Nordisk Skibsrederforening

Recovery of unpaid sums under a time charter

Owners’ lien on sub-freights and intercepting freight under a bill of lading – an update

Under a time charterparty, owners may obtain a valuable benefit through a lien clause which allows owners a lien on sub-freights for sums which have fallen due but remain unpaid by the time charterer.

In light of the Court of Appeal judgment in Dry Bulk Handy Holding Inc and Anr v Fayette International Holdings Ltd and Anr (The “Bulk Chile”) [2013] EWCA Civ 184, it may be time to review again both the meaning and effect of a clause giving a lien on sub-freights and owners’ rights in respect of freight under a bill of lading issued by owners as carrier.

1. Introduction
A lien on sub-freights in order to recover unpaid amounts due from the charterer is a right commonly allowed to an owner under a time charter. The 1946 NYPE form includes the following provision as standard at clause 18:

[T]he Owners shall have a lien upon all cargoes, and all sub-freights for any amounts due under this Charter …

The first part of this provision deals with lien over cargo but we will not examine here the nature of that lien or the practicalities surrounding its exercise. That is a separate and distinct right from the right of lien over sub-freights and for the purposes of this article we will be looking only at the rights afforded to an owner under the latter part of the clause.

2.  The nature of a lien on sub-freights
The right of lien over sub-freights afforded in the NYPE clause is a contractual lien granted by the charterer to the owner. Where there are outstanding sums due from the charterer to the owner, the charterer has agreed that the owner shall have the right to intercept a payment from a third party (i.e., sub-charterer) to the charterer.

The English courts have over the years taken varying views as to the nature of the right that charterers have given. It has often been treated as being an equitable assignment of a debt which is perfected as a legal assignment by the giving of proper notice by the owner to the sub-charterer, but this view has not always been endorsed. The courts have instead tended to focus on the effect of the clause, which is accepted to be that the third-party sub-charterer is bound by the charterer’s agreement to give the owner this right and, in appropriate circumstances as outlined below, is required to pay directly to the owner. The owner is then under an obligation to account for any surplus monies received above and beyond the debt owed in the head charter.

In order to give a more practical demonstration as to how this works, for the purposes of this article, let us take an assumed scenario as follows:

Head owners (A) enter into a period time charter for the vessel to time charterer (B) on the NYPE 1946 form. Time charterer (B) in turn enters into a voyage charter for the vessel to sub-charterer (C).

3.  The requirements for exercising owners’ lien effectively
Where the owner (A) is owed a debt by the time charterer (B) under the head charter and wishes to exercise his right of lien over freight due from sub-charterer (C) under the voyage charter, A must give appropriate notice to the payor (C). That notice should be given in terms that notify C that there is a claim against B, that there is a right of lien in the head charter, what debts are covered by that lien right and that payment must now be made to A directly.

One very important factor to remember is that the owner’s notice must be given before the sub-freight is paid by C to B. Once that debt has been paid there is no longer anything for A to intercept and the lien notice will not be effective in respect of that payment. Provided the debt is due in the head charter, the payment under the sub-charter from C to B does not need to be due. The lien notice may relate to sums which will fall due in the future. This principle has recently been confirmed in the Bulk Chile case ([2013] EWCA Civ 184).

Provided the notice is given at the right time and contains the necessary information, C will be bound to comply with the notice and honour A’s demand. If C ignores a good notice given by A and simply pays to B, C is likely to be liable to pay twice.

4.  Sub-sub-freights and lien rights in chains of charterparties
The above scenario assumes that only three parties are involved in the charter chain. It is often necessary to examine the position under a longer charter chain (for example if the sums payable by C to B are insufficient to satisfy A’s claim against B, A may be left looking to intercept other (more substantial) payments further down the chain).

Let us therefore also look at what happens in the following extended scenario:

Head owners (A) enter into a period time charter for the vessel to time charterer (B) on the NYPE 1946 form. Time charterer (B) in turn enter into a voyage charter for the vessel to sub-charterer (C). Sub-charterer (C) enters into a sub-voyage charter with sub-sub-charterers (D). The time charter is based on the NYPE 1946 form and the voyage charters are based on the Gencon 1994 form (containing the standard lien provision at clause 8 giving a right of lien over sub-freights).

As a matter of English law, it is accepted that parties in a chain of charters can assign (each charterer to their respective owner) their own right to receive payments.

In our scenario, C has the right to receive freight under the voyage charter from D but C has assigned that right to B via the NYPE lien clause (giving B a right to exercise lien over sub-freights payable to C). B has in turn assigned to A (i) the freight due to B from C under the voyage charter and (ii) the right to receive the sub-freight under the sub-voyage charter from D. By this route, A is able to exercise lien over the freight due from D to C and thereby reach freights due much further down the charter chain.

The important principle to remember is that there must be an unbroken chain of lien rights through the sub-charters. If A and B have agreed a lien clause but there is no such clause as between B and C then the chain is broken and A will not be able to demand payment from D.

