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Mark Stiggelbout (Barrister, Quadrant Chambers) examines the complex issue of the nature of an owner’s lien upon sub-hires and sub-freights.

introDuction

Two recent cases in the English Commercial Court have revisited the vexed question of the nature of the owner’s charterparty ‘lien’ upon sub-hires and sub-freights. Although most frequently encountered as clauses 18 and 23 of the NYPE 1946 and 1993 forms respectively (albeit with the unamended 1946 version referring only to sub-freights), similar lien clauses exist elsewhere (for example, in Baltime 1939 and 2001, Barecon 2001, Linertime, and Gencon 1994). For over a century, such liens have been understood as permitting the owner to intercept the freight or hire due to his defaulting charterer from the latter’s sub-charterer, provided notice of the exercise of the lien is given to the sub-charterer before the liened debt is paid to the defaulting charterer or his agent: Tagart, Beaton & Co v. James Fisher & Sons [1903] 1 KB 391.

Although superficially resembling the owner’s right to intercept bill of lading freight from his shippers, (on which, see the Court of Appeal’s decision in The Bulk Chile [2013] 2 All E.R. (Comm) 295), the charterparty lien grants the owner a direct right of action against a sub-charterer with whom he has no direct contract. It raises particularly complex issues in the context of lengthy charterparty chains.

Until the late 1970s, the precise nature of the ‘lien’ exercised in such circumstances had gone largely unexplored. However, a flurry of High Court decisions in the 1980s highlighted two significant practical implications of its juridical classification. First, if a charter chain has more than two charterparties, the ability of an owner to intercept freight or hire from a sub-sub-charterer (or even further down the chain) requires a justification beyond a mere contractual right. Secondly, if the explanation lies in assignments of equitable ‘charges’ over charterers’ book debts, the relevant lien-containing charters potentially require registration under companies legislation. (For UK-incorporated charterers, the relevant provisions have historically been sections 95, 395 and 860 of the Companies Acts 1948, 1985 and 2006 respectively. On

6 April 2013, section 860 of the 2006 Act was repealed by regulation 3 of the Companies Act 2006 (Amendment of Part 25) Regulations 2013/600, and the current requirements are set out in the 2013/600 Regulations and its schedules.)

In both The Western Moscow [2012] 2 All ER (Comm) 1140 and The Bulk Chile [2013] 1 All ER (Comm) 177, the Commercial Court has endorsed the 1980s view that the lien operates through an equitable assignment by the charterer – constituting some form of equitable ‘charge’ – by way of security for the charterers’ debt under the head charter. In so doing, the Commercial Court declined the invitation to follow an obiter dictum of Lord Millett in Agnew v. Commissioner of Inland Revenue [2001] 2 AC 710 to the effect that the lien constitutes a mere personal contractual right of interception analogous to an unpaid seller’s right of stoppage in transitu.

It now appears that only a Court of Appeal challenge could upset the equitable assignment theory. However, the precise nature of the ‘charge’ assigned remains ripe for exploration even at High Court level. Of particular interest, and potentially of crucial financial significance in charter chains, is whether the equitable assignment operates by way of a simple floating charge or by way of a floating mortgage.

The basic distinction between a mortgage and a simple charge is straightforward. Where a debtor assigns the whole of an asset in order to secure a smaller debt, he creates a mortgage of that property (see Tailby v. Official Receiver (1888) 13 App. Cas. 523). The mortgagee, to whom the smaller debt is owed, is probably required to account as resulting trustee for the surplus once the secured debt is discharged (by analogy with Charles v. Jones (1887) 35 Ch D 544 at p.549).

Where, however, the debtor does not wish to assign the whole of the asset up front, he may simply create a charge over it which is sufficient in size to secure the smaller debt owed. The key distinction from a mortgage is therefore that, in the

The Nature of the Owner’s Charterparty ‘Lien’ upon Sub-Hires and Sub-Freights

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case of a simple charge, the creditor is assigned only part of the debtor’s asset (see Walter & Sullivan LD v. J. Murphy & Sons LD [1955] 2 QB 584).

