Lien Clause
Shipowners are granted a lien on the cargo for freight, dead freight, demurrage, and damages for detention. Charterers are obligated to cover dead freight and demurrage, including damages for detention, incurred at the port of loading.
Lien on the Cargo includes:
- Freight
- Dead Freight
- Demurrage
- Damages for Detention
Charterers are also liable for freight and demurrage, including damages for detention, at the port of discharge, but only to the extent that Shipowners are unable to secure payment by enforcing the lien on the cargo.
The purpose of Lien Clauses like this is to permit owners to initially exercise a lien on the cargo to recover costs from cargo owners as much as they are capable.
As demonstrated in the Miramar Case, such lien clauses and provisions in the charterparty that assign responsibility for costs like freight, dead freight, and demurrage must be meticulously drafted.
If these responsibilities are ineffectively transferred to a third party, the cargo owner, the lien will not be enforceable against them. These clauses effectively end the charterer’s liability if recovery can be achieved from the cargo owner at the time.
In the Sinoe Case, the vessel was chartered using the GENCON Charter Party form but with a standard Lien Clause removed and replaced by: ‘Charterers’ liability shall cease as soon as the cargo is on board, with owners having an absolute lien on the cargo for freight, dead freight, and demurrage and average.’
Demurrage occurred at the discharge port. Although the bill of lading incorporated the charterparty terms, including the Lien Clause, no lien could be enforced because the receiver was the Government, which had declared an emergency and prohibited enforcing such liens.
Right of Lien
The Arbitrator determined that the Lien could neither be legally nor practically enforced ashore or on board. The Charterers contended that merely creating a Right of Lien was sufficient, regardless of its enforceability.
The Court of Appeal dismissed this view, ruling that the Right of Lien must be enforceable and effective at the time of Discharge for the charterers’ liability to end. Lord Denning MR noted the deletion of the normal Lien Clause but did not believe it would have altered the outcome, as per the ‘Sinoe’ 1972 case.
It is common to find Cesser Clauses unrelated explicitly to a Lien provision. However, if the Charter Party includes provisions for a lien, even if apparently distinct from the Cesser Clause, both the Cesser and Lien provisions will be treated as coextensive.
Cargo Liens
A lien grants a Shipowner the contractual right to retain possession of cargo at the discharge port as security for the payment of Freight or other charges owed to the Shipowner.
A Shipowner may enforce a lien under common law (outside of express contractual terms) for:
- Collecting General Average (GA) Contributions owed by the cargo.
- Covering any Expenses the Shipowner incurred in protecting the cargo.
- Retrieving Freight payable upon the cargo’s delivery.
Moreover, Charter Parties often explicitly grant Shipowners a lien right:
ASBATANKVOY: Part II Clause 21
“The Shipowner shall have an absolute lien on the cargo for all Freight, dead Freight, Demurrage, and costs, including attorney fees, until these are recovered. This lien continues even after the cargo has been transferred to the Charterer, the holders of any Bill of Lading (B/L), or into storage.”
The ASBATANKVOY Charter Party specifies the Bill of Lading (B/L) form to be used, ensuring all terms, including the lien for Demurrage, are integrated into the Bill of Lading (B/L).
In the ‘Miramar’ case, the Shipowners enforced a lien to collect Demurrage from the consignees. However, the House of Lords ruled against the Shipowners, finding that the term ‘the Charterer’ in the Charter Party should be interpreted strictly as the Charterer of the ship, not the consignee, rendering the lien Clause ineffective when included in the Bill of Lading (B/L).
GENCON form Charter Party Lien Clause:
“Shipowners shall have a lien on the cargo for Freight, dead Freight, Demurrage, and damages for detention. Charterers are liable for any dead Freight and Demurrage (including damages for detention) incurred at the loading port. They are also liable for Freight and Demurrage (including damages for detention) at the discharge port to the extent that Shipowners cannot secure payment by exercising the lien on the cargo.”
This form of lien Clause allows Shipowners to first place a lien on the cargo to recover payments from cargo Shipowners as far as possible.
As illustrated in the Miramar case, such lien Clauses and corresponding Charter Party provisions that assign responsibility for payments like Freight, dead Freight, and Demurrage need careful drafting. Poor transfer of these obligations to a third-party cargo Shipowner can render the lien ineffective against those parties.
