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Extra First Class Course –Part A

NAME: Rohit Seth

ID NO: TMI/EFCE/2017/02

DATE OF SUBMISSION: 21st February 2017

SUBJECT: (A1) Risk Management & Marine Insurance

FACULTY: Dr. B K Saxena


The essence of commercial relationship is that the agreements are made whereby
parties promise to provide goods or services to each other, usually in return for
monetary payment, reward or consideration. It is therefore necessary to ascertain to
what extent such agreements and promises will be considered legally binding.

Those arrangements which do give rise to rights and liabilities are known as

A contract is a voluntary arrangement between two or more parties that is

enforceable by law as a binding legal agreement. Formation of a contract generally
requires an offer, acceptance, consideration, and a mutual intent to be bound.

Shipping being a global business it becomes necessary to bring all its activities
howsoever small which may be, under a contract. Thereby binding all the concerned
parties under a set of rules and liabilities. A contract also ensures protection of a
party’s interest.

A ship owner becomes party to many contracts, starting from ship building to
demolition, and including various other contracts in-between .This paper will try to
look into a few contracts which a ship owner makes during the period of operating

Some important terms related to a contract are

 Parties to the contract

A party to a contract is one who holds the obligations and receives the benefits of a
legally binding agreement. When two parties enter into an agreement, there are two
distinct roles each play: the promisor and the promisee. The parties to a contract
must either perform, or offer to perform, their respective promises, unless such
performance is dispensed with or excused under the provisions of this Act, or of any
other law.

 Considerations in a contract

Consideration must be of value (at least to the parties), and is exchanged for the
performance or promise of performance by the other party (such performance itself
is consideration). In a contract, one consideration (thing given) is exchanged for
another consideration.Consideration is an essential element for the formation of a co
ntract. It may consist of a promise to perform a desired act or a
promise to refrain from doing an act that one is legally entitled to do. In a bilateral co
ntract—an agreement by which bothparties exchange mutual promises—
each promise is regarded as sufficient consideration for the other. In a unilateral
contract, an agreement by which one party makes a promise in exchange for the
other’s performance, the performance is consideration for the
promise, while the promise is consideration for the performance.Consideration must
have a value that can be objectively determined. A promise, for example, to make a
gift or a promiseof love or affection is not enforceable because of the subjective natu
re of the promise.

 Performance of contract/obligation of contract

'Performance of contract' means fulfilment of the obligations by the parties. It is the

execution of a contract by which the contracting parties are automatically discharged
of their obligations under it. Performance of contract is one of the methods to
discharge a contract .After a contract is discharged parties do not have any rights
and liabilities against each other.

 Breaches of contract

Breach of contract is a legal cause of action in which a binding agreement or

bargained-for exchange is not honoured by one or more of the parties to the
contract by non-performance or interference with the other party's performance. If
the party does not fulfil his contractual promise, or has given information to the
other party that he will not perform his duty as mentioned in the contract or if by his
action and conduct he seems to be unable to perform the contract, he is said to
breach the contract.

Presence of these important terms shall be highlighted by taking examples of few

contracts namely

1. Contract of affreightment
2. Contract for salvage operation
3. Hull and machinery insurance contract
4. Contracts of new building of ships

Contract of affreightment

A contract of affreightment is a contract between a ship-owner and another person

(called the charterer), in which the ship-owner agrees to carry goods for the
charterer in the ship, or to give the charterer the use of the whole or part of the
ship's cargo-carrying space for the carriage of goods on a specified voyage or
voyages or for a specified time. The charterer agrees to pay a specified price,
called freight, for the carriage of the goods or the use of the ship.

The ship owner generally signs a charter party whereby he gains a monitory sum in
USD/ day or USD/tonne, for appropriate carriage of specified cargo to a determined
location within a stipulated time.

Time charter and voyage charter are two of the most common forms of contract of

Time charter is a contract between the ship owner/ manager and the charterer,
whereby the charterer intends to assume the partial responsibility of a ship owner for
a certain period of time.

