Ownership and Operation of ships

Malcolm Latarche
Malcolm Latarche

26 February 2018


As with any asset in any industry, ships can be owned and operated in a variety of different ways. The international nature of shipping and the different laws applying various jurisdictions has meant that tried and tested models of ownership and operation are usually preferred over very new ideas – not because of resistance to change in itself but because the certainties of outcomes in case of disputes are more predictable. The following is a brief outline of how ships are owned and operated.

Ownership of vessels is generally determined by the rules applicable in the flag state. Ships may be owned outright or mortgaged to a finance house. In the modern era it has even become common for ships to be owned by finance houses or speculators with no operational skills in shipping and merely used as an asset play. Because the owner has no skills in running ships they are handed over for management to third party specialists for commercial exploitation. Quite often, the speculator will have invested in a newbuilding with customers already in place for final use.

A common complaint levelled at shipping is that the true ownership of vessels is not transparent. This is true to some extent and the use of so-called Brass Plate Companies is often practised by owners. Mostly this done to protect individual ships and the head owner from arrest and seizure as security for disputes involving sister vessels, but it can also be done because different vessels genuinely have different ownership where combinations of investors have come together in a common venture.

This is a characteristic of the German KG method of ownership where many individuals have invested in the owning a single ship. Such ships were often built to be part of the fleet of a traditional ship operator. In such cases, the intended operator of the ships will have the largest say in determining the design and characteristics of the ship.

There is supposed under international law for there to be a strong connection between the owning company and the flag state but this can be interpreted rather laxly especially where the so-called ‘flags of convenience’ are concerned. The owning company may well be incorporated in the flag state but ownership of the company will usually be overseas.

Some flag states also accommodate the Bareboat owning of vessels already registered under a different state’s regulations. Bareboating is a halfway house between ownership and chartering where the ship is owned by one party but for all practical purposes is run as the asset of a second party who is responsible for all manning, maintenance and insurance of the vessel.

Managing Ships

As assets, ships need to be managed to realise their worth to the owner. This can be done in-house which is the method chosen by most traditional shipowners or by one or more of the specialist ship management organisations.

Managing a ship is a complex undertaking as there are many factors to be controlled. First and foremost is ensuring the ship meets all of the requirements of the flag state and also of the international codes and conventions that apply to shipping. That will include things such as the IMO’s SOLAS and MARPOL Conventions and ISM and ISPS Codes but also many more including ILO Conventions covering working conditions on board.

Crewing is a specialised element of ship management covered in part by the STCW convention but also ILO and national flag rules. An owner or manager must not only ensure that the crew meet STCW requirements and are documented as such but also the flag state’s rules which may not recognise the certificates issued by some other flag states. Some owners and managers do all of this themselves but some will sub-contract all or part of it to specialist crewing agencies.

The technical management of the ship should ensure that a vessel is well maintained and repaired when necessary. It would cover day to day technical matters as well as the regular requirement for arranging special and intermediate surveys and drydockings. Then there are matters such as insurance and classification that need to be managed.

The commercial exploitation of the ship is another aspect of ship management and again this can be done in-house or by a specialist organisation. Depending on how the ship is operated, this could involve day to day matters such as bunkering, port calls and storing as well as finding cargoes or work for the ship if a non-cargo vessel. Some owners, particularly the smaller ones will decide to look after the commercial aspect but will decide to take advantage of the economies of scale offered by entrusting the technical management to a specialist organisation.

Commercial exploitation of ships

The prime purpose of a ship is to earn income or -in the case of a very small number of owners – to avoid paying someone else to move their own cargoes. That small number of owners would include some of the oil and gas majors and the likes of Brazil’s iron ore company VALE. Clearly if moving own cargo there will be no contract between the ship operator and the cargo owner unless it is done for tax reasons between two separate subsidiaries.

Assuming the operator plans to use the ship for his own purposes, cargo ship operation generally falls into two categories namely liner or tramp (sometimes called the spot market). A liner operates on a scheduled service between two or more ports and while it may have regular customers, generally there will be a different mix every voyage. On the largest container ships there will be several hundred different shippers and receivers of cargo for each voyage. Anyone wishing to ship cargo will be accepted as a client so long as the cargo is not of a type excluded by the line operators or the perspective shippers does not meet the criteria of the line operator in terms of commercial risk.

Under a liner contract for shipment, all the costs of the voyage including the loading and discharge of the cargo will be absorbed by the shipowner. The cargo owner will be responsible for getting the cargo to the load port and for taking it from the discharge port. Any import or export dues on the cargo will be for the cargo owner’s account.

For many years now, line operators have extended their involvement and most offer through transport terms from the cargo owners premises to the final destination which may be well away from the discharge port. This has changed the legal relationship between the parties but different legal regimes will apply to different stages of the carriage and while at sea the same maritime rules will apply.

The spot market is quite different. In it cargoes are carried under voyage charter arrangements between the ports determined by the cargo’s origin and destination. Unlike the liner operation where there is a common tariff for cargoes, under a voyage charter everything is negotiable. Once a contract has been agreed during the fixture negotiations between the two parties and/or their brokers. A charter party is concluded and the two parties are contractually obliged to complete the intended voyage. Sometimes this does not happen for a variety of reasons but that is outside the scope of this article.

Under a voyage charter, the owner will absorb all of the running costs of the vessel including bunkering costs but payment for loading and discharging and ancillary matters such as dunnaging or securing will have been decided at the fixture negotiating stages. The charterer will pay freight based upon either the tonnage of the cargo carried or a lumpsum arrangement that will involve the same sum being paid regardless of the quantity of cargo loaded. Voyage charters are usually for a single voyage although it is possible to contract for two or more consecutive voyages or for carriage of a set quantity of cargo that will involve more than one voyage

Some owners may wish to avoid the necessity of finding employment for their vessels on a daily basis and decide instead to hire the ship under a Time charter to another operator.

Under a time charter arrangement there will be negotiations about the terms of the contract and particularly about the types of cargo that will be allowed on board and the area in which the ship will be allowed to sail. For all intents and purposes, the time charterer will be free to make his own contracts with cargo interests. Under a time charter, the shipowner will be responsible for only the daily running costs of the vessels with bunker fuel and all port and stevedoring costs being paid for by the time charterer.

Time charters are commonly for long periods of time and in the case of some specialist ships can last for almost the entire lifetime of the vessel. There is a hybrid type of contract known as a time charter trip or trip charter which lasts only for a single voyage but under time charter conditions.

The division of costs under time charter conditions and particularly the fact that the time charterer is responsible for supplying the fuel has led to the misconception that shipowners have no incentive to improve the efficiency of the vessel or its environmental performance. Although it is true that the shipowner is immune to fluctuations in fuel prices or environmental regulations concluded after the terms of the contract has been agreed, the fact remains that the attractiveness of the vessel to future potential charterers will depend upon the owner ensuring the vessel remains competitive with other vessels in the market.

Sub-contracting

Throughout its life a ship may be employed at different times under any of the above types of contractual arrangements. It is also quite common for two or more arrangements to be running simultaneously. For example a ship owned by company A could be bareboated to company B which in turn time charters the vessel to company C. Company C might decide to run the vessel on a line or it might sub-charter it to Company D which could use it for spot market purposes on a string of voyage charters.

The chain of contracts obviously makes for a complex web of interrelationships and rights and responsibilities in the event of any dispute that may arise.