders; fender arrangements at adjacent berths-e.g. condition, disposition, etc. ship's fenders; constraints at berth-water depth, position of other vessels, turning area, etc.

9 Photographic Evidence The importance of contemporaneous photographic evidence cannot be over-emphasized. All too frequently, however, the only photographs taken are by local surveyors and are limited to areas of damaged shellplating. The January 1991 Edition of "SIGNALS" contains useful advice on the use of a camera on board, some of it summarised here. In order to assist the successful prosecution of an unsafe port claim, the officer of the watch should consider it part of his duties to arrange for a crewmember to photograph the following during the approach stage and after coming alongside, as may be appropriate: i) sea conditions at the anchorage; ii) strong current in rivers, ice and other hazards; iii) the berth's fenders and condition of concrete apron; iv) mooring arrangements; v) areas of berth particularly exposed to swell; vi) other vessels affected by adverse conditions; vii) any lack of room to manoeuvre in port; viii) fendering arrangements at adjacent berths (for comparative purposes). Practical and legal considerations A 35mm auto-focus SLR with a built-in zoom lens is sufficient. Ideally, the camera should have a facility which automatically prints the date on each exposure. In order to safeguard owners' right to claim legal "privilege" and thereby avoid being obliged to disclose photographs to third-party interests, the master should send all photographs to owners with a covering letter declaring that: "all photographs have been taken for the purpose of obtaining legal advice and in anticipation of legal proceedings." Standing instructions to the vessel regarding use of the camera should be introduced with a similar statement such as the following: "For the purpose of assisting in the obtaining of legal advice and in anticipation of legal proceedings, photographs should be taken in the following circumstances ... “ 10. Other Evidence The following are examples of other evidence which should be copied. Copies (or originals where possible) should be sent to owners as soon as possible. (Certain of these items will already by in owners' office in any event.) i) General arrangement plan, mooring arrangements plan and other relevant ships plans; ii) chart/plans of port, berth or anchorage; iii) deck, engine, radio logs, bell book, chief officer's cargo book; iv) sketch of berth facilities; v) miscellaneous published information concerning port; vi) note of protest; vii) all communications with third parties together with any handwritten notes of oral/VHF communications. (Charles Baker drew on many sources in compiling this list, in particular notes prepared by London Offshore Consultants in cluly 1992 on the collection of evidence in unsafe berth and port claims).

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Chapter 10

Annex 10. 1

SPECIAL SHIPBOARD OPERATIONS (Extracts from ISF guidelines on ISM Code) Special shipboard operations are those where errors may become apparent only after they have created hazardous situations or when accidents have occurred. Procedures and instructions for special shipboard operations should cover precautions and checks that aim to correct unsafe practices before accidents occur. Examples of special operations are (but are not limited to): - ensuring watertight integrity; - navigational safety, including the correction of charts and publications; - operations affecting the reliability of equipment (such as steering gear) and associated standby machinery; - maintenance operations; - bunkering operations and oil transfers in port; - maintaining stability and preventing overloading and overstressing; - lashing of containers, cargo and other items; and - ship security, terrorism and piracy. Critical shipboard operations are those where an error may immediately cause an accident or a situation which could threaten people, the environment or the ship. Particular attention should be drawn to the need to adhere to strict instructions in the conduct of critical operations, and satisfactory performance should be closely monitored. Examples of critical operations are (but are not limited to): - navigation in confined waters or high density traffic areas; - operations that may cause a sudden loss of manoeuvrability in close or high density traffic waters; - navigation in conditions of reduced visibility; - operations in heavy weather conditions; - the handling and stowage of hazardous cargoes and noxious substances; - bunkering and oil transfer at sea; - cargo operations on gas, chemical and oil tankers; and - critical machinery operations. Arrangements should be put in place to monitor the operational competence of crew undertaking critical shipboard operations. Examples of emergency situations may include: - structural failure; - main engine failure; - steering gear failure; - electrical power failure; - collision; - grounding/ stranding; - shifting of cargo; - cargo spillages or contamination; - fire; - cargo jettisoning; - flooding; - machinery room casualty; - abandoning ship; - man overboard/ search and rescue; - entry into enclosed spaces; - serious injury; 344

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terrorism or piracy; helicopter operations; and heavy weather damage.

