A Shipowner’s Right to Freight: Dry Bulk Handy Holding Inc v Fayette International Holdings Ltd (The “Bulk Chile”) [2013] EWCA Civ 184

Article by Thomas Steward

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“Is a shipowner entitled to demand payment to himself of freight under his bill of lading when that contract stipulates for payment to another party, provided that he makes his demand before the freight has been paid to that other party?”

In The Spiros C [2000] 2 Lloyd’s Rep 319,  Rix LJ commented that a shipowner is so entitled: it had long been established, he said, that a shipowner is entitled to intercept freight at any time before it is paid by the shipper. That is a necessary consequence of the bill of lading being a contract between the owners and the shippers. A provision that freight is “payable as per charterparty” does not exclude that right – the freight is still due to the shipowner, even though it may be payable to someone else. The words “payable as per charterparty” are to be construed as meaning that the obligation is to pay the third party or as the owners may direct.

Strictly speaking, Rix LJ’s view was obiter. In The Bulk Chile at first instance, however, Andrew Smith J followed it and the Court of Appeal has now upheld that decision.

Background

The claim arose out of a chain of charters as follows:

(i)       DBHH time-chartered the vessel to CSAV;

(ii)      On behalf of CSAV as undisclosed principal, DBHH then time-chartered the vessel to KLC on NYPE form;

(iii)     KLC in turn entered into a trip time charter with Fayette. This too was on NYPE form;

The NYPE form contained the standard form Clause 18, namely:

“That the Owners shall have a lien upon all cargoes, and all sub-freights for any amounts due under this Charter…”

Fayette then entered into a voyage charterparty with Metinvest on Gencon 1994 form. Three bills of lading were signed by Metinvest as shippers and Fayette as agents for and on behalf of the master. It was common ground that those bills of lading were owners’ bills. The bills provided “freight payable as per charter-party dated 19.01.2011”, referring to the voyage charterparty between Fayette and Metinvest.

KLC entered into Korean insolvency proceedings, and failed to pay the first two instalments of hire to DBHH. DBHH therefore sent two “Notices of Lien” to Fayette and Metinvest, one over “any balance of freight(s) and/or hire(s) due under any charters, bills of lading, or other contracts of carriage relating to the voyage(s) and cargo(es) covered by the above bills of lading”; the other over “cargo now loaded on board m/v BULK CHILE to be carried under bills of lading numbers…”. The Notices of Lien specifically required Fayette and Metinvest to “arrange payment of all such freight(s) and/or hire(s) in your hands directly to our account when due”.

Metinvest paid the freight to Fayette. DBHH brought a claim against Metinvest for freight under the bills of lading, and CSAV made lien claims against Fayette (for hire under the trip time charter) and Metinvest (for freight under the voyage charter).

First Instance

As to the freight claims, at first instance, Andrew Smith J commented that prima facie the obligation under the bills of lading was for Metinvest to pay DBHH as owners. On the other hand, he noted that the implication of “payable as per charter-party” was that freight was to be paid to Fayette. The Judge concluded that the owners were entitled to demand payment to themselves – it would be improper, he said, for him to depart from the weight of Rix LJ’s decision in The Spiros C, and anyway he found such a view convincing. In the circumstances, the Notices of Lien were effective as demands by the owners for freight to be paid to themselves.

The Judge further held later there was no restriction on the owners to intervene – they did not need to wait until money was overdue.

As to CSAV’s lien claims, the Judge noted that, in his view, CSAV was the proper party to pursue the claim. Following Steyn J in The Cebu (No. 2) [1990] 2 Lloyd’s Rep 316,  he held that the NYPE Clause 18 lien was limited to sub-freights and did not include sub-hire. Accordingly, only the lien claim against Metinvest succeeded.

Court of Appeal

The Court of Appeal agreed with Andrew Smith J. that the owners were entitled to intercept the freight under the bills of lading: where the bill of lading provides for payment of freight to a party other than the owner, the proper analysis is that the third party is to be regarded as the owners’ agent, collecting the freight on the owners’ behalf. Ordinarily, that is satisfactory to the owners, who receive hire under the charterparty. But the owners may well decide to vary the authority of the agent, and they may do so even without default in payment of hire.

Because of that analysis, Tomlinson LJ concluded at paragraph 25 that:

“I see no difficulty in the shipowner countermanding his direction to the shipper to pay freight to a third party provided of course that he does so before the shipper has made the payment as initially directed.”

Analysis

At first blush, the decision appears to be a welcome clarification of Rix LJ’s comments in The Spiros C, and it will obviously be embraced by owners as a useful protection in the event of a charterer’s default.

It will not be so welcome to charterers, however. The effect of Andrew Smith J’s decision at first instance was that Metinvest was liable to pay the freight twice over: once to DBHH under the bills of lading claim, and once to CSAV under the lien claim. Payment of freight to Fayette did not discharge Metinvest’s obligations under the bills of lading. Rix LJ’s view in The Spiros C was that the meaning of “payable as per charterparty” was a question of construction – but is it likely that Metinvest intended to pay freight twice over? The decision also seems unduly unfair on Fayette, who pay hire up to KLC but receive no freight from Metinvest.

Moreover, the Court of Appeal recognised that there are still aspects which will require further consideration. For example, what remedy, if any, does the charterer have in the event that the owner purports to intercept freight without any default by the charterer? The Court of Appeal suggested that a charterer may be able to rely on the standard NYPE Clause 8, but declined to express a firm conclusion. “Whether such an argument would succeed,” they said, “must await decision on another occasion.”

Also, although there is a clear obligation on the owners to account for any freight collected over and above the hire due and unpaid, it is not so clear to whom and in what circumstances this accounting is owed. The Court of Appeal recognised this difficulty, but stated simply that “in practice this has not proved to be a real problem.

In short, the decision raises more questions than it answers.

Stone Chambers

Thomas Steward
Call: 2011

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Tom is developing a broad experience of commercial litigation, arbitration, and advisory work, with particular emphasis on commercial and shipping disputes.

Tom has gained experience in a broad range of disputes. He has drafted pleadings and written advices on speed and performance claims, off-hire claims, laytime and demurrage claims, and late/early redelivery claims.

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