Default in Charterparty Chain - A Shipowner's Right to Freight

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In the recent case of The “Bulk Chile”, the Court of Appeal held that a shipowner is entitled to demand payment of freight under the bill of lading, which would otherwise be payable under the charterparty to the charterer, provided that the demand is made before freight has been paid to the charterer.

The Facts

The “Bulk Chile” was time chartered by head owners, Dry Bulk, to disponent owners, CSAV. Dry Bulk, as undisclosed agents of CSAV, time chartered the vessel to Korea Line Shipping (KLC), who then trip chartered her to Fayette. The time charter and time trip were on the NYPE form, containing the standard clause 18, “that the Owners shall have a lien upon all cargoes, and all sub-freights for any amounts due under this Charter…”

Fayette in turn voyage chartered the vessel to Metinvest, who were the shippers.

Three bills of lading were issued on Congenbill 1994 terms in respect of the cargo. The bills were signed by Fayette as agents for and on behalf of the master, and it was common ground between all the parties that the bills of lading were owners’ bills. Metinvest was named as the shippers. The bills stipulated that freight was payable as per the voyage charterparty between Fayette and Metinvest, and although marked “freight pre-paid”, freight had not in fact been paid.

In 2011, KLC entered Korean insolvency proceedings, leaving substantial hire owing to Dry Bulk, who consequently sent notices of lien to Fayette and Metinvest, one in relation to the cargo on board, and the other in respect of balances of freight and/or sub-hires due under “charters, bills of lading, or other contracts of carriage”. Dry Bulk demanded that Metinvest pay freight due under the bills of lading directly to Dry Bulk and not Fayette, on the basis that an owner is entitled to demand payment under a bill of lading directly to himself, displacing the provisions incorporated in the voyage charter, so long as he does so before the freight is paid.

Metinvest paid the freight to Fayette, and Dry Bulk brought a claim against Metinvest for freight under the bills of lading. CSAV also made a lien claim against Metinvest for freight payable under the voyage charter, and a lien claim against Fayette for hire under the time trip charter.

The Commercial Court Decision

At first instance Andrew Smith J. held that Dry Bulk were entitled to demand payment to themselves of freight due under the bill of lading, and that this right arose independently of their rights under clause 18 of the time charter and could be exercised at any time before freight had been paid.

The notices of lien were sent before freight had been paid, and were therefore effective as demands by Dry Bulk for freight to be paid to them. The notices were also a valid exercise of the clause 18 lien over “all sub-freights due” to KLC. Metinvest were therefore obliged to pay freight to Dry Bulk, and had not discharged this obligation by paying freight to Fayette.

The Court at first instance also held that clause 18 of the charterparty gave Dry Bulk security over “all sub-freights” due to KLC, in the form of an assignment by way of a charge, and since the charter between KLC and Fayette contained the same clause, KLC were granted security over Fayette’s right to receive freight under the voyage charter. As a result, Fayette had given security over the voyage charter freight to KLC, who had assigned that security to Dry Bulk.

The Court of Appeal Decision

The Court of Appeal upheld the decision of the Commercial Court, rejecting arguments by Fayette and Metinvest that Dry Bulk had no entitlement to demand payment of bill of lading freight directly to itself. The Court held that, on a proper analysis, where a bill of lading provides for payment of freight to a party other than the owner, that third party is to be regarded as theowner’s agent, collecting the freight on the owner’s behalf. Normally that would operate satisfactorily by the owner receiving hire under the charterparty, but the owner may decide to vary the authority of the agent, even where there has been no default in the payment of hire.

Tomlinson, LJ concluded:
“I see no difficulty in the shipowner countermanding his direction to the shipper to pay freight to a third party, provided of course that he does so before the shipper has made payment as initially directed.”

The fact that the bills of lading were marked “freight pre-paid” did not affect the position, since Metinvest were themselves the shippers, and the “freight pre-paid” marking was not sufficient to exempt Metinvest from liability for freight, when they knew that in fact it had not been paid.

It should be noted that Tomlinson LJ suggested that if there was an employment clause in the head charter – for example clause 8 of the NYPE 1946 form, which delegates collection of freight to the charterer – this might enable the charterer to restrain the owner from demanding payment of the bill of lading freight to itself, provided that the charterer was not in default of its obligations to pay hire under the charter. However, the Court of Appeal did not reach any firm conclusion on this issue, as it did not arise on the facts in question.

Comment

This judgment, confirming that an 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, adds to a number of recent cases developing the rights of owners when a time charter comes to an end prematurely due to charterers’ failure to pay hire. For example The “Kos” [2012] UKSC 17 (indemnity for consequences of repudiation by charterers when cargo loaded) and The “Astra” [2013] EWHC 865 (Comm) (charterers’ obligation to pay hire on time is a condition, breach of which entitles owners to damages for loss of bargain).

Although the interception of bill of lading freight offers a valuable option to an owner unable to obtain outstanding hire from a charterer by other means, it is unlikely to be an option available as a matter of routine, which should be of some comfort to charterers. It should be noted, however, that as a result of the Court’s decision, Metinvest were liable to pay freight twice: once to Dry Bulk as owners under the bill of lading claim, and a second time to CSAV under the lien claim against Metinvest for sub-freight under the voyage charter.

Although the Court of Appeal did not comment on Andrew Smith J’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 seems to represent the settled view and is consistent with the decision in The “Western Moscow” [2012] EWHC 1224. Where a 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 other creditors, otherwise a failure to register the lien may mean it is void and the owner will be treated as an unsecured creditor.