Suggested subject matter for operations documentation 1 . General 1.1 Shipboard organisation 1.2 Function responsibilities 1.3 Reporting procedures 1.4 Passenger control, when applicable 1.5 Communications between ship and company 1.6 Inspections by the masters and senior officers 1.7 Provision and maintenance of documents and records 1.8 Medical arrangements 1.9 Fitness for duty and avoidance of excessive fatigue 1.10 Alcohol and other drug policies and procedures 1.11 Operational and maintenance instructions for equipment, unless provided separately 1.12 Checklists for sea worthiness and cargo worthiness 2. 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9

The ship in port Accepting cargo and passengers Loading and discharging procedures, including those related to dangerous goods Harbour watches and patrols Liaison with shore authorities Monitoring trim and stability Procedures when the ship is temporarily immobilized Accidental spillage of liquid cargoes and ship's bunkers Use of reception facilities for oil, noxious liquids and garbage Response to pollution incidents

3. 3.1 3.2 3.3 3.4 3.5 3.6

Preparing for sea Verification of passenger numbers, when applicable Checking and recording draughts Checking stability condition Assessment of weather conditions Securing cargo, hatches and all openings in the hull Tests of engines, steering gear, navigation and communications equipment, generators, emergency lighting and anchoring equipment 3.7 Harbour stations 3.8 Documentation of sailing condition 3.9 Verification of pollution prevention equipment and arrangements 3.10 Verifying that up-to-date nautical charts and publications are carried (SOLAS, Chapter V, regulation 20) 4. 4.1 4.2 4.3 4.4 4.5 4.6 4.7

The ship at sea Bridge and engine room watch keeping arrangements Special requirements in bad weather and fog Radiocommunications, including use of VHF Manoeuvring data, unless provided separately Emergency procedures other than those covered separately Security patrols, fire patrols and other arrangements for surveillance Discharge into the sea of oily water from machinery space bilges, cargo residues from oil tankers, noxious liquid substances and garbage

5. 5.1

Preparing for arrival in port Tests of engines, steering gear, navigation and communications equipment, generators and anchoring equipment Harbour stations 345

5.2

5.3 5.4 5.5 5.6 5.7 5.8 5.9

Pilotage Port information and communications Assessment of weather conditions Sailing directions, tide tables and charts Ballast Helicopter operations Stability and watertight integrity

Notes: 1. The above list is not exhaustive and may be varied to take account of the circumstances of the particular ship or its operations. 2.

The operations documentation should include the statement that its contents do not remove the master's authority to take such steps and issue any orders, whether or not they are in accordance with the contents of the documentation, which are considered to be necessary for the preservation of life, the safety of the ship or the prevention of pollution.

Development of a safety management system The commitment and involvement of top management and the need to involve representatives from personnel on board and ashore have been identified as key factors in the creation and implementation of a safety management system (SMS). Companies embarking on the process of developing a SMS may find it useful to consider a number of key questions at the outset and develop the system in accordance with a defined plan. Initial questions The consideration of a number of key questions may assist senior management to: - set clear management directions; - establish a priority of work; - allocate appropriate and sufficient resources; and - identify cost considerations. Typical strategic questions include: - what existing procedures and documentation are relevant to the establishment of a SMS in accordance with the requirements, of the ISM Code? - what functions are to be covered and that standards need to be attained? - what procedures and instructions should be included in the SMS? - what form should the system of documentation take and what manuals need to be developed? - what training or familiarisation is required on the introduction and maintenance of the system and how is this to be delivered? - what timeframes need to be attached to the development of the system? - what personnel are best suited to the development task? - what budgetary considerations can be identified? Development plan Developing and implementing a SMS in accordance with a plan may assist the company to: - adhere to established timeframes; - meet budgetary allocations; - involve and motivate appropriate personnel; and - improve the general understanding of the tasks involved and their interaction. A diagrammatical organisation chart may be a useful tool in describing the team allocated to the development of the SMS and the tasks to be conducted. The Company should decide which personnel are to be involved in the development, and how the top level of management is to be involved and kept informed. A statement from top management explaining its commitment to the development of the SMS and urging all personnel to support the development team in the performance of its tasks is strongly recommended. 346