Time charters are common in the Tanker markets. The contract between the ship
owner and charterers allows the charterer to use the vessel for a certain period of
time e.g. 6 months or 1 year. The details of the contract specify the responsibilities
of both the parties to the contract. The charterer has the possession of the vessel
with the limitations that he shall book cargo for the vessel pertaining to a specific
grade and type for which the vessel has been designed. Ports and locations for
loading/ discharging of cargo shall be safe and away from war zones (unless
specifically mentioned in the contract). Moreover it is the responsibility of the
charterer to return the ship back to the owners at the specified time in the condition
similar to the one in which the ship was received.

During this period of time charter the Owner has the responsibility to maintain the
ship and its machineries and crew as per the standards decided and keep the ship
sea worthy at all times. Moreover the owner/ manager has to ensure that during this
period the ship attains agreed speed in agreed weather conditions consuming a pre
determined amount of fuel. The rate of discharging and loading of cargo will also
have to be maintained as per the contract. It is the duty of the ship owner/manager
to provide a seaworthy ship. The ship owner/manager has an obligation of
reasonable despatch and non- deviation from the agreed route.

On the charterer there is an obligation to nominate a safe port and to refrain from
shipping dangerous and illegal goods.

Voyage charter is a contract for a voyage between specific ports for loading or
discharging. The ship owner earns in USD/Tonne of cargo carried. It is the

responsibility of the charterer to provide for safe cargo of specific quality and a
specified quantity to the ship. The ship owner in turn has to deliver the same to the
already agreed place in a specific time .responsibility of Loading/Unloading may
depend as per the contract.

In every contract of affreightment, there is an implied obligation to provide a

seaworthy vessel. Even if the duty to provide a seaworthy ship is not express stated,
the duty to provide such a ship is, nevertheless, implied at law.

There is a clear contract for carriage of a specified cargo or cargoes similar to the
one specified onboard a vessel.

As in any contract, breaches might happen from either party.

The ship owner may not be able to provide for a sea worthy ship at all times. This
might lead to a cancellation of contract along with financial penalties on the ship
owner. Machineries need continuous maintenance and also for survey purpose a
vessel may have to go out of charter, to avoid such scenarios these contracts
include time period for maintenance mostly of 2 days in a year or sometimes a dry
dock before and after the completion of contract.

Sometimes a vessel might have to re route its course to avoid an imminent danger
or to save a life at sea. Such deviations and the delay caused thereby are not
considered to be a breach.

There are some breaches where no one is at fault, e.g. a cargo becomes dangerous
because of a new regulation or a port becomes a war zone. Such conditions are
called as “FRUSTRATIONS” and all the parties related to such a contract have to
bear the cost proportionately.

Contract for salvage operation

Marine salvage is the process of recovering a ship, its cargo, or other property after
a shipwreck or other maritime casualty. Salvage may encompass towing, re-floating
a sunken or grounded vessel, or patching or repairing a ship. Today, protecting the
environment from cargoes such as oil or other contaminants is often considered a
high priority.

"Salvors" are seamen and engineers who carry out salvage to vessels that they do
not own, and who are not members of the vessel's original crew. When salving large
ships, they may use cranes, floating dry docks and divers to lift and repair
submerged or grounded ships, preparing them to be towed by a tugboat. The goal of
the salvage may be to repair the vessel at a harbour or dry dock, or to clear a
channel for navigation. Salvage operations may also aim to prevent pollution or
damage to the marine environment. Additionally, the vessel or valuable parts of the
vessel or its cargo may be recovered for resale, or for scrap.

A vessel is considered in peril if it is in danger or could become in danger. Examples

of a vessel in peril are when it is aground or in danger of going aground. Prior to a
salvage attempt the salvor receives permission from the owner or the master to
assist the vessel. If the vessel is abandoned no permission is needed.

The amount of the award depends on, in part, the value of the salved vessel, the
degree of risk involved and the degree of peril the vessel was in. Legal disputes do
arise from the claiming of salvage rights. To reduce the amount of a claim after an
accident, boat owners or skippers often remain on board and in command of the
vessel; they do everything possible to minimise further loss and seek to minimize
the degree of risk the vessel is in. If another vessel offers a tow and the master or
owner negotiates an hourly rate before accepting then salvage does not apply.

