Of Bailments and Liens: A Question of Choice
November 29, 2006
James "Jim" Hohenstein- New York
Abstract
In every bunker supply contract, the choice of law election is a crucial decision.
Where a customer, such as a time charterer is insolvent, this decision often will determine the parameters of what relief an unpaid bunker supplier can obtain from a vessel and its registered owner.
To place this issue in context, reference here will be made to the recently promulgated BIMCO Standard Bunker Contract: General Terms and Conditions ("BIMCO Terms"). The BIMCO Terms provide for three choices: English law, U.S. law or the law of another jurisdiction. Those terms also contain a retention of title provision.
Generally English law provides no lien in an action brought against the vessel in the U.S. but other relief by way of the retention of title clause may be available. If U.S. law is selected, the retention of title provision may be of little effect. Moreover, simply electing U.S. law to apply does not automatically result in an enforceable U.S. maritime lien. Finally, the selection of another jurisdiction''s law will normally guide the existence (or not) of a lien.
Introduction[1]
The supply of bunkers is an international business. Given that situation, the selection of what jurisdiction''s law to apply can have and often does have a significant impact when a legal dispute arises from the supply of bunkers to a vessel.
Normally, the choice of law clause is an express provision of the contract involved in the provision of bunkers. However, under certain circumstances, even where there is an express choice of law clause in the contract, it does not always mean that that is the law which will be applied by a U.S. court adjudicating the claim. The reason for this seemingly odd result is the fact that many jurisdictions, including the United States, may require evidence of some connection between the transaction itself and the law of the chosen jurisdiction.
The intent of this paper is to consider the meaning and effect of the choice of law elections in the context of two specific topics: bailments and maritime liens.
To give the discussion context, first a scenario will be outlined. Next, so as to have specific contract terms to consider, the relevant parts of the BIMCO Terms will be reprised.
Under the BIMCO Terms, a party has three choices: English law, U.S. law or the law of another jurisdiction. Each of these choices will be considered below.
Scenario
A typical scenario for the issues to be considered here is as follows:
The involved vessel flies the Greek flag. The vessel''s registered owner is a Greek corporation with its principal place of business in Piraeus which is also the location of the vessel''s managers (also a Greek corporation).
At the relevant time, the vessel was under time charter to a Canadian corporation, with a principal place of business in Montreal. The time charter reflects the usual terms that the charterer will provide and pay for the bunkers to be consumed by the vessel during the term of the charter.
The bunker supplier is a Venezuelan corporation whose principal place of business is in Caracas.
Next, we will posit that the time charterer orders the bunkers from the bunker supplier and the resulting stem takes place in Australia.
Subsequent to the delivery of the bunkers, the time charterer fails to pay the invoice and becomes insolvent.
In the meantime, the vessel commences a voyage from Australia to the United States. During this voyage, the bunkers which had been loaded in Australia are fully consumed.
After the vessel''s arrival at its destination in the U.S., the bunker supplier arrests the vessel because of the non-payment for the bunkers supplied in Australia.
BIMCO Terms
For the purposes of this paper, the relevant parts of the BIMCO terms are as follows:
10. Risk/Title
Risk in the Marine Fuels shall pass to the Buyers once the Marine Fuels have passed the Sellers'' flange connecting the Vessel''s bunker manifold with the delivery facilities provided by the Sellers. Title to the Marine Fuels shall pass to the Buyers upon payment for the value of the Marine Fuels delivered, pursuant to the terms of Clause 8 hereof. Until such time as payment is made, on behalf of themselves and the Vessel, the Buyers agree that they are in possession of the Marine Fuels solely as Bailee for the Sellers. If, prior to payment, the Sellers'' Marine Fuels are commingled with other marine fuels on board the Vessel, title to the Marine Fuels shall remain with the Sellers corresponding to the quantity of the Marine Fuels delivered. The above is without prejudice to such other rights as the Sellers may have under the laws of the governing jurisdiction against the Buyers or the Vessel in the event of non-payment.
….
15. Dispute Resolution
*) (a) This Contract shall be governed by and construed in accordance with English law and any dispute arising out of or in connection with this Contract shall be referred to arbitration in London in accordance with the Arbitration Act 1996 or any statutory modification or re-enactment thereof save to the extent necessary to give effect to the provisions of this Clause.
The Arbitration shall be conducted in accordance with the London Maritime Arbitrators Association (LMAA) Terms current at the time when the arbitration proceedings are commenced.
….