The involvement of selected sea as well as shore staff is emphasised and consideration should be given to the need to free personnel sufficiently from their normal duties while they are directly involved in the development. Necessary familiarisation in the basic elements of a safety management system for members of the team at the outset may be a wise investment. The plan should specify the various tasks to be undertaken and should set corresponding target dates. Tasks to be undertaken may include: - the development of a formal company policy on safety and environmental protection; - the definition of levels of responsibility, authority and lines of communication between shore and shipboard personnel; - the definition of special and critical shipboard operations and the development of instructions dealing with accident prevention and emergency response; - contingency planning ashore and on board; - the establishment of planned maintenance routines; - the establishment of procedures for reporting accidents, hazardous occurrences and nonconformities; - the establishment of procedures for internal audits and management reviews; and - the establishment of document control procedures. Once the SMS has been developed and approved by top management, the plan should allow an appropriate timeframe for implementation and the familiarisation of all relevant company personnel with its aims and requirements. Major international shipping conventions and recommendations Dealing with the ship SOLAS 1974 (International Convention for the Safety of Life at Sea, 1974), as amended, lays down a comprehensive range of minimum standards for the safe construction of ships and for the basic safety equipment (e.g. fire prevention, navigational, life-saving and radio) to be carried on board. SOLAS also contains operational instructions, particularly on emergency procedures, and provides for regular surveys and for the issue of certificates of compliance. The International Bulk Chemical UBC) and International Gas Carrier (IGC) Codes are mandatory requirements under SOLAS 1974. MARPOL 73/78 (International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto), as amended, contains measures designed to prevent pollution caused both accidentally and in the course of routine operations. Five annexes in the Convention cover, respectively, pollution by oil, noxious liquid substances in bulk, harmful substances carried in packaged forms, sewage and garbage. The International Bulk Chemical (IBC) and the Bulk Chemical (BCH) Codes are mandatory under MARPOL 73/78. COLREG (Convention on the International 117egulations for-Preventing Collisions at Sea, 1972) as amended, lays down the basic "rules of the road", such as rights of way, safe speed, action to avoid collision, and procedures to observe in narrow channels and in restricted visibility. International Convention on Load Lines, 1966, sets the minimum permissible freeboard, according to the season of the year and the trading area of the ship; special ship construction standards are laid down in regard to watertightness. Dealing with the shipowner IMO resolution A.441 (XI) invites every State to take the necessary steps to ensure that the owner of a ship which flies the flag of the State provides such State with the current information necessary to enable it to identify and contact the person contracted or otherwise entrusted by the owner to discharge his responsibilities for that ship in regard to matters relating to maritime safety and the protection of the marine environment. Dealing with the seafarer and the ship ILO Convention 147 (Merchant Shipping (Minimum Standards) Convention, 1976) requires Administrations to have effective legislation on safe manning standards, hours of work, seafarers' competency, and social security. It also sets the employment standards equivalent to those contained in a range of ILO instruments (covering, for example, minimum age, medical care and examination, social security, training). 347

Dealing with the seafarer STCW 1978 (International Convention on Standards of Training, Certification and Watchkeeping for Seafarers, 1978) lays down training, certification and qualification requirements (including syllabuses and sea time) for senior officers; all officers in charge of watches in the deck, engine and radio departments; and ratings forming part of a watch. All such seafarers are required to have a certificate, endorsed in a uniform manner. It also specifies basic principles to be observed in keeping deck and engine watches and special qualification requirements for personnel on oil, chemical and liquefied gas tankers. IMO resolution A.481(XII) (on principles of safe manning) recommends that all Administrations provide each of their registered ships with a document specifying the minimum number and grades of qualified seafaring personnel required to be carried from the safety standpoint. It gives basic principles and detailed guidance to be observed by Administrations when assessing the safe manning of ships. IMO resolution A.443(XI) invites Governments to take the necessary steps to safeguard the shipmaster in the proper discharge of his responsibilities in regard to maritime safety and the protection of the marine environment by ensuring that: a) the shipmaster is not constrained by the shipowner, charterer or any other person from taking in this respect any decision which, in the professional judgement of the shipmaster, is necessary; b) the shipmaster is protected by the appropriate provisions, including the right of appeal, contained in, inter alia, national legislation, collective agreements or contracts of employment, from unjustifiable dismissal or other unjustifiable action by the shipowner, charterer or any other person as a consequence of the proper exercise of his professional judgement.