In the ‘liens’ context, it is therefore potentially important to know whether the charterer equitably assigns, by way of security, his entire contractual right to receive sub-freights (an equitable mortgage) or whether he simply charges that contractual right to the extent of the debt which he himself owes (a simple equitable charge). Since only a mortgagor assigns more than he owes by way of security, the distinction may be crucial to the quantum of the owner’s lien claims where the debts down the charter chain differ in amount.

However, before considering in more detail the nature of the ‘charge’ created by a lien clause, it is worth beginning with what a lien clause is not.

What the lien clause Does not Give

The basic starting point is that the lien is not a possessory lien. Even in the simple, three party situation of Owner > Charterer > Sub-Charterer, where both Charterer and Sub-Charterer fall into arrears, the Owner never physically acquires an asset over which he can retain possession pending payment of the debt due to him. The rules on possessory liens are therefore of limited, if any, utility: The Bulk Chile [2013] 1 All ER (Comm) 177 at [55].

Secondly, the exercise of the lien requires default under the charter containing it and is therefore entirely independent of the owner’s right to intercept bill of lading freight. As Andrew Smith J noted in The Bulk Chile [2013] 1 All ER (Comm) 177 at [36]:

“the right of owners to intervene to have freight under their contract with shippers paid direct to themselves does not depend upon whether the charterers under the head charterparty have defaulted in paying hire or whether sums have ‘accrued due’ (in the terms of cl 18 of the 1946 NYPE form) under the head charterparty.”

Thirdly, the lien clause does not grant the Owner any immediate proprietary right over debts subsequently owed from Sub-Charterer to Charterer. In the first place, this is because, at the time the head-charter is concluded, there will often be no sub-charter (let alone sub-charter debt) in existence. More importantly, however, it follows from the fact that, until the Owner gives notice of the exercise of the lien, the Charterer is free to receive payment of sub-charter hire in the ordinary course of business. Accordingly, “if the shipowner’s notice to pay comes too late, and the sub-freight has already been paid, then the lien fails to bite on anything”: The Spiros C [2000] 2 All ER (Comm) 542, at [11], per Rix LJ).

the lorD millett oBiter Dictum

According to an obiter dictum of Lord Millett in Agnew v. Commissioner of Inland Revenue [2001] 2 AC 710, at [41], the Owner’s inability to follow a liened debt into the hands of its

payee meant that the lien clause simply could not be explained on the basis of an equitable charge. If there was a proprietary right in equity, one ought to be able to follow it into the hands of the recipient. Lord Millett therefore opined that the lien on sub-hires is a rule peculiar to “the maritime law”, giving the Owner a mere contractual right to sue the Sub-Charterer.

The main difficulty with this view, however, was that it was inconsistent, in at least two respects, with the 1980s High Court decisions on the lien clause.

First, it has always been clear that the Owner > Charterer > Sub-Charterer scenario permits the Owner to sue the Sub-Charterer directly, which is very difficult to explain if the Owner’s entitlement to the liened debt exists only by reason of a right in the Owner > Charterer contract. If the right was a mere contractual right, one would expect the Owner’s remedy to be confined to an injunction restraining the Charterer from collecting the liened debt or ordering the Charterer to direct its payment to the Owners: see The Western Moscow [2012] 2 All ER (Comm) 1140 at [51].

It is even more difficult, on the mere contractual right theory, to explain how the Owner can sue beyond the Sub-Charterer where the charter chain is: Owner > Charterer > Sub-Charterer > Sub-Sub-Charterer. However, the Commercial Court had long since held that the Owner could sue the Sub-Sub-Charterer directly in this scenario: The Cebu (No.1) [1983] 1 QB 1005.

