UK: Court Of Appeal Confirms Ship-Owners’ Rights To Intercept Freight

Last Updated: 11 April 2013
Article by Bob Deering and Chris Ward

Dry Bulk Handy Holding Inc. and another v. Fayette International Holdings and another (The Bulk Chile) [2013] EWCA Civ 184

In our October 2012 Shipping E-brief, we reported on the Commercial Court decision in The Bulk Chile, which held that a ship-owner is entitled to redirect the payment of freight due under bills of lading and separately rely on a charterparty lien on sub-freights. The Court of Appeal has now upheld that decision. The prevailing view remains that a lien on sub-freights is a form of security in the form of a charge which in certain jurisdictions may need to be registered to be effective where the time charterer becomes insolvent. It should be noted that such charges are registrable in the UK and that our rules governing the registration of charges changed on 6 April 2013.

The background facts

The vessel owned by DBHH was time chartered to KLC and sub-time-chartered to Fayette. Both time charters were on NYPE terms, clause 18 of which provided that "Owners shall have a lien upon all cargoes and all sub-freights for any amounts due under this charter... ." Fayette voyage chartered the vessel to Metinvest. KLC failed to pay hire so DBHH sent a notice to Fayette and to Metinvest requiring them to pay direct to DBHH freight or hire due under "charters, bills of lading, or other contracts of carriage".

Subsequently, bills of lading were issued for the cargo which stated "Freight payable as per [the voyage charter]" and "freight prepaid", although freight had not in fact been paid. The bills were owners' bills and the shippers were Metinvest. Metinvest paid freight to Fayette. DBHH accordingly brought both bill of lading claims and charterparty lien claims.

The Commercial Court decision

Mr Justice Andrew Smith held that DBHH was entitled to instruct Metinvest to pay the freight due under the bills of lading to DBHH. This right arose independently of DBHH's rights under clause 18 of the time charter and could be exercised at any time before the freight had been paid.

Clause 18 gave DBHH security over "all sub-freights" due to KLC. This security took the form of an assignment by way of a charge. The KLC-Fayette charter contained the same clause and therefore gave KLC security over Fayette's right to receive freight under the voyage charter. Consequently, Fayette had given security over the voyage charter freight to KLC who had assigned that security to DBHH.

As the notices were sent by DBHH before freight was paid, they constituted a valid demand for payment of the freight under the bills of lading. As KLC was in default, the notices were also a valid exercise of the time charter lien over "all sub-freights" due to KLC. Metinvest were therefore obliged to pay freight to DBHH. Metinvest did not discharge this obligation by paying Fayette.

The Court of Appeal decision

The Court of Appeal agreed with the Judge's finding that DBHH was entitled to redirect the payment of freight due under the bills of lading. As the bills were owners' bills, they evidenced contracts between DBHH and Metinvest. It did not matter that the bills were issued pursuant to the Fayette-Metinvest voyage charter. DBHH and Metinvest were the only parties to the bill of lading contracts and DBHH was entitled to receive the freight due under them.

The fact that the bills stated "Freight payable as per [the voyage charter]" identified that Fayette was nominated as agent to collect the freight on DBHH's behalf. DBHH was entitled as the carrier under the bills to notify Metinvest that this nomination was revoked and demand that Metinvest instead pay the freight to DBHH.

Since Metinvest were themselves the shippers, it did not matter that the bills were marked "freight prepaid". This was not sufficient to show that Metinvest were not liable for freight which they knew had in fact not been paid.

The Court held that a ship-owner who intercepted bill of lading freight would be required to account for any surplus which exceeds the hire due under the head charter. The Court also observed that insolvency can give rise to complications. However, the Court was quite clear in confirming that none of these complications should interfere with the ship-owner's right to intercept the freight, not least since that right would most likely be needed in cases of insolvency.

Unlike the charterparty lien on sub-freights, DBHH's right to intercept the bill of lading freight did not depend on whether KLC was in default. The possibility that ship-owners might routinely intercept bill of lading freight did not concern the Court because this was regarded as unlikely in practice. The Court also considered that a time charterer who was not in default may arguably be entitled to restrain a ship-owner from demanding direct payment of the bill of lading freight on the grounds that the ship-owner had agreed to delegate collection of freight to the charterer.

The notices issued by DBHH to Metinvest were sufficient to intercept the freight due under the bills. They were sent when the freight had not been paid and were explicit in warning Metinvest of the risk of being required to pay twice. It did not matter that the notices were sent before the bills were issued.

Registration of charterparty liens on sub-freights

The Court of Appeal did not comment on Mr Justice Andrew Smith's finding that a charterparty lien on sub-freights is a form of security taking effect as an assignment by way of a charge. That finding appears to represent the settled view and is also consistent with the recent decision in The Western Moscow [2012] EWHC 1224.

The cases further indicate that where the time charterer is a company incorporated in the UK, a lien on sub-hire or sub-freight may need to be registered as a charge to be effective against the time charterer's liquidator, administrator and/or creditors. Where other claimants hold other forms of security over the charterer's assets, there may be questions as to the rights of the competing claimants to the monies representing the freight. A failure to register the lien may mean that it is void and the ship-owner will be treated as an unsecured creditor of the time charterer.

New registration rules

The time-limit for registering charges against a UK company is 21 days from the day after the charge is created. The prevailing view is that the time charter is the instrument which creates the charge and therefore the security created by the lien must be registered within 21 days after the charter date.

English law changed on 6 April 2013 when new rules were introduced dealing with the registration of charges. The new rules apply to all applications for registration even where the charge is created before 6 April 2013. The time-limit for registration is still 21 days. However, the company creating the charge (i.e. the time charterer) is no longer obliged to register the charge. Instead, registration is voluntary and the onus is on the charge-holder (i.e. the ship-owner) to ensure that the charge is registered.

Registration under the new rules is performed by sending to the registrar of companies a statement of particulars of the charge, together with a certified copy of the instrument creating the charge (i.e. the time charter) and the registration fee. A correctly registered lien on sub-freights will be valid against the time charterer's liquidator, administrator and creditors and may assist in establishing the priority of the ship-owner over monies representing the sub-freight.

The new rules apply whenever the time charterer is a corporation registered in the UK irrespective of where their assets are located. Overseas companies are not required to register charges over their assets under English law even when the assets are located in the UK. However, ship-owners wishing to ensure that a lien on sub-hire or sub-freight is effective should verify whether similar requirements apply in other relevant jurisdictions.

Comment

It is clear from the decision of The Court of Appeal in The Bulk Chile that a ship-owner may redirect the payment of freight due under bills of lading where the bills are owners' bills and the sub-charterer is the shipper. Therefore, where the time charterer is in default and this remedy is available to the ship-owner, it may have the advantage of simplicity over the more complicated requirements of exercising a valid lien on sub-freights.

What is less clear however is whether a ship-owner may retain priority over freight which has been redirected under the bills in the face of claims from a liquidator, administrator, trustee in bankruptcy (in a Chapter 11 type situation) and/or competing creditor of the time charterer. As such, ship-owners wishing to establish security over sub-freight and sub-hire should endeavour to ensure that a lien on sub-freights is incorporated throughout the charter chain and that the security granted by the lien is properly registered wherever this may be necessary.

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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