Vol 14 (2017) - Issue 2

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Insolvencies in the Supply Chain: Recourse against the Owner of the Goods

Introduction
The collapse of Hanjin Shipping Co. Ltd. at the end of 2016 continues to present a wide range of lingering legal challenges in maritime jurisdictions around the world, many to be resolved applying the principles of English Law. An overview was given in the article in volume 13, issue 6 of International Corporate Rescue; ‘The Collapse of Hanjin Shipping: An English Lawyers Perspective’. In particular, that article drew attention to the potential difficulties for creditors caused by the restriction, often contained in foreign insolvency recognition orders, prohibiting the taking of steps to enforce security over the debtor’s property. The recognition order made by Nugee J in the United Kingdom in respect of Hanjin on 6 September 2016 contained such a restriction. And as the article explained, that represents a potential obstacle to the shipowner’s traditional remedy of a lien over sub-freights owed to the debtor.
The present article focusses on the other remedies (apart from the enforcement of security over the debtor’s property) available to creditor carriers and wharfingers in the logistical supply chain when their contracting counterparty fails but they remain in possession of the goods; so, where A (a carrier or warehouse) contracts with B to carry or look after the goods of C and B (through insolvency) fails to pay A, what recourse will A have against C if he terminates the contract? The answers to this question have been most carefully refined in the area of carriage by sea, but much of the reasoning can be carried over into cases of carriage by air and road and storage contracts. The consequent rights and liabilities must be carefully analysed in the particular case before A attempts to terminate his contract with B.

Contract with the owner of the goods?
The first step is to ask whether there is a direct contract with the owner of the goods. So, in the shipping context, a shipowner (A) may, in addition to his contract by way of a charterparty with the charterer (B), enter into a carriage contract with the cargo owner/shipper (C). The latter contract, if it exists, will typically be
contained in or evidenced by the bills of lading issued by B. Much depends on whether the bills of lading are 'owners' bills’, in the sense of having been issued on behalf of the shipowner, or 'charterers' bills’. Only the former can usually be relied upon as representing a direct contract between the shipowner and cargo owner/ shipper.
If a direct contract is identified, there are two main consequences. First, even if the shipowner terminates the charterparty for non-payment, he may remain obliged under the bill of lading contract to carry the cargo to the scheduled destination. The shipowner is not at liberty to abandon the carriage. Second, the good news for shipowners is that they may have a direct claim against the cargo owners for the payment of unpaid freight under the bills of lading together with a lien allowing them to withhold delivery of the cargo until payment is made. The direct claim for freight rests on the analysis that the freight is usually collected from the shippers by the charterers acting as agent for the shipowners, and shipowners can, by giving written notice, terminate that agency (confirmed recently in The Bulk Chile [2013] 2 Ll Rep 38). The basis of the lien is slightly different. It relies on an analogy with wharfingers who, under the common law, have a lien for their storage charges. In explaining the lien in The Lehmann Timber [2013] ll Rep 541, Sir Bernard Rix stated:
'Shipping is performed on the basis that time is money and that a ship is a floating and travelling warehouse for which cargo must pay either in the form of agreed freight or by way of damages for breach of contract … A shipowner should not be required to abandon his lien because the only other choices facing him are disastrous ones of turning his ship into a floating warehouse for an indefinite period, or throwing them into the sea, or storing them on land at his own expense.'
This reasoning may apply far beyond the specific context of carriage by sea. The common law lien may well be available to other participants in the international supply chain including road and air carriers, distributors and warehouses.