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April 1991
Vol. 2, No. 1
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Contents
ENFORCING LIENS ON CARGO IN THE UNITED STATES
Robert
G. Shaw
The United States Supreme Court established the main principles of American law concerning the lien on cargo in the second half of the 19th century. [n. 1]
Like all other liens recognized by the general maritime law of the United States the lien on cargo is enforceable by process in rem pursuant to Rule C of the Supplemental Admiralty Rules of the Federal Rules of Civil Procedure. Unlike all other maritime liens, the lien is, however, in some degree possessory. This does not mean that a shipowner can only enforce the lien if it never gives up possession of the cargo, but it cannot unconditionally release the cargo without losing the lien. The shipowner must either discharge the cargo into a facility under its control or deliver the cargo with an adequate reservation of the lien.
Differences Regarding the Lien on Cargo Under English Law
By contrast, English law does not grant a lien on cargo nearly as extensive as the American lien. The English "common law" lien, as it is called, is so narrow in scope that it can rarely, if ever, be relied on by a shipowner.
The English common law lien is described in detail in Scrutton. [n. 2] It does not secure hire or demurrage. It only secures freight if freight is payable contemporaneously with discharge. Under modern voyage charters freight is not payable contemporaneously with discharge. In addition to the English common law lien, under English law the parties to a contract of affreightment can create by agreement a more extensive possessory lien. Charter forms regularly in use today expressly grant an owner a lien on cargo for freight and demurrage, or, in the case of a time charter, for hire.
Although the shipowner's lien on cargo under American law is much broader than the English common law lien, there are many cases where either the American lien does not exist or where it cannot, for various reasons, be enforced.
Prepaid Bills of Lading
This happens most clearly where the shipowner in a charter authorizes the charterer to issue bills of lading for the master or agrees that the master will sign bills of lading as presented and bills of lading are then issued bearing the words "Freight Prepaid". In such cases, no cargo lien can be enforced because the lien has been waived by agreement.
The issuance of "Freight Prepaid" bills of lading can be disastrous, particularly for a shipowner already experiencing financial problems. If a vessel is on a time charter trip, bills of lading are often issued after only the first installment of hire has been paid. If a vessel is on voyage charter, bills of lading are often issued before freight becomes payable. After "Freight Prepaid" bills are issued the shipowner is under an obligation in either case to the holder of the bills, if it is not the same party as the charterer, to complete the voyage or risk a claim for damages and the arrest of its vessel. In either case the shipowner has no lien for hire or for freight and demurrage.
Where "Freight Prepaid" bills of lading are issued on liner terms, the shipowner is obliged to complete the voyage without any security for the unpaid freight or hire. It is also exposed to the risk of an arrest of its vessel if it does not pay loading or discharging costs.
There is very little a shipowner's lawyer can do after a problem like this arises except to caution against the shipowner doing something hasty which might lead to a big claim and an arrest of the vessel. The most useful advice can only be given before a fixture is agreed. If the trading record or financial strength of a charterer is doubtful, an owner should either not fix, or if this is commercially unrealistic, should insist that the charter specify that prepaid bills will not be issued. Owners should also check that the lien on cargo can be enforced at the discharging port or ports within a range specified in the charter.
Third-Party Cargoes For Which All Freight Has Been Paid
The lien on cargo also does not exist under American law where the cargo is owned by a third party who is not a party to the charter but is a party to some other contract governing the cargo and has paid all freight due under that contract. To give a simple example: although the lien can be enforced on cargo covered by "Freight Collect" bills of lading even if these are held by a third-party who is not the charterer, the lien can only be enforced to the extent of the unpaid amount of freight due on the bills of lading. [n. 3]
Bills of lading are often issued which do not state a rate of freight. For example, most bills of lading for oil cargoes discharged in New York harbor do not specify a freight rate. The cargo often has been loaded on a vessel chartered by the chartering arm of an oil company or oil trader. By the time of the vessel's arrival at New York, the cargo often has been sold by the oil company or oil trader to a third party, under a contract which typically does not specify that a particular portion of the purchase price is allocable to transportation of the cargo to New York.
In such a case, even if all the other pre-conditions exist for the proper assertion of the lien, it is at least open to question whether the cargo can be liened to the extent of a freight portion to be allocated to the purchase price specified in the cargo sales contract.
Further Obstacles to Enforcement
Problems with enforcing the lien often arise at foreign discharging ports. Although the charter may be governed by American law and although the necessary conditions may exist under American law for the lien to be enforced, often local law or practice prevents the lien's enforcement at the discharging port. The laws at many discharging ports around the world do not recognize a lien on cargo, or if they recognize such a lien the legal machinery often does not exist there for effective enforcement. This may be because of the way in which the courts and the legal system operate in the country in question. It may also be because the consignee is a government entity and at the particular port legal actions cannot be taken against government entities either as a matter of law or as a practical matter.