The effect of such Clauses is to end the Charterer’s liability as long as recovery can be achieved from the cargo Shipowner at that time.
In the ‘Sinoe’ case, the ship was chartered using the GENCON form, but with the standard lien clause removed and replaced by the following clause:
“Charterers’ liability shall cease as soon as the cargo is on board, with Shipowners having an absolute lien on the cargo for Freight, Dead Freight, Demurrage, and Average.”
Demurrage was accrued at the discharging port. Although the Bill of Lading (B/L) included the terms of the Charter Party and the lien clause, the lien could not be enforced because the government of the discharging country, which was also the receiver, had declared an emergency that prohibited the enforcement of such liens. The Arbitrator determined that the lien was neither legally nor practically enforceable onshore or aboard the ship. The Charterers contended that merely establishing a right to a lien was sufficient, regardless of its enforceability.
The Court of Appeal dismissed this notion, ruling that for the Charterers’ liability to cease, the lien must be enforceable and effective at the time of discharge. Lord Denning MR noted the deletion of the standard lien clause but indicated that its presence would not have altered the outcome, as recorded in the ‘Sinoe’ [1972] 1 Lloyd’s Rep 201.
It is common to encounter cesser clauses that do not directly relate to the provision of a lien. However, it has been established that as long as the Charter Party includes provisions for a lien, even if seemingly separate from the cesser clause, the cesser and lien provisions will be treated as interconnected.
The practical challenges associated with enforcing a lien are numerous.
Before a lien can be enforced, the Shipowner must demonstrate that the Charterer is liable for the debt that the lien seeks to secure. Shipowners often worry about receiving Freight payments when there are concerns about the Charterers’ financial health. However, a lien cannot be enforced over the cargo for these debts unless such charges like Freight and Demurrage are due. For instance, if Freight is payable upon discharge completion, Shipowners cannot enforce a lien for Freight since these charges are not due until after the discharge is complete. Once the cargo is discharged, possession is lost, and the ability to enforce a lien is forfeited.
As in the ‘Miramar’ case, it is crucial to assess the conflicting and contrasting obligations between the Shipowner and Charterer, and between the Shipowner and cargo Shipowner under the Bill of Lading (B/L). If these contracts are not aligned, the Shipowner’s liability to cargo Shipowners may significantly differ from those to the Charterer. Under such circumstances, enforcing a lien can be exceptionally challenging.
A significant and often insurmountable challenge can be the stance of local courts at the cargo’s discharge location. While the Charter Party may be governed by English or US law and jurisdiction, and the Bill of Lading (B/L) might also include such terms necessitating dispute resolution in English courts, local courts during the cargo discharge may exclusively recognize their own jurisdiction. In such scenarios, a cargo Shipowner, whose cargo is being detained by the ship’s Shipowner for payments owed by the Charterer, will likely seek intervention from the local court to retrieve the cargo. Additionally, the ship may be subject to arrest within the local jurisdiction as a security measure for any losses incurred by the cargo Shipowner.
Thus, practically speaking, exercising a lien over cargo often presents challenges, necessitating legal consultation.
The process of exercising a lien involves two fundamental steps: firstly, a formal demand for the payment concerning which the lien is to be applied must be issued; secondly, there must be continuous retention of the cargo by the ship’s Shipowner.
The ship’s Shipowner must clearly communicate to all relevant parties that a lien is being placed over the cargo and must provide adequate details to allow the cargo Shipowners and/or Charterers to ascertain the amount owed and arrange for its payment to lift the lien.
Moreover, the ship Shipowner must maintain possession of the goods. Typically, this involves retaining the goods on board the ship. However, this can lead to significant delays, during which, if the lien is improperly applied, the ship might neither earn Freight nor accrue Demurrage. Proper execution of a lien usually results in Demurrage. While unusual, it is possible for the Shipowner to offload the cargo into dedicated storage facilities where his agent maintains a lien while the ship departs the port.
In conclusion, for a lien to be effectively executed, the Shipowner must have a precisely formulated lien clause within the contract detailing the conditions and terms under which the lien can be enacted. There must be an outstanding payment, notification must be issued, and continuous possession of the goods must be maintained.
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