A charter party is a contract of carriage between a shipowner and a charterer that sets forth the parties’ responsibilities for cargoes carried on the vessel. However, if cargoes are carried for third-party cargo interests, the contracts of carriage usually will be in the form of bills of lading issued by the charterer.

In the event of cargo damage, cargo interests normally will claim for their losses against the vessel and the parties to the charter. Most claims are settled directly with cargo interests by either the shipowner or charterer. However, the ultimate liability for cargo loss will be allocated between the shipowner and charterer pursuant to the terms of the charter party.

The universally used New York Produce Exchange form for a time charter party for dry cargoes provides a simple procedure for allocating cargo liability risks. The procedure is called the Inter-Club Agreement. The purpose of the agreement is explained in the New York Exporter arbitration (S.M.A. 2170):

“The Inter-Club Agreement is designed to provide a framework for an owner and a time charterer, and their respective P & I clubs (cargo liability assurers), to settle cargo damage claims between themselves based on an apportionment criteria. The primary purpose of the agreement is to obviate disputes between owners’ and charterers’ clubs for cargo damage claims and thereby to reduce the likelihood of costly and time consuming litigation on such matters.”

Under the Inter-Club Agreement, the formula generally used for the apportionment of cargo claims is:
“Damage to cargo due to unseaworthiness is for the shipowner’s account.
“Cargo damage due to bad stowage is for the charterer’s account.
Cargo claims for short delivery and condensation damage are equally allocated between the parties.

It is not often that the interpretation of the Inter-Club Agreement is raised before an arbitrator. This rare event recently occurred in New York in the M/V Lux Challenger arbitration (S.M.A. 2806).

This dipute concerned a voyage where a chartered vessel carried a cargo of packaged steel coils from France to New Jersey. Following discharge, cargo interests presented a claim to the shipowner under bills of lading issued by the charterer. The $13,324 seawater rust claim for eight coils was settled by the shipowner for $7,500.

In the arbitration, the shipowner admitted liability. However, it contended it would not have had to settle for the above amount had the charterer incorporated the defenses of the Carriage of Goods by Sea Act (Cogsa) in the bills of lading, as required by the charter. If Cogsa had been included in the bills of lading, the package limitation defense would have limited liability to $500 a package, for a total of 4,000. Instead, the charter permitted the Hague-Visby Rules to be included in the bills that nullified the Cogsa package limit.

The charterer contended it was not liable for any share of the settlement. It argued that the Inter-Club Agreement placed loss liability on the shipowner regardless of the charterer’s failure to incorporate Cogsa into the bills of lading.

The arbitrator found the shipowner responsible for the liability as per the Inter-Club agreement. However, the monetary damage was limited to the sum the shipowner would have had to pay, had the charterer complied with its charter obligation to incorporate only Cogsa into the bills of lading. The charterer was held liable for the $3,432 excess paid to cargo interest.

The arbitration illustrates that if charterers breach charter obligations to insert Cogsa defenses in bills of lading, they cannot use the Inter-Club Agreement to avoid liability for resulting losses sustained by shipowners.