The main obligation of the charterer under a charter-party agreement is the payment of freight/hire and other monies payable, such as the demurrage and deadfreight. The charterer’s default on such payments constitutes the major risk for any shipowner and especially in today’s volatile market this risk is even higher. Prior fixing a charter-party, a detailed due diligence on the counter-party risk can be proactive so as to avoid such situations and our marketplace helps parties in this respect, mainly through the “feedback” that all users may leave after the completion of each business. However, what happens if charterer’s default arises after the vessel is loaded? Owner’s weapon, in this case, is called “Lien”. Lien on cargo or lien on other monies payable to the charterer from the sub-charterer (if applicable).
The lien on cargo is a right which may be granted to the shipowner under the terms and conditions of the governing charter-party and/or the Bills of Lading, by which the shipowners can keep the loaded cargo under their possession, due to unpaid sums from charterers. The lien can be exercised at the discharge port and in this case, the cargo should be stored at a warehouse close to the port and remain under shipowner’s control and expense. Owners could then recover these expenses if same is expressly stated in the charter-party. In case a lien on cargo is exercised, owners should keep the cargo in good condition, while they are not entitled to sell the cargo in order to satisfy their debts (unpaid money from charterers), unless this is expressly mentioned/agreed in the charter party or specifically permitted by the local laws of the country where the lien took place.
Diversity of Lien clauses in Charter parties
Both time charter parties and voyage charter parties may include a lien clause. In some of them there is a standard printed clause, while in others, where such clause is missing, shipowners are including their own wording which is usually subject negotiation between the parties. The Gencon94, which is the most common voyage charter party, already includes a lien clause which reads as follows and gives owners the right to exercise a lien on cargo for all amounts which are unpaid under the c/p, while gives owners the right to recover the costs of the warehousing or other costs associated with these legal actions.
8. Lien (GENCON 94 STANDARD CLAUSE)
The Owners shall have a lien on the cargo and on all sub-freights payable in respect of the cargo for freight, deadfreight, demurrage, claims for damages and for all other amounts due under this Charter Party including costs of recovering same.
The Amwelsh93, which is another major voyage charter party used in coal trades also includes a similar wording which gives owners the right to exercise a lien on cargo, however it does not give owners an express right to recover their costs associated with the exercise of lien on the cargo (e.g. warehouse costs etc). Therefore, if owners exercise a lien on the cargo by using the clause of this charter party, they may need to pay money out of their pocket.
21. Lien and Cesser (AMWELSH 93 STANDARD CLAUSE)
The Charterers' liability under this Charter Party shall cease on cargo being shipped, except for payment of freight, deadfreight and demurrage, and except for all other matters provided for in this Charter Party where the Charterers' responsibility is specified. The Owners shall have a lien on the cargo for freight, deadfreight, demurrage and general average contribution due to them under this Charter Party.
The Nype93 which is the most reputable time charter contract includes also a lien clause, however, same as happening with the AMWELSH c/p - it does not expressly give owners the right to recover the costs incurred when exercising a lien. In these cases, owners should also include an additional wording similar to Gencon94 which will enable them to recover any additional costs/expenses incurred during the process of exercising the lien. Furthermore, in contrary to GENCON 94 and AMWELSH 93, NYPE 93 gives charterers the right to exercise a lien on the vessel for money paid in advance but not earned.
23. Lien (NYPE 1993 STANDARD CLAUSE)
The Owners shall have a lien upon all cargoes and all sub-freights and/or sub-hire for any amounts due under this Charter Party, including general average contributions, and the Charterers shall have a lien on the Vessel for all monies paid in advance and not earned, and any overpaid hire or excess deposit to be returned at once.
How to incorporate Lien clause into the Bill of Lading
While a lien clause in a charter-party protects the shipowner against the charterer, the shipowner is not fully secured since the cargo may not be owned by the charterer but a third party (i.e. who may be the shipper or receiver but not necessarily the charterer) whose relationship with the owner/carrier is regulated only through the Bill of Lading. Let’s assume, for example, that the owner “A” charters a vessel to the charterer “B” who is also the shipper of the cargo. Upon loading, the “B” sells the cargo to company “C” who is the receiver of the cargo. The charterer “B” does not pay the freight to “A” as per c/p and the vessel arrives at the discharge port. The shipowner “A” might consider exercising a lien on the cargo for the unpaid freight of company “B”, however the cargo is now owned by the company “C” (who purchased it from company “B”). Company “C” is not aware of the terms and conditions which apply in the charter party between the “A” and “B” since it is not a party of this c/p. However, the “C” is waiting to receive the cargo as per the Bill of Lading which says that the specific cargo will be delivered from the carrier/owner of the vessel (“A”) to the receiver (“C”). So, in case the cargo is not delivered to the “C” due to a lien, the “C” might have a claim against the “A” for non-delivery of the cargo or for delayed delivery of the cargo.
