Both the shipowners lien on sub-freight and the charterers lien on the vessel are usually stipulated in the

same clause of most of the time-charterparty forms. This paper seeks to examine several aspects of the theoretical and practical issues which have arisen from the first years of their application in the late 19 th century under both English and American Law. The two liens are examined in two separate parts, the lien on sub-freight constituting the major and basic part of this paper.

PART I : LIEN ON SUB-FREIGHT

1.1

INTRODUCTION

A typical lien clause confers a lien on all sub-freights for any amounts due under this Charter and is found in most of the time-charterparty forms such as the N.Y.P.E., the Baltime, the Shelltime 4 and the Linertime form. Although such lien clauses have been discussed in 19th century cases, the concept of the lien became well established from the early 20th century and may be summarized in that the shipowner may intercept the sub-freights in the hands of the sub-charterer before they are paid to the head charterer in cases where the later defaults in payment under the head charterparty. It is notable that the shipowner may

exercise the lien not only against sub-charterers but also against bill of lading shippers or consignees. In this paper the term sub-charterer normally includes shippers and consignees and the term sub-freight includes bill of lading freight and possibly sub-hire or sub-sub freight/hire as will be analyzed infra. While the majority of the Courts which have attempted to make a detailed discussion on the lien on sub-freight acknowledge that the roots of the lien clause are obscure, this is not equally true as regards its practical value in the modern shipping industry in view of the

limited available remedies for the shipowner when the time charterer defaults in payment. Rights of withdrawal will be of value only in cases where the market is at more favorable rate as compared to the agreed hire and the shipowner, even if he manages to prove a charterers repudiation, he will always face the danger of a potentially assetless debtor. Furthermore his lien on the cargo, which in the majority of the charterparty forms coexists with the lien on sub-freights, will seldom be enforceable against a third party shipper since usually the modern employment & agency clauses do not allow the master to demand incorporation of the lien clause in the bills of lading. On the other hand a lien on sub-freight in some cases may offer little or no protection at all to the shipowner. Freight pre-paid bills of lading, cases where sub-freight has been paid to the charterer before the shipowner manages to notify the sub-charterer, cases where the shipowner is unable to ascertain who are the sub-charterers and jurisdictions where the lien must be registered in order not to be void against other creditors or liquidators are some examples that will be examined in detail below.

1.2

JUDICIAL NATURE

The courts tendency to focus mainly on the issues of the extent and the operation of the lien on sub-freight has led to an uncertainty as regards some aspects of its legal nature. While theres no doubt that the right is a contractual one and that, strictly speaking, it is not a lien at all since it is incapable of physical possession, there are conflicting decisions and opinions in respect of the way it takes effect. The most common theories are the equitable charge and equitable assignment ones. It must be noted that especially the case of the lien on sub-freight

constitutes a strong argument in favour of the view that discussions of the legal nature of a right are not only of theoretical value since the accepted theory will affect issues like the existence of a lien on sub-sub freight or the need for registration at least in countries where theres no statutory solution in that respect.

1.2.1

A Contractual & Non-Possessory Right

The lien on sub-freight is contractual in that it has no independent root in admiralty, common law, equity or statute. This is equally true as regards American law where it is clearthat no such lien can arise without an express grant in the charter of the vesselThe lien cannot arise unless there is a specific lien clause written into the charterpartyNo legal or equitable process or proceeding is necessary for the creation of such a lien1. It must also be noted that the term lien is not accurate and has been regarded as a misnomer since sub-freights are mere choses-in-action that can not of course be possessed. R.Goff, J., as he then was, described the N.Y.P.E. cl.18 use of the word lien as not being used consistently in this clauseIt is obvious that neither the owners lien for sub-freights, nor the charterers lien on the ship can be a possessory lien2. It is also obvious that a lien on sub-freight does not depend upon possession of cargo even in cases where the charterparty provides for a lien on cargo too. In Tarstar Shipping Co. v. Century Shipline Ltd.3, when the shipowner purported to exercise a lien on sub-freight the charterer contended that since the cargo onboard the Aliki was released without assertion of a lien, no lien on sub-freight could be exercised. It was held that if a shipowner is not
1

per Frederick V.P. Bryan, D.J. in re North Atlantic and Gulf S.S. Co., 1963 A.M.C. 871 at p. 876-7. See also Schilling v. A/S D/S Dannebrog, 320 F.2d 628; Marine Traders Inc. v. Seasons Navigation Corp., 422 F.2d 804, at p.806; Cf. Hall Corporation of Canada v. Cargo Ex Steamer Mont Louis and Subfreights Thereon, 62 F. 2d 603. 2 Ellerman Lines Ltd v Lancaster Maritime Co Ltd (The Lancaster), [1980] 2 Lloyds Rep 497, at p.501. See also Richmond Shipping Ltd v. D/S A/S Vestland (The Vestland), [1980] 2 Lloyds Rep 171, at p.181, where Mocatta, J. said that this was a very strange use of the word but added that the word lien is, however, not infrequently used in a loose sense.

entitled to lien the cargo it would be unfair to preclude it from liening the freights on the ground that it failed to lien the cargo4.

1.2.2

Theories Of A Lien On Sub-Freight

At least six theories have been supported judicially or by way of legal analysis. However, not all of them are modern or capable to provide a theoretically correct and commercially practical solution to the peculiarities of the lien on sub-freight.

1.2.2.1 Contractual Relationship Theory This theory which is based on the privity of contract doctrine effectively does not recognize any practical effect to a lien on sub-freight clause. It may be summarized in that the shipowners right to collect freight from a shipper exists only if he is in contractual relationship with him i.e. when the issued bills of lading are shipowners ones. This view was firstly supported in Wehner v Dene Steam Shipping Co.5, where clause 19 of the 12-month charterparty was almost identical to the modern lien clauses. The charterers, Brauer Co., as they had power to do pursuant to the charterparty, arranged with Gleichmann to carry a cargo of phosphate from New York to Hamburg and the bills of lading which were respectively signed by the master of the vessel were held to be shipowners ones. While the main issue of the case was whether there was any payment default when the shipowner purported to exercise his lien, Channell J., in his attempt to establish that the bill of lading was a shipowners one, referred to the lien on sub-freight and said that apart from the case of a
3

451 F. Supp. 317. See also The Solhaug, 2 F. Supp. 294, at p.299; N.H. Shipping Corp. v. Freights of the S/S Jackie Hause, 181 F. Supp. 165, at p.171; U.S. v Freights of the Mount Shasta, 1927 A.M.C. 943, at p.944, where it was said that any freight remaining due to the charterer from the shipper after delivery of the cargo is a res which the shipowner may proceed against in rem. McReynolds J., at p.945, however, dissented from this view. 4 ibid., at p.327. 5 [1905] 2 K.B. 92.

demise charter the rule is that the contract contained in the bill of lading is made not with the charterer but with the owner, and that will, I think, explain away and accounts for all the difficulties which would otherwise arise as to the existence of the shipowners lien. When there is a sub-charterparty there is no direct contract between the sub-charterer and the owner, and if the contract in the bill of lading were made, not with the owner, but with the subcharterer, how is the shipowners lien to be accounted for as against the holder of the bill of lading? It would be very difficult to deal with the question upon any logical or intelligible footing6. This limited privity of contract theory was rejected in Molthes Rederi Aktieselskabet v. Ellermans Wilson Line Ltd7 where Greer J. criticized the Wehner line of reasoning: Though Channel J. bases his judgement [in Wehner v. Dene] on the fact that the bill of lading contract is with the ownerhe still speaks of the owners right as arising out of his lien. It is difficult to understand how a shipowner can be said to have a lien on that which, ex hypothesis, is his own property The lien clause in the charterparty is needed to give the owner a lien in those cases where the sub-freight is due to the charterer and not to the owner, as where goods are carried on a sub-charter without any bill of lading. In such a case the owner could only become entitled to the sub-freight by virtue of the lien clause8 .

1.2.2.2 The Mandate & Agency Theory According to this view the charterer gives the shipowner a mandate to collect the subfreight in case of a payment default under the head charterparty. As Oditah, however, states the problem is that a mandate, even where supported by consideration, is always revocable at

6 7

ibid., at p.98. [1927] 1 K.B. 710. See also the American The Banes, 221 F. 416, at p.418; Schilling v A/S D/S Dannebrog, supra, n.1. 8 ibid., at pp.716,717.

will unless agreed to the contrary implicitly or explicitly9. While there is no indication that the draftsmen of the clause intended to subject the shipowners right to the charterers good will, this solution would furthermore lead to impractical results for the shipowner. According to a similar view the shipowners lien could be analyzed as one of agency. In The Annangel Glory10 there was no dispute neither over the amount due to the shipowner by the charterer nor over what was respectively due from the sub-charterers to the shipowner since they had paid those sums into a special interpleader account. However, the charterer, who was in liquidation, supported that the N.Y.P.E. clause 18 created a registrable charge which rendered the shipowners right void as against the liquidator pursuant to s.395 of the Companies Act 1985 since no registration had taken place within 21 days of the date of the charterparty. In his attempt to reject this argument Mr. R.Aitkens QC, for the shipowner, submitted that the clause 18 right was simply a contractual right, by way of an authority given to the owners to act as the charterers agents to collect the sub-freights when amounts were due to owners under the head charter. Lord Alverstone was definite that it is not possible to analyze the right given in relation to sub-freights in cl.18 in terms of agency. Whatever the true nature of the lien it seems to me to be obvious that the parties intended to give the owners a right which the owners could exercise on their own behalf not on behalf of the charterersI can find nothing in the words of cl.18 which could be read as giving the owners a right to act merely as agents for the charterers11.

1.2.2.3 The Maritime Lien Theory It must be noted that a typical lien on sub-freight clause creates different liens as regards their nature under English and American law. Under the latter the lien is a maritime one and is
9

F. Oditah, The judicial nature of a lien on sub-freights [1989] LMCLQ 191, at p.192. [1988] 1 Lloyds Rep 45. 11 ibid., at p.47.
10

enforceable by an action in rem while such an option does not exist under English law. It is submitted that the characterization of the lien as a maritime one in the United States may be explained by the rather loose sense in which the term is used to refer to rights arising by operation of law and those which are created by contracts 12. However, it must be noted that pursuant to a number of American cases, a maritime lien may arise out of contract only where all the provisions of the contract are maritime in nature, a condition which will usually be fulfilled at least as regards the majority of the common charterparty forms13.

1.2.2.4 The Subrogation Theory This view was firstly adopted in 1902 in the leading American Steel Barge Co. v. Chesapeake & O. Coal Agency Co.14 and has been very frequently followed since then by United States Courts. In that case, when the charterer became insolvent, the shipowner brought suit against the bill of lading holder pursuant to the lien clause of the charterparty. Putnam, J. said that a libelant holding a lien on sub-freight becomes subrogated to all the remedies of the charterer, which include a proceeding in personam against the holder of the bill of lading15. Inevitably the Court acknowledged that this [lien] clause cannot be applied as against the cargo owner beyond the amount stipulated in the bill of lading 16.