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The development of maritime commercial practice-extracts from the Nautical Briefing International trade today

Although hedged by trade barriers, bilaterial trade agreements and trading blocks (such as the European Community) and, theoretically at least, liberalised through international agreements such as the General Agreement on Tariffs and Trade (GATT), international trade at its most basic involves the flow of goods from a seller to a buyer in accordance with the terms of a contract of sale. Much of this trade is carried by ships and thus the maritime link is an integral part of any sale contract. Through its role as document of title, the bill of lading and, consequently, the shipmaster, play a key role in the process of delivery and payment as well as carriage and care. Every international trade transaction starts with a buyer and a seller and a contract of sale. Once the price and specification is agreed, the two parties must consider two other crucial aspects: how to get the goods from seller to buyer and how and when the payment is going to pass from buyer to seller. These issues immediately bring other parties into the transaction. Every international trade transaction requires: 0 an agreed product or service, - a sales contract, - shipping and delivery details, - terms of payment, - documentation, - insurance cover, and to this list could be added: - a means of triggering payment for the goods (and, indirectly linked to that, the payment of freight); together with - a means of transferring title, and therefore the risk, in the goods. There are three different times at which payment can be made: 1: In advance: this can be in whole or in part and requires a high degree of trust by the buyer in the seller. One of its uses is to assist the seller finance the production of the goods 2: At the time of shipment: immediately involving the vessel in the transaction; and 3: After shipment or on receipt: invariably effected thrdugh some kind of credit. We shall look first at the various methods of settling international trade transactions through the procedures controlling one of the most common methods of payment, the documentary credit. These procedures are established by the International Chamber of Commerce (ICC) and the following descriptions and definitions, are based on the Uniform Custom and Practice for Documentary Credits (UCP 500) and, where applicable, Incoterms 1990, a set of uniform rules codifying the interpretation of trade terms. However sophisticated the procedures surrounding a trade transaction, payment against documents for imports en route (ie payment by documentary credit) cannot give protection against the risk of fraud, especially when the seller is not well known. The strong advice for both parties is to know who you are trading with and, if uncertain, to get a recognised bank guarantee. There are 13 Incoterms 1990 controlling the transfer of risk from seller to buyer, designed so that this can be effected at a convenient place where the goods can be inspected and condition and quantity verified. They are--explained in more detail in Commercial Management for Shipmasters but are: EXW FAC FAS FOB CFR CIF CPT CIP DAF DES DEQ DDU DDP

Ex Works Free Carrier Free Alongside Ship Free on Board Cost and Freight (C&F) Cost, Insurance & Freight Carriage Paid to Carriage & Insurance paid to Delivery at Frontier Delivery Ex Ship Delivery Ex Quay (duty paid) Delivery Duty Unpaid Delivery Duty Paid 360

(named (named (named (named (named (named (named (named (named (named (named (named (named

place) place) port of shipment) port of shipment) port of destination) port of destination) place of destination) place of destination) place) port of destination) port of destination) port of destination) port of destination)

Once the terms of trade have been decided, the exact means of payment must be selected. Cash in advance is straightforward, cheap and, as has been stated, requires a high degree of trust. Open account describes an arrangement whereby the goods are manufactured and delivered before payment is required; and obviously a particularly high degree of trust is required by the seller. Collection describes an arrangement whereby the goods are shipped and a bill of exchange (draft) is drawn by the seller on the buyer and documentary evidence (of which the bill of lading is a key ingredient) is sent to the seller's bank in order to effect collection through the buyer's confirming bank. The logical extension of this is the documentary credit or letter of undertaking. This is issued by a bank for the account of a buyer (the applicant) -or for its own account-and is an undertaking to pay the beneficiary the value of the draft, provided that the terms of the documentary credit are complied with. The documentary credit can satisfy the seller's desire for cash and the buyer's desire for credit: it serves the interests of both parties independently and offers a unique and used method of achieving a commercially acceptable undertaking by providing for ,payment to be made against complying documents that represent the goods, and making possible the transfer of title to those goods without contemporaneous physical transfer of the goods being . It will immediately be obvious that payment (and consequent transfer of ownership, ie title and risk by way of a documentary credit, introduces the financial institutions and converts the originlly simple, one-contract transaction into a distinct, triangular contractual arrangement: - First- the sale contract between buyer and seller; - Second- the application and security agreement' or the 'reimbursing agreement' between the buyer,( the applicant) and the issuer (the issuing bank); and - Third -the documentary credit between the issuing bank and the beneficiary.

