Lien on Sub-Freights (and Hire?)


Published: 6 November 2008

In times of widespread financial troubles, one understandable consequence is the fact that there will be an increased focus and attention on obtaining security for payments. One of the possibilities open to a ship owner is the lien on sub-freights granted in the NYPE form.

Clause 18 of the NYPE 1946 form clearly states that “the Owners shall have a lien upon... all sub-freights for any amounts due under this Charter...”

This seems, at first, straightforward: a notice to a sub-charterer to make his payment to the owner, rather than to the charterer should be sufficient to have any payments made to the owner himself.

There are, however, a number of matters which must be borne in mind if this useful tool is used. Nowadays, the vessel may be subject to sometimes long chains of C/Ps involving a great number of (sub)charterers and the question will also be “how far” the right of this particular lien extends.

  1. Using the Bill of Lading
    Even before exercising a lien on sub-freights, the owners should consider whether they have available an option where they would not have to rely on the lien for sub-freight if they have issued a carriers’ B/L under which they will be entitled to receive the freight payable under that B/L.
    In practice, freight due under the B/L will often, nevertheless, almost invariably be paid to the charterers (or their agents) and the owners must then still consider how best to secure their rights and give proper notice, including to whom notice should be given.
    A notice should be sent to the payor and any charterers’ agents appointed by charterers to collect the freight.
    A notice to the charterers’ agents before the freight has been received by the agents may serve to oblige these agents to collect the freight for the owners’ account as opposed to for the charterers’ account. The same outcome could possibly even be achieved where the notice is given by the owners after the freight has been received by the agents but before it has been paid over to the charterers themselves.
    Any notice to the charterers’ agents in this respect should therefore, as far as possible, make it clear to the agents that the owners are entitled to collect the freight under the carriers’ B/L and that agents will have to collect the freight (or account for freight already received) on the owners’ behalf. The Club can assist with the appropriate wording of such a notice.
    In practice, there is certainly scope for both misunderstandings and disagreements: More than once have owners been faced with delays in accepting this type of instruction only to be told that funds have already been received and passed on.
    Other problems in giving proper notice are the fact that the full identity of sub-charterers is not always known and certainly any communication via brokers rather than direct communication will delay matters at a time when speed is of the essence.
  2. Exercising the lien on sub-freights
    If the “Bill of Lading” route is not available, the right of lien on sub-freights becomes relevant and can be used where the sub-freights are to be paid, in the first place, directly to charterers. The lien in clause 18 of the NYPE 1946 form is a contractual lien granted by the charterers to the owners in the C/P. It is not a lien (such as a lien on cargo) that operates by way of retaining possession of property/cargo but it is a right for the owners to intercept a payment which is moving from a  third party (sub-charterer) to the charterers.
    One question to bear in mind is whether “sub-freight” will also include hire i.e. hire payable under a (sub) time C/P.
    Remarkably, there are two cases both decided by the London Commercial Court on almost identical facts, that has come to different results. The first, the CEBU from 1983, held that sub-freights include all sub-freights including sub-time charter hire whereas a second, the CEBU (No. 2) from 1990, came to the opposite result i.e. that hire was not included under the term sub-freight.
    Given that there may still be some uncertainty on this, the very much safer option for ship owners is to expressly include in their C/Ps that the lien is given not only in respect of “all sub-freight” but also “all sub-hire”or similar wording.
    This additional wording has in fact been included specifically in the NYPE 1993 form (in line 260).
  3. In order to be effective, the interception of any payment from third parties to the charterers will have to be effected by giving an appropriate notice to the third party, typically the charterers or sometimes the shippers (“the NANFRI” (1979))
    The Club can provide assistance with an appropriate wording, and a purpose of this notice is to ensure that the third party is made aware of the owners’ claim, that a lien has been granted by the charterers and that payment therefore can be made only to the owners. If the notice is given properly, the charterers or shippers will have to make payment to the owners and will have to do so even if they ignore the notice and instead pay charterers. There will be no direct contractual relationship between the owners and the charterers/shippers so this will, if necessary, have to be pursued before the ordinary courts.
    If the amount has already been paid, there is obviously nothing more that can be done (“the SPIROS C” (2000)).
    Notice can be given even if the sub-freight exceeds the amount due under the hire charter.
  4. If the sub-freights are indeed received by the owners, they will have to account for any leftover balance to the charterers.
  5. Often if several time charters are in place and they include identical provisions concerning lien on sub-freights, the owners will have a right to lien sub-freights payable to the sub-charterers i.e. intercept payment due further down the chain of C/Ps.
  6. The fact that “freight prepaid” Bs/L have been issued does not, as such, interfere with the owners’ right in the sense that the owners can still try and intercept the freight. Even if the bills are marked “prepaid” but the freight has in fact not been paid and the notice is given timely before payment, the notice will still be effective to ensure that payment must be made to the owners.
  7. With respect to certain time charterers, the giving of notice will not be sufficient to ensure that the lien has been validly perfected.
    If the time charterers are a company incorporated in England (or Wales or Scotland), the lien on sub-freights will be void against any creditors, liquidators or administrators (in bankruptcy) of the time charterers unless the particulars of the lien have also been registered as a charge under the Companies Act 1985. This registration must take place within 21 days of the charge being created.
    Non-registration may also have the same result under English law if the time charterers are overseas companies but which have a place of business in England, Wales or Scotland.
    The important thing to notice is that what has to be registered is the time charter itself i.e. the instrument/agreement which creates a charge, and unfortunately it is presumably only very few owners who take the trouble to register the time charter within 21 days of its signature in order to secure that their lien will remain valid if exercised.
    These particular rules have been due for some time for amendment where an amendment to the Companies Act would specifically stipulate that a ship owner’s lien on sub-freights should not be treated as a charge for the purposes of the Companies Act, but so far, according to our information, this amendment has not come into force.
    If the time charter which creates the charge has not been registered under the Companies Act within 21 days of its signature, the lien on sub-freight will not be valid against the creditors et al of time charterers incorporated in England, Wales or Scotland.

The NANFRI [1979] 1 Lloyds’ Rep. 201
The CEBU [1983] 1 Lloyds’ Rep. 302
The CEBU (No. 2) [1990] Lloyds’ Rep. 316
The SPIROS C [2000] 2 Lloyds’ Rep. 319