What is Maritime Lien?
Like all liens, a maritime lien is a claim by a creditor on a debtor’s property. In shipping business, that debtor’s property is generally a ship. On the other hand, maritime liens are not similar to other onshore liens. Maritime liens unique feature is that they need not be recorded or noticed.
Maritime Lien follow the ship wherever it goes. That is why, the peculiarities of maritime liens are important to any understanding of shipping business. Maritime lien is an interest in a ship arising by operation of law. According to maritime lien law, a ship is a separate legal entity that can incur debt. Maritime lien serves as security for the repayment of indebtedness incurred by the ship itself during its operations.
Generally, ship operator or master order provisions or spare parts to ship, people or companies that provide services to a ship obtain a lien against the ship until the services are paid for. If bunker supplier sells bunkers to a ship, a Maritime Lien automatically arises against the ship until the bunker bill is paid. Even if the ship leaves port where the bunker was sold.
Usually, Maritime Lien does not need to be recorded. Maritime Lien can be silent, maritime liens are need to be recorded to be valid. Because Maritime Lien can be silent, there is no way to ascertain with certainty whether a ship has liens against it without having a detailed understanding of the ship’s activities. Nevertheless, maritime liens can be filed and recorded under the requirements of many ship registries.
If a ship is sold to another ship owner, Maritime Lien on that ship does not extinguish. Maritime Lien is an interest in the ship itself. Maritime lien goes with the ship even if ship is sold. All sale and purchase ship contracts contain provisions requiring ship seller to affirm that there are no existing maritime liens on ship. If maritime liens on sold ship do in fact exist, contact provision give rise to a breach of contract claim by ship acquirer against ship seller. But, provisions do not, in and of itself, eliminate those liens.
Maritime Lien can be terminated or destroyed by several mechanisms:
- If a ship itself is lost or destroyed, then any maritime liens against ship are as well, since a maritime lien is an interest against the ship and only survives as long as the ship itself survives.
- Judicial sale of a ship by a maritime court is usually made free of liens, including maritime liens. This may also occur in the bankruptcy context. If a person with a claimed lien fails to come forward during the sale, the lien may be lost.
- Time lapse: applicable law regarding statutes of limitations relating to the particular claim may bar further proceedings regarding the lien after the passage of a certain period of time.
- Creditor claimant may affirmatively renounce reliance on a maritime lien.
Maritime Lien applies to:
- Ship’s Equipment
- Ship might earn (all earned but not paid freight)
Maritime Lien might also apply against the cargo the ship carries, but generally only until the cargo is delivered. Once cargo is out of possession of the ship, cargo is no longer subject to a maritime lien on that ship.
United States courts apply the choice of law factors enacted by United States Supreme Court to determine what country’s substantive law should apply to the creation of maritime liens. Maritime lien is created is determined according to the substantive law that the court applies. If bunker is sold to a ship in Turkey, then the court would likely apply the law of Turkey. Maritime lien has been created there even if bunker seller is seeking to enforce the lien in Italy.
Law of Maritime Lien
Law of Maritime Lien in the United States has been codified in the Commercial Instruments and Maritime Lien Act but still relies heavily on common law precedent. Maritime Lien Act identifies certain services that automatically give rise to liens by operation of law and provides guidance on the priority of such liens in the event that funds from the sale of a ship or otherwise are insufficient to pay all valid claims.
Claims that give rise to Maritime Lien in United States under Maritime Lien Act:
- seamen’s wages
- salvage: services incurred in saving a ship or cargo from the dangers of the sea
- tort claims: such as claims relating to collisions, personal injuries and damage to cargo
- general average: maritime rule providing that all cargo interests should share in the burden of losses if certain cargo is sacrificed to save the ship and the balance of cargo
- necessaries: like fuel, supplies, pilotage, repairs, dockage, towage
- breach of charter claims
- preferred ship mortgages
- unpaid freight or demurrage
- pollution claims
- other statutory liens
Maritime Lien Act defines necessaries as including repairs, supplies, towage, and the use of a dry dock or marine railway. Courts interpreting the Maritime Lien Act have deemed many activities to be encompassed by the term necessaries, including surveyor’s services fees, crew member air fare, certain legal fees and insurance premiums. Usually, courts have given the term necessaries a broad interpretation to encompass any service or item reasonably necessary for the ship’s operation. Every order of necessaries, on behalf of a ship, does not give rise to a maritime lien.
According to Maritime Lien Act only:
- owners of the ship
- master of the ship
- manager of the ship
- bareboat charterer of the ship
- another person authorized by the owner, charterer, owner pro hoc vice
- agreed buyer in possession of the ship
can order necessaries and thereby create a maritime lien. Maritime Lien Act states that supplier of necessaries may rely on the presumption that a charterer has authority to incur liens unless the supplier has actual notice of the lack of such authority.
Maritime liens prioritized and ranked among potential ship claims:
- judicial expenses referred to as custodia legis (a claim not giving rise to a maritime lien)
- seamen’s wages
- salvage and general average
- tort claims
- breach of maritime contracts that give rise to a preferred maritime lien (including necessaries, incurred prior to a mortgage filing)
- preferred ship mortgages
- necessaries incurred after a mortgage filing
- state-created maritime liens
- liens for federal statutory violations such as pollution laws
- preferred non-maritime liens such as tax liens
- attachment liens
- maritime liens in bankruptcy
Maritime Liens are prioritized within each category in a counter-intuitive way (last in time incurred has a higher priority than liens incurred earlier in time, inverse order rule, last-in-time, first-in-right). There are a few well-established exceptions, like priority of competing preferred ship mortgages is determined by first-in-time, first-in-right.
Maritime Liens can be filed and recorded with United States Coast Guard. Federal law permits the filing of a notice of claim of lien with United States Coast Guard. Maritime lien notice of claim must meet certain requirements including stating:
- nature of the lien
- date the lien was created
- amount of the lien
- name and address of the claimant
- be signed and acknowledged by the claimant
- notice of claim must also be sent to ship owner, each holder of any other recorded maritime lien and each mortgagee with a ship mortgage.
Holder of a potential Maritime Lien might file such a notice of claim to affect the potential reflagging of a ship. Because United States Coast Guard will not issue a registration deletion certificate for reflagging until filed and recorded mortgages and maritime liens are released. Maritime liens are enforced through maritime arrests.
Courts have held that a person asserting a Maritime Lien cannot have any direct ownership in ship. Hence, an owner or part owner may not acquire a lien against the ship. Furthermore, certain third parties that form a joint venture with the owner of the ship may be prohibited from acquiring maritime liens against the ship.