1.2.2.5 The Equitable Assignment Theory This theory was initially favoured by the Queens Bench Division in The Nanfri, Benfri and Lorfri17, where Mr. Justice Kerr held that as between the owners and the charterers
12 13

Oditah, op. cit., supra, n.9, at p.193. See North Atlantic and Gulf S.S. Co., 204 F. Supp. 899, at p. 904; The Walter Adams, 253 F. 20, at p.24. 14 115 F. 669. See also MCT Shipping Corp. v. Sabet, 497 F. Supp. 1078, at p.1085; Larsen v. 150 Bales of Sisal Grass, 147 F. 783, at p.785. 15 ibid., at p.674. 16 ibid., at p.672. 17 [1978] 1 Q.B. 927

[the lien] operates as something in the nature of an equitable assignment which can be perfected by giving the proper notices if and when the charterers are in default. Even though the Lords were of different opinion, the same view was supported some years later in The Cebu18 which involved a chain of three N.Y.P.E. based charterparties. When disputes arose between Care Shipping, the shipowner, and Naviera Tolteca, the charterer, as regards unpaid hire under the head charterparty, the former sent a first telex to Itex, the sub-sub charterer, purporting to exercise a lien on sub-sub freight which might be due from Itex to Lamsco, the sub-charterer, and a second one to Lamsco purporting to exercise a lien on any hire due from Lamsco to Naviera Tolteca. The main issue was whether the shipowner was entitled to exercise a lien on the sub-sub freight. Lloyd J. held that On the true construction of cl.18 I would hold that Naviera Tolteca has assigned to the owners by way of equitable assignment, not only sub-freights due to it as charterers, but also any sub-freights due under the sub-sub charter of which it is equitable assigneeI can see no reason why the law should not give effect to that intention by virtue of equitable assignments 19. Lamscos main argument was that the charterers right to receive freight from the sub-sub charterer was only by way of security for freight due from the sub-charterer and could not therefore be the subject of an assignment by the charterer to the shipowner. However, Lloyd, J. stated that the fact that the assignment was by way of security did not prevent it being an absolute and effective assignment20. The equitable assignment theory was also adopted by Steyn, J. in The Attika Hope21 though not very clearly since the Judge cited Lord Russells comments in The Nanfri22 who favoured
18 19

[1983] 1 Lloyds Rep 302. Ibid., at p.309. 20 ibid., at p.309. For a full discussion on the effect of this theory on the extent of the lien clause to sub-sub freight and on the differences in that respect between the N.Y.P.E. and the Baltime forms see infra 1.5.2. 21 [1988] 1 Lloyds Rep 439. 22 supra, n.17.

the equitable charge theory. The case, which illustrates some of the most important consequences of the assignment theory, involved a N.Y.P.E. based head charterparty between the shipowner and Ideomar and a voyage sub-charterparty between the latter and Compagnie National Algerienne de Navigation (CNA). As soon as the head charterparty was entered into, on November 16, 1983, Ideomar assigned by a series of telexes the sub-freights to a third party, Angelakis Shipping Co., and notice of this assignment was given to CNA. On January, 13 and while Ideomar had defaulted on payment of some hire instalments, the shipowner notified CAN that he was exercising his lien on sub-freight. Four days later, Angelakis notified CAN to pay sub-freights direct to them. CAN finally decided to pay the shipowner and the Court, on the basis of the assignment theory and the well established chronological priority Dearle v. Hall23 rule, held that the assignment of freights to Angelakis had priority over the shipowners claim since the bills of lading under the sub-charterparty were not released until 26 December, 1983 and stipulated that 95% of the freight was not payable until 15 January 1984. Furthermore the shipowners notice was given almost two months after the assignee had notified the sub-charterer who was consequently obliged by the Court to pay twice. United States Courts do not seem to find major practical differences between the terms subrogation and assignment. In Hornbeck Offshore Operators v. Ocean Line 24, R.G. Doumar D.J. said that it is well established that a maritime lien on sub-freights is a derivative right which amounts to essentially an agreed assignment of the rights of the charterer in the unpaid freight and referred to the leading American Steel Barge case where Putnam, J. preferred the term subrogation. That use of the term assignment may be
23 24

(1823) 3 Russ. 1. 1994 A.M.C. 1716, at p.1727. See also St. John Marine v. U.S., 1996 A.M.C. 2894, at p.2907, where the assignment was regarded as at most a conditional assignment or promise of the right to collect sub-freights; W. Tetley, Maritime Liens and Claims, (2nd ed. 1998), at p.795 n.239.

explained by the need to examine whether a lien on sub-freights falls within the scope of the Anti-Assignments Act which is discussed infra, in the registration paragraph of this paper. The main objection to the theory in question arises from the fact that an equitable assignment essentially results in the acquisition of a proprietary right by the assignee since such an assignment by way of security takes effect either as an equitable mortgage or charge. As Oditah states, a lien on sub-freight does not however possess the ordinary incidents of a proprietary right since the lienee has no right of property or pursuit on the sub-freight and his rights of enforcement are limited25.

1.2.2.6 The Equitable Charge Theory This analysis is often confused with the equitable assignment one mainly due to the fact that in a number of cases the courts have characterized them as similar. In The Ungland Trailer26, Nourse, J., as he then was, criticized Lloyds J. view in The Cebu, a case where the assignment theory was favoured, that if the equitable charge theory was preferred, the legal analysis would be different. Steyn, J. in The Attika Hope held that the lien clause creates an equitable assignment but paradoxically cited Lord Russells speech in The Nanfri who favoured the equitable charge theory. In the most recent authority, The Cebu 227, Steyn, J. insisted on his opinion and seemed to regard the two theories as interchangeable28. Although one could accept that an equitable assignment of a chose in action by way of security creates an equitable charge on the chose29, it must however be stated that there are some differences between the two theories, especially as regards their legal effects, which
25 26

See Oditah, supra, n.9, at p.193. [1985] 2 Lloyds Rep 372, at p.375. 27 [1990] 2 Lloyds Rep 316, at p.319. 28 See M. Davies & A. Dickey, Shipping Law (2nd ed., 1995), at p.402, n.420. 29 This statement is attributed to Nourse, J., in The Ungland Trailer, supra, n.26, at p.374, who invoked the authority of Re Kent & Sussex Sawmills Ltd., [1974] Ch. 177 and of Walter and Sullivan Ltd. v. J. Murphy & Sons Ltd., [1955] 2 Q.B. 584.

10

thus render this view as at least inaccurate. If the equitable charge theory is accepted it would inevitably follow that the lien must be registered as a charge at least in jurisdictions where the legislator has not intervened in that respect. If on the other hand, the equitable assignment theory was preferred there would be no doubt as to the existence of a lien on sub-sub freight whereas under the charge theory this is not clear30. When The Nanfri31 reached the House of Lords, Lord Russell seemed to disagree with Kerrs J. opinion in the Queens Bench as regards the nature of the lien and stated that it operates as an equitable charge. The case involved an alleged breach of three charterparties when the shipowner gave instructions to the masters not to sign freight pre-paid bills of lading. The charterer said that this act constituted a repudiatory breach of contract and the shipowner contended that he was merely exercising the lien. While there was no disagreement on that the shipowners conduct was certainly a repudiatory breach, Lord Russell expressed the above mentioned opinion as regards the nature of the lien, which was clearly not necessary thus rendering his view an obiter dictum. Furthermore no authority was cited. His view found support in some first instance decisions like The Ungland Trailer and The Annangel Glory. Apart from the belief that such an analysis is an error which crept into the law probably because of the equitable nature of the old admiralty jurisdiction, the equitable charge concept can not be accepted both for theoretical and practical reasons32. The main objection against the equitable charge theory pertains to what was argued by a number of judges i.e. that a lien on sub-freight can only be created by an assignment which takes effect merely for security, the lien thus essentially operating as an equitable charge. It is submitted that this view is misconceived mainly because there is no need for the creation of
30 31

For a full discussion on the issues of registration and sub-sub freight see infra 1.4.1. supra, n.17. 32 See Oditah, supra, n.9, at pp.194-197. Most of the the arguments against the theoretical correctness of the charge theory are derived from this article. Carruthers, J. in The Lakatoi Express, (1990) 19 N.S.W.L.R. 285, at p.300, refers to this article and seems to be of the same opinion with its author.

11

the lien to be based on an assignment. The lien is vested once the head time charterparty is signed irrespective of when the shipowner can exercise it33. Secondly, Oditah tries to negate the validity of the statement that since the lien is intended as a non-possessory security it necessarily takes effect as an equitable charge and invokes the examples of other legal mechanisms like the retention of title in a sale of goods contract or the contractual set off, which on the one hand behave like securities in that they guarantee priority but on the other hand they are not real security interests in law because the priority they guarantee is not an incident of an underlying property right - an attribute of every true security interest. The writer thus concludes that an intension to come to an agreement which may operate as a security does not suffice for the creation of a security interest in law. Finally it is submitted that normally, a third party who receives charged property with notice of the charge is a constructive trustee. This is not true as regards the lien on sub-freight where it is well established from the early 20th century in Tagart, Beaton & Co. v James Fisher & Sons34 that the shipowner may only intercept the sub-freight before it is paid. Nourses J. opposite view in The Ungland Trailer that the shipowner could follow the money into the hands of a third party who had notice of the lien is clearly incorrect. The liens loss does not depend on the identity of the receiver who, in any case, may not be required to return the money provided that he is a bona fide assignee or that his notice was given to the charterer before the shipowners one35. Nourses, J. additional argument that this assumed conflict proceeds from a confusion between the nature of the right and the event which defeats it is not sustainable simply because the shipowners inability to intercept the sub-freight once paid is not a mere event but a basic incident of the lien which reveals one aspect of its judicial nature.
33 34

For a detailed analysis on the date of birth of the lien see infra at 1.3.2.1. [1903] 1 K.B. 391. 35 See The Attika Hope, analyzed supra, at 1.2.2.5.

12

Finally there is a number of practical problems which would arise if the equitable charge theory was accepted and would render the exercise of the lien extremely difficult. Apart from the problem of registration which is discussed infra, a shipowner must be aware of any subcharter of his vessel or the signing of a bill of lading contract if he wishes to intercept the subfreight proceeds. He must give notices of the assignment by way of charge of the sub-freight to him to every sub-contractor even in cases where there is no default under the head charterparty and no other amounts are due, in order to be protected against the possibility of the charterer assigning the sub-freights to a third party. He will have to do so because a consequence of the equitable charge or assignment theory is the application of the old Dearle v. Hall rule, cited in the above-mentioned The Attika Hope, which requires notice of assignment for the preservation of the shipowners priority as assignee against subsequent assignees36. There is no doubt that such a course is at least impracticable from a commercial point of view.

