Exercising Maritime Liens Against Cargo and Sub-Freights

Vessel owners rarely carry cargo for their own account.  More commonly by far, a vessel owner will charter its vessel to another party to carry their (or their sub-charterer’s) cargo.  The contracts can vary widely – from voyage charters or contracts of affreightment to time charters to negotiable bills of lading (not to mention the more complex arrangements that one often sees for container cargos).  But in most instances, vessel owners are in the business of transporting cargo on behalf of others and, all going well, of being paid to do so.  This article is about one mechanism the vessel owner may use to ensure that it gets paid: the maritime lien against cargo.

It has been settled for over a century under United States maritime law that a shipowner has a maritime lien against cargo for charges incurred during the course of its carriage.  As the Supreme Court stated in its 1866 decision in Bird of Paridise,  “Ship-owners, unquestionably, as a general rule, have a lien upon the cargo for the freight, and consequently may retain the goods after the arrival of the ship at port of destination until the payment is made.”  Traditionally, a maritime lien against cargo for freight and demurrage was considered a “possessory” lien, meaning that the lien is lost upon the delivery of the cargo to the consignee.  To exercise its maritime lien, in other words, the vessel owner was expected to retain possession and control of the cargo until payment; and if no payment was received, it needed to enforce its lien by maritime arrest while the cargo remained in its possession.

It is not difficult to imagine the impracticalities of this rule.  For instance, it certainly would not do in most circumstances to simply retain the cargo on board the vessel pending payment, given that the vessel is presumably looking to complete discharge and commence her next voyage as quickly as possible.  And while some kinds of cargo may lend themselves to segregated storage ashore, whether in a bonded warehouse or dedicated storage facility, this is often logistically complicated and also expensive.  Add to those practical difficulties the additional contractual challenge that some portion of freight and demurrage often are not even due until sometime after the cargo is delivered, and it is not difficult to see why the “possessory” element of the lien can often prove problematic.

Recognizing these problems, the courts have determined that “it would frustrate commerce to require shipowners to retain their liens only by actual possession of the implicated cargo.”  They therefore have found that “a shipowner enjoys a strong presumption that, absent a clear indication to the contrary, he has not waived his cargo lien upon the delivery of cargo.”   As the Fifth Circuit Court of Appeals explained in one case where the charter provided for a lien against cargo for freight and demurrage but also provided for payment of these items after the cargo’s delivery:  “No rational person would establish a lien on cargo for certain costs that are due after delivery of the cargo but have delivery of the cargo extinguish the lien.  If that were the case, the lien would be a futile mechanism for protection.”

What does this “no waiver” presumption mean?  It means that although the cargo may have been delivered to the receiver, it may yet be possible for the vessel owner to maintain and enforce its lien by arresting the cargo in an in rem court proceeding.  In analyzing whether the lien persists after discharge, the Court will look at the available evidence to determine whether the parties intended that the lien would be waived upon delivery. 

Most relevant in this respect would be wording in the applicable charter or bill of lading making clear that the lien survives discharge, but it could also come from a notice from the vessel owner at or before discharge that the delivery is conditioned on the maintenance of the lien.  It might even come from established local usage at the port.

Of course, this rule presents its own practical difficulties.  In particular, once a cargo is discharged it is not always easy to identify or segregate – particularly with liquid or dry bulk cargoes that may be discharged into storage facilities and commingled with other product.  Some commentators have suggested that the lien may yet survive so long as the cargo is commingled with product of the same type and specification; however, once the cargo is admixed or processed, the lien may be extinguished.

It is one thing when the cargo belongs to the charterer who actually owes freight or demurrage, but what if the cargo belongs to a third party?  Here, the vessel owner’s rights become far more constrained, and the courts have held that the vessel owner does not have a maritime lien against a third party’s cargo.   Vessel charters do, however, also commonly provide that the vessel owner shall also have a lien against sub-freights – meaning the amounts that may be owed to the charterer by third parties for the carriage of their cargo.  Such liens are routinely enforced.

A lien against sub-freights is materially different from a lien against cargo.  First, the lien can only be exercised to the extent of sub-freights still outstanding, and once the freight is paid the lien right disappears.  Moreover, the lien against sub-freights arises solely as a matter of contract, and not under the maritime law.  Thus, to be enforceable against a third party – i.e., the party owing the sub-freight – the vessel owner must give actual notice of the lien to the cargo owner before it pays its freight to the charterer; otherwise, the lien is discharged.  (If, however, the party owing sub-freights pays the original party after receiving valid actual notice, that party may be liable to pay the freight twice).

As can be seen, maritime liens against cargo and sub-freights are important tools in the shipowner’s enforcement arsenal, both before cargo is discharged and, often, even afterwards.  Fully understanding how these tools work – and how far they may (or may not) reach – is important for both the vessel owner and the charterer of a vessel carrying cargo.

References

1  72 U.S. 5 (1866).

2  See Dampskibsselskabet Norden A/S v. 25,001.078 MT of Fly Ash, 308 F. Supp. 3d 693 (N.D.N.Y. 2018)(quoting In re World Imports Ltd., 820 F.3d 576, 584 (3d Cir. 2016).

3  Arochem Corp. v. Wilomi, Inc., 962 F.2d 496, 500 (1992).

4  In re 4,885 Bags of Linseed, 66 U.S. 108 (1861); See also Dampskibsselskabet Norden A/S v. 25,001.078 MT of Fly Ash, 308 F. Supp. 3d 693, 697 (N.D.N.Y. 2018).

5  VOYAGE CHARTERS, 17A-19 (Informa 4th Ed. 2014).

6  See Lykes Lines Ltd. v. BBC Sealand, 398 F.3d 319, 323 (5th Cir. 2005).