Key takeaways
Lien clause
Incorporated into many time charters, including NYPE.
Sub-hire
Not all lien clauses extend to sub-hire.
Interception of freight under bills
Separate to any rights under charterparty.
A time charterer who fails to pay hire under a time charterparty, whether due to temporary financial difficulties or to insolvency, can cause cash flow and other problems for the shipowner. The shipowner may elect to withdraw the vessel from service pursuant to an express contractual right to do so and, if the failure to pay hire is sufficiently serious, may choose to terminate the charterparty and seek damages.
The shipowner may also wish to secure the debt by laying claim to any money due to the time charterer under any sub-charters into which the charterer has entered. Many standard time charterparties incorporate a lien clause, which provides that the shipowner has the right to exercise a lien on sub-freight in the event that the shipowner is owed money under the head charter. See, for example, clause 18 of NYPE and clause 8 of GENCON.
This means that, upon notice from the shipowner that it is exercising its contractual lien, the sub-charterer must pay sub-freight to the shipowner directly. The valid exercise of a lien on sub-freight allows the shipowner to bypass a defaulting (and potentially insolvent) head charterer. However, absent notice of exercise of a lien, the sub-charterer can proceed to pay the sub-freight to the charterer immediately above it in the charterparty chain.
In many cases, the lien clause in the charterparty may expressly state that it extends to sub-hire also. Where the lien clause does not expressly extend to sub-hire, there is a divergence of authority on whether it nonetheless covers sub-hire. It may, therefore, be advisable to amend any charterparty lien clause to expressly state that it also extends to sub-hire.
However, even if the lien clause expressly states that it applies to sub-hire, a sub-charterer receiving a lien notice might find it is facing competing demands for hire (or even freight) payments.
Furthermore, where there is a chain of back-to-back time charterparties all containing lien clauses and involving many sub-charterers, it may not be straightforward to determine who should pay hire to whom and what the scope of any particular lien is. Sub-charterers who receive different notices of lien or who are not sure whether a purported lien is being validly exercised need to tread warily. If they pay the wrong claimant, they face being sued by those who are legally entitled to exercise the lien. If the sub-charterer pays over sub-hire pursuant to the invalid exercise of a lien, they may find that the time charterer directly above them in the chain suspends performance or withdraws the vessel from the charter.
Below we look at some key cases that have clarified the nature of a lien on sub-freight/sub-hire and the way in which it operates.
Western Moscow
In Bulk Shipowning III A/S -v- Carbofer Maritime Trading ApS (Western Moscow) [2012] EWHC 1224, there were five charterparties in the chain.
The head charter was on an amended NYPE form incorporating an amended lien clause 18, which stated: ’That the Owners shall have a lien upon all cargoes, and all sub-freights, hire and sub-hire for any amounts due under this Charter, including General Average contributions …’. The immediate sub-charter, Sub-Charter No. 1, was on similar terms.
Οwners terminated the head charter and withdrew the vessel from the charter service for non-payment of hire by their time charterer. The time charterer had the day previously accepted what it considered to be Sub-Charterer No. 1’s repudiatory breach of Sub-Charter No. 1 for non-payment of hire. Sub-Charterer No. 1 alleged that it was the time charterer who was in repudiatory breach.
Owners then gave a notice of exercise of lien to Sub-Charterer No. 1 under their sub-charter. Owners also gave notice of exercise of a lien to Sub-Charterer No. 2 under Sub-Charter No. 2, arguing that they had acquired their time charterer’s rights of lien under Sub-Charter 1.
In deciding whether the Owners’ claims were valid, and whether it should continue a worldwide freezing injunction obtained by the Owners against Sub-Charterers Nos 1 and 2, the Court considered the true nature of the lien under clause 18 NYPE.
Having reviewed the (conflicting) authorities and academic commentary, the Court decided that the lien operated as a form of equitable assignment by way of charge, whereby the charterer provided the owner with security for payment of what was owed under the head charter. On this construction, Owners would have a direct claim against Sub-Charterers.
On this construction, therefore, in a back-to-back chain of charters, that charge is assigned down the chain allowing head owners to exercise a lien on sub-sub-hire (or any number of sub-hires). In this case, once they had received Owners’ notices of the exercise of a lien, Sub-Charterers No. 1 and No. 2 became legally liable to pay their sub-hire to Owners.
