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Choice of Venue and Maritime Lien Claims

by George Wang + Xin Mu (Dentons LLP (Beijing))

Preferred maritime liens can raise challenging issues during maritime disputes—especially during bankruptcy. Creditors may encounter problems when filing for seizure due to their unique nature, with venue is becoming a determining factor.

Importantly, parties involved in maritime cases are often not immediately evident. Unlike mortgages, maritime liens are unpublished, only attaching to a vessel once credit exists. Thus, a claim that can appear to be paid off may be subordinated by previously invisible claims after the vessel is arrested. Moreover, maritime laws vary according to location—making venue and local counsel even more vital. Utilizing a local attorney who is familiar with lex fori can optimize the success of the seizure and maritime lien claims, increasing the likelihood of credit being paid off.

These issues were brought to the forefront in the 2014 bankruptcy of OW Bunker where bunker suppliers faced few recovery avenues. They sought to secure claims for unpaid fuel by arresting vessels that contracted with the defunct company. In response, vessel owners sought to enjoin arrest in the US Southern District of New York (SDNY) in a case called O’Rourke Marine Servs. L.L.P. v. M/V Cosco Haifa. The major issues were whether the supplier had maritime liens regarding the necessaries against the ship owner; and, if so, whether OW Bunker constituted a “supplier.” The court found that the Commercial Instrument and Maritime Lien Act (CIMLA) was intended to protect the interests of direct necessary providers. Thus, OW Bunker, a merchant who supplied vessels through third-party providers, was not entitled to maritime contract liens stricti juris.

Although the High Court upheld an arbitral award in favor of OW Bunker that the appellee is entitled to the oil payment from the ship owners (UPT Pool Ltd. v. Dynamic Oil Trading (Sing.) Pte. Ltd.), OW Bunker had extreme difficulties enforcing the judgment. Under US law, necessaries for a specific vessel, such as bunker supplies, are subject to maritime contract liens. Maritime contract liens that pre-date a recorded mortgage have priority over the mortgage (US flag vessel), which makes the US a preferred location for seizure of the vessel. It is more likely for the suppliers to have their credits liquidated in the US than in any other place, where they rarely have securities. Ultimately, OW Bunker failed to benefit from the choice of venue.

The bankruptcy of Hanjin Shipping again emphasized that the location of vessel seizure is a critical factor in determining the likelihood of credit payment. With major issues caused by OW Bunker still unsettled, Hanjin Shipping obtained an order from the Seoul Central District Court to commence rehabilitation proceedings in 2016. Recognition of rehabilitation has now been granted by courts in Australia, Canada, Germany, Japan, Singapore, the UK and the US, with more countries expected to be added in the coming weeks; this recognition has set the threshold to arrest Hanjin’s vessel in those jurisdictions.

US Bankruptcy Court has granted provisional relief to Hanjin. Currently, any vessels owned, managed or chartered by Hanjin are prohibited from seizure by a court order. Under such circumstances, creditors tend to seek damages from other jurisdictions, where the courts do not recognize the rehabilitation of Hanjin. China has become a preferred location of creditors seeking to bring seizure actions or apply injunctions in any form to arrest Hanjin’s vessels. However, the proceedings are not moving forward as smoothly as expected in Chinese maritime courts. Maritime liens were struck after being filed for the seizure claims at courts due to the diversity of maritime lien acts or maritime laws between countries. The primary reason is there is no action in rem in China as there is in the US; thus the standing of the claimant is terribly limited.

Under Chinese Maritime Procedure, qualified claimants who are entitled to bring seizure actions are enumerated, which prohibits some creditors, such as a stevedoring company, to file for arresting a vessel if the claim is not brought directly against the ship owner or the disponent charterer, even though the service was provided to a particular Hanjin vessel (the legislation was challenged somewhat academically). The claimant may bring an action in rem in the same situation in the US if contracting with the ship owner or ship owner’s agent. The procedural law is enforced in any lawsuits proceeding in a Chinese court, which means a creditor may not make a choice of law to avoid the enforcement.