Problems may also arise because under the law of the particular place for the lien to be exercised the cargo has to be discharged into a special bonded warehouse. There may however be no available storage space at the warehouse in question into which to effect the discharge.
Pre-Conditions For Enforcement
Fortunately there are some cases where the lien can be enforced. The ideal pre-conditions for the enforcement of the lien are as follows: (1) the bills of lading are not marked "Freight Prepaid" or do not otherwise negate the existence of the lien; (2) the discharging port is in the United States or in a place where the law not only recognizes the lien but also enforces it in a prompt and predictable fashion; (3) the cargo is owned by the charterer and not by a third party, or if it is owned by a third party, subfreight or sub-charter hire or the identifiable freight portion of a C&F contract is still due from that party in respect of the cargo; (4) the shipowner discharges the cargo in a way which does not amount to an unconditional delivery.
If all of these five pre-conditions exist, the lien is enforceable. In most cases, not all of them exist.
Cases Where Enforcement Is Uncertain but Arguable
Assuming that the first three preconditions are satisfied, i.e. (1) that the bills of lading are not marked "Freight Prepaid"; (2) that the discharging port is not in an unsuitable jurisdiction and (3) that some subfreight or subcharter hire or the freight portion of a C&F contract is owed in respect of the cargo, the question remains whether there has been an unconditional delivery of the cargo.
A large number of nineteenth and early twentieth century cases indicate quite clearly that provided the shipowner does not release the cargo unconditionally but does so only with an adequate reservation of his lien at the time of delivery, the lien survives even against a third party to the extent of any unpaid freight due from the third party for carriage of the cargo. [n. 4]
This principle - that a lien is saved by a qualified delivery, as opposed to a provision in a contract with the third party - is consistent with the notion that the American maritime lien on cargo arises by operation of law. In this respect the American law maritime lien on cargo is quite unlike the contractual lien usually relied on by shipowners under English law, because the American lien does not depend on a contractual provision for its existence. By way of distinction, a lien on subfreights has to be expressly stated in a contract of affreightment. [n. 5]
Confusing Case Law on Enforcing the Lien on a Third Party's Cargo
In the last 20 years, the Second Circuit and the Fifth Circuit have stated in confusing dicta that for a third party to be bound by the lien on cargo, a provision stating that the lien exists has to be included in the contract between the shipowner and the third party evidenced by the bill of lading. These dicta appear in part to arise from a confusion over the difference between liens on subfreights and liens on cargo.
Oceanic Trading v. The M/V "Diana", [n. 6] involved a disputed lien on sub-freights, not on cargo. The Second Circuit, in dicta, stated that not only a lien on subfreights but also a lien on cargo has to be the subject of a contract to be enforceable against a third party consignee. The Second Circuit, as support for its dicta, referred to a footnote at page 517 of Gilmore & Black which makes the same overly broad statement itself without citing any supporting authority.
In Goodpasture v. M/V "Pollux", [n. 7] the Fifth Circuit held that a shipowner could not exercise a lien on a cargo against a seller of the cargo at the loading port who retained title to the cargo, where the seller had not chartered the vessel and no bills of lading had been issued. The Fifth Circuit reasoned that because the shipowner had no contract with the seller of the cargo it followed that it had no lien on the cargo.
This reasoning appears to be imperfect. While it was true that the shipowner had no in personam claim against the seller, this did not mean that a lien on the cargo could not arise. The correct reason no lien existed was that no freight had yet become due under any contract and no bill of lading had been issued for the cargo. Neither the Oceanic case nor the Pollux case can safely be relied on as overthrowing the principles established by the Supreme Court in the 19th century which do not require a clause providing for a lien on cargo to be incorporated into a bill of lading for the lien to be binding on a consignee, to the extent of any unpaid freights due in respect of the cargo.
Avoiding An Unconditional Delivery: Adequate Reservation of the Lien on Discharge
Various problems can arise which make it difficult to avoid an unconditional delivery. First, there may be no separate storage space for the cargo at the discharging port into which the shipowner may discharge the cargo subject to its claim of lien. In such circumstances the shipowner may risk being held, if he discharges the cargo to the consignee's possession, to have effected an unconditional delivery, thus waiving his lien. Second, the charter, as is typical in tanker voyage charters, may state that freight is payable only after delivery. If the shipowner does not deliver the cargo to the consignee but to a separate facility, he may be met with the argument that no freight is due and therefore no lien exists. On the other hand, if the cargo is delivered to the consignee, the shipowner risks losing the lien by unconditionally giving up possession. This is particularly a risk where the cargo is discharged into a facility under the control of the consignee and it is mixed with other cargo, causing it to lose its character. It is well established that if cargo is mixed in this way with another commodity the lien is lost. An admixture of this kind may often happen with oil cargo discharged into shore tanks.