The second problem with Lord Millett’s view was that it would necessarily treat as wrongly decided those cases which had held that the lien clause was registrable as a charge on the Charterer’s book debts, at least where the Charterer was a company incorporated in the UK. These include the Companies Court decision in The Ugland Trailer [1986] Ch 471 and the Commercial Court decision in The Annangel Glory [1988] 1 Lloyd’s Rep. 45.

the Western moscoW

In The Western Moscow [2012] 2 All ER (Comm) 1140, in the context of an application for the continuation of freezing orders obtained by the owners, Christopher Clarke J (as he then was) was confronted squarely with the dilemma created by Lord Millett’s dictum.

At [49] to [52], Christopher Clarke J declined to follow Lord Millett’s dictum, confirming the view that the lien constitutes – or at least resembles – a floating charge over book debts, which crystallises by notice from the Owner and thereby furnishes a proprietary right in equity:

“49. I do not see why the clause cannot be regarded as amounting to an agreement to assign future debts by way of security, which gives rise to rights in equity… The right cannot be exercised if nothing is due to the owner and, being an agreement to assign a debt, it cannot subsist if the debt in question is paid without notice of the assignment. Although the

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lien provides an immediate security interest at the date of the charter, it may be that it creates no proprietary interest in favour of the owner until the owner gives notice because, until then, it is open to the charterer to claim the debt in the ordinary course of business.

…52. … I prefer to hold that the clause creates an assignment by way of

charge, following the authorities at first instance decided by distinguished judges of this court which must have been acted on as authoritative for many years.”

Accordingly, the ‘charges’ created by lien clauses are probably registrable (see [49]) and, provided each link in the charter chain (save the final one) contains such a clause, the party at the top has a direct cause of action against the party at the bottom.

This is possible by virtue of a chain of equitable assignments. The head charterer assigns to the owners, not only future sub-hire due to him under his direct sub-charter, but also any rights to future sub-sub-hires (under any sub-sub-charters) of which he himself becomes equitable assignee (see [58] to [61]).

the Bulk chile

A further aspect of the lien’s nature was explored before the Commercial Court in The Bulk Chile [2013] 1 All ER (Comm) 177. At [51], Andrew Smith J noted that, in light of The Western Moscow, it had been conceded that “a lien over sub-freights operates by way of an equitable assignment of the right to be paid them or, in the case of sub-sub-freights, a chain of assignments”.

However, one disputed question was whether the lien could be invoked before the relevant freights became due. The question arose because, in that case, freight fell due two banking days after completion of loading, by which time the owners had already given notice of the exercise of their clause 18 NYPE 1946 lien.

Andrew Smith J held, at [64] to [66], that the lien applied to such debts, on the basis that the entitlement to freight is a chose in action which vests on the date the voyage charter is concluded, albeit that its payment is conditional. Moreover, as the owner will rarely know precisely when such sub-freights fall due contractually, any alternative view of clause 18 would severely emasculate it.

precisely What – or hoW much – is assiGneD?

Whereas it is therefore now relatively settled that the lien operates as an equitable assignment by way of equitable charge, the word ‘charge’ has generally been used rather imprecisely. One important practical question is whether it is a simple floating charge or a floating mortgage.

As discussed above, whereas a mortgage constitutes an assignment of the whole property by way of security (with a

requirement to account once the secured debt is discharged) a simple charge relates only to part of the relevant property. Although floating securities (those which crystallise some time after their creation) are generally referred to as floating ‘charges’, that term also encompasses floating mortgages: see Beale et al., The Law of Security and Title-Based Financing, 2nd Edition (2012) at [6.58], [6.67] and [6.73], and Tailby v. Official Receiver (1888) 13 App. Cas. 523.

Consider, for example, a scenario in which the Owner at the top of a NYPE 1993 chain is owed US$200,000 in hire, his Charterer is owed US$50,000 in sub-hire, and the Sub-Charterer is owed US$75,000 in sub-sub-hire. The chain would look like this: Owner – ($200k) – Charterer – ($50k) – Sub-Charterer – ($75k) – Sub-Sub-Charterer.