1.2.2.7 A Sui Generis Personal Right This view is attributed to F. Oditah who, after examination of all the possible theories, came to the conclusion that none of them is completely suitable to explain the judicial nature of the lien. In addition the author believes that such a sui generis view would be consistent with the way in which sea merchants see the right ie. as a mere right of interception. No doubt, Oditahs opinion overcomes all the theoretical and practical problems which arise from the other theories. However, one has to observe that the equitable charge theory, which is almost prevalent in the U.K., though based on an obiter dictum and some first instance cases, is likely to be adopted by the majority of the Courts especially after the elimination of the registration requirement pursuant to s.93 of the Companies Act 1989 which is discussed infra.
36

See The Attika Hope, supra, n,21.

13

1.3

OPERATION OF THE LIEN ON SUB-FREIGHT

The way the lien operates depends on whether the third partys bills of lading are held to be shipowners ones or whether the third party receives charterers bills of lading or is a subcharterer.

1.3.1

SHIPOWNERS BILL OF LADING

When the bills of lading are held to be a shipowners ones the latter will not need to invoke a lien on sub-freight in order to collect the bills of lading freight, as has been declared in Molthes Rederi Aktieselskabet v. Ellermans Wilson Line Ltd37. In cases like that the role of the agent who will usually be appointed by the charterer must be considered carefully. The agent must be well aware on whose behalf he is acting when he performs any task in the course of his duties38. In Wehner v. Dene there was a chain of two time-charterparties which contained almost identical terms. When the sub-charterer agreed with Gleichmann for the carriage of a cargo of phosphate, the bill of lading was signed by the master and was indeed held to be a shipowners one. H. Vogemann, an agent appointed by the sub-charterer to collect the bill of lading freight at the port of discharge, received payment from the consignees on 15 December 1902. The following day and while there was a payment default under the head charterparty,
37

Greer, J. said: It seems a misuse of words to say that a shipowner has a lien on the debt due to him under the contract made with him by a bill of lading. The case is analyzed supra at 1.2.2.1. 38 Hill, Maritime Law, (1998), at p.198. A freight forwarder can be the agent either of the shipowner or the charterer depending on the facts. See Bartlett-Collins Co. v. Surinam Navigation Co., 381 F.2d 546; United States v. American Union Transport, 327 U.S. 437, where the freight forwarder was held to be agent for the charterer.

14

the shipowner gave notice of his claim to the agent. A further amount under the head charterparty became due on 23 December. Channel, J. stated that although the owner has the right to demand the bill of lading freight from the holder of the bill of lading because the contract is the owners contract, yet the owner has also, of course, contracted by the charterparty that for the use of his ship he will be satisfied with a different sum, which will also in the great majority of cases be less than the total amount of the bills of lading freights; and, therefore, if the owner were himself to demand and receive the bills of lading freight, as he might do if he chose, he would still have to account to the charterer or the sub-charterer, as the case might be, for the surplus remaining in his hand after deducting the amount due for hire. As regards the role of the agent he added: if I am right as to the bill of lading contract being with the owner, then it seems to me to follow that the agent appointed to receive the bill of lading freight becomes by the very act of appointment the agent of the shipowner to receive freight for him. Finally it was held that the shipowner should not deduct the second amount of hire which became due on 23 December, i.e. one week after he notified the agent of his claim. The court adopted this last conclusion, logically it would seem, due to the wording of the lien clause for any amounts due under this charter even though, as has already been stated above, the shipowners right was based on the contractual relationship between him and the bill of lading holder. The shipowner is equally entitled to give notice of his claim to the agent even in cases where the latter has not yet collected any sub-freight. In Molthes Rederi Aktieselskabet v. Ellermans Wilson Line Ltd39 the plaintiffs let the Sproit to Maurice Elliff & Co. on the Baltime form which contained a typical lien on sub-freight clause. The charterers agents subchartered the vessel by a voyage charter and shipowners bills of lading were issued. When the Sproit arrived at Hull, the port of discharge, a considerable amount of hire was in arrear
39

supra, n.7.

15

and on February 10, 1926, the shipowner notified the defendants, who were appointed as agents by the charterers, to collect the sub-freight on his behalf. The defendants refused to hand over the sub-freights, which were finally collected on February 11, on the ground that this amount would be absorbed by the disbursements incurred by them in the course of their agency duties. Greer J. extended Channels J. ruling in Wehner v. Dene by stating that the shipowner can equally intervene at any time before the agent appointed by the charterer has received the freight and say to him: I am no longer content that the charterer should collect the freight. If you collect it at all, you must collect it for me 40. As regards the agents refusal to hand over the collected sums to the shipowner it was held that the alleged disbursements, mainly for attending the discharge of the vessel, were incurred by them in their capacity as agents of the charterers since they were doing for them what the charterers had undertaken to do pursuant to clause 3 of the time charterparty. Consequently the Court did not recognize an agents right to set-off those expenses against the shipowners right to the sub-freight. It seems that the agents fate would be different if they had come to an agreement with the shipowner when the latter notified them of his claim on the sub-freight41.

1.3.2

CHARTERERS BILL OF LADING - SUB-CHARTERPARTIES

In cases where no contractual relationship exists between the shipowner and the shipper or the sub-charterer, a right to intercept sub-freight must be based on a lien clause of the head charterparty. The basic rule is that the shipowner has to notify the sub-charterer of his lien before any amount is paid to the charterer or to anyone authorized to receive the money on his behalf. Several issues like the notification of the sub-charterer, the liens exact birth and loss
40 41

ibid., at p.715. ibid., at p.714.

16

date or the question whether the lien clause must be incorporated in the bill of lading in order to be effective against shippers or consignees must be examined in detail.

1.3.2.1 Date Of Creation Of The Lien The issue of the birth of the lien has not been discussed per se in detail under English law where the main question which has arisen is when is the earliest time an owner may notify the sub-charterer of his lien. This question was the logical consequence of a number of cases which adopted the equitable charge theory given that the Companies Act 1985 required registration within 21 days after the date of the charges creation (emphasis added). The question was discussed in The Annangel Glory where the dilemma was whether the charge was created at the date the charterparty was entered into or when hire became actually due. The Court adopted the former interpretation on the grounds that there is no requirement for a property or an undertaking, as is the one effected by a lien clause, which constitute the subject of a security, to exist at the time of the agreement, at least pursuant to the Companies Act 1985, in order to be regarded as charges. Consequently the shipowners argument that this was true only as regards book debts, as provided in the Companies Act 1985 s.396(1)(e), while, as he contended, the lien on sub-freight was at best a floating security, as described in s.396(1)(f), was rejected42.

42

M.T. Wilford in Liens on Sub-freights and Priorities [1988] LMCLQ 148, at p.150, argues that the view adopted in The Annangel Glory essentially results in a number of practical problems which are analyzed as drawbacks of the equitable charge theory, supra 1.2.2.6. The author also supports that adopting the view that the charge is created only when moneys become due under the head charterparty would better fit the intention of cl.18 of the N.Y.P.E. form.

17

In American law the main view is that the lien comes into existence on the date of the charterparty. This approach, which seems to be a logical consequence of the subrogation theory, was firstly supported in the leading American Steel Barge43 case where the charterer became insolvent. When the cargo owner, who was also the bill of lading holder, invoked his right to set-off against the charterer, the Court held that a lien on sub-freights must be given preference over it since the lien, having been created on the date of the charter, was prior to the charterers indebtedness to the bill of lading holder. In the words of Putnam, J. the rights of the owner of the vessel under the [lien] clause in question reverted to the date of the execution of the charter and did not accrue as of the date of the giving of the bill of lading, as now supposed by the owner of the cargo44. However, in a number of cases it has been held that the lien accrues only when the vessel is loaded. In re North Atlantic and Gulf S.S. Co45., the District Judge, in his attempt to prove that a lien on sub-freight is not rendered void by s.67 (a), Bankruptcy Act, 11 U.S.C.A. went further than trying to establish that such a lien is a contractual one and said that it arises by virtue of the charter of the vessel and the subsequent loading and carriage of cargo aboard her46. That approach was the inevitable conclusion of the way the Court thought a lien on sub-freight operates provided that the charterparty contains a lien clause: When the vessel is loaded the charterer acquires a lien on the cargo as against the shipper to secure his sub-

43 44

supra, n.14. ibid., at p.673. See also Luckenbach Overseas Corporation v. The sub-freights of the S.S. Audrey J. Luckenbach, 232 F. Supp. 572, at p.574, where it was further defined that the lien comes into existence on the date of the charterparty as an inchoate lien. Cf. St John Marine v. United States, supra, n.24, at p.2528, where S.W. Kram, D.J., seems to make a distinction between the date when the lien arises, being that of the charterparty, and the date when it becomes vested and complete, being the time when sub-freights become due and collectible. 45 supra, n.13. See also Diana Compania Maritima v. The Subfreights of the S.S. Admiralty Flyer, 280 F. Supp 607, at p.611; The Saturnus, 250 F. 407. 46 ibid., at p.905.

18

freights. The charterers lien against the cargo to secure the sub-freights is, however, in turn subject to such liens of the shipowner as may arise under the charterparty47. It is argued that the North Atlantic approach enables the shipowner to prevail over an insolvent charterers trustee in bankruptcy on the ground that the lien is not obtained by attachment or legal process and hence not invalidated by s.67 (a) of the Bankruptcy Act 48. However one could reach the same conclusion without adopting the view that the lien accrues when the vessel is loaded. What in fact renders the Bankruptcy Act inapplicable is the fact that the lien is contractual in nature and not obtained by attachment, judgement, levy, or other legal or equitable process or proceedings as required by s.67(a). Bryan, J. in the North Atlantic case bases his judgment on this point. It is obvious that the issue of the date of the liens birth is vital in respect of the problem of priorities among various claims. Allen argues that the fiction of relating the liens accrual to the date of the charterparty may help to put the shipowners lien ahead of a claim to the subfreight by the charterers assignee49.

1.3.2.2 Sub-Charterers Notification When money becomes due under the head charterparty, the shipowner may intercept the sub-freight by notice of his claim to the sub-charterer or his agent. While in English Law the

47 48

ibid., at p.904. H.C. Allen, Liens: Liabilities Arising from Delay or Failure in Performance, (1975) Tul. L. Rev., 970, at p.973. 49 ibid.