The documentary credit may also be confirmed by another (confirming) bank and it is important to understand that each contract is independent of the other: 'Credits, by their nature are separate transactions from the sales or other contract(s) on which they may be based, and banks are in no way concerned with or bound by such conract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate andlor fulfil any other obligation under the credit is not subject to claims or defences by the applicantt resulting from his relationship with the issuing bank or beneficiary' and

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‘ A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank.' UCP 500 sub-Articles 3a & b.

Process of documentary credit

There are many advantages which flow from the use of documentary credits of which the foremost can be seen to be the provision of a confirmed method of payment. However the process involves many more institutions (and their costs) than in the originally simple contract between buyer and seller; and as the frequent non-availability of bills of lading in the port of delivery proves, documentary credits generate a paper chase of their own. A particular advantage of credits documentary or otherwise, to commodity traders and others who buy and sell goods is that they can enable an onsale to take place before the buyer's bank has to effect payment under the credit. If the trader structures his transaction correctly, his buyer will pay him before the trader's bank settles under the credit, thereby leaving the trader with a positive cashflow. A cargo of crude oil from the Gulf may be traded several times in this way en route to North America, Europe or the Far East. Behind each of these complementary but totally separate transactions is, at its simplest, a banking structure similar to the one depicted in Figure 2. Each set of transactions requires original documentation in order to effect payment, and central to this documentation, is the bill of lading in the dual roles of document of title and proof of quantity and quality. Although a documentary credit represents the payment end of a single sale contract, each link in the chain-buyer (or applicant) to issuing bank, issuing bank to advising (or confirming) bank and advising bank to seller (or beneficiary)-is a separate and distinct contract. Thus, if incorrect documentation is presented to the issuing bank by the advising bank, the issuing bank's recourse is to the advising bank, not to the seller. Since the documentary credits department of a large, international bank will be handling thousands of transactions daily, they will rely totally on the validity of the documents presented to them, and will have no knowledge of or, for that matter, interest in the physical movement of that cargo. This goes a long way to explain why banks will generally only accept a clean bill of lading, that is, a bill of lading that normally stipulates that the goods were 'in apparent good order and condition' when accepted. Since, as is inherent in their very name, documentary credits are executed by the presentation of the specified documents, including inevitably, the bill(s) of lading, it is hardly surprising that these same bills of lading are frequently unavailable at the port of discharge. Figure 2 reproduces a standard application for an irrevocable documentary credit and there are a number of points to note from the 'shipping' end of the transaction. For a start, a documentary credit is time-related and stipulates an expiry date. Secondly it describes the goods to be shipped and this description, which should tally with the description on the bill of lading, will certainly contain no reference to defects in quality, quantity or even packaging. Thirdly, the application stipulates the documents that must be presented; and it is against these documents alone that the credit is transacted. There is a wide range of documentary credits, from irrevocable to transferable and revolving which all follow the same basic principles. The 'Red Clause' documentary credit, so-called because it was originally written in red ink is an interesting variation. Here funds can be made available before shipment and this can be useful where traders or dealers require a form of pre-financing. An example might be where a grain exporter is purchasing parcels of grain to form an economical Panamax cargo. HIs eventual buyer may allow him partial advance payment to settle with his supplier and reserve silo space in the port of loading. Whatever method of credit is used, the same basic principles apply and settlement follows the procedure illustrated in Figure 3.