The Court preferred this analysis over the competing argument which was that the lien created a sui generis contractual right of interception similar to an unpaid seller’s right of stoppage in transit. Indeed, such a sui generis right would give an owner no direct claim against the sub-charterer, but only a restricted right to have the time charterer restrained from receiving the sub-charter hire or ordered to direct its payment to the owner or to a blocked account.
On the basis that a lien over sub-freight (or sub-hire) is a charge, the charterparty creating the charge must in some jurisdictions be registered at the relevant companies’ registry where the time charterer is incorporated. Otherwise, it will be void against any creditors, liquidators or administrators of the time charterer. Registration of the charge over a time charterer based in the UK is required and must take place within 21 days of its creation (Part 25 Companies Act 2006).
Bulk Chile
In this case, it was held that a shipowner is entitled to redirect the payment of freight due under bills of lading and separately rely on a charterparty lien on sub-freight.
The Bulk Chile was time chartered by Dry Bulk Handy Holding Inc (Dry Bulk) to Korea Line Corporation (KLC). KLC entered into a time charter trip with Fayette International Holdings Ltd (Fayette). The time charterparties were both on the NYPE form and incorporated the standard wording of clause 18, the lien clause.
Fayette voyage sub-chartered the vessel to Metinvest International SA (Metinvest). Three bills of lading were issued for the voyage on behalf of Dry Bulk, naming Metinvest as the shippers.
The bills were in the standard GENCON form and included the following on the reverse: ’All terms and conditions, liberties and exceptions of the Charter Party, dated as overleaf, including the Law and Arbitration Clause, are herewith incorporated.’ Although the bills stated ’Freight prepaid,’ freight had not in fact been paid.
KLC failed to pay instalments of hire under the head charter when they became due (it had entered into rehabilitation proceedings in Korea). Dry Bulk sent a notice of lien to both Fayette and Metinvest requiring them to pay directly to Dry Bulk any freight or hire due under any charters or contracts of carriage.
Dry Bulk then withdrew the vessel from KLC’s service and Fayette gave Dry Bulk five days’ notice of redelivery. Dry Bulk continued to perform the voyage and duly discharged the cargo as required. However, Metinvest paid the freight to Fayette.
Dry Bulk accordingly brought both claims under the contract of carriage (evidenced by the bills of lading) and charterparty lien claims.
The Commercial Court upheld the charterparty lien claim against Metinvest pursuant to clause 18, which effectively gave Dry Bulk security over ’all sub-freights’ due to KLC. Reflecting the reasoning in the Western Moscow, the Court confirmed that this security took the form of an assignment by way of a charge that was assigned down the charter chain. As a result, Dry Bulk could validly exercise a lien on sub-freight once KLC were in default and Dry Bulk had served the requisite notice. As Metinvest had paid the freight to Fayette after they had received the notice, they were obliged to pay the freight again, this time to Dry Bulk.
The Court dismissed Dry Bulk’s lien claim against Fayette on the basis that the standard unamended wording of clause 18 of NYPE did not provide for a lien covering sub-hire.
The Commercial Court upheld Dry Bulk’s claims under the contract of carriage. Fayette’s appeal to the Court of Appeal in this respect was dismissed. The Court of Appeal agreed with the Commercial Court that Dry Bulk were entitled to redirect the payment of freight due under the bills of lading. The bills were owners’ bills and evidenced a contract between Dry Bulk and Metinvest.
The fact that Metinvest were the shippers meant that they knew the freight had not been prepaid so that it became irrelevant that the bills had been marked ’Freight prepaid.’
Fayette’s role was as nominated agent to collect the freight on Dry Bulk’s behalf. Dry Bulk were entitled to revoke that nomination and call for the freight to be paid directly to themselves, which they did when they served notice of exercise of the lien.
In conclusion, the right to intercept freight payable pursuant to the bills of lading was independent to any rights under clause 18 of the time charter and did not depend on any default by the head charterer. The Court of Appeal stated, however, that a shipowner would be obliged to account for any amounts exceeding the hire due under the head charter.
M/V Smart
The MV Smart was trip time-chartered by Alpha Marine Corp (AMC) to Minmetals Logistics Zhejiang Co Ltd (Minmetals) on an amended NYPE form. Minmetals sub-chartered the vessel on a voyage charter to General Nice Resources (Hong Kong) Ltd (GNR). GNR was the lawful holder of the bills of lading, which provided that freight was to be payable ’as per charterparty.’