19

need for notification is undisputed50, there are some American cases where it has been held that constructive notice is sufficient. The shipowner of The Solhaug51 time-chartered his vessel to Columbus Line under the N.Y.P.E. form. The charterer sub-chartered the vessel and bills of lading were issued to National Sugar Refining Co. who paid sub-freights to Columbus in a number of separate installments mainly before March 26, 1930 when Columbus informed the shipowner that they were financially embarrassed and could not pay. When the shipowner sued National for the sub-freights, the shippers contended inter alia that they had paid in good faith, without notice of the shipowners lien and that it was not even clear to them that the vessel was not owned by the charterer since the sub-charterparty referred to them as owners or chartered owners and the blank provided in the bills of lading for incorporation of the terms of the charterparty was not filled in. In addition the representative of the shippers testified that he did not know who were the owners and that he was only aware of the sub-charterparty and of course the bills of lading. The District Court rejected all those arguments on the ground that a prudent shipper would have ascertained that the vessel was not owned by the charterer. The judgement was based on several conclusions like the facts that National, an important importer of sugar, should have known that a very considerable amount of Cuban sugar is moved in chartered tonnage and that since the vessel discharged her cargo at Nationals refinery the shippers could have easily ascertained that she was a foreign vessel and that it would be unlikely that she was owned by the charterers who were an American Corporation. Nationals admission
50

Wehner v. Dene, supra n.5, at p.99.; Molthes Rederi Aktieselskabet v. Ellermans Wilson Line Ltd, supra n.7, at p.718; The Cebu, supra, n.18. In the words of Putnam J. in American Steel Barge Co. v. Chesapeake & O. Coal Agency Co., supra, n.14, at p.676, the absence of that knowledge [of the shipowners lien] protected the holder of the bill of ladingon rules so well settled and so universally known that it would be a waste of words to discuss that particular proposition. For examples of forms of notice which are normally sent to the subcharterer or his agents see Hill, op. cit., supra, n.38, at p.197; Tarstar Shipping Co. v. Century Shipline Ltd, supra, n.3, at p.320. 51 supra, n.3.

20

that they were aware of the sub-charterparty and the fact that some disbursements endorsement on the bill of lading was signed by the charterers agent whereas the bill of lading itself was signed by the master were also taken into account. In addition the Court held that the fact that the shipowner did nothing to assert his lien before April, 7, over a month after redelivery of the vessel, constituted neither a waiver of his lien, since the shipper did not manage to prove any intention on his part, nor an equitable estoppel against the shipowner, since the shipper had not been prejudiced, given his duty to proceed to a reasonable inquiry as regards the owners rights. Similarly in East Asiatic Trading Co. v. Navibec Shipping Ltd.52, although the shipowner notified the sub-charterers agent of his lien, Gagliardi J. admitted that a constructive notice may equally bind a sub-charterer. He added that such a constructive notice is created by the mere fact that in the sub-charterparty the charterer is referred to as charterer and that there is no requirement for the sub-charterparty to incorporate by reference the head charterpartys lien clause. This line of authority has been criticized in the recent American case law which stress the need for actual notice of the lien. In Finora Co. Inc. v. Amitie Shipping Ltd.53 when the subcharterer paid sub-freight to the charterer, the shipowner sued him and invoked the typical lien clause of the head charterparty. The District Court held that the sub-charterer was protected since no clear notice was given to him. In the Court of Appeal the shipowner contended that the District Court erred in ignoring The Solhaug authority and J.H. Wilkinson J. invoked a number of arguments to defend the first instance ruling and to prove that actual
52

1979 A.M.C. 1043. See also Sarma Navigation S.A. v. Navibec Shipping Ltd., 1979 A.M.C., 1050, at p.1057, where a shipowners notification to the sub-charterer, that the party who had sub-contracted with was chartering the vessel from him, was held to be sufficient. However the same Court, some 15 years later, in St. John Marine v. U.S., supra, n.24, at p.2529, admitted that the extent of notice required to perfect a lien on sub-freights is unsettled. 53 1995 A.M.C. 2014. See also Berdex International Inc. v. The Kapitan Grishin , 1992 A.M.C. 1559.

21

notice is a better rule. Firstly it would be unfair for the sub-charterer to incur search costs in order to learn of the lien and even if he managed to do so he would not be sure whether the owner would exercise it. Secondly a charterers default may not be easily recognized by the sub-charterer. In the event he does discover such a default he is ..ill-suited to ascertain whether default has actually occurred. There may be an assignment of rights, an extension of credit, or some other arrangement between the owner and the charterer 54. Thirdly, in case of a charterers default under the head charterparty the sub-charterer who refuses to pay the sub-freight to him would face the danger of his act being regarded as a breach of contract as well as the danger of the charterer exercising a lien on his cargo if a relevant cargo lien clause is contained in the sub-charterparty.

1.3.2.3 Loss Of The Lien It has already been stated infra that the shipowners lien is lost once the sub-freight reaches the hands of the charterer or his agent. While this rule was firstly declared in the early 20 th century and still constitutes the general rule, each individual case has to be considered carefully. Firstly it must be remembered that when the bill of lading is held to be a shipowners one, the latter may notify the agent and intercept the sub-freight even in cases where the agent received it before the shipowners notification, as has been declared in Wehner v. Dene. However, some three years before Wehner, in Tagart, Beaton & Co. v James Fisher & Sons 55 the Court of Appeal stated that a lien such as this on a sub-freight means a right to receive it as freight and to stop that freight at any time before it has been paid to the time charterer or his agent56. The problem was discussed in Molthes Rederi Aktieselskabet v. Ellermans
54 55

ibid., at p.2019. supra, n.34. 56 per Lord Alverstone, ibid., at p.395.

22

Wilson Line Ltd where Greer, J. admitted that it seems difficult to reconcile [the abovementioned decisions]. Apart from the fact that he finally thought it unnecessary to address the problem for the purposes of the case before him, he nevertheless stated that the material facts of the two cases were distinguishable in that in Molthes Rederi there was no privity of contract between the sub-charterer and the shipowner whose right was consequently based on the lien clause of the head charterparty. It is thus evident that the shipowner is better protected in cases where shipowners bills of lading are signed, provided of course that they constitute evidence of the contract of affreightment between the shipowner and the shipper and not mere receipt between the shipowner and the charterer as was the case in Tagart, Beaton. Under American law the general rule may be summarized in that a shipowners lien on subfreight is lost by good faith payments by the sub-charterer to the charterer without notice of the shipowners rights57. The application of this rule may sometimes be problematic mainly due to the fact that, apart from some cases where a constructive notice was held sufficient, no court has suggested how a sub-charterer can have such notice before an amount due under the head charterparty becomes actually due and is not paid by the charterer. In addition it has been stated that it is scarcely bad faith for a sub-charterer to meet his obligations to the charterer as they fall due58. This statement is confirmed by cases where prepayments are made by a shipper to the charterer even though no freight pre-paid bills of lading are issued. Such prepayments may result in the discharge of the shipowners lien. In Marine Traders Inc. v. Seasons Navigation Corp.59, a head-charterparty, based on the NYPE form, was signed between Marine Traders Inc., the shipowner, and Seasons Navigation Corp., the charterer, and
57

Jebsen v. A Cargo of Hemp, 228 F. 143, at p.148 ; Hall Corporation of Canada v. Cargo ex Steamer Mount Louis, 62 F. 2d 603, at p.605. In Cornish Shipping v. Ferromet, 1955 A.M.C. 235, it has been added that a shipowner may not trace the sub-freight in the hands of the charterer or his agent simply because, as Tetley, supra, n.24, at p.790, states, the res to which the lien attaches is the debt owed to the charterer and not the funds in his hands; Cornish Shipping Ltd. v. International Nederlanden Bank N.V., 1995 A.M.C. 2582. 58 H.C. Allen, supra, n.48, at p.974. 59 supra, n.1.

23

provided for the hire of the Granapolis. Various arrangements took place between Seasons and U.S. Steel International for the carriage of steel products not only onboard The Granapolis. The shipper made two payments to the charterer for the carriage of cargo on two other vessels, The Smith Explorer and The Dearborn. However, some portions of the cargo which were shut out of those two vessels were finally loaded on The Granapolis and the respective overpayments were credited to her freights. When Seasons defaulted on the payment of one instalment of hire due under the head charterparty and some other related expenses, the shipowners inter alia instituted an action against the sub-freights of The Granapolis and invoking the American Steel Barge case argued that those overpayments should be treated as loans from the shipper to the charterer. However, in the latter case it had been stated that such a ruling did not concern situations where advances from the shipper to the charterer were given on the expectation of offsetting them against subsequent subfreights. The Court in Marine Traders held that the case before it, where the prepayments were initially earmarked on account of freights on other vessels, was not crucially different and treated the prepayments as advances made in good faith which extinguished the shipowners lien. On the other hand some cases suggest that a lien on sub-freight will not be necessarily lost if the sub-charterer pays the charterer in good faith and without knowledge of the shipowners lien. In Tarstar Shipping Co. v. Century Shipline Ltd.60, the shipowner notified the subcharterer only after the latter had already paid the sub-freight to his agent but before the agent had handed over the money to the charterer. The Court held that the lien had not been lost and the sub-charterer was obliged to pay twice. In the words of R.J. Ward, J., the agency relationship imposed a duty to act and precluded Koctug [the sub-charterer] from simply assuming that Century [the charterer] had already been paid. To blind itself to its agents
60

supra, n.3.

24

knowledge as to whether or not Century had been paid, and to keep its agent in the dark as to the lien can hardly be considered good faith61. In Jebsen v. A Cargo of Hemp62 the sub-charterer who had agreed for the carriage of a cargo of hemp consigned to H.W Peabody & Co., had paid the sub-freight to the charterer without knowledge of the shipowners lien. While it seemed that the lien on sub-freight was lost, the District Court held that when the shipowner does not intercept any sub-freight or at least enough sub-freight to satisfy the charterers debt to him, he can catch the unpaid bill of lading freight provided that he has a lien on the cargo onboard his vessel. Surprisingly, Morton, J., referred to the above-mentioned Wehner v. Dene which is however, distinguishable in that it involved shipowners bills of lading whereas in the case in question the bills of lading were held to be sub-charterers ones. It has been argued that the ruling can be questioned on several grounds although it has been followed in at least one arbitration decision63.

1.3.2.4 Freight Pre-Paid Bills Of Lading And The Conflict Between The Lien Clause And The Employment & Indemnity Clause. Due to the well established rule that upon payment of the sub-freight without notice of the shipowners rights the lien is lost, both English and American Courts have recognized that upon delivery to a third party, freight pre-paid bills of lading will effectively result in the discharge of the lien. Thus, in The Nanfri, where three Baltime charterparties where signed, Lord Denning explained that the owners place much reliance on that lien [on sub-freights] clauseIt is obvious that if such freights were prepaid, there would be nothing on which the

61 62

ibid., at p.1112. supra, n.57. 63 H.C. Allen, supra, n.48, at p.975.

25

lien could operate. So in this trade, where freight was always pre-paid, the clause was not much use to the owners64. The same approach was adopted in The Searaven where it was also added that once the lien is discharged by delivery of freight pre-paid bills of lading to purchasers for value, it can not be restored by the posting of a bond for payment of freights by the consignee65. What is possibly most important is the fact that under most of the common employment & indemnity clauses the master may not refuse to sign freight pre-paid bills of lading. In the above-mentioned The Nanfri, when the charterer made a number of deductions from hire, the shipowner instructed the masters of all three vessels to refuse to sign freight pre-paid bills of lading and to endorse all bills of lading with a clause which incorporated all the terms, conditions and exceptions of the charterparty and referred specifically and expressly to the lien clause thus ensuring that it would render it applicable as against the bills of lading holders even if the bills where held to be charterers ones. In the Court of Appeal, Goff L.J., held in favour of the employment clause 9 adding that the shipowner effectively based his claim on a without prejudice to the head-charterparty interpretation of the clause which however was not the correct one66. The same view had been adopted in the late 19th century case, The Shillito, even though the employment clause contained a without prejudice term67. While it seems that this line of authority will be equally applicable in respect of the less strict N.Y.P.E. employment clause 5, it does not seem likely that the courts will extend the shipowners indemnity right in cases where freight pre-paid bills of lading effectively result in the discharge of the lien68.