To overcome this situation, the lien clause of the charter-party should be clearly and expressly incorporated in the Bill of Lading so as the receiver to be aware that if the freight is not paid from the charterers of the vessel (if the charterer is a third party) then a lien clause applies. Some bills of lading, like Congenbill, already include a general standard clause by which they incorporate all the terms and conditions of the charter-party into the Bill of Lading, such as the following:
All terms and conditions, liberties and exceptions of the Charter Party, dated as overleaf, including the Law and Arbitration Clause/ Dispute Resolution Clause are herewith incorporated.
In order for the shipowners to be covered, they need to focus on two points here:
a) Incorporate the correct charter party date into the bill of lading. This is very important especially when there are many charter-parties involved in the chain between the head owner and the head charterer and where the sub-charterer may issue the bill of lading basis the sub-charter party, which might not include a lien clause by the way.
b) Even if the correct c/p date is included, it would be better the lien clause to be expressly incorporated into the Bill of Lading. For example, the above standard wording of Congenbill might be slightly changed to read “… including the Law and Arbitration Clause/ Dispute Resolution Clause and Lien Clause are herewith incorporated”.
What is the process for exercising a lien on cargo?
When the shipowners come across a situation where they need to exercise a lien on cargo, a few standard steps should be taken.
Step 1: Check whether the lien is expressly allowed under the terms and conditions of the charter-party. Meaning: Is there any lien clause in the c/p and if yes, what does it say?
Step 2: Check whether the cargo is owned by the charterer or a third party. This verification is not always easy to happen, unless owners are aware that the charterer is the end-receiver of the cargo. The Bill of Lading may give the answer in this respect, if it mentions the details of the shipper and consignee in order to see if any of these parties is the same with the charterer under the c/p. However, even in this case, the situation is not always clear since the change of cargo’s ownership is taking place upon its payment. If the owners are sure that the consignee is the same party with the charterer, then should go directly to Step 4 below, otherwise they should follow Step 3.
Step 3: Check whether the Bill of Lading expressly includes a Lien Clause either by its own or by incorporating the terms and conditions of the proper charter-party which includes a Lien clause.
Step 4: Check with the local jurisdiction at discharge port if the exercise on lien is permitted. Even if the Lien clause is incorporated in both the charter-party and the bill of lading, in order for the owners to be able to proceed with a lien on cargo, same should be clearly allowed by the local jurisdiction at the port of discharge. For example, a vessel discharging in China is able to exercise a lien on the cargo only if the cargo is owned by the party who is liable to the owner for the unpaid freight or other amounts (i.e. meaning that the lien is allowed only if the charterer is also the owner of the cargo at the time that the lien is exercised), which is rarely the case. Such limitations may be the case in many jurisdictions while other jurisdictions may not allow the lien at all.
Step 5: If all the above conditions are met, shipowners should inform the charterer and all other parties who may have an interest on the cargo properly by an official lien notice. This official notice should be in writing and include the charterer’s default, the demand for payment of the outstanding debt which should be specifically mentioned and owner’s plan to exercise the lien on cargo as per charter-party/ bill of lading terms and conditions. In case the charterers and other stakeholders are not notified within time, the exercise of lien may be considered wrongful and the owners will be responsible for any delay and costs which may arise from such actions.
Does the lien on cargo give any comfort to Owners?
Apparently, the process of exercising a lien on the cargo is not easy at all. Despite the fact that a relevant clause may already be included in the charter-party and/or the Bill of Lading, most local jurisdictions put several other limitations making it really difficult for a lien to be exercised unless the receiver is also the charterer of the vessel. This is also known to most charterers who, even in case that they are also the receivers, use a separate company to act as the charterer of the vessel in order to take benefit of the limitations at local jurisdictions.
Despite the fact that a lien on the cargo is not easily exercised, many shipowners usually threaten the charterers that they will proceed with a lien on the cargo and/or refuse to discharge in order to put pressure on the charterers and achieve their goals. However, in this case, if the exercise of lien is not eligible, the owners may be liable to the B/L holder for failing to perform the voyage under due dispatch. Another issue, in this case, is that the owners may not be able to keep the cargo in their possession for a long time and their pressure will not have any effect if the charterer is not paying the freight or other monies due to financial difficulties.
Therefore, the lien on cargo may give some comfort to shipowners since they have another weapon in their possession, however in fact there are so many limitations which make this right not easily enforceable. After all, the next time you (as shipowner) are thinking of proceeding with exercising a lien or the next time that you (as charterer) are threatened, first of all, look in detail whether such lien is enforceable before you take any further steps. The OpenSea team understands that the proactive dispute resolution gives competitive advantage to Owners and Charterers and we make this available to our paid users along with additional features that our marketplace provides.