UK: Liability For Freight: Beware "…The Risk Of Being Required To Pay Twice"

Last Updated: 23 September 2012
Article by Nick Burgess and David Richards

Dry Bulk Handy Holding Inc. and another v. Fayette International Holdings Ltd and another (The Bulk Chile) [2012] EWHC 2107 (Comm)

The Commercial Court has recently determined a dispute concerning an attempt by owners to intercept freight payable by sub-charterers. The case illustrates the risks of a sub-charterer failing to heed a warning that, should he pay his disponent owner despite being put on notice of the ship-owner's rights, he runs the risk of having to pay twice. The court also dealt with a claim for payment for services rendered post-withdrawal.

The background facts

The vessel was, at the material times, subject to the following charterparty chain: DBHH – CSAV – KLC – Fayette – Metinvest.

In early 2011, KLC entered "rehabilitation" proceedings in Korea to restructure their debt obligations. The charterparties in the chain between DBHH and Fayette were all on terms which included clause 18 of the NYPE form which provides that "Owners shall have a lien upon all cargoes and all sub-freights for any amounts due under this Charter...".

Bills of lading were issued by Metinvest as shippers stating "freight payable as per Charterparty" and "freight prepaid". In fact, the freight had not been prepaid.

The head owners, DBHH, issued a number of invoices to KLC for hire until in excess of US$ 700,000 was outstanding. On 1 February 2011, notices were sent on behalf of DBHH to Fayette and Metinvest, directing the sub-charterers to pay freight or hire due under "charters, bills of lading, or other contracts of carriage" directly to the owners. A second notice was sent on 5 February 2011 which sought to extend the lien to cargo onboard.

On 26 February 2011, DBHH withdrew the vessel from KLC's service. On 1 March 2011, Fayette gave five days' notice of the vessel's redelivery. Even though DBHH had withdrawn the vessel from KLC, they continued to perform the voyage and discharged the cargo at Jakarta. On 12 April 2011, Metinvest paid about US$ 2.5 million in freight to Fayette.

Various claims arose and came before the Commercial Court.

The Commercial Court decision

Claim under the bills of lading

DBHH argued that, under the contract of carriage between DBHH and Metinvest as evidenced by the bills of lading, Metinvest were liable to pay freight to DBHH. Mr Justice Andrew Smith held that the right of DBHH to intercept or to intervene so as to require payment of freight was distinct from any right they might have to exercise a lien over sub-freight.

It was irrelevant that the bills of lading stated that freight was prepaid in circumstances where the freight was in fact unpaid. The judge dismissed arguments that the owners could not intercept the freight once it had been paid by Metinvest to Fayette. He stated that, unless the contract of carriage provides that payment to a charterer discharges the shipper's liability to pay freight directly to the carrier, any agreement to pay freight under a charterparty ceases to be effective once the ship-owners have demanded that freight be paid directly to them.

Mr Justice Andrew Smith also made it clear that the right to intervene to have freight paid directly to the owners does not depend upon whether the head charterers have defaulted in paying hire or whether any sums are yet due to the owners. Therefore, as Metinvest had paid freight after DBHH's notice intercepting that freight, the judge held that they were liable to pay the freight again.

The lien claim

The judge then dealt with the lien claim against Fayette and the arguments as to why the lien did not work in this case.

  1. The sub-charterers disputed whether the standard clause 18 wording, which refers to the right to intercept "sub-freights", could apply (without amendment) to intercept sub-hire. Although the judge's own view was that the phrase "sub-freights" was wide enough to cover sub-hire, he felt bound to follow previous authority to the effect that the unamended NYPE lien clause does not provide for a lien covering sub-hire. This is therefore a statement of the present law until it is reviewed by an appellate court.
  2. There was an issue as to whether a lien could intercept sub-sub-freights but it was eventually accepted by all parties that (as per the decision in The Western Moscow [2012] EWHC 1224), a lien on sub-freight confers on an owner the right to intercept sub-sub-freight provided that an appropriate lien clause is included in all charters in the chain.
  3. The sub-charterers asserted that a lien clause could not be effective if the notice misstates the date of the assignment or the amount of the debt to be transferred. They relied on strict rules that apply to assignments concerning the transfer of title. The judge decided, however, that these strict rules did not apply to equitable assignments. The only conditions for an effective notice to invoke a lien on sub-freights is that it must inform the charterers: (i) that the owners are assignees of a debt owed or to be owed by the sub-charterers; (ii) what debts are assigned; (iii) that an amount is due to the owners under the head charterparty and (iv) that the owners require that the assigned debt be paid directly to them. Other than this, no particular form of words is required and the judge held that the owners were not required to state exactly what amount was due to them under the head charterparty.
  4. The sub-charterers contended that sub-freights due from Metinvest to Fayette could only be assigned if they were due for payment. Mr Justice Andrew Smith rejected this argument holding that, provided a sum was due under the head charterparty, the lien could relate to sub-hire or sub-freight due in the future.
  5. The sub-charterers sought to rely on the Korean court orders in respect of KLC's rehabilitation proceedings to prevent the owners from enforcing their claims on the basis that this would give them an advantage over KLC's other creditors. The judge rejected these arguments and held that those proceedings did not have extra-territorial effect and did not in any event provide any answer to the lien claims made against the sub-charterers.

The post-withdrawal claims

The judge finally dealt with a claim against Fayette and Metinvest for a payment in respect of the continued use of the vessel after its withdrawal from KLC.

  1. The judge first rejected a claim that a new contract came into existence because Fayette continued to accept the vessel's services. On the facts, Fayette's conduct did not amount to an intention to enter into a new agreement for the continuing hire of the vessel.
  2. The judge applied the test laid down by the Commercial Court and confirmed by the Supreme Court in The Kos [2012] UKSC 17 that where, after a valid withdrawal, owners performed further services at the request of charterers, they may become entitled to remuneration for performing those services. On the facts, he concluded that Fayette had impliedly requested the vessel to continue to perform services by serving re-delivery notices and giving further instructions to the vessel.
  3. Alternatively, Mr Justice Andrew Smith held that, in principle, the owners could be entitled to a quantum meruit payment for providing "freely accepted" services. He was not persuaded, however, that Fayette were liable on that basis in this case because the owners were obliged to perform their contractual obligations under the bills of lading to deliver the cargo to destination – Fayette had no option as to whether to accept those services or not.
  4. Given his decision on the bill of lading claims and the post-withdrawal contractual claim for reasonable remuneration, the judge did not have to decide CSAV's alternative claim of unjust enrichment. He said, however, that he would have allowed the claim against Metinvest for unjust enrichment in continuing to use the vessel after its withdrawal, as per the Supreme Court decision in The Kos.

Comment

The judge's analysis of liens over sub-freight and sub-hire is in line with the recent decision of Mr Justice Clarke in The Western Moscow. Mr Justice Teare's decision is also noteworthy for applying the principles recently laid down by the Supreme Court in The Kos with regard to owners' rights of remuneration post-withdrawal of a vessel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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