June, 2021 - Smart decision: clarifying an owner’s unfettered right to intercept freight

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Welcome clarity on an owner’s unfettered entitlement to freight has been received in a judgment handed down recently by the Commercial Court. The decision overturned a finding in London arbitration and will be welcome news to owners seeking security for their claims.

The decision in Alpha Marine Corp v Minmetals Logistics Zhejiang Co. Ltd (The M/V Smart) [2021] EWHC 1157 (Comm) essentially confirms that an owner is entitled to demand freight from the bill of lading holder without any default on the time charterer’s part, subject only to a requirement to account to the time charterer for any funds received over and above the hire due.

Facts

Alpha Marine Corp, the owner of the MV SMART, chartered the ship to Minmetals Logistics Zheijang Co on the NYPE charter form. Minmetals subsequently voyage-chartered her to General Nice Resources. The voyage charterer was the holder of the bills of lading, which were payable “as per charterparty” (meaning the voyage charter). 

After the ship departed from Richards Bay, she grounded.  The cause of the grounding was disputed and an unsafe port claim arose. 

Minmetals had issued a freight invoice to the voyage charterer on the basis that freight fell due 45 days after leaving the loadport. However, before payment was made by the voyage charterer, the owner issued notices to the cargo interests revoking the charterer’s entitlement to freight and demanding that freight be paid directly into the owner’s account by way of security for its claim.  Under the standard NYPE wording, the owner was authorised to collect unpaid freight under the bills.

Minmetals rejected the owner’s entitlement to intercept freight in this way, particularly in circumstances where Minmetals was not in default. 

As a result of the notices and the resulting uncertainty as to whom they should pay, the cargo interests withheld payment and shortly thereafter became insolvent, with the result that neither the owner nor the charterer ever received the freight.

Minmetals claimed damages from the owner in respect of its lost freight.  Minmetals argued that there was an implied term in the time charter to the effect that the owner should allow the time charterer to collect freight and should not intervene to collect bill of lading freight unless the charterer failed to do so itself.  The dispute was referred to London arbitration.  

Arbitration 

The tribunal found in favour of Minmetals on the basis of guidance given in The Bulk Chile [2013] 2 Lloyd’s Rep 38. In that case, the judge had said that “it is to my mind arguable that a time charterer who is not in default of his obligation to pay hire, and other amounts, under the head charter could restrain a shipowner from demanding payment of bill of lading freight to be made directly to himself.” 

The arbitration tribunal accordingly held that the owner was not entitled to issue its notice requesting payment of freight directly to it in the absence of the time charterer’s default and that, in doing so, the owner had been in breach of an implied term in the charterparty that they would not do so. 

Court ruling

On appeal to the High Court, the finding in the arbitration was overruled.

Mr Justice Butcher held that an owner is entitled to demand bill of lading freight from the holder of an owner’s bill of lading directly, countermanding any requirement under the relevant charterparty that payment be made to the time charterer, regardless of whether the time charterer is in default. 

The requirements for implying into the time charter the term argued for by Minmetals had not been met. Such a term was not obvious or necessary and the charterparty was workable without any additional terms being implied. The charterparty did not lack commercial or practical sense given that the owner was required in any event to account to the charterer for any excess received beyond what was due in hire. 

Conclusion

This decision resolves a question which was left unanswered by the Court of Appeal in The Bulk Chile. Following this decision, it seems that an owner can demand freight without any default on the part of the time charterer, subject to the proviso that the owner must account to the time charterer for any surplus payment obtained. The decision also serves as a reminder of the difficulty of implying terms into charterparties.
This judgment is likely to be reassuring to owners with concerns that their charterer may be on the brink of financial difficulties and will therefore be welcomed in the current uncertain economic times. The clarity provided by the court may also mean that this is potentially a more straightforward route to obtaining security than exercising a lien over freight, which is often fraught with difficulties.  It remains to be seen whether charterers will now seek to include express wording in charterparties restricting owners from intercepting freight payments. 

Members are invited to contact the Club in the usual way with any questions relating to the issue discussed in this article.