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Shipping Law

Shipping Contracts

The great majority of contracts governing the transportation of goods by ships are made either by bills of lading or charter parties. The term charter party is a corruption of the Latin carta partita, or "divided charter." It is used to describe three types of contracts dealing with the use of ships owned or controlled by others. Under a demise charter, the shipowner gives possession of the vessel to the charterer, who engages the ship's master and crew, arranges for repairs and supplies, takes on the cargo, and acts much like the owner during the term of the charter.

A more common arrangement is the time charter. In this arrangement, the shipowner employs the master and crew, and the charterer only acquires the right, within contractual limits, to direct the movements of the ship and decide what cargoes are to be transported during the charter period. Under both demise and time charters, the charterer pays "charter hire" for the use of the ship at a specified daily or monthly rate.

The third type is the voyage charter, which is a contract of affreightment, or carriage. Essentially, a voyage charter is a contract to rent all or part of the cargo space of a merchant vessel on one voyage or a series of voyages. When a charterer contracts for only a portion of the cargo space, the governing contract is called a space charter. Under a voyage charter, it is customary for the master or her agent to issue a bill of lading to the shipper, who is usually the charterer. However, the voyage charter remains the governing contract.

A bill of lading is an ACKNOWLEDGMENT, by the master or owner, that serves as confirmation of the receipt of the goods specified to be taken aboard the vessel. Each charterer is entitled to receive a bill of lading from the shipowner or an

agent of the owner. In ordinary transactions, a bill of lading, signed by the master, is binding upon the owner of a vessel. It can circumvent disputes that might otherwise arise over whether goods were ever received and their condition when placed upon the vessel.

Ocean bills of lading are usually in order form, calling for delivery of the order to the shipper or some other designated party. This type of bill of lading may be negotiated similarly to a check, draft, or negotiable instrument, which means that a bona fide purchaser of the bill of lading takes it free and clear of any defects not appearing on its face. A bona fide purchaser is one who has purchased property for value without any notice of any defects in the title of the seller. Therefore, if cargo is externally damaged on shipment but the damage is not recorded on the bill of lading, the carrier will be barred from establishing that the cargo was damaged before it came into the carrier's custody. Once a bill of lading issued under a voyage charter is negotiated to a bona fide purchaser, it becomes the governing contract between the carrier and the holder of the bill.

Under the Carriage of Goods by Sea Act (46 U.S.C.A. §§ 1300 et seq. [2000]), a "clause paramount" must be included in any bill of lading involving a contract for transportation of goods by sea from U.S. ports in foreign trade. This clause states that the bill of lading is subject to the act, which governs the rights, obligations, and liabilities of the issuer to the holder of the bill of lading in regard to the loss or damage of goods.

When a ship strands or collides with another vessel, cargo loss or damage may occur. If the damage was caused by a sea peril or an error in navigation, the carrier will not be liable if the goods were being carried under a statutory or contractual provision based on the 1923 Brussels Convention on Limitation on Liability. If, however, the damage was caused by the carrier's failure to exercise due diligence to make the ship seaworthy and to ensure that it was properly staffed, equipped, and supplied, the carrier will be held responsible.

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