It is clear that the Owner can lien the $50,000 by giving notice to the Sub-Charterer of the exercise of the clause 23 lien in the head charter. The explanation is that, by clause 23 (as perfected by notice), the Charterer assigned to the Owner the future chose in action constituting his right to receive the US$50,000, by way of security for the debt of $200,000 due to the Owner. As the charged property ($50,000) is smaller than the debt secured ($200,000) it matters not whether the Charterer merely equitably charged his right to receive sub-hire or assigned it by way of equitable mortgage.

However, the mortgage/charge distinction becomes important when the Owner seeks to lien, directly, the $75,000 due from the Sub-Sub-Charterer. Although the $75,000 is still smaller than the $200,000, it is greater than the $50,000 owed in the sub-charter (and which it was assigned by the Sub-Charterer to secure). It is therefore vital to know whether the Sub-Charterer, in securing his debt of $50,000, assigned to the Charterer the entire $75,000 subject to a proviso for reassignment upon payment of the $50,000 (“the mortgage analysis”) or only assigned to the Charterer a charge over the $75,000 worth $50,000 (“the simple charge analysis”).

On the simple charge analysis, the Owner could lien the $50,000 from the Sub-Charterer, plus a further $50,000 from the Sub-Sub-Charterer, giving a total of $100,000 in lien claims. He could not lien the full $75,000 because, by hypothesis, the Charterer was never assigned more than an equitable right to receive $50,000 of the $75,000, and so could not have re-assigned it to the Owner.

On the mortgage analysis, however, the Owner could lien both the $50,000 from the Sub-Charterer and the full $75,000 from the Sub-Sub-Charterer, thereby recouping $125,000 in lien claims. This is because, if the Charterer received an equitable mortgage of the $75,000 (to secure the $50,000 debt), the Charterer must have re-assigned the same $75,000 to the Owner, together with the $50,000, to secure his debt of $200,000.

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submitted or is, perhaps, not made at all without appearing before the court after the service of the claim, the judge will order the continuation of the proceeding on the merits and dismiss the jurisdiction objection. P&I Clubs and liability insurers may be reluctant to appear before Turkish courts considering that an appearance may be taken as accepting the jurisdiction of Turkish courts. However, this is not the case.

If a defendant P&I Club or liability insurer should submit defences to a Turkish court one problem might be that their submissions would not be limited to purely procedural defences. Turkish law does not make any distinction in respect of a special appearance for a procedural objection. Therefore P&I Clubs and liability insurers, in response to a claim, should raise any jurisdiction objections and substantive defences at the same time. If they seek to protect their rights by submitting a purely procedural defence, such as an objection to jurisdiction, this may have a negative impact on the court’s assessment of the case if

the case continues on the merits.

general aVaIlabIlIty of defences to Insurers

Possible defences may include those available under the insurance policy, which determine the limits of the cover, and also other defences contained in the TCC that may be raised against the member or insured. While issues about the cover, in addition to defences on the merits of the case, may be available to P&I Clubs and liability insurers in theory, in practice, it is difficult to say whether the Turkish courts would allow all the limitations or exceptions that might be contained in Club or insurance cover.

P&I Clubs are indemnity insurers and, in certain jurisdictions, may only be obliged to make payment under a policy if the insured first makes payment to discharge its liability: the familiar “pay to be paid” rule. This rule may provide a valid and strong defence in jurisdictions where disputes would normally be submitted under the policy. However, in the writer’s view the “pay to be paid” rule is not a policy condition that would necessarily find favour with the Turkish courts.

comment

Article 1478 may be a perfect solution for claimants whose claims are not secured. However, this provision may cause concern for P&I Clubs and liability insurers. The Article is not well drafted in relation to potential cases against insurers domiciled outside Turkey and may give rise to uncertainty for a considerable period of time. In particular, the uncertain scope of Article 1478, and its grey areas which may affect the availability of defences for P&I Clubs and liability insurers, are cause for concern - especially where the jurisdiction of the Turkish courts is challenged. Therefore, from a strategic point of view, it is crucial for P&I Clubs and liability insurers to defend each and every case and then to choose the right case to exhaust the appeal process.

