O.W. Bunker Aftermath: Actions Every Owner Should Take to Protect Against Secret Liens

by Holland & Knight LLP
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Holland & Knight LLP

HIGHLIGHTS:

  • The high-profile collapse of the O.W. Bunker Group has caused havoc in the maritime industry and illustrated the need for owners to take every step possible to avoid allowing any lien for bunkers attached to its vessel.
  • Countless owners and their vessels have been targeted because of the all-too-common failure of a charterer to pay for bunkers.
  • Stakeholders, including owners and insurers, should take immediate steps to put in place a process and procedure to be followed at every fuel delivery.

The high-profile collapse of the O.W. Bunker Group has caused havoc in the maritime industry and illustrated the need for owners to take every step possible to avoid allowing any lien for bunkers attached to its vessel. Countless owners and their vessels have been targeted because of the all-too-common failure of a charterer to pay for bunkers. Moreover, failure by the bunker seller to pay a physical supplier for the fuel it purchased on credit often leads to multiple claims against a vessel by both the seller and the physical supplier. Liens for unpaid bunkers against a vessel are the largest threat to an owner's bottom line and yet can be entirely avoided with good practices.

It is no coincidence that most bunker sales contracts incorporate U.S. law with respect to the existence of a lien against the vessel for unpaid bunkers. Simply put, U.S. law is by far the most generous in terms of allowing a lien against the vessel in favor of the seller for unpaid bunkers.

Background

The U.S. Commercial Instruments and Maritime Lien Act (CIMLA) has been the subject of increased litigation and interpretation over the past three years as a result of the O.W. Bunker bankruptcy in Denmark and its subsidiaries around the world. (See Holland & Knight alert, "Second Circuit Confirms Physical Suppliers Don't Have Maritime Liens," June 21, 2018.) To quickly summarize, the current consensus among U.S. District Courts who have heard these cases is that a contract supplier possesses a maritime lien against the vessel, while the physical supplier, acting pursuant to instructions from O.W. Bunker, has not acted on the authority of any person authorized to bind the vessel. See 46 USC §31342. Based on the typical facts surrounding the O.W. Bunker cases, a charterer contracting with a bunker supplier has not authorized that supplier to subcontract with the physical supplier, sufficient to create the agency relationship required by CIMLA.

When faced with maritime lien claims from both O.W. Bunker as contract supplier (i.e., seller), as well as from the physical suppliers down the contractual chain, owners have faced significant damages as well as litigation costs as a result of the assertion of maritime liens, regardless of the ultimate merit of those claims. This is in part due to the ex parte nature of the Rule C arrest proceedings filed by sellers and physical suppliers and the minimal pleading standard in order to obtain the requested warrant of arrest. This alert refers to sellers and physical supplier collectively as "suppliers" for the sole purpose of addressing notice issues.

Proactive Steps

The recent bunker supply cases have highlighted the need for owners to take proactive steps to protect themselves, both from physical supplier claims as well as those from contract sellers. CIMLA was drafted to protect suppliers that faced the risk of going unpaid by a vessel whose creditworthiness could not be evaluated by the supplier. But this principal is outdated in an industry where suppliers are entering into sophisticated contracts with brokers, contract suppliers and charterers, including the extension of significant lines of credit and 30 days (or longer) credit terms.

CIMLA itself provides a rebuttable presumption that a charterer is authorized, on behalf of an owner, to bind the vessel to a maritime lien for the provision of necessaries to a vessel. 46 U.S.C. §31341, specifically states:

(a) The following persons are presumed to have authority to procure necessaries for a vessel:

(1) the owner;

(2) the master;

(3) a person entrusted with the management of the vessel at the port of supply; or

(4) an officer or agent appointed by—

(A) the owner;

(B) a charterer;

(C) an owner pro hac vice; or

(D) an agreed buyer in possession of the vessel.

Despite the recent increase in maritime lien cases in the United States, the presumption that an owner has authorized the charterer to bind the vessel to a lien is simply that – a rebuttable presumption for the owner to overcome. An owner must therefore in the eyes of U.S. law take proactive measures in order to avoid being held responsible for a charterers' debts. In the current industry where an owner could face claims from numerous parties down the contractual chain with whom it has never interacted, the O.W. Bunker cases have shown that this is especially important.