The older cases suggest that the best way an owner can attempt to overcome these problems is to have the master of a carrying vessel issue a notice at the time of discharging, informing the consignee that by delivering the cargo, the shipowner is not waiving its lien. The owner should then follow up as quickly as possible with an arrest of the cargo. [n. 8]
There is authority which supports the view that such a discharge based on a conditional notice does not give rise to a waiver of the lien, provided that following the delivery the shipowner promptly arrests the cargo.
While there are no cases in point, it is at least arguable that where the cargo does not lose its character but is merely mixed with other cargo of the same type, for example, No. 6 fuel oil mixed in a shore tank with other No. 6 fuel oil, the fact that the total amount of product is of the same grade and is fungible in nature should not cause a lien to be lost. At least a quantity of the product equivalent to the cargo discharged is arguably subject to the lien at the time of discharge, provided that the cargo was discharged subject to a notice that the delivery was unconditional.
Moreover, if the cargo is discharged
subject to a conditional notice of the kind described above, it is also
possible that an admixture by the consignee of the cargo, which otherwise
causes the lien to be lost, can give rise to a claim in personam against
the consignee for wrongfully interfering with the shipowner's lien right.
While there appears to be no reported authority to support such a proposition,
at least a plausible argument in support of such a claim could be made.
********
This article is derived from a talk which Mr. Shaw gave before the Society of Maritime Arbitrators in New York on November 14, 1990.
1 The Bird of Paradise, 72 U.S. (5 Wall.) 545, 18 L.Ed. 662 (1866); 4885 Bags of Linseed, 66 U.S. (1 Black) 108, 17 L.Ed. 35 (1861); The Eddy, 72 U.S. (5 Wall.) 486, 18 L.Ed. 486 (1867).
2 Scrutton on Charterparties and Bills of Lading (19th Ed.) at 386-391.
3 Carib Alba Ltd. v. 26 Units of Amusement Equipment, 1987 AMC 560 (ED Va. 1985); American Steel Barge Co. v. Chesapeake & C. Coal Agency, 115 F.669, 672 (1st Cir. 1902); Jebsen v. A Cargo of Hemp, 228 F.143, 147-148 (D. Mass. 1915); The Albert F. Dumois, 54 F.529 (EDNY 1893).
4 4,885 Bags of Linseed, cited in Note 1 above; Costello v. 734,700 Laths, 44 F.105 (EDNY 1890); Egan v. A Cargo of Spruce, 41 F.830 (SDNY 1890) aff'd, 43 F.480 (2d Cir. 1890).
5 Tarstar Shipping Co. v. Century Shipline, Ltd., 451 F.Supp. 317, 328 (SDNY 1978); The Solhaug, 2 F.Supp. 294, 299 (SDNY 1931).
6 Oceanic Trading Corp. v. The Freights of the Vessel "Diana", 423 F.2d 1 (2d Cir. 1970).
7 Goodpasture v. M/V "Pollux", 602 F.2d 84 (5th Cir. 1979).
8 The Giulio, 34 F.909 (SDNY 1888); Six Hundred Tons of Iron Ore, 9 F.595 (D. NJ 1881), and Costello v. 734,700 Laths, cited in Note 4 above.
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NATIONAL ACADEMY OF SCIENCES RELEASES REPORT
"TANKER SPILLS: PREVENTION BY DESIGN"
John
C. Koster
Just prior to the press date for this issue of "MAINBRACE" the United States National Academy of Sciences released pre-publication copies of the long awaited report of its study prompted by the March 1989 grounding of the EXXON VALDEZ. The purpose of the study was to determine how alternative tank vessel designs might enhance the safe carriage of petroleum products and minimize spills in the event they do occur. Even as the Oil Pollution Act of 1990 ("OPA 90") progressed toward enactment into law last year, it was generally known that the Academy would favor double hulls as the most cost-effective way of preventing spills and/or minimizing those that nonetheless occurred. The Academy has now done so -- one might almost say enthusiastically. It also criticizes existing strength criteria for tank vessels and naval architectural detail work.