Besides standing, another main issue the likely to confront creditors is the ranking of claims. Under Chinese law, the custodial legis has priority over liens and mortgages. Maritime liens rank second with five types of credits or damages and are given the following order: (i) crew (including the captain) wages, maintenance and cure, health and medical insurance, and payments ejusdem generis; (ii) personal injury and death relating to the vessel; (iii) taxes, port charges, pilotage and other administration-oriented fees; (iv) salvage; and (v) property damages relating to the vessel. General liens, such as payment held by the ship builder, rank third, while mortgages (recorded or not) are given the least priority. Moreover, Chinese maritime law also adopts the inverse order rule so salvage claims (claim iv) accrued later in time take priority over claims (i) to (iii) and those salvage claims liens that come last in time are first in priority. Liens within a class are paid pro rata if the ship value is insufficient to cover all liens.

Substantive laws regarding maritime liens are much more likely to be subject to the law of the country in which the action is brought. The Chinese conflicts of law and maritime law both adopt such opinions, providing that the court should apply the law of venue compulsorily to maritime lien cases. Additionally, maritime lien holders, general lien holders and the mortgagees all have the right to file for arrest. It is accepted that the maritime lien acts worldwide share the same mechanism. However, local concerns result in variations in the legislation.

Under CIMLA, custodial legis trumps all other claims followed by the preferred maritime liens, including (i) wages of crew, maintenance of cure, stevedore wages if employed directly by ship owner or ship owner’s agent; (ii) salvage; (iii) maritime torts, personal injury, property damage and cargo tort liens. Maritime contract liens predating the filing of preferred mortgage, including necessaries, repairs, supplies, towage, use of dry dock, cargo contract damage liens and contract charter liens, have the third priority, with preferred mortgage as fourth priority. Contract liens such as necessaries which post-date the recorded preferred mortgage are the fifth class, with the sixth class being foreign preferred ship mortgage. Maritime contract liens accruing after foreign preferred ship mortgage have the least priority; however, liens for necessaries provided in the US are subordinate to any foreign preferred ship mortgage regardless of the time of the occurrence. CIMLA adopts the inverse order rule, but in the same class. The existence of preferred ship mortgage exempts maritime contract liens from the inverse order rule. Additionally, maritime contract liens are subject to the “same voyage rule” in terms of the ranking.[N2]

Due to the differences between the legislations, the likelihood of a lien holder to have the credit paid off can be reversed under particular circumstances. If a stevedoring company, employed by ship owner’s agent, asserts stevedoring payment against the ship owner, his claim will create a preferred maritime lien, which is secured with the highest priority, except custodial legis. On the contrary, the same claim brought in a Chinese court will be classified to the general claims without security. The similar situation applies to the OW Bunker case. If OW Bunker brought the claim under a Chinese court, it would not be taken by maritime court. If, however, the maritime court were to hear the case, necessaries are not subject to maritime liens under Chinese maritime law. However, it was supposedly able to allege a maritime contract lien under CIMLA, though it failed. The similar issue arises regarding the salvage. Under Chinese maritime law, if a salvage fee accrues after a wage owed to a seaman, the salvage claim creates a maritime lien that is preferred over the wage claim. However, if CIMLA applies, the salvor would lose his priority over the seaman.

The recognition of Hanjin’s rehabilitation set up barriers to the creditors to seize the vessel in some jurisdictions, such as the US. Seeking legal support from other jurisdictions such as China, where a seizure is still allowed by the court, is a requisite decision for some creditors. Understanding the risks inherent in applicable laws is essential for those who seek arrest overseas. Lack of knowledge of the lex fori may result in undesirable effects, but taking advantage of the local rules can ensure success in the foreign jurisdiction.

[N1], [N2] Robert Force, Admiralty and Maritime Law; Second Edition; Federal Judicial Center 2013

January 15, 2017

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