The August 31, 2016, bankruptcy of container shipper giant Hanjin Shipping Co. Ltd. has thrown ports and retailers around the world into confusion. With its fleet of more than 100 container ships, Hanjin is South Korea’s largest container carrier, seventh largest in the world, and accounts for eight percent of trans-Pacific trade volume for the U.S. Market. Worldwide ports and companies that provide necessary services and supplies to its ships have denied them access for fear of not being paid. This has stranded billions of dollars of cargo at sea. On September 9, 2016 courts in South Korea and the United States cleared the way for Hanjin to spend $10 million to unload four ships headed to the U.S. west coast. The ships will be allowed to dock and unload their cargo without fear of seizure by creditors. However, Hanjin ships have been seized in in ports in China and Singapore.
Given these circumstances, now is a good time for a brief review of the maritime lien which often is the only security that a provider of necessaries to a ship can rely upon. Simply stated, the maritime lien is designed to furnish security to a creditor, and to enable the vessel to obtain goods and services even though it may be a world away from its home port. The notion of the maritime lien arose in those long ago days when there did not exist technology that facilitated rapid communication and financial transactions. Then suppliers of goods and services were reluctant to do business with vessels whose owners were unknown to them or located far away. After receiving goods or services, the vessel could sail away leaving the owner unpaid. To ensure payment, the master or vessel’s agent or representative was enabled to pledge the vessel as security. In the United States the Federal Maritime Lien Act, 46 U.S.C. § 31301, et seq., first enacted in 1910, codified the maritime lien to all suppliers of “necessaries” to a vessel on the order of the owner, master, or charterer. The lien, which is a non-possessory property right or privilege, attaches to the ship and its appurtenances. It gives the aggrieved provider the right to seize the vessel, force its sale, and extract payment. Maritime liens can attach to a vessel under a number of circumstances such as personal injury, property damage, preferred ship mortgages, seaman’s wages, or contractual disputes. As a result, the courts have ranked the liens in order of priority, with those ranked first having first claim on assets realized from the sale.
The Act defines “necessaries” as including “repairs, supplies, towage, and the use of a dry dock or marine railway”. § 31301. The courts have been more inclusive and recognized services of a marine surveyor, taxi fare for crew member to get to the vessel, insurance premiums, and gambling equipment furnished to a cruise ship. Also included are pilotage, wharfage and dockage, stevedoring services, advances made by the ship’s agent, damage to cargo, and bills for unpaid bunkers or other necessaries.
The lien attaches when the supplies or services are provided. While it is not necessary to record or file a maritime lien, it is recommended that the lien holder file a formal Notice of Lien with the U. S. Coast Guard Office of Vessel Documentation, if the vessel is documented. The Coast Guard has General Instructions for Filing and Recording of liens that are easily accessible. If not documented, the lien may be filed where the shipowner’s headquarters are located. The benefit of filing is that it serves to notify the public of the lien. The cost is negligible. The lien follows the vessel, even if sold. The lien is extinguished if the vessel is lost or destroyed.
The lien can be enforced only by filing a complaint in federal court, which has original jurisdiction, naming the vessel as a defendant and petitioning the Court to arrest the vessel pursuant to a warrant of arrest issued by the Court. Acting on the warrant the U.S. Marshall is authorized to serve the Master and take custody and control of the vessel by placing a custodian aboard. The vessel remains in the jurisdiction of the Court until ordered released by the Court. This can be an expensive. A deposit (as much as $10,000) is required to cover marshal costs, costs of custodian and insurance.
Once arrested in order to achieve its release, the vessel’s owner must file an answer and claim of ownership. To secure its release, the owner must post security approved by the Court. This may be a bond, cash, or letter of undertaking. The amount is usually equal to the lien, plus interests and costs. If no agreement as to the value can be agreed upon by the parties the Court may exercise its discretion and set the amount. If security is not provided the Court may, after due process has run its course, order the vessel sold and the proceeds distributed to the lienholder. If there are multiple lienholders, the funds are distributed by order of privilege. Vessels may be seized wherever found and if not in a U.S. port will require the U.S. lienholder to access the courts in that country which has jurisdiction over the vessel.
It is important to note that there are circumstances where a lien may be lost or waived. In charter agreements between the owner and bareboat charter there may be provisions that provide that any services furnished are for the account of the charterer, not the vessel. This may not be binding on the provider if the provider has no knowledge of the provision. A lien may be lost if the holder waits an unreasonable period of time to enforce it and the owner is prejudiced. This is left to the discretion of the Court which will rule after hearing the evidence. Prompt action is always the best course for the provider to set.
Thanks to Robert Jablon, Associated Press, and Lisa Richwine, Reuters, for their informative articles on the Hanjin bankruptcy.