*) (b) This Contract shall be governed by and construed in accordance with Title 9 of the United States Code and the Maritime Law of the United States and any dispute arising out of or in connection with this Contract shall be referred to three persons at New York, one to be appointed by each of the parties hereto, and the third by the two so chosen; their decision or that of any two of them shall be final; and for the purposes of enforcing any award, judgment may be entered on an award by any court of competent jurisdiction. The proceedings shall be conducted in accordance with the rules of the Society of Maritime Arbitrators, Inc.
….
*) (c) This Contract shall be governed by and construed in accordance with the laws of the place mutually agreed by the parties and any dispute arising out of or in connection with this Contract shall be referred to arbitration at a mutually agreed place, subject to the procedures applicable there.
….
*) Sub-clauses (a), (b) and (c) are alternatives; if this Clause has been incorporated into the Contract without an express choice of law and arbitration forum chosen from sub-clauses (a), (b) and (c), then sub-clause (a) of this Clause shall apply. Sub-clause (d) shall apply in all cases.
The English Choice
The discussion in this section presumes that Clause 15(a) has been selected as the choice of law and forum clause in the bunker supply contract.
A. Bailment
Clause 10 of the BIMCO terms clearly seeks to establish a bailment: "Until such time as payment is made, on behalf of themselves and the Vessel, the Buyers agree that they are in possession of the Marine Fuels solely as Bailee for the Sellers."
The functioning of this contract provision is illustrated in Forsythe International (UK) Ltd. v. Silver Shipping Co. Ltd., [1993] 2 Lloyd''s Rep. 268 [QBD (Adm. Ct.) 1993]. In Forsythe, the plaintiff had supplied bunkers to a vessel upon the order of its time charterer. Having not been paid for the bunkers, the bunker supplier brought an action against the vessel''s owner as well as the charterer. The bunker supplier based its claim against the vessel owner on an allegation of the conversion of the bunkers. The bunker supplier''s standard terms and conditions reflected a term similar to Clause 10 of the BIMCO Terms. Referring to this contract provision, the Court stated:
It is also common ground that the retention of title provision in [the terms and conditions] had the effect, as between the plaintiffs and the charterers, that property in the bunkers did not pass until they were paid for and that, since the bunkers were not paid for, the property never passed to the charterers. It follows (as is again common ground) that any assumption of ownership of the bunkers by the owners would amount to a conversion of them which would entitle the plaintiff to damages for conversion unless the owners are entitled to rely upon s. 25 (1) of the Sale of Goods Act, 1979.
Id. at 272. The Court then finding that the provisions of the Sale of Goods Act, 1979 did not apply in this case, the vessel owner was held liable to the bunker supplier for damages for conversion, namely the value of the bunkers (albeit only after the time that the vessel owner had terminated the charter for non-payment of hire). Id. at 280-81.
Forsythe has been construed by a U.S. appellate court. In Wave Maker Shipping Co., Ltd. v. Hawkspere Shipping Co., Ltd., 56 Fed. Appx. 594, 2003 A.M.C. 209 (4th Cir. 2003), the creditor of a charterer attached bunkers on board the chartered vessel as security for this creditor''s claim against the charterer.[2]
In the attachment action, the creditor necessarily had to allege that the bunkers on the vessel were the property of the charterer who previously had arranged for the provision of these bunkers in Russia. The vessel owner sought to set aside the attachment of the bunkers, based upon the retention of title terms in the contract between the charterer and the bunker supplier. In other words, if the bunkers were not the property of the charterer, those bunkers could not be attached. The bunker supply contract was governed by English law. Id. at 210-11.
In applying English law, Wave Maker cited Forsythe in support of the proposition that under the retention of title provision, the supplier, not the charterer or vessel owner, retained title to the bunkers pending payment. As such, Wave Maker held that the attached bunkers were not the property of the charterer as title remained with the Russian bunker supplier. The Court also noted that as the vessel owner had consumed the bunkers, it putatively amounted to a conversion of the bunker supplier''s property and that party remained free to assert its rights against the vessel owner. Id. at 214.
B. Maritime Lien
The next issue to consider under our scenario is where the bunker supplier has asserted a maritime lien against the vessel based upon the provision of bunkers.
Here, it is near certain that a U.S. court will not recognize a lien against the vessel, given the choice of English law. That is, U.S. courts have consistently held that under English law, a claim for repairs or necessaries (such as bunkers) does not give rise to a maritime lien. Because an enforceable maritime lien is a prerequisite for an in rem action against the vessel, a court would likely find that it lacked jurisdiction over the arrest action against the vessel in our scenario. See, e.g., Trinidad Foundry and Fabricating, Ltd. v. M/V K.A.S. Camilla, 966 F.2d 613, 617 (11th Cir. 1992) (where repairs were furnished to the vessel in Trinidad and the contract required the application of English law, there was no right to arrest the vessel and assert a maritime lien in a U.S. action).