The report notes that on the average 9,000 tons of oil are spilled annually into United States waters with large spills (those in excess of 10,000 U.S. gallons) causing nearly 95 percent of the accidental spillage. The study indicates that double hulls could reduce this amount by roughly half at an added transportation cost of approximately $700 million a year, or one cent per gallon transported (or, from a different standpoint, $777,777 per ton of spilled oil prevented).
The report reviews the additional operational risks posed by double hulls, including safety factors, stability, and increased maintenance problems. It evaluates a total of seventeen other design concepts (including hydrostatically balanced loading) before coming out in favor of double hulls.
Additionally, regardless of design considerations, the report recommends that all new tank vessels should, as a matter of standard equipment, possess towage fittings of a design recommended by IMO, mounted on both the bow and the stern, should have a reliable on-board system for transferring cargo from a damaged tank, either to another tank or to another vessel, and recommends that IMO and the United States Coast Guard prohibit the placing of cargo piping in ballast tanks.
Given the requirements now in effect or recommended for new vessels, the report states that serious consideration should be given to requiring that all existing crude oil tankers promptly meet IMO provisions for pollution prevention, including the requirements for segregated ballast tanks, crude oil washing, and possibly protective location of ballast tanks. Generally, the report endorses the proposition that no program should encourage the continued use of older (pre-MARPOL) vessels by providing them with any economic advantage over newer vessels required to meet increased standards.
Finally, the report notes the lack of data on which all but general conclusions can be based (including, admittedly, some of the conclusions reached in the report) and endorses a comprehensive and intensive research program to, inter alia, continue risk assessment studies, accomplish basic research required for improved designs, and test and evaluate design concepts beyond the theoretical and model analysis currently available.
We are advised that due to demand further copies of the report, which will be of particular interest to naval architects and engineers, will not be available until May. Should any of our readers wish a pre-publication copy before that time we have a limited number of copies and can provide one on request.
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RECENT SUCCESS ILLUSTRATES QUIRK IN NEW YORK LAW
Glen
T. Oxton
A Motion for Preliminary Injunction was successfully opposed in State Court in a case governed by the New York Arbitration Act, Seaport Lines Management Co., Inc. v. Seaport Harbor Cruise Lines, Inc. [n. 01] The Arbitration Clause was contained in a Joint Venture Agreement which enabled either party to terminate the Agreement at the end of any year if specified profit levels were not met. The profit levels were not met for 1990, and before the end of the year one partner to the joint venture indicated that it intended to terminate the venture. Plaintiff, the other partner, commenced an action for damages on the theory that the breaches of the Agreement by the other partner prevented it from attaining the profit levels specified in the Termination Clause. The action was stayed pending arbitration. Just before the end of the year, the plaintiff returned to court, seeking a preliminary injunction enjoining termination of the Joint Venture Agreement pending the arbitrators' determination.
The injunction was sought under New York Civil Practice Law and Rules ("CPLR") §7502(c), a section that became effective in 1986. It provides that the court may grant a preliminary injunction or an order of attachment in connection with an arbitrable controversy, "only on the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief."
The court held that the award would not be rendered ineffectual even if the preliminary injunction were not granted and that money damages would adequately compensate the plaintiff in the absence of an injunction.
The court followed Saferstein v. Wendy, [n. 02] which held that the traditional three-prong test for injunctive relief must be modified when applied to arbitrable disputes. Traditionally, one must show irreparable harm, a likelihood of success on the merits, and a favorable balance of the equities. When dealing with an arbitrable dispute, however, the courts may not consider the merits of the case. Thus, Seaport and Saferstein suggest that the criteria for obtaining an injunction or an attachment in an arbitrable dispute are less rigorous than they would be in an ordinary lawsuit. This surprising result might be explained by the se quence of amendments to Article 75 of the CPLR. Before 1986, the judicial function was limited to determining whether the dispute came within the ambit of the arbitration agreement. For the purpose of determining arbitrability, New York law follows the widely-adopted rule:
In determining any matter arising out of this article, the Court shall not consider whether the claim with respect to which arbitration is sought is tenable, or otherwise pass upon the merits of the dispute. CPLR § 7501.
This rule can be rationalized on the theory that the right to arbitration extends to the right to arbitrate frivolous claims, or the right to have the arbitrators determine whether a claim is frivolous. Presumably, the arbitrators would issue the appropriate sanctions if a party pursued a claim wholly lacking in merit. The same reasoning, however, does not apply to provisional remedies. The court should not grant injunctions with respect to frivolous claims.
