Both the shipowner’s lien on sub-freight and the charterer’s 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 19th 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

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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 charterer’s

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

there’s 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

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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

there’s 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

clear…that no such lien can arise without an express grant in the charter of the vessel…The

lien cannot arise unless there is a specific lien clause written into the charterparty…No legal

or equitable process or proceeding is necessary for the creation of such a lien’1.

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 clause…It is obvious that neither the owners’ lien for sub-freights,

nor the charterer’s lien on the ship can be a possessory lien’2.

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 Lloyd’s Rep 497, at p.501. See also Richmond Shipping Ltd v. D/S A/S Vestland (The Vestland), [1980] 2 Lloyd’s 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.

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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 cargo…’4.

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

shipowner’s 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 shipowner’s 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 shipowner’s 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

shipowner’s 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.

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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 shipowner’s 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 sub-

charterer, how is the shipowner’s 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

footing…’6.

This limited ‘privity of contract’ theory was rejected in Molthes Rederi Aktieselskabet v.

Ellerman’s 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 owner…he still speaks of the owner’s 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 clause…’8 .

1.2.2.2 The Mandate & Agency Theory

According to this view the charterer gives the shipowner a mandate to collect the sub-

freight 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 ibid., at p.98.7 [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.

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will unless agreed to the contrary implicitly or explicitly9. While there is no indication that the

draftsmen of the clause intended to subject the shipowner’s right to the charterer’s good will,

this solution would furthermore lead to impractical results for the shipowner.

According to a similar view the shipowner’s 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 shipowner’s 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 charterer’s 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 charterers…I 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 charterers’11.

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. 10 [1988] 1 Lloyd’s Rep 45.11 ibid., at p.47.

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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 contracts12. 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 lading…’15. 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 Queen’s Bench Division in The Nanfri, Benfri and

Lorfri17, where Mr. Justice Kerr held that ‘…as between the owners and the charterers… [the 12 Oditah, op. cit., supra, n.9, at p.193.13 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

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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 assignee…I can see no reason why the law should not give

effect to that intention by virtue of equitable assignments…’19. Lamsco’s main argument was

that the charterer’s 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 Russell’s comments in The Nanfri22 who favoured

18 [1983] 1 Lloyd’s Rep 302. 19 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 Lloyd’s Rep 439.22 supra, n.17.

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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 shipowner’s 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 shipowner’s 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 Line24, 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 (1823) 3 Russ. 1.24 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.

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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 Lloyd’s 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 Russell’s 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 See Oditah, supra, n.9, at p.193.26 [1985] 2 Lloyd’s Rep 372, at p.375. 27 [1990] 2 Lloyd’s 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.

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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

Kerr’s J. opinion in the Queen’s 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 shipowner’s 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 For a full discussion on the issues of registration and sub-sub freight see infra §1.4.1.31 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.

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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 20 th century in Tagart, Beaton & Co. v James

Fisher & Sons34 that the shipowner may only intercept the sub-freight before it is paid.

Nourse’s 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 lien’s 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 shipowner’s one35. Nourse’s, 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 shipowner’s 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 For a detailed analysis on the date of birth of the lien see infra at §1.3.2.1.34 [1903] 1 K.B. 391.35 See The Attika Hope, analyzed supra, at §1.2.2.5.

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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 sub-

charter of his vessel or the signing of a bill of lading contract if he wishes to intercept the sub-

freight 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 shipowner’s 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, Oditah’s 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.

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1.3 OPERATION OF THE LIEN ON SUB-FREIGHT

The way the lien operates depends on whether the third party’s bills of lading are held to

be shipowner’s ones or whether the third party receives charterer’s bills of lading or is a sub-

charterer.

1.3.1 SHIPOWNER’S BILL OF LADING

When the bills of lading are held to be a shipowner’s 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. Ellerman’s 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

shipowner’s 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.

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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 owner’s 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 shipowner’s 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.

Ellerman’s 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 sub-

chartered the vessel by a voyage charter and shipowner’s 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.