The customers' objectives

The use of terms of settlement as well as the type of sale contract, reflects the objectives of our customers, the buyers, sellers and traders who generate the demand for maritime transport. At one end of the spectrum is the regular movement of goods from established seller to established buyer that typifies the user of liner services and, increasingly today, containers. Here, the decision as to

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whether the sale contract will be EXW (ex-works) or DDP (delivered duty-paid) at the other end of the spectrum, will depend upon the relative strength of buyer and seller. A manufacturer of finished goods may well wish to enhance his sales service by taking responsibility for arranging freight (transportation) and documentation and deliver his product to his buyer's warehouse or retail outlet. On the other side of his business, when he is sourcing assembly parts, he may well wish to retain maximum flexibility and purchase exworks, FAC (free carrier), or FAS (free alongside ship) from a number of sources. In such cases, he will require a relatively large and sophisticated shipping department and will control and own the goods throughout the sea passage, if not the whole, transportation phase. This will lead towards his using a liner bill of lading, or even a non-negotiable sea waybill. In these instances the use of the document is concentrated on its role of evidence of a contract of carriage and of quality and quantity rather than on the bill of lading's role in transferring title. The way in which containers enable the whole transport chain to be regarded as one overall operation, involving sea, road and/or rail has led to the natural, though not necessarily uncomplicated, extension of the liner bill of lading/sea waybill into the through bill or universal bill of lading.

While liner bills of lading, defined as ocean or marine bills of lading under UCP 500, form the basis for regular shipments of the 'common carrier' kind, traded commodities tend to travel on chartered vessels and charter party bills of lading are used. When the movement of oil, and especially crude oil, was largely controlled from well to refinery and beyond by the 'Seven Sisters', the original oil majors that also owned, or chartered most means of transportation, the role of the bill of lading was of relatively low significance. As they moved back from their dominant role, the independent tanker owners increased their role in transportation, operating under voyage rather than time charters. As the oil industry fragmented more, and political instability in the oil producing nations produced increased price volatility, so the trader/speculator moved into a more central role as the users of sea transport. For many independent traders, living and profiting on their ability to predict the movements of the market, credit was es sential. With cargoes being sold five, six or more times a voyage, the bill of lading, linked to a documentary credit, became increasingly important and increasingly more delayed within the banking system. The requirement for shipmasters to deliver, frequently at transhipment terminals in favour of little known receivers, put severe pressure on the carrier and his P&I Club. Letters of indemnity, with or without bank guarantees, became a common occurrence; and shipmasters were put under intense pressure to sign clean bills of lading which would pass, trouble-free, through the banking system. 363

It is logical, if payment is to be made against the passing of a document rather than the physical transfer of the goods themselves, that the buyer dhould be able to rely implicitly upon the details shown on the document. Herein lies the rub for the carrier, for, through the doctrine of estoppel, he is legally barred from denying the accuracy of any detail which he has acknowledged on the bill of lading. If any carrier ' or his ;servant' ie the master, knowingly shows incorrect details on the bill of lading in order for it to comply with letter of credit details, he joins the shipper in becoming party to a fraud on the consignee. Since a confirraing bank can and must rely only on the documents presented. and ensure that they comply with the doccuments stipulated in the application for credit, it is easy to see how a forged bill of lading can enter and pass through the system- Many companies are now makin a much greater effort, to control the distribution, of, and access to, blank bill of lading and to track them through a discrete numbering system.