A Lloyd's Open Form, formally Lloyd's Standard Form of Salvage Agreement, but
more commonly referred to as LOF, is a standard legal document for a
proposed marine salvage operation. The two-page contract is published by Lloyd's
of London. It is called "open" because it is literally open, with no amount of money
being stipulated for the salvage job: the sum to be paid is determined later in
London by a professional arbitrator. At the top of page one, beneath the title
"Salvage Agreement" is a statement of the contract's fundamental premise. "NO

The contract for salvage is between the salvage company and the ship owner/
manager. The master of the vessel to be salvaged can act as the owner.

The contract determines the parties to the contract and also the benefits which all
the parties shall gain. The salvor receives a sum for saving the vessel from a peril.
The contract binds the salvor to owe a duty to the owner of the vessel in danger. He

will carry out the salvage operations with due care and will try to prevent or minimize
damage to the environment. Whenever circumstances reasonably require will seek
assistance from other salvor and will accept the intervention of other salvors when
reasonably requested to do so by the owner or master of the vessel; provided
however that the amount of his reward shall not be prejudiced should it be found
that such a request was unreasonable.

The owner and master of the vessel shall owe a duty to the salvor as per the
contract to co-operate fully with him during the course of the salvage operations and
in doing so, to exercise due care to prevent or minimize damage to the environment
and when the vessel or other property has been brought to a place of safety, to
accept redelivery when reasonably requested by the salvor to do so.

Both the salvor and the salvaged are bounded by the contract to carry out their part
of the duty under utmost good faith.

The contract has its own difficulty of implementation and there are breaches which
have to be dealt with effectively.

In the past salvage companies had asked for huge sum as reward from owners
even when the property was not saved or the salvors were not called for. This led to
the NO CURE-NO PAY policy. Although the policy protected the ship owners this
led to a detrimental effect and the salvage companies became less pro active and
stepped into a salvage operation only if there was a surety of positive outcome.

Special compensation and SCOPIC clause has been included in standard salvage
contracts now.

The ship owner often tries to breach the salvage contract when the gains from total
constructive loss or total loss are more than retrieving the vessel. A salvage
company can still carry out the salvage operation citing environmental protection
and compulsory salvage in territorial waters as requirements.

The disputes on payments for salvage are taken care by legal tribunals.

The salvage company also try to breach the salvage rules to have financial gains
like voluntary salvages. Inspectors and arbitrators decide over such matters
determining whether an intervention was actually required. Master of the vessel in
distress shall have the authority to execute such contract on behalf of the ship
owner, and property owners on board.

Hull and machinery insurance contract

The insurance policy is a contract between the insurer and the insured, known as
the policyholder, which determines the claims which the insurer is legally required to
pay. In exchange for an initial payment, known as the premium, the insurer promises
to pay for loss caused by perils covered under the policy language.

Insurance contracts are designed to meet specific needs and thus have many
features not found in many other types of contracts. Since insurance policies are
standard forms, they feature boilerplate language which is similar across a wide
variety of different types of insurance policies.

The insurance policy is generally an integrated contract. H&M policy protects ship
owners against physical loss or damage to the vessel’s hull, machinery and
everything connected therewith.

Marine perils are covered, unless specifically excluded. In order to reject a claim, the
insurer must prove that a relevant exclusion applies. Some excluded perils in an
H&M policy include war risks, intervention by a State power, Insolvency or nuclear

Losses and cost covered are total loss, damage, measures taken to avert or
minimise loss, including salvage and general average. The insurance covers the
ship (hull and machinery), equipment on board and spare parts belonging to or used
by the assured, Bunkers and lubricating oil on board. Objects not covered are
Supplies, engine and deck accessories etc. intended for consumption.

The insurance policy is valid only if the owner maintains the ship, its machineries
and equipment in good order. There is a breach of policy if a claim can be rooted to
be an intentional act. Any claim arising because of material or design failure or
because of faulty equipments do not form a part of H&M policy. Many a times ship
owners try to claim for repair work on machineries which were non functional before
the accident .Any damage which does not form part of the given incident or has
been present before the policy is made is not covered.