Clause 15(a) of the BIMCO Terms is mandatory ("shall be governed") as far as the application of English Law. However, in the context of other marine contracts, modifications have been made to such terms as far as the scope of a maritime lien.
In Liverpool and London S.S. Protection and Indemnity Ass''n Ltd. v. Queen of Leman MV, 296 F.3d 350 (5th Cir. 2002), the key issue concerned the assertion of a maritime lien against vessels for unpaid P&I insurance premiums. Although the applicable P&I rules required the application of English law there was an caveat to that general provision giving the P&I club the right "to enforce its right of lien in any jurisdiction in accordance with local law in such jurisdiction…". Id. at 353. Based on that phrase, the Court held:
We interpret the P&I rules to provide generally for the choice of English substantive law, but to except from this choice of law the substantive issue of whether a maritime lien exists in the first place. Under the contract, that question, like the enforcement of such a lien, is to be determined by the law of the local jurisdiction. We therefore conclude that in this case that the P&I rules call for the application of United States substantive law to determine the existence of maritime liens.
Id. at 355. Having made this determination, the Court remanded the case to the lower courts for further proceedings. It is important to note that Queen of Leman did not reach the ultimate question, that is, whether the P&I club in fact had, under U.S. law, an enforceable maritime lien against the vessels.
Indeed, subsequent decisions have rejected the notion that the reasoning in Queen of Leman allows for the creation and enforcement of a lien under U.S. law, where the terms of the contract refer to a party''s right to take action in any jurisdiction. Such terms have been interpreted to be more a choice of forum clause as opposed to a contract provision that purports to allow for the creation of a lien under the law of a jurisdiction other than that selected in the contract. See Bominflot, Inc. v. The M/V Henrich S, 465 F.3d 144 (4th Cir. 2006) (bunker supply contract: reference to enforcement of rights in any jurisdiction was a forum selection clause rather than a choice of law clause); Marine Oil Trading Ltd. v. M/V Paros, 287 F.Supp.2d 638 (E.D. La. 2003) (bunker supply contract: reference to the supplier''s rights to take action in any jurisdiction did not create a lien under U.S. law, as the lien right was still governed by English law, the law chosen in the contract); Marine Oil Trading Ltd. v. M/V Sea Charm, 2003 A.M.C. 882 (E.D. La. 2003) (bunker supply contract: same).
Thus, it remains to be seen if the type of language which appeared to be successful in Queen of Leman can actually result in the creation of a U.S. maritime lien when English law (or the law of some other jurisdiction) is the generally governing law of the contract.
The American Choice
Under this section, we will presume that the election in the BIMCO Terms is now paragraph 15(b), which requires the contract to be governed by the maritime law of the United States.
A. Bailment
In contrast to the English law position as set forth in Forsythe and recognized in Wave Maker, the enforcement of the retention of title provision (Clause 10) is far from certain under U.S. Law.
The relevant decision on this issue is In re Millenium Seacarriers, Inc., 2003 WL 22939112, 2004 A.M.C. 538 (S.D.N.Y. 2003), aff''d, 419 F.3d 83 (2d Cir. 2005). In Millenium, a bunker supplier had furnished bunkers to several vessels owned by a vessel owner whose base of operations was in the U.S. However, the physical provision of the bunkers was all outside the U.S. The vessel owner subsequently entered U.S. bankruptcy proceedings.
The issue before the court was one of the priority of maritime liens. That is, the issue was the priority as between the party holding foreign-registered mortgages on the vessels and the bunker supplier. Under established U.S. law, the foreign mortgages would prime the liens related to the bunkers as those bunkers had been provided outside the United States. On the other hand, it is equally established under U.S. law that a maritime lien arising from a tort would prime the contract liens of the mortgagee.
In that regard, the bunker supplier alleged that its liens were in fact tort-based because of the retention of title provision in its standard terms. Thus, as argued by the bunker supplier, when the bunkers had been consumed by the vessels, the tort of conversion had occurred and thus the vessels were liable in rem. The Court rejected the bunker supplier''s position:
Here, the bunker fuel was sold to [vessel owner] and delivered to its vessels by [bunker supplier] with full knowledge and the expectation that it would be consumed by the vessel beginning shortly after delivery. The agreement between the parties call for payment in thirty or sixty days from delivery. Agreements to sell bunker fuel on those terms are inconsistent with a bailment relationship. Bailment contemplates that the person who receives delivery of goods or personal property will redeliver the goods to the bailor or otherwise deal with the property according to the deliverer''s order.