After the vessel ran aground shortly after the voyage commenced, Minmetals issued a freight invoice to GNR because freight was deemed to be earned under the voyage charter “whatever vsl/cargo lost or not” and was to be paid on or before 45 days from the date of sailing from the load port.
Prior to the date for payment, AMC notified GNR that they had revoked Minmetals’ authority to collect freight under the bills of lading and required that freight should be paid directly to them. Minmetals objected, so GRN did not pay any freight at all for almost two years, after which it paid a small amount into escrow pursuant to a tripartite agreement. GNR was then wound up.
Claims relating to the loss of the vessel were brought in arbitration. With regard to the issue of freight, Minmetals argued that there was an implied term that AMC would not collect freight under the bills of lading unless sums were due under the time charter. Absent Minmetals’ default, AMC’s notice to GNR breached that implied term.
AMC denied there was any such implied term and contended that they had an unfettered right under the bills of lading to collect freight from GNR as the lawful holder of the bills whether or not sums were due under the head time charter and that they would then be obliged to account for any surplus.
In AMC’s view, the only term that might be implied was an ’All Freight Implied Term,’ pursuant to which AMC were entitled to collect all the freight even it exceeded any amount owed by Minmetals. In such a case, there was no breach of the implied term because Minmetals had been in default at the time AMC had served the notice on GNR because they had failed to pay an outstanding sum due in respect of bunkers.
The arbitral tribunal found in favour of Minmetals. On appeal, the Commercial Court allowed the appeal and found in AMC’s favour. The Court rejected the implication of either of the proposed terms because they were not obvious or necessary to make the time charterparty commercially workable.
The Court, therefore, held that AMC had an unfettered right to collect the bill of lading freight and also that they had an obligation to account for any surplus. Such an unfettered right did not interfere with Minmetals’ employment of the vessel, nor did it deprive Minmetals of the benefit of the vessel’s earning capacity, not least because at the time the notice was given, the vessel had suffered a casualty that had brought the charter to an end.
The Court added, as had previously been observed in the Bulk Chile, that it will rarely be the case that a shipowner will seek to collect freight under a bill of lading where the time charterer is not in default under the head charter, but there is little doubt that it is open to the shipowner to do so.
Maria Theo I
It is worth mentioning this Singapore Court decision briefly because it referenced the M/V Smart decision.
Marchand Navigation Co (Marchand) time chartered a vessel to Sinco Shipping Pte Ltd (Sinco). The time charter was on the NYPE form and incorporated clause 18 which was in these terms: ’[T]he Owners shall have a lien upon all cargoes, and all sub-freights or hire or sub-hires or demurrages and time for detention, if any for any amounts due under this Charter,…’
Sinco sub-voyage chartered the vessel to Olam Global Agri Pte Ltd (Olam). Following completion of the voyage, Olam owed Sinco amounts in respect of incurred demurrage. Sinco had failed to pay hire under the time charter and so Marchand sent a notice to Olam, purporting to exercise its lien pursuant to clause 18 for sums owed in respect of bunkers. Sinco had failed to pay for the bunkers supplied to it by a third party and Marchand had paid the outstanding amount in order to avoid the vessel being arrested.
Sinco denied that any sums were owing to Marchand and objected to the exercise of the lien. Olam was faced with two competing claims and wished to avoid the risk of having to pay twice. In proceedings commenced by Marchand against Olam, to which Sinco was joined as a third party, the Singapore High Court had to decide whether Marchand’s payment for the bunkers constituted an amount due under the charterparty for the purposes of clause 18. Sinco contended that clause 18 did not apply to any payment for bunkers because that was Sinco’s liability to a third party, not money it had to pay to Marchand.
The Court disagreed and held that clause 18 was wide enough to encompass the amounts due in respect of bunkers in circumstances where Sinco was liable to make the relevant payments.
Comment
While it might be correct that a shipowner is unlikely to seek to collect bill of lading freight unless their time charterer has defaulted, it may be a useful option (and a powerful tool) for a shipowner faced with a likely future default by its time charterer (e.g. pending insolvency) or to exert pressure in the context of an ongoing dispute, in circumstances where the shipowner knows that freight has not yet been paid.
It is important to remember that a shipowner’s unfettered right to collect freight under bills of lading is a separate right to those rights that a shipowner may have under a charterparty lien clause, such as clause 18 of NYPE, to intercept sub-freight and potentially also sub-hire.
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