64 65

[1978] 2 Lloyds Rep 132, at p.137. Beverly Hills National Bank & Trust Co. v. Compania de Navigacion Almirante S.A. Panama (The Searaven), 437 F. 2d 301. See Michael Wilford et al, Time Charters (4th ed., 1996), at p. 496. 66 supra, n.64, at p.149. 67 (1897) 3 Com. Cas. 44.

26

1.3.2.5

Incorporation Of The Lien Clause In The Bills Of Lading

There is a difference of opinion, not only among textwriters, but also among mainly American cases as to whether in order to make the lien effective against third party shippers and consignees, the terms of the charterparty or the specific lien clause must be incorporated by reference into the bills of lading. A positive answer was given in Oceanic Trading Corp. v. The Freights etc. of the Vessel Diana69 where Anderson, D.J., simply invoked the opinions of two leading American textwriters70 without making any attempt to analyze the problem and without citing any judicial authority. A different approach was adopted in the above-mentioned Tarstar Shipping Co. v. Century Shipline Ltd.71, where the Court, on the one hand held that the shipowner could not assert a lien on cargo against the shipper since the bills of lading did not even refer to the head charterparty but on the other hand accepted the shipowners right to assert a lien on subfreights. The latter approach is also favoured by H.C. Allen 72, whose view is cited in a number of cases. The writer bases his opinion on the argument that most of the common employment & agency clauses, like clause 8 of the N.Y.P.E. form, obligate the master to sign bills of lading as presented by the charterer and this obligation scarcely leaves him at liberty to insert an incorporation clause. Furthermore, the writer adds, such an incorporation will be of little value for the shipowner since he will not be entitled to enforce any claim against a third party
68

The shipowners indemnity right, express or, more recently, implied, in respect of additional liability incurred due to the masters signing bills of lading at the charterers request has been limited by the courts mainly in cases where the bills impose more onerous terms on the shipowner or where they fail to incorporate a charterparty exception. For a brief synopsis see John F. Wilson, Carriage of Goods by Sea, (3rd ed., 1998), at p.111. 69 423, F. 2d 1. 70 Gilmore & Black, The Law of Admiralty (2nd ed. 1957), at p.517 n.103; Robinson, Handbook of Admiralty Law in the United States (1939), at pp. 401-404 and 635-636. 71 supra, n.3. 72 supra, n.48, at p.972.

27

shipper or consignee who has paid the sub-freights in good faith to the charterer. In the Cargo of Schooner Paul73, on which Allen bases this last view, the shipowner was not allowed to assert a lien on the shippers cargo since the bills of lading were freight pre-paid ones. A statement by the master in the bills of lading all conditions as per charterparty 74 was held that could not change this. However this last point is not very clear simply because there is a line of authority which, as has already been mentioned infra, suggests that actual notice of the shipowners lien is not always required. Although the modern approach is different, one can not disregard the possibility of a court holding that in cases where the lien on sub-freight clause is effectively incorporated in the bills of lading, a prudent shipper shall examine, before handing over the sub-freights to the charterer, whether the shipowner purports to exercise his lien. However, it must be noted that such an approach involves some elements of impracticality especially in cases where it is difficult for the shipper to ascertain who is the shipowner and whether a default under the head charterparty has occurred. The view that the lien clause does not need to be incorporated in the bill of lading seems more appropriate to the nature of a lien on sub-freights. Although the lack of privity between the shipowner and a bill of lading holder, or even a sub-charterer, raises some questions, most of them are answered by theories like the assignment or the subrogation ones at least in cases where the shipowner actually notifies the third person of his rights. Furthermore the courts seem to accept such a mechanism. In East Asiatic Trading Co. v. Navibec Shipping Ltd .75, a case which involved a head and a sub-charterparty, Gagliardi D.J., referring to a number of American cases, stated that nor have these courts required that the sub-charters recite or acknowledge the existence of the shipowners lien. Although actual or constructive
73 74

1924 A.M.C. 967. Under English law it is questionable whether such a term would satisfy the so-called description requirement for effective incorporation. A shipowner should prefer to insert in the bill of lading a clause with specific reference to the lien clause of the charterparty: see The Merak [1964] 2 Lloyds Rep 527. 75 supra, n.52, at p.1046.

28

knowledge of the lien is required to bind a party, the sub-charters incorporation by reference of the charterpartys lien clause is not a [conditio] sine qua non for its enforcement. The judge added that it was the actual notice of the sub-charterer which rendered him subject to the shipowners lien.

1.4 REGISTRATION, STATUTORY PROBLEMS AND OTHER PRIORITIES ISSUES The need to register a lien on sub-freights, usually pursuant to general statutory requirements, was firstly recognized under English Law and is believed to exist in several other jurisdictions76. That is why a discussion as regards registration is not useless even after 1989 when the English Companies Act removed this registration requirement. Apart from those which are essentially created by the registration need, further statutory provisions and priority problems have been discussed especially in the context of cases where shipowners attempted to enforce the lien against the United States government.

1.4.1

Registration Under English & American Law

In English law the problem did not appear until The Ungland Trailer77 of 1985, a case where a N.Y.P.E. based charterparty of about six months duration was signed. After the end of the first month the charterers executed a debenture in favour of Lloyds Bank which provided that all present or future book debts due or owing to the company and the benefit of all rights relating thereto were charged. In addition, the debenture which stipulated that the charge thereby created should be a fixed first charge, was duly registered pursuant to s.95 of the
76 77

M.T. Wilford, Lien on sub-freights registrable as a charge, [1986] LMCLQ 1, at p.3. supra, n.26.

29

Companies Act 1948. When the charterers defaulted in the payment of hire, the shipowner terminated the charter and gave notice to all shippers, whose cargo was carried under consignment notes, to pay all outstanding freights to him. On the basis of the rights conferred by the debenture, the bank appointed receivers who collected the sub-freights and applied for directions to the Court, pursuant to s.369 (1) of the Companies Act 1948, whether to pay the collected sums to the owner or to the bank. While the Court favoured the equitable charge theory, it was obvious that the question of priority between the claims of the shipowner and the bank depended on whether the lien should be registered under s.95 (1) of the 1948 Act. Nourse, J. did not reject the shipowners argument that the need for registration would be extremely inconvenient since the normal 21-day period of s.95 (1) or even the extended period of s.95 (3) in which the particulars of the charge and the instrument should be registered, would in almost all cases expire before the end of the charterparty, thus rendering registration essential in all cases. He also accepted that s.93 of the Companies Act 1908, the original predecessor of s.95 of the 1948 Act, could not have intended that the general reference to a charge on book debts of a company should be applicable in respect of a lien on sub-freight. However he admitted that to accede to those arguments would be an excess of the Courts judicial function since the words of the Act were precise and held that lien indeed fell within the scope of s.95. It is noteworthy that when the shipowner is in contractual relationship with the bill of lading holder then no registration requirement could exist even in jurisdictions where the lien is registrable as a charge because in those cases the shipowners right to intercept the sub-freight is not based on the lien clause. In the above-mentioned Ungland Trader the cargo was carried under consignment notes. The Courts decision would be clearly different if shipowners bills of lading had been issued instead of them.

30

Those views were further elaborated in The Annangel Glory78 which involved a N.Y.P.E. based charterparty. Saville, J., provided a detailed analysis on the basis that the right to payment of sub-freights was vested to the shipowner by way of assignment and that the effect of the lien clause was to create a charge over the debts due. Invoking the authority of Independent Automatic Sales Ltd. v. Knowles & Foster 79, he argued that this charge was a floating one within the meaning of s.396 (1)(f) of the Companies Act 1985, void as against the liquidator and any creditor if not registered. Moreover he defined that the 21-day registration period commences from the date of the charterparty and not from the date when the debt comes into existence. It has been argued that by promoting the latter interpretation many of the commercial objections created by the registration requirement would be met80. The consternation created by the intrusion of the concept of the equitable charge into what had been regarded previously as purely commercial transactions and the consequent registration requirement appeared to be even more problematic in view of the fact that s.395 applied not only to companies incorporated in England and Wales but also to overseas companies which had a place of business there pursuant to s.409. Furthermore in N.V Slavenburgs Bank v. Intercontinental Natural Resources Ltd. 81 it was held that a charge was void even though the foreign company, which created it, was not registered as an overseas one. It was also held that registration would be equally required in cases of property not in England at the time the charge was created but which subsequently came to England and in

78 79

supra, n.10. [1962] 1 W.L.R. 974, at p.985. 80 Wilford, op.cit., supra, n.65, at p.486. This view was expressed by the shipowner in The Annangel Glory who invoked the authority of Tailby v. The Official Receiver, (1888) 13 A.C. 523, where it was held that nothing attaches or can attach to the book debts unless and until they come into existence. This argument was rejected. See also D.G. Powles, Liens on subfreights (sea), [1988] J. Bus. L., 503, at p.507, where the author seems to suggest that a solution to the problem of registration could be alternatively provided by an appropriate wording of the lien clause. 81 [1980] 1 W.L.R. 1076. See Wilford, supra, n.76, at p.2.

31

cases where a company ceased to have a place of business in England after creation of the charge82. The words of Nourse J. in The Ungland Trailer that the remedy, if there is to be one, must be sought elsewhere proved prophetic and the new Companies Act 1989 added a new s.396(2)(g) which stipulates that a shipowners lien on sub-freights shall not be treated as a charge on book debts or as a floating charge for the purposes of s.396(1). Under American maritime law, a lien on sub-freight does not have to be perfected as other security interests, in order to gain priority against other claims. In Re Pacific Carribean Shipping (U.S.A.) Inc.83 it has been held that although sub-freights are included within the literal terms of the Uniform Commercial Code (U.C.C.) since they constitute a right to payment for services rendered and a right incident to a vessel charter, however the lien on sub-freights being a maritime one, falls outside the filing requirements of the U.C.C. The Court thus held that the shipowners lien prevailed over the claim of the bankruptcy trustee even though the former had not been filed. This view was further analyzed in Re Topgallant Lines Inc. v. First American Bulk Carrier Corporation et al84 where it was explained that it seems at first view that there is a conflict between the Federal Maritime Lien Act and the U.C.C. The reason why the first one should prevail, thus discharging any filing requirements, lies in the interpretation given to the later. According to L.W.Davis Jr. Ch.J., the official text of the pre-1972 U.C.C. included the words such as the Ship Mortgage Act 1920 as an example of United States statutes that were not affected by the passage of the U.C.C. That phrase was stricken in the new U.C.C. 1972 and that lead to the conclusion that the drafters of the Georgia version of the U.C.C., which was in question in this case, considered as not affected not only the Ship Mortgage Act but also the
82 83

ibid. 789 F. 2d 1406, at p.1407. 84 1992 A.M.C. 2511.