When the legislature amended Article 75 and added the paragraph permitting injunctions and attachments (CPLR § 7502(c)), it may have overlooked the fact that the prohibition of the court's examining the merits (which is quoted above) applies to all of Article 75. There is no logical reason to modify the three-prong test with respect to arbitrable disputes. Indeed, it would seem that the court should examine the merits in order to avoid granting provisional remedies for claims that are not likely to succeed. The legislature obviously wanted to reduce the grounds for provisional remedies available in arbitration. Instead of the four grounds for an attachment provided in CPLR § 6201 (the defendant is a foreign corporation, etc.), and the two grounds for an injunction provided in CPLR § 6301, it provided a single ground in CPLR § 7502(c), that the award may be rendered ineffectual without such provisional relief. But it is not clear that the legislature intended that the broadly stated prohibition against the court's examining the merits contained in CPLR § 7501 should apply to provisional remedies.
Until an amendment to the CPLR is made, however, it is undeniable that the CPLR embodies the questionable rule that the courts may not examine the merits in connection with applications for provisional remedies in arbitrable disputes.
********
01 Sup. Ct., N.Y. County, No. 21926/90 (Justice Baer).
02 523 N.Y.S.2d 725 (Sup. Ct., N.Y. County 1987).
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Computer Developments
The firm's electronic Precedent Library is nearing completion. Several hundred briefs, memoranda and opinion letters have been scanned and placed on the computer system in a word search program. Current work product documents may be added to the library without scanning by pressing a few keys. Using the computer at his desk, each attorney can review materials prepared on similar issues simply by typing in a few key words. This will enable the firm to provide more efficient service to our clients.
Another similar project has been commenced to compile a centralized electronic form library that will be accessible by computer.
* * *
John D. Kimball spoke on "Discovery and Evidence Issues in Arbitration" at a Seminar sponsored by the Society of Maritime Arbitrators and the Arbitration Committee of the Maritime Law Association of the United States on Wednesday Evening, April 10, 1991. The venue was the World Trade Institute.
* * *
Gordon W. Paulsen was the Moderator at an Arbitration Day Maritime Program held on Friday, April 12, 1991 at the New York Hilton Hotel, beginning at 8:30 A.M. The subject was "RICO CLAIMS AND PUNITIVE DAMAGES IN MARITIME ARBITRATION." Speakers were the Honorable Charles S. Haight, Jr., U.S. District Judge for the Southern District of New York; Jack Berg, former Vice President of Continental Grain, and David A. Nourse, Partner in Nourse and Bowles. The subject is extremely timely in view of recent decisions of the U.S. Supreme Court and the United States Court of Appeals for the Second Circuit.
* * *
Gordon W. Paulsen is to be inducted as a Knight First Class in the Royal Norwegian Order of Merit by Consul General John Bjoernebye on April 29, 1991 at the Harvard Club in New York, in recognition of his outstanding services to Norway. He is currently Chairman of the Board of Trustees of the Norwegian Seaman's Church in New York and, as a maritime lawyer, has represented Norwegian interests in litigation in the United States. He is also a member of the Executive Committee of the Board of Directors of the Norwegian-American Chamber of Commerce.
* * *
Simon Harter joined the Firm as an associate on February 19, 1991. He received his B.A. from Ohio State University and his J.D. from Tulane University School of Law in 1986. He is admitted to practice before the state courts of New Jersey and Louisiana, the federal district courts for the Eastern, Middle and Western Districts of Louisiana and the District of New Jersey, and the U.S. Court of Appeals for the Fifth and Eleventh Circuits. He is a member of the American Bar Association and the Maritime Law Association of the United States.
While at Lemle & Kelleher in New Orleans, Simon was heavily involved in maritime litigation, often for Underwriters at Lloyd's, and also handled a substantial number of commercial litigation matters. Simon's wife, Karen, is originally from New Jersey. Simon and Karen have an 11-month old daughter, Kathryn Elizabeth, and reside in Princeton, New Jersey.
NOTE: This is the fourth issue of
"Mainbrace", a publication which we hope our friends will find
interesting and informative. Future issues will include articles of general
interest; items concerning the work of the firm and activities of its members
and associates; discussions of cases in which we have been involved and
brief reports of recent cases. "Mainbrace", our firm's cable
address, in nautical terminology means the brace or rope sustaining the
main yard on a ship. The Staff of "Mainbrace" consists of Nicholas
J. Healy, Gordon W. Paulsen, Betty M. Waterman, Geraldine Varnas and Oma
Sattar.
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NOTE: "Mainbrace," our Firm's cable address, in nautical terminology means the brace or rope sustaining the main yard on a ship. The Staff of "Mainbrace" consists of Nicholas J. Healy, Gordon W. Paulsen, John C. Koster, Matthew A. Marion, Betty M. Waterman and Renee Kintzer.
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