Do banks accept Charter Party Bill of Lading for credit?

Charter party shipments involve signing a charter party contract between the owner of the vessel and the charterer (usually the applicant or the beneficiary, depending on the Incoterm that is used in the documentary credit). Charter Party Bill of Lading (CPBL’s) are issued subject to the terms and conditions of a charter party. A CPBL is synonymous with commodity or bulk shipment cargoes. 

For a charter party bill of lading to be acceptable under a documentary credit, the documentary credit must indicate that such a document is required or permitted. 

In effect, the party chartering the vessel hires such vessel in order to take its goods from port A to port B within a certain period of time. 

The goods are loaded and discharged according to the terms of the charter party contract and, for this reason, some banks do not consider a charter party bill of lading as having the same level of security in the goods as a conventional bill of lading, even if the document indicates that the goods are consigned or endorsed to its order. A bank is not concerned with, nor does it examine, a charter party contract even if called for under a documentary credit.  

UCP 600 sub-article 22 (a) (i) states that a CPBL must appear to have been signed by:

• The master or a named agent for or on behalf of the master, or.
• The owner or a named agent for or on behalf of the owner, or,
• The charterer or a named agent for or on behalf of the charterer.

If a credit allows for or requires the presentation of a CPBL, then any such document that is issued and signed by a carrier or its agent is discrepant under the above sub-article.

This is a noted difference in that the carrier or a named agent for or on behalf of the carrier can sign most other transport documents.

The rationale behind the absence of ‘carrier’ in sub-article 22 (a) (i) was originally based upon the fact that it was not commonplace for CPBL’s to be signed by a carrier or by an agent for or on behalf of the carrier. . 

The text of the Opinion indicates that the exclusion of a carrier as a signing party was to assist document examiners.

If not excluded, a document examiner could face the potential problem of trying to determine, out of a number of different entities ranging from the owner to charterers and sub-charterers, who exactly might be the contractual carrier. As stated above, it is not for a document examiner or the banks to look at the terms of the contract of carriage. 

Conflicting duties under the Charter Party and the Bill of Lading

• Once the cargo has been shipped under a Chartered vessel it is clear that the ship owner can be a party to different contracts (the charter party and the bill of lading) with two different contracting parties (the charterer under the charter party and the consignee under the bill of lading).

• Example 1; Employment orders given by the charterer under the charter party may put the owner in breach of his obligations to the cargo owner under the bill of lading.
• An order given by a charterer to change the port of discharge from Port A to B after the Bills of lading have been released for Port A would if the shipowner complied with them, make him guilty of deviation under the bill of lading contract.
• This could seriously prejudice his P&I cover (Insurance)
• The issue of a bill of lading may seriously diminish the effectiveness of rights which the owner may have under the charter.

NYPE clause 5

under Clause 5 of the NYPE form an owner has the right of charter to withdraw the vessel from the charterer’s employment if hire has not punctually been paid.

However, if a bill of lading has been issued in the meantime a withdrawal is no use to the ship owner since he completely has separate obligations to the cargo owner under the bills of lading will continue
• These obligations include the duty to proceed to and deliver the cargo at the port specified in the bill of lading even though the bill of lading freight may already have been pre-paid to the charterer and even though no further hire will be payable under the time.

NYPE 1946 Clause 5 provides:

“…failing the punctual and regular payment of the hire, or bank guarantee, or on any breach of this Charter Party, the Owners shall be at liberty to withdraw the vessel from the service of the Charterers, without prejudice to any claim the Owners may otherwise have on the Charterers.”

The effect of these words is that if even a single instalment of hire is not paid on time and in full, the owner is entitled to bring the charterparty to an end by withdrawing the vessel from the service of the charter.

Withdrawal is effected simply by giving notice to the charterer that the vessel is withdrawn. No particular form of words needs to be used.

Anti-technicality clause in Charter party bill of lading

Most charters now contain an “anti-technicality clause”. These clauses give the charterer a fixed warning
period to rectify a default in the payment of hire, before the owner is entitled to exercise the right to withdraw.

NYPE 93 clause:

“Where there is a failure to make punctual and regular payment of hire due to oversight, negligence, errors or omissions on the part of the Charterers or their bankers, the Charterers shall be given by the Owners 3 clear banking days . . . written notice to rectify the failure, and when so rectified within those 3 days following the Owners’ notice the payment shall stand as regular and punctual.

Failure by the Charterers to pay the hire within 3 days of their receiving the Owners’ notice as provided herein, shall entitle the Owners to withdraw the vessel.( Sub-clause 11a ).

Indeed, the owner may even have to pay out of his own pocket port expenses, stevedoring charges and other costs which should have been for the time charterer’s account under the time charter if the charter had not been terminated by the withdrawal.

[The exact number of banking days’ grace is blank in the BIMCO form and is to be filled in by the parties.]

It can be seen from the above that, where there is an anti-technicality clause, two notices are required in order to complete the process of withdrawal:

a) Anti-Technicality Notice, which can only be given when the time for payment of the instalment of hire has expired, and hire has not been paid in full;

b) Withdrawal Notice which can only be given once the grace period specified in the anti-technicality clause has expired.

The Anti-Technicality Notice needs to be drafted with care. It must state that if hire is not paid before the end of the grace period specified in the clause, the vessel will be withdrawn.

• It is not enough merely to reserve the right to withdraw the vessel. It is prudent to seek advice and assistance from legal advisers when preparing the notice.

• The Anti-Technicality Notice cannot be given until payment is overdue. It mean that notice must be given after midnight on the last day of the payment period. Notice given after business hours on the last day but before midnight might be invalid.

• It is equally important, however, that the owner does not delay too long after the expiry of the payment date before giving the Anti-Technicality Notice. The Notice must be given within a “reasonable time” of the default.

• The length is not an exact period. It depends on all the circumstances of the case and ultimately can be determined by an arbitration tribunal or court. It will not usually be more than one or two days.