2004 A.M.C. at 542-43. In reaching this conclusion, Millenium relied on various U.S. precedents that distinguished bailment contracts from sales contracts. See, e.g., In re Sitkin Smelting & Refining, Inc., 648 F.2d 252, 254 (5th Cir. 1981) ("unconditional promise to purchase and pay indicates a sale rather than a bailment...").
Given that Millenium concluded that there was no bailment and thus no tort, while the bunker supplier had valid maritime liens against the vessels, under the priority rules, its maritime liens were subordinate to that of the mortgagee.
B. Maritime Lien
The question next to be addressed is whether by simply electing the application of U.S. law in a bunker supply contract, under the scenario outlined above, a U.S. court would recognize the existence of an enforceable U.S. maritime lien against the vessel.
Certainly U.S. courts follow the general proposition that a choice of law provision in a contract should be enforced. Sembawang Shipyard, Ltd. v. Charger, Inc., 955 F.2d 983, 986 (5th Cir. 1992). However, it is also established that a maritime lien does not arise by contract, but only by operation of law. Rainbow Line, Inc. v. M/V Tequila, 480 F.2d 1024, 1026 (2d. Cir. 1973).
Illustrative of this point is Trans-Tec Asia v. M/V Harmony Container, 437 F.Supp. 2d 1124, 2006 A.M.C. 1011 (C.D. Ca. 2006). In Trans-Tec, the Taiwanese charterer of the vessel ordered bunkers from a bunker supplier, also located in Taiwan, and the bunkers were supplied in South Korea. However, the general terms which the bunker supplier sought to incorporate into the bunker order called for the application of laws of the United States, including the existence of a U.S. maritime lien. 2006 A.M.C. 1013-14. The Court had initially held (for a number of reasons) that the choice of law clause had not been incorporated into the agreement between the bunker supplier and the charterer. Id. Moreover, relying on Rainbow Lines, the Court also reiterated the rule that a maritime lien cannot be created by the terms of a contract. 2006 A.M.C. at 1026 n. 10.
As to the creation of a maritime lien by operation of law, Trans-Tec noted that a U.S. maritime lien for necessaries (bunkers) did not arise here where the supplier of a necessary was foreign, the vessel was flagged in a foreign country, the bunkers were supplied in a foreign port and the entire contract was negotiated in Taiwan. 2006 A.M.C. at 1023.
This decision is to be contrasted to those situations where a court has concluded a maritime lien does exist under U.S. law; for example, where there are significant contacts with the United States, such as the location of the place of business of the charterer, and where the contract itself was formed in the United States. Gulf Trading & Transp. Co. v. M/V Tento, 694 F.2d 1191, 1192, 1195 (9th Cir. 1982).
The Other Choice
The BIMCO Terms also allow for the selection of the law of other jurisdictions, as set forth in Clause 15(c).
Thus, if an action is brought against the vessel in a U.S. court, the court would be expected to look to the law of that jurisdiction as to whether, under such law, there is an enforceable maritime lien against the vessel. See, e.g., Sembawang, 955 F.2d at 988-89 (under Singapore law there was not an enforceable maritime lien); Vestoil Ltd. v. M/V M Pioneer, 2005 WL 3675960, 2005 A.M.C. 1035, 1040 (M.D. Fla. 2005) (Greek law does not create a maritime lien for the supply of fuel bunkers).
Summary and Conclusion
It is clear that the assertion of a maritime lien under U.S. law cannot be successfully done simply by adopting a U.S. law provision into the standard terms of the contract. Something more will be required, mainly some relationship between the transaction itself and the U.S. Moreover, as also discussed above, an action against the owner of the vessel (where the bunkers were ordered by the charterer) for conversion will probably not be successful under U.S. law.
On the other hand, an action in the U.S. on the conversion theory may well be successful in the U.S. where the law of the contract is English. However, if that jurisdiction''s law is elected and an action is brought against the vessel in the U.S., under most circumstances, no enforceable lien will be found to exist.
In conclusion, the election of the law of the contract as well as the decision about the place to enforce its terms must be made with care.
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[1] The contents of this papers is not intended to be, and should not be construed as, legal advice. The assistance of counsel should be sought with regard to any specific circumstances for which legal advice is required.
[2] In general terms, under U.S. procedure, a vessel is "arrested" on the basis of a claim of a maritime lien against the vessel, in rem. There is a different maritime process known as "attachment". Here, a plaintiff "attaches" the property of a defendant based upon an in personam claim.
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