Lien clause

Lien clause. This is generally connected with the “Lesser clause” in a charterparty. The shipowner is given a possessory lien either by the common law or by express agreement (e.g. in the “Lien and Lesser” clause) on the cargo earned.

The common law gives the owner a lien for freight, general average contributions and expenses incurred by the master or owner in protecting and preserving the cargo (for example, for salvage services) but not for other claims such as for demurrage and deadfreight. These have to be covered in an express clause. Such a clause could state:

“The Owners shall have a lien on the cargo for freight, deadfreight, demurrage and average contributions due to them under this Charterparty . . .” (MULTIFORM.)

The charterparty may give a contractual lien on cargo owned by the charterer but possibly not on cargo owned by the consignee, unless the consignee is also the charterer. A lien may be enjoyed by a shipowner only if the bill of lading covering the cargo gives him one. In The Fort Kip, 1985, difficulties were experienced on exercising liens on cargo owned by the charterers. The cargo of oil was carried on a voyage charter. Freight was payable immediately after completion of discharge.

The charterparty contained a lien clause. The owner stopped the discharge into a barge and retained some cargo on board as exercise of the lien. After a delay the balance cargo was discharged into another barge. The court held that the owners could not exercise their lien on the cargo while it remained on board the Fort Kip but could exercise their lien on the cargo discharged into the second barge. The charterers’ obligation to pay freight arose only on completion of discharge and the charterparty did not provide for freight to be paid in instalments. Once the cargo was fully discharged, the owners could exercise lien on it before it was delivered to the charterers.

This means that the owners must find suitable storage space for the discharged cargo. Liening cargo on board, even if freight is not due after discharge, may be impracticable. However, exercising a lien on discharged and warehoused cargo can also present problems, especially if the consignees fail to claim it. The shipowners may be liable to pay for storage and insurance costs and the cargo may be deteriorating. The practical solution is to apply to a court for an order to sell the cargo after a reasonable time has passed.

In a time charter the owner may also be given a lien on sub-freights. This may be a useful practical remedy for a shipowner to collect outstanding payments from a time-charterer. Under a period charter (a medium to long-term time charter) the owners may be able to withdraw the vessel for non-payment of hire and any other amounts.  However, under a trip-charter (a voyage charter on time-charter terms), withdrawing a vessel may not be a suitable remedy, especially when the vessel has cargo on board under bills of lading and which must be delivered at the destination on presentation of good hills of lading. The local laws at the port of destination may also not help the shipowner, especially if the cargo is for government-linked consignees. Exercising a lien on cargoes may be impracticable.

In time charterparty forms, the owners are given an additional lien to a lien on cargo that they would have under a voyage charter. For example, the New York Produce Exchange form states

β€œ . . . the owners shall have a lien upon . . . all sub-freights for any amounts due under this charter, including general average contributions . . .”

The BALTIME form states:

“The owners to have a lien upon all . . . sub-freights belonging to the time charterers and any bill of lading freight for any claims under the charter . . .”

The BALTTME form seems to give less protection to the owner than the NYPE form. In the BALTIME the lien is on sub-freights belonging to the charterers. If the vessel is sub-sub-chartered, the amounts due under the sub-sub-charter would not belong to the head charterers and may not be limed.

The lien on sub-freights is not as simple to exercise as, perhaps, a lien on cargo where the cargo can be retained in the carrier’s possession until the amounts due are paid. Sub-freights are not physical goods, which the shipowners actually possess. Therefore a “lien” on sub-freights cannot be a possessory lien.  The owners giving notice to the sub-charters or shippers requiring the latter to pay subcharter hire or freight to the owner directly exercise the lien on sub-freights. This right was considered in The Cebu, 1983. The charterers owed large sums of money to the shipowners. The owners gave notice to the sub-sub-charterers. The latter paid their hire into court. The owners’ claim to the amounts paid into court was resisted by the sub-charterers. The sub-charterers argued that the NYPE form gave the owners a lien on “sub-freight”, not on “hire”. Furthermore, they argued, the owners could claim amounts due as subhire payable to the defaulting head charterers and not sub-sub-hire payable to the sub-charterers who were not in default.

The court held that “sub-hire” was the same as “sub-freight” and the lien extended to “sub-sub-hire”. Under NYPE, the lien was an equitable transfer of all freights or hire as and when they became due under the head charterparty. (Under the BALTIME, there is a restriction on freights belonging to the head Charterer; see above.) Therefore, the lien transferred all rights of the sub-Charterer also. (The transfer of rights is called an “assignment”.) This lien is of considerable use to a shipowner in a bad market or during a shipping recession, as was experienced from the late 1970s to the mid-1980s when many charterers in a chain of time charters defaulted.

It may be interesting to note that The Cebu came before a different court in 1989 for other sums of hire due under the same charterparty. On this occasion, a different judge refused to accept the lien on subfreights extended to sub-hire or even to sub-sub-hire. The owners were not permitted to exercise their lien on sub-hire.

One obvious solution to a possible conflict because of terminology would be for the time charterparty to be claused accordingly to specify that the lien was on all sub-freights and also on all hire and sub-hire due.


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