Dry market commodities

In the dry bulk market, commodity traders often tend to specialise in a product, or range of products such as coffee, cocoa and sugar, rice, beans and pulses or, the biggest market of all, grain. They will take future positions, guessing the level of next season's production levels. They will buy ahead and put 'on the book' produce that is not yet sown, let alone grown, to a value far greater than the company's net asset value. Much of this exposure may be hedged or sold on the futures market (sold 'off the books') in a risk management exercise. Nevertheless, it would not be unusual for a company capitalised at US$300 million to have an overnight exposure of US$2 billion. Part of their 'book' they will deliver physically, either sold on the market or to meet future contract commitments, and this will bring marine transport into their risk equation. In many cases, they will be delivering essential foodstuffs, for example sugar, to poorer nations or receivers with less than triple. A credit ratings. Credit arrangements will need to be put in place and, if payment is by a national or regional bank, corresponding confirming banks in one of the international financial centres will be required, adding yet another link to the chain. Shipping costs can add 10 per cent and frequently more to the trader's costs and so he win keep a close and constant eye on the freight market, possibly hedging his future shipping needs on Biffex, the Baltic International Freight Futures Exchange, or by taking a percentage of his requirement on time charter. The majority, however, will be secured 'as and when' on the spot market. This means there is a tendency for traders to think of ships as taxis, expected to be available when required but ignored otherwise. It is, perhaps, this attitude which precludes a true premium being paid for quality. The first concern common to traders is that the chartered vessel will not make her laycan, leaving him paying a fortune in storage costs or demurrage on rail cars. Young traders are frequently taught that shipowners tend to be economical with the truth regarding the exact position of their vessels. Once the vessel is fixed, the trader wants to ensure that his buyer has his letter of credit in place before bills of lading are signed. At the port of loading, the trader may well receive the cargo 'in warehouse' or 'in silo' or even free on board and have the same feeling of apprehension that the shipmaster feels; that is that the agents, surveyors, stevedores and authorities 'are not on his team'. High on the trader's priority list, especially if he is shipping foodstuffs, will be the cleanliness of the holds and the level of the master's knowledge of how to stow and carry that cargo. If he is an experienced trader, he will make available to the shipowner details of the cargo and how he wants it to be carried. In a competitive market, the owner's chartering brokers may well feel that to enquire too overtly about the method of carriage will weaken their negotiating position. With the vertically integrated shipowner giving way to the more remote ship manager/crew manager relationship, masters and mates are liable to find themselves changing trades and cargoes with far more frequency. They should, however, not forget that advice is available through the P&I Clubs as well as in the IMDG Regulations, other IMO publications and in a variety of text and reference books. The break up of the integrated shipping company can also produce an environment where it is difficult for a master to ask for advice on surveying, accepting, stowing and carrying a particular cargo, or on the custom of the trade in that particular port. Carrying timber and bauxite in the North Atlantic does not prepare one well for decisions on the fumigation and acceptance of a twoparcel cargo of rice in a South East Asiail port-especia.Ily if the mate is a tanker man and the second and third mate last sailed on offshore supply vessels. In this environment, it is understandably difficult to build up an in depth knowledge of every particular cargo type, a factor which has been reflected in the incidence of cargo claims over the last 364

decade or so. Masters, owners and charterers/traders could all benefit by a more open approach to the carriage and care of cargoes. By the time the master is ready to commence loading, the trader will have ensured that his receiver has a valid letter of credit in place. This, as we have seen, will invariably stipulate a requirement for clean bills of lading. While it is frequently impossible to make any assessment as to quantity until loading is completed and the draught survey carried out, an assessment on quality and, if relevant, packaging often can and should be made at the earliest opportunity possible. The master, or the mate as his representative, should participate actively in the cargo survey if at all possible. It is, after all, the best way to learn. In many cases the local cargo surveyors will have a much closer relationship with the shipper than the trader. If in doubt, ask the local P&I Club representative to recommend or appoint a cargo surveyor. The cost is not generally high compared with the risk and in some cases it is reasonable for the trader to share or carry this cost. On other occasions, the receivers will have their cargo surveyor in attendance. It is essential that the master identifies the various parties involved and recognises their ultimate interests as soon as possible. The mate's responsibilities during loading are to ensure that he and his fellow officers take a lively, constant and intelligent interest in the loading and the stow. Despite the undoubted pressures exerted by terminals it is, after all, your ship and you are acting as servants of the charterer and as bailee on behalf of the cargo owner. Be aware how the cargo is being weighed (and make a record), keep up to date with the tallyor organise one if you feel it necessary-and constantly check the quality of cargo and packaging. Check with the charter-party or the charterer's loading instructions: if it is, for example, a bagged cargo, ensure all involved know the type and quality of bag stipulated, the number of spare bags to be provided and at what level part damaged bags become unacceptable. The trader's real requirement is early and accurate advice about actual or impending problems or discrepancies so that he can take prompt action within the loading lay-days. The objective is to load a cargo that fairly matches the description on the bill of lading so that the master need have no qualms about signing bills 'clean'. To do this, the mate's receipts should either be clean themselves or show the corrective action that has resulted from the mate making an endorsement. This means that mate's receipts should be kept up to date and reviewed daily at the very least. If there is a golden rule it is that if the master, or any of his officers, become aware of any factor which could justifiably prevent the master from signing clean bills of lading, the charterer/trader is to be advised immediately, and if necessary, loading should be stopped. Turning from our customers' interests to our own, the reason for all this activity is to earn freight, the wherewithal from which, either directly or indirectly, the master and crew are paid. Even if the vessel is on time charter, where the payment is or should be automatic, the charterer will be depending upon the payment of freight. Usually, freight is paid 'upon completion of delivery' and is calculated on the basis of that delivered cargo. This, understandably, is enough to make any shipowner nervous. It is exceedingly difficult to establish a lien or claim for unpaid freight on a cargo of crude oil that has disappeared through the ship's manifold in the direction of a heavily (if not necessarily well) guarded tank farm half a mile away. This raises the question as to whom the master should deliver the cargo and when. Apart from the universally known stricture that the master must only release the cargo to the first person to present a properly endorsed original bill of lading, the law and text books-and indeed operations manuals-are generally light on assisting the master in the practicalities of carrying out this duty. If, as so often happens, the bill of lading is caught up in the banking system, the obligation to authorise the release of the cargo moves to the shipowner, his position being guaranteed by a letter of indemnity from the shipper/ charterer, frequently backed by a bank guarantee.