It may be the case that judgments of the Turkish courts may not be readily enforceable against P&I Clubs and liability insurers as they may be protected by the laws of the States where they are domiciled. However, there is always a risk of enforcement with various enforcement options available in view of the globalisation of trade and flow of money in cash or in different forms such as premiums or through guarantees.

“20 Years”

On the mortgage analysis, therefore, the Owner recoups $25,000 more, essentially at the expense of the Sub-Charterer (who mortgaged property worth $75,000 to secure a debt of $50,000). It is likely, of course, that the Sub-Charterer has a right of recourse against the Owner and/or the Charterer for the excess $25,000 and equitable interest (see, by analogy, Charles v. Jones (1887) 35 Ch D 544 at p.549), but in terms of cashflow it may be crucial for the Owner to receive the $75,000 upfront.

There is support in the authorities for both approaches. In The Cebu (No.1) [1983] 1 Lloyd’s Rep. 302, Lloyd J held, at p.308 col. 2, that the clause 18 NYPE 1946 assignment takes effect by way of mortgage, stating that

“the equitable assignment by LAMSCO [the Sub-Charterer] to Naviera Tolteca [the Charterer] was effective to transfer to Naviera Tolteca the whole right of LAMSCO to receive freight due from Itex [the Sub-Sub-Charterer], so long as there was anything due from LAMSCO to Naviera Tolteca” (emphasis added).

In our example above, Lloyd J’s reasoning suggests that the whole right to the debt of $75,000 is assigned as security for the debt of $50,000, such that the equitable right to $75,000 must have been re-assigned through the chain to the Owner.

On the other hand, The Ugland Trailer [1986] Ch 471 arguably supports a narrower view. There, at p.478 col.2, Nourse J said that the effect of the lien clause is to “give the shipowner a limited right to require payment from the shipper of money which is owed by the shipper to the charterer.” He went on to say that:

“Having been given for any amounts due under the charter, it obviously cannot be an out-and-out assignment. It can only be an assignment by way of security for what is owed by the charterer to the shipowner. It is established law that an equitable assignment of a chose in action by way of security creates an equitable charge on the chose…”

However, Nourse J’s distinction between an “equitable charge” and an “out-and-out assignment” is clearly concerned with distinguishing between assignments which operate by way of security and those which do not. It is an oversimplification to the extent that it suggests that one cannot secure a debt of $X with a charge worth more than $X. As explained in The Cebu (No.1), one can do precisely that if the security is an equitable mortgage.

In fact, the mortgage analysis is the easier to rationalise, even in the straightforward Owner > Charterer > Sub-Charterer scenario. It is clear on authority that the relevant ‘charge’ is created at the date the head charter is concluded, rather than at the date of notice of lien or the date on which the sub-hires became due: The Annangel Glory [1988] 1 Lloyd’s Rep. 45. It is also now clear that the lien bites on debts which fall due even after notice of the lien’s exercise is given: The Bulk Chile [2013] 1 All ER (Comm) 177.

If the crystallising event is the giving of notice, but the lien nonetheless captures further sub-hire/freight accruing after that date, the simplest explanation is that the Owner acquires the whole right to the sub-hire/freight on the giving of notice. Otherwise, the ‘charge’ must, conceptually speaking, grow in size post-notice.

conclusion

For a long time there has been considerable agreement as to what the owner’s lien on sub-hires and sub-freights does not provide. However, since Lord Millett’s obiter dictum in the early 2000s, there has been lingering doubt as to what it is.

Following the recent decisions in The Western Moscow and The Bulk Chile, owners are on firmer ground in asserting a right to sub-hires and sub-freights down charter chains with continuously present lien clauses. Equally, however, those decisions serve as a reminder of the potential need to register lien clauses where a UK-incorporated charterer is involved.

Moreover, it remains to be seen whether and how the owner’s lien is limited by reference to smaller debts existing down the charter chain. Whilst it appears that the equitable ‘charge’ may in fact be an equitable mortgage, even that conclusion leaves difficult and controversial questions as regards the method of accounting down the charter chain.