A lien clause is commonly found in many standard time charterparty agreements. Generally the wording will provide that the ship owner will have a “lien on sub-freights” and this is often expanded to expressly state “and/or sub-hire”. For example claue 18 of NYPE charter form:
“The Owners shall have a lien upon all cargoes and all subfreights and/or sub-hire for any amounts due under this Charter Party, including general average contributions, and the Charterers shall have a lien on the Vessel for all money paid in advance and not earned, and any overpaid hire or excess deposit to be returned at once….”
Sub-hire is the money payable to the charterer under the terms of any sub-charterparty. The possibility of exercising a lien over sub-hire payments is a very useful opportunity for the owner to ensure that hire payments can be met in the event that their charterer defaults and fails to pay the sums due under the head charterparty. It effectively entitles the owners to leap frog their own charter and demand payment directly from the sub-charterer. In challenging economic times, on the face of it, a practical and effective way of protecting cash flows.
In theory the operation of a lien should be straightforward. A notice should be sent informing a sub-charterer that their disponent owner owes hire and directing that sub-charterer to pay hire that they are due to pay to their disponent owner to head owners. However, in practice, the operation and enforcement of a lien is often far from straightforward. For example, the lien clause may refer only to “sub-freight”; even if those words included “sub-hire” (which is often disputed) or there is express reference to sub-hires, an innocent sub-charterer in receipt of a lien notice risks being in breach of (i) that notice if hire (or freight) is paid in accordance with the sub-charter or (ii) the charter, if hire (or freight) is paid in accordance with the lien notice when faced with competing demands for their hire (or freight) payments.
Further it is not unusual for there to be lengthy time charter chains on a “back-to-back” basis containing identical lien clauses. In these circumstances, with a potentially large number of sub-charterers (i) the potential for confusion as to whom to pay hire is correspondingly increased and (ii) there may be questions as to how far a particular lien can “extend”.
It is often said a lien on sub-hire operates by way of an equitable charge which can be assigned. As such, in a back-to-back chain of charters, that charge is assigned down the chain allowing a head owner to exercise a lien on sub-sub-hire (or any number of sub-hires).
Indeed, in The “Cebu (No 1)”, the Court held that a lien on sub-freight was an equitable assignment of a debt which was converted into a legal assignment when the hire due to the shipowner is overdue and the owner notifies the sub-charterer of the lien.[1]
This is, though, arguably contrary to the general understanding of liens where the object being liened must be in the control of the lienor before the lien can be exercised. For example (i) a lien is exercised over cargo when in the custody and care of a shipowner whereas (ii) sub-freight or hire is not in the control of the party exercising a lien. In this respect liens over sub-freights or hires have been likened to an equitable right of stoppage in transit.[2]
These issues were recently touched on by the English High Court in The “Spar Sirius” (Cosco Bulk Carrier Co Ltd v Armada Shipping SA & 1 Or [2011] EWCH 21). However, it was not necessary to decide which is the correct view and as Briggs J said in that case “as Gross J concluded in Samsun Logix Corp v Oceantrade [2008] 1 Lloyd’s Rep 450, at 457, the answer to the question may not generally make any difference to priority issues arising from the charterer’s insolvency.”
The operation of a lien over sub-hire remains a complicated area for both owners and charterers. The only clear advice that can be given where sub-charterers are served with competing notices of lien, or it is unclear whether the purported lien is validly exercised, is that early legal advice should be sought. In practice it is often the end-charterer who is tasked with deciding whose lien is valid and who to pay. As discussed above, if the end-charterer pays the “wrong” party then they risk being sued by the other parties who are also exercising a lien. There is also a risk that if the exercise of the lien is invalid but hire is paid pursuant to that lien, there could be a right to withdraw from the charter or to suspend performance.
Article by Diana Sailor
[1] A series of first instance decisions, following on from an obiter dictum of Lord Russell in The “Nanfri” [1979] 1 Lloyd’s Rep 201 at 210, concluded that an owner’s lien on sub-freights created by contract in a charterparty operates as an equitable charge on what is due from the shipper to the charterer. The first instance decisions include The “Ugland Trailer”) [1986] Ch 471, “Annangel Glory” [1988] 1 Lloyd’s Rep 45,
The “Attika Hope”) [1988] 1 Lloyd’s Rep 439, and The “Cebu” (No 2) [1990] 2 Lloyd’s Rep 316.
[2] in his article “The Juridical Nature of a Lien on Sub-freights” [1989] LMCLQ 191, as endorsed by Lord Millett in Agnew v. Commissioners of Inland Revenue [2001] 2 AC 710, at paragraphs 38 to 41