The shipowner's position

The shipowner's position is, however, very exposed. If the cargo is wrongly delivered without a bill of lading, the owner's P&I insurance is invalid and the owner could be liable for the entire value of the cargo, plus consequential damages, to the rightful intended recipient. The master must therefore take every reasonable precaution that the cargo is being delivered to the correct receiver, including questioning the agent; a most careful and documented enquiry as to local custom and practice. Help can also be sought from the P&I club correspondent to ascertain the best course of action. 365

Although the Bill of Lading Act of 1855 established the shipowner's right to sue the receiver for freight on the basis of the bill of lading- contract, as mentioned, the owner's lien on the cargo is a possessory lien and lapses, both legally and practically, on discharge. These, then are some of the practical reasons why the shipmaster and his officers should be as aware of, and involved in, the commercial aspects of the operation of their vessel as they are in the technicalities of navigation, maintenance, crew management and safety. Another reason is because we are professionals, with a proud history stretching back to the earliest days of civilisation. To repeat the words of Rudyard Kipling, 'transport is civilisation'. Without the merchant shipmaster there would have been little transportation and, by implication, little civilisation. Acknowledgements: The use of the Guildhall University, Institute of Chartered Shipbrokers and Nautical Institute libraries, as well as the British Library, has been invaluable. In addition to the International Chamber of Commerce and P&O's Merchant's Guide, sources have included General Average and the York Antwerp Rules by Lowndes and Rudolf; A Short History of the World's Shipping by C. Ernest-Foyle; Maritime Transport by Edgar Gold; The Origin and Development of the Law of the Sea by R.P. Anand, Maritime Affairs, a World Handbook by H.W. Degenhardt; as well as sources from the UK P&I Club.

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THE NAUTICAL INSTITUTE THE NAUTICAL INSTITUTE is an international professional body for qualified mariners whose principal aim is to promote a high standard of knowledge, competence and qualifications amongst those in charge of seagoing craft. The Institute publishes a monthly journal, SEAWAYS, and is actively involved in promoting good operational practices, as demonstrated by this book on Commercial Managementfor Shipmasters. This book is a companion volume to Watchkeeping Safety and Cargo Management in Port, widely used as a training manual. Other projects and certificate schemes include The Nautical Institute on Command, The Work of the Nautical Surveyor, The Work of the Harbour Master and the confidential Marine Accident Reporting Scheme (MARS). There are now over 6000, Nautical Institute members in 80 different countries with 34 Branches world-wide. The requirements for Full Membership are a recognised foreign-going master's certificate of competency; naval command qualifications; a first-class pilotage certificate; or five years in command of coastal vessels. Feedback The Nautical Institute is always seeking to improve the quality of its publications by ensuring that they contain practical, relevant, seamanlike advice which is up to date and can be applied at sea. If you have any suggestions which you think would improve the contents of this book please send your suggestions to:The Secretary The Nautical Institute 202 Lambeth Road LONDON SEI 7LQ UK or telephone 0171-928 1351 fax 0171-401 2817

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