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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 Channel’s 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 shipowner’s 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 CHARTERER’S 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 lien’s exact birth and loss

40 ibid., at p.715.41 ibid., at p.714.

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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 charge’s 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 shipowner’s 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 charterer’s 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 cargo’44.

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

her’46. 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 supra, n.14.44 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 charterer’s 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 charterparty’47.

It is argued that the North Atlantic approach enables the shipowner to prevail over an

insolvent charterer’s 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 Act48.

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 lien’s birth is vital in respect of the problem of

priorities among various claims. Allen argues that the fiction of relating the lien’s accrual to

the date of the charterparty may help to put the shipowner’s lien ahead of a claim to the sub-

freight by the charterer’s assignee49.

1.3.2.2 Sub-Charterer’s 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 ibid., at p.904. 48 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 shipowner’s 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 National’s 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. National’s admission

50 Wehner v. Dene, supra n.5, at p.99.; Molthes Rederi Aktieselskabet v. Ellerman’s 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 shipowner’s lien] protected the holder of the bill of lading…on 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 sub-charterer 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 charterer’s 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 owner’s rights.

Similarly in East Asiatic Trading Co. v. Navibec Shipping Ltd.52, although the shipowner

notified the sub-charterer’s 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 charterparty’s

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 sub-

charterer 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 shipowner’s 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 charterer’s 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 charterer’s 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 shipowner’s 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 shipowner’s one,

the latter may notify the agent and intercept the sub-freight even in cases where the agent

received it before the shipowner’s notification, as has been declared in Wehner v. Dene.

However, some three years before Wehner, in Tagart, Beaton & Co. v James Fisher & Sons55

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 agent’56. The problem was discussed in Molthes Rederi Aktieselskabet v. Ellerman’s

54 ibid., at p.2019.55 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 above-

mentioned 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 shipowner’s 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 shipowner’s lien on sub-

freight is lost by good faith payments by the sub-charterer to the charterer without notice of

the shipowner’s 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 shipowner’s 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.

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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 sub-

freights’. 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

shipowner’s 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 shipowner’s

lien. In Tarstar Shipping Co. v. Century Shipline Ltd.60, the shipowner notified the sub-

charterer 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 agent’s

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 faith’61.

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 shipowner’s 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 charterer’s 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 shipowner’s bills of lading whereas in the case in question

the bills of lading were held to be sub-charterer’s 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

shipowner’s 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]

clause…It is obvious that if such freights were prepaid, there would be nothing on which the

61 ibid., at p.1112.62 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 owners’64.

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 charterer’s 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

shipowner’s indemnity right in cases where ‘freight pre-paid’ bills of lading effectively result

in the discharge of the lien68.

64 [1978] 2 Lloyd’s Rep 132, at p.137.65 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 shipowner’s right to assert a lien on sub-

freights.

The latter approach is also favoured by H.C. Allen72, 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 shipowner’s indemnity right, express or, more recently, implied, in respect of additional liability incurred due to the master’s signing bills of lading at the charterer’s 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 shipper’s 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

shipowner’s 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 shipowner’s lien. Although actual or constructive 73 1924 A.M.C. 967.74 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 Lloyd’s Rep 527. 75 supra, n.52, at p.1046.

28

knowledge of the lien is required to bind a party, the sub-charter’s incorporation by reference

of the charterparty’s 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 shipowner’s 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 M.T. Wilford, ‘Lien on sub-freights registrable as a charge’, [1986] LMCLQ 1, at p.3.77 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 shipowner’s 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

Court’s 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 shipowner’s 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 Court’s decision would be clearly different if shipowners’ bills

of lading had been issued instead of them.

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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 & Foster79, 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

Slavenburg’s 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 supra, n.10.79 [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 sub-freights (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.

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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 shipowner’s 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 shipowner’s 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 ibid.83 789 F. 2d 1406, at p.1407.84 1992 A.M.C. 2511.

