Cargo Liens for Unpaid Hire / Freight

We were involved, some time back, in a situation in which Owners held lien on cargo and containers (without completing the voyage) and sought payment of the unpaid charter hire based on the dicta of The Pioneer Container. While we did not agree to the Owners position, the Owners and the Container Operator (“CO”) were fortunately able to resolve this matter. As this issue still remains unsettled in law, we are considering whether unpaid charter hire and freight entitles Owners and Operators to hold lien on the cargo. In particular, we will consider whether:

• Owners are entitled to hold lien on the cargo / containers on the basis that the Time Charterer has not paid the charter hire as due
• Operator (includes a CO and who may include a NVOCC) are entitled to hold lien on the cargo / containers when unpaid by their counterparty, say the Voyage Charterer or Freight Forwarder (as Carrier).

1. Time Charter:
   1. Payment of hire is of utmost importance to Owners given that they, in turn, would need to make payment to the crew, financiers (bank for mortgage) failing which their very existence would be in peril. Invariably, charter parties would entitle Owners to hold lienⁱ on the cargo for all unpaid hires and freight due.
   2. The question is whether this entitlement would allow Owners to hold lien on cargoes where the Charterers have issued a Freight Prepaid Bill of Lading? While the usual practice is for the Charterers to either issue Owners Bills of Lading (as agents), in the issue we were involved, the Time Charterers issued their own Bills of Lading, with “freight as arranged” endorsement. The Time Charterers subsequently became insolvent such that the Owners remain unpaid for the charter hires due. The Owners then held lien on the cargo and containers on board the vessel (which they subsequently discharged at a terminal without completing the voyage) and sought payment of the unpaid hires from the Container Operators (“CO”)/ Cargo interests on the basis that the CO Bills of Lading provided for a liberty to sub-contract clause i.e. “The Carrier shall be entitled to sub-contract on any terms whatsoever the whole or any part of the Carriage”. The Owners position, based on this liberty clause, was that they were entitled to hold lien on the cargo inside the containers as the charterparty with the Time Charterers read together with the CO’s liberty clause provided them this right.
   3. We submit that even if Owners were correct in holding the cargo inside the containers (on the basis of the CO liberty to sub-contract clause and the entitlement provided in the Time C/P), this lien would be restricted to the cargo and not the containers owned by the CO’s. This being the case, at the very least, the CO were entitled to seek return of the containers such that in order for Owners to continue to excercise their lien on cargo, they would have to devan and return the empty containers back to the CO. We believe that the operational and  the storage costs for continuing with the cargo lien would have forced the Owners to rethink as to whether they wished to proceed further.
   4. Finally, we believe that if tested, the courts would take a purposive approach in considering the wordings of the liberty to sub-contract clause to only read what was germane to the contract of carriage. This being the case, we submit that the Courts would be prepared to only allow Owners to hold lien on the cargo if the freight remained unpaid for the voyage and not for the outstanding hires due from the Charterers.
2. Container Operator: Issues may also arise when the CO remains unpaid from their contractual party but with the cargo interests having made the payment of freight to their contractual parties. In this regard, there appears to be two possibilities:
   1. Cargo interests are issued “Freight Prepaid” or “Freight as arranged” CO’s Bills of Lading: In Cho Yang Shipping Co Ltd v Coral (UK) Ltd, the English Court of Appeal held that the Shippers had made no agreement to make payment to the Carriers (Cho Yang) and instead, the Carrier should look at their contractual party and who was insolvent. Accordingly, if Shipper’s are issued with a Freight Prepaid Bills of Lading of the CO, we submit that subject to providing evidence of payment to their contractual parties, they bear no further exposures.
   2. Cargo interests are issued with a Freight Forwarder/NVOCC’s Bill of Lading, and who in turn contracted with the CO (who remain unpaid): In Ultratech Pte Ltd v Ocean Projects Incⁱⁱ, the Singapore Court of Appeal decided that the Overlying Carrier were not entitled to hold lien on the cargo for unpaid freight given that their contract was with the Underlying Carrier (Freight Forwarder acting as Carrier /NVOCC). They also considered the common law right of a Carrier to hold lien on the cargo for unpaid freight and held that in order for a Carrier to excercise this right, they must have completed the voyage. In this instance, the Carriers had not completed the voyage and therefore they  were not entitled to hold lien on cargo for the unpaid freight.
      We also submit that whether a CO is entitled seek recovery of freight on the basis of common law right to hold lien on the cargo would also depend on the location where the cargo is to be delivered together with the system of justice available in that jurisdictionⁱⁱⁱ.
3. Risk Management:
   1. Such risks arise due to  counterparties inability to pay which can be managed  by conducting a regular KYC to ensure that they are good for their monies.
   2. With respect to Insurance for the unpaid hire / freight, to our knowledge, none is available. However, a Freight, Demurrage and Defence cover (also known as FDD  and which is a discretionary cover) would aid in dealing with the pursuit and defence costs for recovery but would not deal with the unpaid hire/freight involved.
4. Conclusion:
   1. Owners should be aware that it would be difficult to recover unpaid hire from 3^rd parties. Instead, Owners should ensure that they regularly conduct KYC’s to ensure that their counterparties/charterers are able to make payment of the hire as due failing which they should consider other options including intercepting sub-charter hire/ freight if unpaid.
   2. A CO, if unpaid, would be entitled hold lien on the cargo to seek unpaid freight from 3^rd parties provided they accomplish the voyage contracted for.

ⁱ. See Clause 23 of NYPE 2015 and which can be viewed at https://www.bimco.org/contracts-and-clauses/bimco-contracts/nype-2015#
ⁱⁱ. See Ocean Projects Inc v Ultratech Pte Ltd [1994] 2 SLR (R) 245
ⁱⁱⁱ. We have based our article on Common Law Principles and Judgements.