32

Maritime Lien Statute as well as other federal statutes which govern rights of parties in particular types of property transactions85. The Judge cited also the authority of re Sterling Navigation Co. Ltd.86 where it was held that a shipowners lien on sub-freight was not subject to art. 9 of the New York Commercial Code and its filing requirements and thus had priority over a bankruptcy trustee.

1.4.2

Lien On Sub-Freight Against The United States Government And The Problems Posed By The Assignment Of Claims Act, The Suits In Admiralty Act And The Federal Tort Claims Act.

The American Assignment of Claims Act, also known as the Anti-Assignment Act stipulates that voluntary assignments of claims against the government of the United States are void87. It was thus in doubt whether the Courts would allow a shipowner to exercise a lien on sub-freight, which effectively involves an assignment from the charterer to the shipowner, against the Government where the latter was a sub-charterer or a shipper under charterers bills of lading. The problem seems even bigger due to the broad literal scope of the Act which embraces alike legal and equitable assignments and strikes at every derivative interestIt is not necessary that the interest transferred be absolute or vested in order to come within the statute. While Tetley88, without citing any authority, suggests that the Act is not applicable on the basis that the assignment which takes place in the case of a lien on sub-freight is an involuntary one by operation of the maritime law, the problem was judicially discussed in 1994, in Hornbeck Offshore Operators v. Ocean Line89. In that case the shipowner time85 86

ibid., at p.2516. 1983 A.M.C. 2240. 87 31 U.S.C. sect. 3727. The Act permits only those assignments which are made only after a claim is allowed and its amount is decided. 88 supra, n.24, at p.791. 89 supra, n.24.

33

chartered his vessel to Ocean Line of Vermuda (OLB) which signed a two-year contract on liner terms with the Department of the Navy Military Sealift Command (MSC). When OLB defaulted in payment under the head charterparty, the shipowner notified MSC of his claim pursuant to a typical lien on sub-freight clause of the head charterparty. MSC contended that the shipowners rights were subject to set off by all claims of the Government against OLB for unpaid dockage, wharfage and stevedoring services pursuant to the contract between OLB and MSC and that the shipowners claim was barred by the Anti-Assignment Act. The Court found that the Government should prevail in this action by virtue of its right to set off but, nevertheless went on to examine whether the Act could otherwise be applicable. While R.G. Doumar, J., distinguished a lien on sub-freight from land liens, he finally came to the conclusion that the former is a derivative assigned right probably within the meaning of the Act. However he examined the shipowners argument that the U.S. Supreme Court has carved out exceptions to the Act where the assignment at issue poses no danger of undue prejudice to the Government and concluded that if the transfer of OLBs rights to the Government eliminated the latters right to set off, then the Government would indeed be prejudiced and the Act would be applicable. It thus seems that from a theoretical point of view the problem remains open even though it seems very improbable that the Courts will adopt an interpretation which will effectively lead to the annulment of a very common clause with a life of more than one century. Some less significant theoretical problems in respect of the exercise of the lien against the United States Government are posed by specific provisions of the Suits in Admiralty Act90 and by the Federal Tort Claims Act91. Most of those problems were discussed and answered in St. John Marine v. U.S.92 when the shipowner of the M/V St. John sued AID, an agency of the
90 91

46 U.S.C. 741 et seq. 28 U.S.C 1346(b), 2671. 92 supra, n.24.

34

U.S., who had sub-chartered the vessel from Afram, the head charterer under a timecharterparty, which contained a typical lien on sub-freights clause. The basis of the suit was that even though the shipowner notified AID of their claim on December 19, 1990 when Afram failed to pay a hire instalment, AID nevertheless paid the sub-freights to Afram on December 31. The Government firstly contended that it cannot be sued due to section 741 of the Suits in Admiralty Act which stipulates that no vessel owned by the U.S. and no cargo owned or possessed by the U.S. shall be subject to arrest or seizure by judicial process in the U.S. or its possessions. The Court held inter alia that since a lien on sub-freight is not possessory, no arrest or seizure can take place when a notice of the lien is given from a shipowner to a U.S. agency as was AID93. The Governments argument that the notice of the lien was nevertheless in effect a garnishment, prohibited pursuant to well established authority, was also rejected on the grounds that a lien on sub-freight is more closely aligned to an assignment than to a garnishment94. Finally the Government supported that the shipowners claim was barred by the Federal Tort Claims Act which prohibits claims based upon acts or omissions of Governmental employees for the exercise or failure to exercise a discretionary function on the part of a federal agency etc. This argument was easily rejected on the grounds that the discretionary exception stipulated by the Act applies only to tort claims against the U.S. and not to contractual ones, as is clearly a claim based on an agreed lien on sub-freights95.

1.5 EXTENT OF A LIEN ON SUB-FREIGHT

93

The Court also referred to 742 of the Act which allows nonjury proceedings in personam against the U.S. in cases where proceedings could be maintained if the vessel or the cargo were owned or operated by a private person. 94 supra, n.24, at p.2531. 95 This interpretation of the Act, which literally encompasses any claim, is based on the authority provided by a number of cases cited at p.2532 of the case review.

35

The majority of the common charterparty forms confer a lien on all sub-freights without providing any further definition. It was not therefore surprising that a number of disputes arose in respect of whether a shipowner would be entitled to a lien on sub-hire or sub-sub freight/hire as well as in respect of several other issues such as the extent of a sub-charterers obligation to pay the shipowner or whether the lien may be exercised if the amount due under the sub-charter is unliquidated or in dispute.

1.5.1

Lien On Sub-Hire

The problem was firstly discussed in The Cebu96, which involved a chain of one head and two time sub-charterparties, all in the N.Y.P.E. 46 form. When the shipowner purported to exercise his lien on sub-sub hire the sub-sub charterer contended inter alia that clause 18 of the N.Y.P.E. did not confer a lien on sub-hire but only on sub-freight. Lloyd, J., rejected this view and favoured a wider interpretation of the lien clause, which he based on a number of arguments. He firstly invoked the authority of Inman Steamship Co. v. Bischoff 97 where it had been held that a policy on freight covered also loss of hire under a time charter. Secondly he referred to the 20th century tendency of the shipping community to assimilate the rules relating to voyage and time charters which was explained, in his opinion, by the rapid growth and the practical value of the time charter trip. However the Judges main concern was to distinguish the case before him from The Nanfri where the main question was whether the well established rule that no deductions are permitted in the case of voyage charter should be equally applicable in respect of time charter hire. The majority of the Court of Appeal was negative and Lord Denning proceeded to an analysis of the fundamental differences between the terms freight and hire. Lloyd, J., felt that The Nanfri did not compel him to reach a
96 97

supra, n.18. (1882) 7 App. Cas. 670.

36

similar result and attributed the ruling to the Courts of Appeal wish on the one hand not to completely overthrow the old no deductions rule but on the other hand not to extend it to time charters. While American Courts do not seem to have examined the problem at least in the context of the lien clauses interpretation, it was in 1990 when the issue was discussed before the same Court but a different judge in The Cebu 298. In that case, which involved the same series of charterparties for the same vessel, Mr. Justice Steyn enumerated the conclusions reached in The Cebu 1 and provided counter-arguments. Firstly, he argued that the fact that time charter trips could be assimilated to some extent with voyage charters does not entitle one to bring all species of time charters within the term all sub-freights of the lien clause. It is however questionable whether Lloyd, J., supported that only time charter trips have the characteristics to be covered by the lien clause or referred to them as the best example or even the reason of the new 20th century tendency to bridge the gap between voyage and time charters. Secondly Steyn, J., added that modern shipping dictionaries of the late 20 th century clearly distinguish between the two terms thus indicating the change which has taken place from the time when the term freight was used in a wider sense. Furthermore he invoked the terminology of both the N.Y.P.E. and the Baltime forms which even from their mid-20 th century revisions had used the term hire and added that although one could argue that the term sub-freight might receive a different color from the context of the whole charter form, such an argument could not be accepted in respect of the N.Y.P.E. one. The plural sub-freights, the use of the word all before it, as well as the N.Y.P.E. clause which confers to the charterer a liberty to sublet could provide no indication as to the scope of the term sub-freight according to the Judges view. Finally Steyn J., rejecting an authentic interpretation of the contracting parties intention, examined the problem from a commercial point of view and reached the conclusion
98

supra, n.27.

37

that a number of difficulties like the identification of the shipowner, the possible withdrawal of the vessel by the disponent owner and the more complicated exercise of a lien on sub-hire from an accounting point of view suggest that the drafters of the N.Y.P.E. form intentionally preferred the term sub-freights. The Cebu 1 approach was favoured in The Lakatoi Express99 a decision of the Supreme Court of New South Wales, though some months before The Cebu 2. Carruthers J. stated that the N.Y.P.E. term sub-freights is in principle at least capable to embrace sub-hire too. As Davies & Dickey100 however, suggest the case should be reconsidered in the light of The Cebu 2 because Carruthers J., did not seem to have examined the details and counter-arguments raised in the latter case. The new 1993 edition of the N.Y.P.E. form which includes both the term sub-freights and sub-hires has put the issue beyond doubt and probably suggests that Steyn J., was not successful in his attempt to guess the 1946 drafters intention given that the circumstances have not changed significantly since then. It is submitted that the ambiguity caused by the use of the term sub-freight must be attributed on the one hand to the tendency of the shipping world and therefore of the forms drafters, not to proceed to changes to common and sufficiently construed by the courts clauses and rules, and on the other hand to the fact that the issue was firstly examined in the 80s.

1.5.2

Lien On Sub-Sub Freight

The question whether a typical lien clause, such as that contained in the N.Y.P.E. form, could operate in a lien on sub-sub freight, or even further in cases where more than two subcharterparties are involved, was again discussed in The Cebu. As one would expect, the answer to some extent depends on the accepted theory as to the legal nature of the lien. As has
99 100

supra, n.32. supra, n.28, at p.401.