5. The Bulk Chile decisions
The scenario in The Bulk Chile was slightly different in that there was a chain of time charterparties on the NYPE 1993 form, followed by a voyage charter at the end of the chain.

Time charterer B failed to pay hire under the head charter with A and A therefore sent notices of lien to sub-time charterer C (for sub-hire) and to voyage charterer D (for sub-freight). After receipt of the lien notice, D nevertheless paid freight to C. A then sued both C and D.

Until the first instance decision in The Bulk Chile ((2012) EWHC 2107), there had been some uncertainty as to whether the reference to “sub-freights” in the NYPE 1946 form was sufficient to cover sub-hire. In the case of The Cebu ([1983] 1 Lloyd’s Rep 302) it was held that “sub-freights” should be read to include time charter hire. However the opposite conclusion was reached in The Cebu (No.2) ([1990] 1 Lloyd’s Rep 316), limiting the reading of the clause to sub-freights only and not sub-hire. The fact that there were two first instance decisions out there reaching different conclusions gave rise to disputes as to how the 1946 clause should operate.

In his first instance decision in The Bulk Chile, Andrew Smith J followed the decision in The Cebu (No.2) and found that under the NYPE 1946, the charterer has only assigned a right to sub-freights and not sub-hires. In the context of that case, A’s notice of lien was, as a result, not effective as against C (who owed hire to B) but was effective as against D (who owed freight to C).

The result would have been different had the parties contracted on the NYPE 1993 form which includes in the lien clause an express right to receive “sub-freights and/or sub-hire”. A’s notice of lien would then have been effective both against C (for the hire due to B) and against D (for the freight due to C).

6.  Freight under bills of lading
The other key point that was addressed by both the High Court and the Court of Appeal in the Bulk Chile case was when a shipowner may be entitled to demand payment of bill-of-lading freight to himself directly.

In addition to a lien on sub-freights, A may have rights under the bill of lading if A has issued the bill as carrier. Where an owner issues a bill as carrier, they are party to that bill-of-lading contract and, as a result, have corresponding rights and obligations under that contract.

In The Bulk Chile, the courts were examining whether the owner was entitled to receive the freight payable under the bill, even though the bill stated on its face that freight was payable “as per charterparty”, which was a reference to a charterparty between C and D under which D was obliged to pay to C.

The starting-point under a carrier’s bill is that an owner effectively gives instructions that the freight due to the owner (A) under the bill of lading contract between A and D should be paid to the voyage charterer (C). A in turn receives hire from the head time charterer (B). Provided B pays the hire which is due to A, A does not then interfere with the payment of freight from D to C.

The question which arose in The Bulk Chile was whether, in circumstances where B does not pay hire to A, A may reverse the “instruction” that D should pay freight to C and require D instead to pay directly to A. The Court of Appeal (upholding the High Court decision by Andrew Smith J) held that the owner was entitled to freight from D under the bill of lading. By serving notice of lien, A had effectively reversed the instruction to pay to C and had required D to pay to A directly instead.

The effect of the judgment was that D, having already paid freight to C for performance of the voyage charter (despite previously receiving notice from A), also had to pay freight to A under the bill of lading. Payment to C did not discharge D’s obligations to A under the bills of lading.

7.  Some common practical issues
In circumstances where an owner has an agreed lien right over sub-freights and sub-hires, he may still experience considerable difficulties in enforcing that right practically. One of the main problems for an owner may lie in identifying who the sub-charterers or sub-sub-charterers may be further down the chain and what is payable (and when) under those sub-contracts to which the owner is not a party. In addition, since there is no contract between the owner and the sub-charterer, there may be questions as to the appropriate jurisdiction for pursuing a claim against the sub-charterer for failing to comply with the notice of lien.

Sub-charterers also face difficulties. They will be the party holding the sub-freight or sub-hire, knowing they have to pay the money to someone but not knowing to whom to pay. If they pay the wrong party they will be at risk of having to pay twice. They also face the risk of refusing to pay their disponent owners based on a lien notice received from head owners which ultimately proves not to be valid. That failure to pay hire to disponent owners could lead to withdrawal of the vessel or suspension of services under that time charter with possible far-reaching consequences. In many situations, these problems are resolved by an agreement between the three parties (owners, charterers and sub-charterers) to pay the disputed sum into an escrow account out of which either owners or charterers can obtain payment once the dispute between them is resolved. If that avenue is not available, a sub-charterer may have to initiate interpleader proceedings whereby the disputed sums are paid into court and the owner and charterer must then establish their entitlement to those moneys.

In summary, the concept of a charterer granting an owner a right to exercise lien over sub-freights or sub-hires is not an entirely straightforward one, nor is its exercise. Owners will equally be required to comply with certain formalities if seeking to intercept freight under a bill of lading and charterers will need to use caution in determining whether or not to comply with such a notice. We would advise members to make contact with Nordisk in circumstances where these issues arise so that we can assist in finding both practical and legal solutions.