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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 shipowner’s 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 charterer’s

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 interest…It

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 time-85 ibid., at p.2516.86 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.

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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 shipowner’s 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 shipowner’s 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 shipowner’s 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 OLB’s rights to the Government

eliminated the latter’s 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 46 U.S.C. §741 et seq.91 28 U.S.C §§1346(b), 2671. 92 supra, n.24.

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U.S., who had sub-chartered the vessel from Afram, the head charterer under a time-

charterparty, 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 Government’s 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 shipowner’s 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-FREIGHT93 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.

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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-charterer’s

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. Bischoff97 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 Judge’s 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 supra, n.18.97 (1882) 7 App. Cas. 670.

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similar result and attributed the ruling to the Court’s 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 clause’s 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

Judge’s 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.

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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 sub-

charterparties 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 supra, n.32.100 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 shipowner’s 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 sub-

charterer to a shipper, the Court accepted the shipowner’s 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 shipowner’s 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 charterer103. It is however

101 supra, n.57.102 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. O’Rourke, ‘Shipowner’s Lien on Sub-sub freight in England & The U.S.: N.Y.P.E. Clause 18’, Loy. L.A.. Int’l & 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 shipowner’s 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 Lloyd’s 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 charterparty104. 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 shipowner’s 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 lien’s 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 charterer’s 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 sub-

charterer’s bills of lading. In cases of dispute he will be perfectly protected if he chooses to

interplead.

104 Davies & Dickey, supra, n.28, at p.401.105 O’Rourke, supra, n.103, at p.90.106 ibid.

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1.5.3 Measure Of Shipowner’s Recovery

A well established interpretation rule in respect of the lien clause is that the lien on sub-

freights 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 shipowner’s 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 century’s 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 supra, n.5. 108 (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.

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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 lien’s extension on

demurrage the incorporation requirement, as has already been said, is still in dispute and it

does not seem that the Court’s 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 19th 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 Allen114 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 supra, n.69, at p.5.114 supra, n.48, at p.971.

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Steam Navigation Co.115, where charterer’s 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 shipowner’s 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 shipowner’s 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 supra, n.108.116 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

vessel’s 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 lien’s 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 sub-

charterer 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 sub-

freight 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 sub-

freights 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 supra, n.3.119 ibid., at p.945.

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PART II : CHARTERER’S LIEN ON THE VESSEL

Apart from granting a shipowner’s lien on cargo and sub-freight most of the modern lien

clauses provide for a charterer’s 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 contract120. 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 Nature Of The Lien 120 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 shipowner’s breaches like non-payment of dispatch money etc. See for example The Corvus, 282 F. 939.

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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 month’s 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 Rigby’s 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 Rigby’s

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 (1897) 2 Com. Cas. 258; (1897) 8 Asp. M.L.C. 327.122 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 Rigby’s 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

Sumner’s difficulty to reconcile the charterer’s ability to refuse redelivery while not being

obliged to pay hire. He described the lien’s 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 exercised’126. It is however, notable that, as Wilford observes127, 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 supra, n.2.126 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 shipowners129. 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

all’130 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 [1978] 1 Lloyd’s Rep 368.129 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 Judge’s view the lien comes into existence not when the charter is

entered into but only when money becomes actually due to the charterers132.

Lord Roskill’s and Goff’s 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 charterer’s 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 ibid., at p.503. 133 See O’Rourke, 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 shipowner’s refusal to deduct from

charter hire some advances made by the charterer to the master for the vessel’s 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 therefrom’135.

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 charterer’s 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 charterer’s 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 charterer’s 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 charterer’s lien on the vessel, it has

been confirmed that the charter contract ceases to be executory and the lien attaches upon

139 Medina v. Marvirazon, 533 F. Supp. 1279.140 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 charterer’s 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 shipowner’s 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 & Black146 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 vessel’147, 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 1973 A.M.C. 1431.144 530 F. Supp. 75.145 See supra §2.1.2.146 supra, n.57.147 O’Rourke, 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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