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already been stated supra, Lloyd J., favoured the equitable assignment theory and therefore acknowledged the shipowners right as against the sub-sub charterer. He added however, that the authority of the American Jebsen v. A Cargo of Hemp101was not suitable because in that case which involved one sub-charterparty and a set of bills of lading issued by the subcharterer to a shipper, the Court accepted the shipowners right against the shipper even though the former had paid the charterer and no notification had taken place by the shipowner. In that point Lloyd J., stated that English Courts are loath to apply neither the constructive notice doctrine nor the subrogation theory which firstly appeared in the leading American Steel Barge Co. v. Chesapeake & O. Coal Agency Co., discussed supra. Starting from that last point which was made by Lloyd J., a comparison between the consequences of the equitable assignment and the subrogation theory in respect of a lien on sub-sub freight seems interesting102. The main difference may be summarized in that under the subrogation theory a lien on sub-freight does not necessarily include a lien on sub-sub freight. The basis of the theory is that when the head charterer defaults in payment the shipowner steps into his place with respect to the rights that the charterer has against the sub-charterer. Furthermore as long as each charterer in a chain of multiple sub-charterparties owes freight to the party who chartered the vessel to him, the shipowner can proceed further in the chain. If however a charterer fulfills his sub-freight obligations before a shipowners notice, the chain will be broken since the party to whose rights the shipowner would be subrogated would have no remedy against him. On the contrary it has been argued that the equitable assignment theory avoids this anomaly and ensures that the shipowner will be able to exercise his lien even if the sub-charterer has paid the sub-freights to the charterer 103. It is however
101 102

supra, n.57. Mr. Justice Lloyd, at p.309, seemed to suggest that it might be difficult for a shipowner to assert a lien on sub-sub freight if the equitable charge theory was favoured. 103 Kenneth R. ORourke, Shipowners Lien on Sub-sub freight in England & The U.S.: N.Y.P.E. Clause 18, Loy. L.A.. Intl & Comp. L.J., 73, at p.89.

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questionable whether this view is in conformity with the generally applicable rule that once the sub-freight is paid without notice of the shipowners rights the lien is lost. The problem was not addressed by Steyn J. in The Cebu 2, since he had already rejected the existence of a lien on sub-hire. It has been stated that from this fact one can not assume that he would disagree with Lloyds J. view and that the two cases may be reconciled by saying that the N.Y.P.E. lien clause extends to sub-sub freight under a voyage charterparty but not to sub-sub hire in a time charterparty 104. It is also notable that the Baltime form confers a lien upon sub-freight belonging to the time charterers thus excluding a lien on sub-sub freight. Apart from the various formulations and judicial approaches, there is a significant number of arguments which suggest that a lien on sub-freight should extend to sub-sub freights too. From the shipowners point of view it is clear that this would constitute an additional protection especially against unscrupulous charterers who could otherwise set up a fictional sub-charterparty, before sub-sub chartering the vessel, in order to avoid the possibility of the sub-freight being intercepted by the shipowner, thus rendering the lien effectively inapplicable105. One could argue that the liens extension so as to include sub-sub freights essentially prejudices the sub-charterer. However even in that case the latter could protect himself by inserting a freight pre-paid clause in the sub-sub charterparty or bill of lading 106. Finally from the sub-sub charterers point of view it is clear that it will make no difference to him whether he pays the sub-charterer or the shipowner given that in the last case he will not be required to pay more than the amount agreed in the sub-sub charterparty or the subcharterers bills of lading. In cases of dispute he will be perfectly protected if he chooses to interplead.

104 105

Davies & Dickey, supra, n.28, at p.401. ORourke, supra, n.103, at p.90. 106 ibid.

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1.5.3

Measure Of Shipowners Recovery

A well established interpretation rule in respect of the lien clause is that the lien on subfreights can only be exercised by the shipowner in respect of hire which has already become due at the time the sub-freights are paid to the agents. In the above-mentioned analysis of Wehner v. Dene107, it has already been stated that the shipowner was not entitled to deduct from the sub-freights amounts that became due one week after he exercised the lien. Although in that case the bills of lading were shipowners ones and the shipowners right was based on the contractual relationship between them and the shipper, the Court in effect proceeded to a nevertheless valid interpretation of the lien clause. The same approach was followed some years later in the similar Samuel & Co. v. West Hartlepool Steam Navigation Co. 108, where Walton J., held that a lien on sub-freight could be exercised in respect of advance hire which had accrued due at the time the bills of lading freight was paid but not for hire that had accrued after that point. This view has been also confirmed more recently in The Lakatoi Express109, a case which involved a sub-charterparty and where the lien was indeed based on the lien clause of the head charterparty. Another limitation to the shipowners rights is that the sub-charterer or the shipper may not be obliged to pay more than what is due under the sub-charterparty or the bills of lading. That is a basic principle of the lien concept which was declared even from the 18 th centurys badly reported Paul v. Birch110 and which has been further analyzed in the context of the lien on sub-freights per se in a number of American cases like the leading American Steel Barge Co. v. Chesapeake & O. Coal Agency Co.111, where Putnam J., invoked the authority of various old British cases and a number of leading textwriters112.
107 108

supra, n.5. (1906) 11 Com. Cas. 155; (1907) 12 Com. Cas. 203. 109 supra, n.32. 110 26 E.R. 771, at pp. 771-772. See Tetley, op.cit., supra, n.24, at p.789. 111 supra, n.14. 112 ibid., at p.672. See also Finora Co. Inc. v. Amitie Shipping Ltd., supra, n.53.

41

Apart from sub-freights or bill of lading freights it has been argued that the lien clause may also be extended to demurrage payable to the head charterer but only in cases where that is clearly stipulated in the head charterparty. It is notable that in Oceanic Trading Corp. v. The Freights etc. of the Vessel Diana113 which involved a charterparty that indeed contained a lien on demurrage, it was held that this clause should be incorporated in the charterers bills of lading. Although this case is probably the only authority in respect of the liens extension on demurrage the incorporation requirement, as has already been said, is still in dispute and it does not seem that the Courts statement pertained specifically to demurrage but reflected a general view in respect of the whole lien clause. A lien on sub-freights extension to demurrage is stipulated in the recent 1984 Shelltime 4 , clause 26.

1.5.4

For Any Amounts Due Under This Charter

The exact scope of the term for any amounts due and precisely the question as to which other sums apart from the charter hire could be claimed on the basis of the lien clause has been judicially discussed even from the late 19 th century under both English and American Law. It is however noted that hire is the item of paramount concern to the shipowner who will seldom exercise his lien only in respect of other sums due and, as Allen 114 states, normally, sums other that hire will be claimed through the exercise of the lien only incidentally to the main hire claim. It has been held that disbursements made by the shipowner, which pursuant to the head charterparty fall within the responsibility of the charterers, are indeed amounts due under this charter. Such disbursements will usually be paid in cases where in the course of the charter the head charterer becomes insolvent. That was the case in Samuel & Co. v. West Hartlepool

113 114

supra, n.69, at p.5. supra, n.48, at p.971.

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Steam Navigation Co.115, where charterers bills of lading had been issued to a third party. When the charterer became insolvent the shipowner exercised his lien and collected the bill of lading freight. One of the main issues was whether he was entitled to keep sums in respect of fuel costs and several other disbursements which were made by him before the bill of lading was paid. The Court held that since those expenses were the responsibility of the charterer, the lien clause indeed covered them. Similar issues had also been discussed in more detail some years earlier in the American The Freights of The Kate116. The charterer became insolvent in the course of the charter and the Court had to determine whether several shipowners claims could fall within the scope of the lien clause. It was held that the clause covered advances and supplies for coal , port charges, extra meals at the place the vessel had to put in for supplies, expenses of replacing a bulkhead etc. Furthermore it was held that the lien clause covered sums paid to cargo owners in respect of cargo damage or short delivery. General Average contributions may also be covered by the lien on sub-freight clause. Although there seems to be no judicial authority on this issue, both the 1946 and the 1993 revisions of the N.Y.P.E. form provide so117. While in most of the cases one can easily ascertain the extent of the shipowners lien by checking which of the disbursements made by him fall within the responsibility of the charterer pursuant to the terms of the time charterparty, some difficulties have arisen in cases where the vessel is withdrawn. Due to the fact that in the majority of the cases a default in payment will not only allow the shipowner to exercise his lien but will also entitle him to withdraw the vessel, several cases have come before the courts, the main question being

115 116

supra, n.108. 63 F. 707, at pp.722-724. 117 Clauses 18 and 23 respectively.

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whether the lien on collected sub-freights covers expenses incurred by the shipowner after the vessels withdrawal. In the above-mentioned The Freights of The Kate the shipowner argued that his lien should extend to cover his damages due to a possible non-employment or less profitable employment of his vessel during the residue of the charter period. The Court held that such an approach would fall outside the literal scope of the lien clause since a claim to mere damages accruing after termination by the shipowner is not a claim for an amount due under this charter. Furthermore in The Lakatoi Express the head charterer defaulted in payment and on 22 December the shipowner accepted the repudiation and withdrew the vessel. However he allowed the sub-charterer to use her until 23 January 1989 and the Court held that for this period the shipowner was entitled to a reasonable remuneration for the use of the vessel. It was however added that those quantum meruit sums were clearly outside of the scope of the lien clause since they were not amounts due under [the head] charter. A final point in respect of the liens extent pertains to whether it can be enforced in cases where the amount due under the sub-charterparty is unliquidated, uncertain and in dispute. This issue has been discussed in U.S. v Freights of the Mount Shasta118 where the subcharterer denied the jurisdiction of the Court, alleged that he ignored the existence of a head charterparty and set up counterclaims which were more than sufficient to exhaust the subfreight claim. The U.S. Supreme Court reversed the decision of the District Court and held that a Court may not be deprived of jurisdiction merely by an argument denying that subfreights are due since the issue of jurisdiction is determined by the theoretical allegations of the libelant. This approach is based on the view that a sub-freights debt may be treated as a res as easily as a ship. Mr. Justice McReynolds dissented on the basis that such a disputed claim could not be arrested or taken into custody119.
118 119

supra, n.3. ibid., at p.945.

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PART II : CHARTERERS LIEN ON THE VESSEL

Apart from granting a shipowners lien on cargo and sub-freight most of the modern lien clauses provide for a charterers lien on the vessel in respect of various amounts like monies paid in advance and not earned or overpaid hire. Furthermore a similar lien is recognized under the American general maritime law for any breach of the charterparty by the shipowner irrespective of the terms of the contract 120. This basic distinction is the reason why English textwriters focus mainly on the nature of the lien created by the lien clause while in America the basic problems pertain to the extent of the lien and to the exact time the lien is created. It thus seems more appropriate to examine the problems under each jurisdiction in two separate parts even though some aspects are comparable and share common characteristics in both of them.

2.1 ENGLISH LAW

The major part of the existing authority in respect of the lien on the vessel is basically focused on its essentially non-possessory nature as well in its incapability to create an equitable charge on insurance proceeds from the loss of the ship.

2.1.1
120

Nature Of The Lien

This paper concerns only the reciprocal liens on the sub-freights and the vessel in the context of time charterparties. A maritime lien on the vessel may however be recognized under voyage charters in respect of several shipowners breaches like non-payment of dispatch money etc. See for example The Corvus, 282 F. 939.