Similarly the insurer also tries to delay the repair work because of lack of availability
of repair yards of their choice, such an act also is a breach of contract and any
financial losses incurred to the ship owner due to excessive delay in repair work has
to be compensated by the insurer.


Contracts of new building of ships

Shipbuilding contract is the contract for the complete construction of a ship,

concerns the sales of future goods, so the property could not pass title at the time
when the contract is concluded. The aim of shipbuilding contract is to regulate a
substantial and complex project which the builders and buyers assume long-term
obligations to other and bear significant commercial risk.

Shipbuilding contract is a non-maritime contract and not within the Admiralty

jurisdiction because it is insufficiently related to any rights and duties pertaining to
sea commerce and/or navigation. The property passes to the buyer when the ship
has been completed. To avoid difficulties, provision can be made for the property to
pass in stage in the process of development and construction. It is different from
most hire-purchase agreements where the seller has ownership of the property until
the payment of the final instalment.

Under the Sale of Goods Act 1979, this kind of agreement to sell ‘future’ goods may
be a sale either by description or by sample. The sale of new building ship, which is
large manufacturing project, is obviously undertaken by description. It is a condition
to comply with the agreed description when performing the contract.

The duty of a builder is to complete the new building ship in accordance with the
design and specification given by the buyer. He must ensure the materials he uses
are fit for the purpose required and must carry out the building works with general
standard of skills expected for a shipbuilder since the buyers rely on the builder’s
skills and judgment when contract is being performed. He should also comply with
the safety requirement laid down in the Merchant Shipping ACT.

Within the shipbuilding contract, the risk does not pass from builder to buyer until
delivery of the completed ship. It is suggested that builder should take out an
insurance cover before the delivery of ship.

If the buyer cannot fulfil the payment, the builder may:

a) Exercise his possessory lien;

b) Resell as a result, exercising his lien;

c) Exercise a common law right of stoppage in transit; and

d) Sue for the price

The buyer may want to exit from the contract due to change in market situation or
financial situation. When the builder had made use of his contractual remedy to
cancel the contract for the future, the buyer’s default indeed will trigger the

guarantor’s liability and make the letter of guarantee operative. Moreover, if the
buyer fails to take delivery, the builder may sue him for failure to accept. The builder
has remedies available when the buyer breaches the contract.

If the builder fails to deliver the ship, the buyer may:

a) Seek specific performance or

b) Sue for non-delivery

There may be an express term in the contract that the property is to pass in whole or
partly by stages to buyer before delivery. This does not mean that the buyer has the
right to reject the ship if it fails to meet up with the required standard.

The buyer has the right to examine the complete property before he is obliged to
signify acceptance. He has no right to reject after accepting the delivery, but only to
redress if he discovers fault is by way of damage.

The builder must notify the buyer the ship’s readiness for trials which will be taken
place at the agreed place of delivery. The buyer may choose any place to take the
delivery and the costs are for his account.

The time of delivery is normally stated and treated as an essential term of the
contract. If it is not mentioned or it is not an essential term, the builder should deliver
the completed ship within a reasonable time. “Reasonable” will be determined case
by case.

Shipbuilding contract is different from the general sales contract in terms of nature of
contract, time frame and passing of risks. Each shipbuilding contract is tailor made
where there are different requirement from each buyer.

Shipbuilding contract needs very careful drafting of provisions in contemplation of

the likely event of damage before completion.

The ship building contract can be breached by the ship owner by non payment of
dues and the builder can breach the contract by not following the specifications.

Thus we see that all the contracts whether related to carriage of goods, insurance,
ship building or salvage are bounded by some common factors like the parties to the
contract, consideration in a contract, performance of a contract and breaches in a

Contracts may cater to different needs and jobs but all the various contracts have
been developed on basic fundamentals which form its building block.

This paper also dealt with these building blocks showing examples from various
contracts in maritime field.


 Contracts The Essential Business Desk Reference; Richard Stim

 Global Risk Global coverage , CEFOR
 The International Convention on Salvage, 1989
 Wikipedia
 www.steamshiputual.com
 www.marinelink.com