Many charters include a "no lien clause" which states that the charterer is not authorized to bind the vessel to a maritime lien. It could be argued these "no lien clauses" are standard in many form contracts and an owner, or a broker acting on its behalf, should take steps to negotiate that a "no lien clause" is contained within the charter. But typically, where the fuel supplier does not receive a copy of the contract and has no notice of such a provision, this clause cannot be relied upon by an owner when defending a maritime lien claim from the supplier. A supplier must have "actual knowledge" of the relevant clause. Additionally, even if the charterer is under a contractual obligation to communicate the "no lien clause" to the supplier, which the new Baltic and International Maritime Council (BIMCO) clause purports to require, it is difficult to police this in practice, and a charterer's failure to do so may result only in a breach of contract claim, which the owner must then pursue against a likely defunct charterer. Thus, the new BIMCO lien clause is insufficient to protect an owner against a lien for unpaid bunkers under U.S. law and caution should be exercised by any owner who is advised that a BIMCO lien clause is all that is needed.

Additionally, courts have consistently held that the addition of a "no lien stamp" to a bunker delivery note, which is affixed following the transfer of fuel, does not provide sufficient notice to the supplier. In our experience, the most common mistake made by owners is caused by a misunderstanding of the effect of a "no lien stamp." While a "no lien stamp" may put the supplier on notice that a "no lien clause" is contained within the charter and that the owner objects to any lien being lodged against the vessel is essentially has no effect in preventing a lien against the vessel. Any owner relying on a "no lien stamp" placed upon the bunker delivery note subsequent to the delivery of fuel to the vessel must immediately come to terms with the fact that a "no lien stamp" is meaningless under U.S. law unless certain additional steps are taken by the owner to convey its position that the fuel is being supplied solely on the credit of the charterer.

Holland & Knight has been a leading U.S. firm representing owner's interests on lien issues in defense of bunker liens and recently represented the owner in a case before the U.S. District Court for the Northern District of New York, Bomin Greece S.A. v. M/V Genco Success, 2017 A.M.C. 1716 (May 30, 2017). This case is the most important decision in favor of an owner in recent years and provides useful guidance for owners attempting to avoid a maritime lien. In that case, the Court agreed with relevant precedent that the burden of showing that the supplier has actual knowledge of the charterer's lack of authority rest squarely on the owner of the vessel to overcome the supplier's statutory presumption under CIMLA. Where the chief engineer of the vessel, on behalf of the owner, made affirmative representations to the captain of the bunker supply barge in a pre-bunkering meeting, such communications were sufficient to overcome the presumption. In that case, the pre-bunkering notice of the no-lien provision of the charter party and lack of authority of the charterer to bind the vessel was also documented contemporaneously with a letter of protest that the barge crew was asked to sign, though they refused.

The Bomin case involved a finding that the corporate entity responsible for crewing the bunker supply barge was related to the physical supplier. However, the Court noted that the owner was responsible for providing notice to the only party it was aware of – and that the physical supplier in turn was in a position to "effect" renegotiations of the contract, if necessary.

Conclusion and Takeaways

While ultimately the Bomin court found that the notice provided in the pre-bunkering meeting was sufficient to provide actual notice to the supplier in that particular situation, there are further preventative steps that should be taken by an owner to avoid costly litigation in the first place, not to mention an arrest of the vessel. A checklist of actions should be instituted by vessel owners that masters and chief engineers must follow, and protection and indemnity (P&I) insurers should require or encourage these policies in order to reduce litigation costs for bunker claims. It makes little sense in today's uncertain market that an owner would continue to put itself at risk for payment of fuel which a charterer ordered for its own behalf. Owners can 100 percent prevent what amounts to strict liability for payment of fuel delivered to the vessel. Stakeholders, including owners and freight, demurrage and defense (FD&D) insurers, should take immediate steps to put in place a process and procedure to be followed at every fuel delivery. Taking such steps, including those recommended by Holland & Knight in its "Bunkering Checklist," will ensure victory in the fight against the ever-increasing efforts of fuel suppliers to hold the owner strictly liable for fuel delivered to the vessel.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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