45

A lien on the vessel was firstly judicially discussed in a case of the late 19 th century, Tonnelier and Bolckow, Vaughan v. Smith121. In that case the time-charterer argued that he was not bound to pay a full months hire since it was obvious that the vessel would be redelivered before the end of this month, given that it had already reached the port of redelivery and discharge was likely to occupy less than 30 days. The Court rejected this view and Rigby L.J., based his decision on the existence of the lien clause which inter alia conferred a lien on the ship for all amounts paid in advance and not earned. In his words, the last provision [of the lien clause] that the charterer was to have a lien on the ship for all moneys paid in advance and not earned, makes it plain, if it were otherwise doubtful, that the payments in advance were to be provisional only and not final, and would entitle the charterer to postpone delivery of the ship until the unearned payments were repaid a right which would effectually secure prompt repayment of those amounts (emphasis added)122. Lord Rigbys statements were discussed some years later in the context of French Marine v. Compagnie Napolitaine123, a case where the vessel was requisitioned only six days after the time charterer had paid in advance a hire instalment of one month, the main question being whether the balance of hire not earned was recoverable under common law or the terms of the charterparty. While Viscount Finlay and Lord Wrenbury seemed to agree with Lord Rigbys view as to the way the lien operates, Lord Sumner quoted the above-mentioned passage of his speech and said that there is a major difficulty in reading the lien clause as meaning that the charterer can refuse redelivery of the vessel and yet not be under a continuing liability for further hire. He added that the charterer in the strict sense had no lien on the ship irrespective of the term used in the lien clause124.
121 122

(1897) 2 Com. Cas. 258; (1897) 8 Asp. M.L.C. 327. ibid., at p.330. 123 [1921] 2 A.C. 494. 124 The non-possessory nature of the lien has already been stated in the context of The Lancaster, supra, at 1.2.1.

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However in the more recent authority, The Lancaster125, Mr. Justice Robert Goff, as he then was, favoured and confirmed Lord Rigbys approach. The case concerned a N.Y.P.E. based time charterparty which provided for payment of hire monthly in advance and of course a typical lien clause. The shipowner mortgaged the vessel and assigned all insurances and the benefits thereof relating to the ship as security for loans received by two banks. When the vessel after a collision became a constructive total loss the proceeds of the assigned insurance policies were collected by brokers who began paying the money to the bank which was chronologically the first mortgagee. However the charterer obtained a Mareva injunction restraining this distribution and on the basis of the lien clause argued that his lien had priority over the two banks claims since the charterparty was entered into before any of the mortgages. This argument was rejected and Goff J., stated that he disagreed with Lord Sumners difficulty to reconcile the charterers ability to refuse redelivery while not being obliged to pay hire. He described the liens operation in those words: the time charterer redelivers the ship subject to his lien, which means that he can restrain the shipowner (presumably by injunction) from resuming his control over the use of the ship so long as the lien is being lawfully exercised126. It is however, notable that, as Wilford observes 127, Goff J., parted from the words used by Rigby J., in that he did not use the phrase to postpone [re-] delivery probably in order to meet the inconsistency pointed by Lord Sumner.

2.1.2

Lien On The Vessel And Insurance Proceeds

The question whether a lien on the vessel entitles the charterer to insurance indemnification in respect of loss or damage to the ship was firstly raised but not finally

125 126

supra, n.2. ibid., at p.502. It was also defined that in cases of demise charters the charterer retains actual possession of the ship, the lien thus operating as a possessory security. 127 M.T. Wilford, op. cit., supra, n.65, at p.487.

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decided in The Panglobal Friendship128 of 1978. In that case the time-charterparty provided for a lien on the vessel not only for not earned advance hire but also for the value of the fuel in bankers and for all claims for damages arising from any breach by the shipowners 129. When the vessel sank in February 1975, the charterers claimed the insurance proceeds in respect of various claims for money lost due to speed deficiency etc. However in 1974, two years after the charterparty was signed, the shipowner had assigned the policies to a bank by way of security for a loan. A majority of the Court of Appeal permitted the charterer to intervene on an action by the creditor bank and Lord Denning M.R., stated that the lien clause conferred something in the nature of an equitable charge to the time charterers in respect of the damages which they claim. Otherwise it is very difficult to see what meaning the clause has at all130 and added that although the lien does not literally cover insurance moneys it could nevertheless be argued that those moneys take the place of the vessel. Roskill L.J., in dissent, argued that an approach in favour of the charterer would be against the well established method in the shipping industry where ship building is financed by banks whose security is partly constituted by assignments of insurance policies. In his view the banks priority should not be attacked. The issue was finally decided in The Lancaster, analyzed supra, where Goff J. took the view that even if one accepts that the lien clause creates a form of equitable lien on the ship, there is authority which suggests that the proceeds of insurance upon a chattel can not represent the chattel131. Furthermore he added that even if that last point is not correct, an assignment to a bank, being a legal one, ranks before any equitable interest, such as the lien, if
128 129

[1978] 1 Lloyds Rep 368. This constitutes probably the more extensive lien clause a charterer can achieve. The N.Y.P.E. 46 and 93 revisions confer a lien on the vessel for monies paid in advance and not earned and for overpaid hire, Shelltime 4 for monies paid in advance and not earned and for all claims for damages arising from breach of the charterparty and the Baltime only for monies paid in advance and not earned. 130 supra, n.126, at p.371. 131 supra, n.2, at p.502.

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the equitable charge approach is accepted. Even an assignment to a second bank, such as that which took place in the case before him and which could not be a legal one, would gain priority against the lien if the peril insured against occurred after the assignment to the bank. It is thus evident that in the Judges view the lien comes into existence not when the charter is entered into but only when money becomes actually due to the charterers132. Lord Roskills and Goffs J., approach seems more consistent with the nature of the lien and at least rational since it does not seem likely that even the drafters of the lien clause would imagine it taking priority over traditional security methods. It is however notable that a lien on the vessel will indeed cover insurance proceeds if and when an equitable assignment theory is favoured instead of the equitable charge one133.

2.2 AMERICAN LAW

Under American Law a charterers lien on the vessel is created by the general maritime law and confers an action in rem against the vessel for a broad scope of breaches of the charterparty by the shipowner. Several issues like the application of the executory contract doctrine, the breaches covered, or the effect of an anti-lien clause in the charterparty have been judicially discussed even from the early 20th century.

2.2.1

Nature & Extent Of The Lien The Effect Of An Anti-Lien Clause

132 133

ibid., at p.503. See ORourke, supra, n.103, at p.88, n.114.

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The leading case is The Oceano134 of 1906, where the Court held that the charterer could proceed in rem against the vessel on the basis that the shipowners refusal to deduct from charter hire some advances made by the charterer to the master for the vessels disbursements amounted to a breach of the charterparty. In his words, as soon as the performance of a charterparty is commenced, a lien exists on the vessel and a suit in rem may be maintained for any liability of the master or owner arising therefrom135. Although under American Law the lien does not need to be expressly conferred by the contract, it nevertheless has the law priority of a contract lien as opposed to a tort one simply because it exists in respect of breach of contract. This characteristic is crucial in cases where the charterers lien coexists with other tort liens or preferred mortgages as happened in Kopac International v The Bold Venture136 where the charterer of a fishing vessel filed various claims such as for overpayment of hire induced by the shipowner or involuntary removal of one of his representatives from the vessel. The Court certified that those claims are covered by the lien clause but sound in contract and are subordinate to earlier recorded ship mortgages and other preferred liens such as for crew wages etc137. One major question is what will be the exact extent of the lien in cases where the charterparty contains a clause conferring a lien in respect of specific incidents. In Schilling v. A/S D/S Dannebrog138 the charterparty contained the typical N.Y.P.E. lien clause and the question was whether the charterer was entitled to a lien for remaining fuel on redelivery, a claim which, strictly speaking, does not fall in the literal scope of the N.Y.P.E. lien clause.
134

148 F. 131. See also The Schooner Freeman v. Buckingham, of 1856, 59 U.S. 182, at p.190, where it was obiter said that charterparties must in the invariable regular course of business, be made, for the performance of which the law confers a lien on the vessel. 135 ibid., at p.133. 136 1987 A.M.C. 182. 137 Those priority rules are now codified at 46 U.S.C. 31301(5),(6) and 31321-31330. See Wilford, op.cit., supra, n.65, at p.499. 138 supra, n.1. Apart from the cases analyzed supra, the lien has also been recognized for not earned freight and for non indemnification of cargo claims against the charterer when the vessel was withdrawn. For a brief summary see Tetley, supra, n.24, at p.727.

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The Court of Appeal, reversing the decision of the District Court, held that such an absence of an explicit charter provision in respect of a lien on the fuel sums is not important. A clause in the charterparty which is intended to prevent liens arising in favour of third parties does not affect the charterers lien on the vessel139. This view is consistent with the modern lien clauses which include both provisions in the same sentence. However an anti-lien clause in the head charterparty may preclude a sub-charterer from exercising a lien on the vessel for breach by the disponent owner pursuant to a lien clause of the sub-charter. In MMI International v. Skyros140, the sub-charterer was precluded from invoking the lien clause of the sub-charterparty on the grounds that by the exercise of reasonable diligence he could have been aware of the fact that the vessel was under a head charter which contained an anti-lien clause141.

2.2.2

Attachment Of The Lien & The Executory Contract Doctrine

The executory contract doctrine, pursuant to which no lien arises in either direction for breach of a contract in executory status, was firstly introduced by the U.S. Supreme Court for application in respect to charterers claims against the vessel for breach of non-demise contracts. In the words of Curtis J., in The Schooner Freeman, the law creates no lien on a vessel as a security for the performance of a contract to transport cargo, until a lawful contract of affreightment is made, and a cargo shipped under it 142. The doctrine has been further elaborated and modified since then and in cases such as the leading The Oceano, analyzed supra, which were specifically concerned with a time charterers lien on the vessel, it has been confirmed that the charter contract ceases to be executory and the lien attaches upon

139 140

Medina v. Marvirazon, 533 F. Supp. 1279. 1991 A.M.C. 1264. 141 See Wilford, op.cit., supra, n.65, at p.504. 142 supra, n.134, at p.188.

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delivery of the vessel to the charterer. Thus, in Rainbow Line v. M/V Tequila143 it was held that the charterers lien outranked a preferred mortgage which was recorded some fifteen months after the delivery of the vessel and R. Anderson J., underscored his disagreement with prior cases which favoured the view that the lien attaches upon the loading of cargo. Some seven years later, in Redwood Empire v. Marine Ways144 it was affirmed that the lien may be inchoate until a shipowners breach occurs, but exists as from the delivery of the vessel. The difference with English Law as expressed in The Lancaster is obvious145. The view that a lien on the vessel attaches upon her delivery seems to suit better in cases of time-charterparties and is consistent with the modern judicial approach in the U.S. even though there are some doubts whether this view will survive in cases of time-charter trips which share some characteristics of a contract of affreightment stricto sensu as described in the old Schooner Freeman and a passage of the leading Gilmore & Black 146 whose view has been cited in almost all cases which state that the lien attaches upon loading of cargo. While it has been suggested that the problem is one of interpretation of the terms contract of affreightment and delivery of the vessel147, it has also been argued that in the not too distant future the executory contract doctrine will be completely removed, a view which seems at least rational in the case of a lien on the vessel which is a non-possessory form of security148.

143 144

1973 A.M.C. 1431. 530 F. Supp. 75. 145 See supra 2.1.2. 146 supra, n.57. 147 ORourke, supra, n.103, at p.989. 148 N.Healy & D.Sharpe, Cases and Materials on Admiralty, (1974), at p.157.
148

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