Novorossiysk Co. v. Chemex

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Chembulk Trading LLC v. Chemex Ltd.; Novorossiysk Company v. Chemex Ltd.
United States Court of Appeals for the Fifth Circuit: Judges King, Smith and Garza: 2004 U.S. App. LEXIS 25185 (5th Cir. 2004): 8 December 2004
Maritime: time-charter party; freights: sub-freights: contractual lien: maritime lien: Whether "freights" includes "sub-freights"
In this case, the Fifth Circuit Court of Appeals, in a majority opinion, reversed the judgment of the district court and held that the time-charter between Novorossiysk and Chemex, under which Novorossiysk was afforded a lien on "all freights", was sufficiently explicit to provide a lien on all subfreights. Accordingly, the court concluded that Novorossiysk had a maritime lien over the subfreights that would take priority over a third-party’s Rule B attachment. Rule B* of the Supplemental Rules for Certain Admiralty and Maritime Claims codifies the traditional maritime attachment practices and procedures under U.S. law.

DMC Rating Category: Confirmed

Case note submitted by Jana N. Byron of the firm Healy & Baillie, LLP in New York. Healy & Baillie are the International Contributors to the website for the United States

Novorossiysk’s entered into a time-charter with Chemex for the m/v "Tuapse". Pursuant to the time-charter, Novorossiysk was granted a lien on "all cargoes and all freights for any amounts due under this charter." Chemex thereafter entered into a voyage-charter with Westway Trading Co. ("Westway") for the m/v "Tuapse". In a separate transaction, Chembulk Trading voyage-chartered the m/v "Chembulk Clipper" to Chemex. Chemex failed to make necessary payments under the Novorossiysk (m/v "Tuapse") time-charter and failed to pay freight and demurrage due under the Chembulk Trading (m/v "Chembulk Clipper") voyage-charter.

Novorossiysk thereafter faxed a notice to Westway stating that it was exercising a lien on "all freights and subfreights" due under the time-charter and requested that Westway pay all outstanding freight due under the Chemex-Westway voyage charter directly to Novorossiysk. Chembulk Trading subsequently obtained a Writ of Attachment and Garnishment pursuant to Rule B on the same funds owed by Westway to Chemex. After Chembulk Trading obtained its writ, Novorossiysk also obtained a writ of Attachment for the funds.

After some procedural maneuvering by the parties and consolidation of the cases, the issues before the district court were narrowed to the following: whether Novorossiysk had a maritime lien on the Westway freight giving it priority over Chembulk’s Rule B attachment? Generally speaking, claimants with maritime liens (which arise as a matter of law) are entitled to preference and priority over attaching creditors. As between attaching creditors, the first to attach has priority. A ship-owner normally has a maritime lien upon cargo owned by a charterer for compensation not yet paid. Where the cargo is not owned by the charterer, the vessel owner will not have a maritime lien on the cargo. However, parties to a charter are free to provide that a ship-owner will have a maritime lien for freights and sub-freights owed by the third-party cargo owner to the charterer.

As stated above, the Novorossiysk-Chemex time-charter granted Novorossiysk a maritime lien on "all cargoes and all freights for any amounts due under this charter." The district court determined that, as a matter of law, the Westway freight was properly characterized as "subfreights" rather than "freights" (because it was money owed to Chemex by a third-party payor/subcharterer of the m/v "Tuapse"). The court then concluded that the Novorossiysk-Chemex time-charter did not give Novorossiysk a maritime lien on the Westway freight because the charter provided for a lien only on "all freights" and not on "subfreights."

The Circuit Court reversed this decision, holding that the district court’s interpretation of "all freights" in the Novorossiysk-Chemex time-charter was erroneous as a matter of law. The Court based its decision on the basic principle of contract interpretation that all the terms in a contract should be interpreted without rendering any of them meaningless or superfluous. Applying this principle, the Court reasoned that if the charter gave Novorossiysk a lien over "freights" only, it would, in effect, be affording Novorossiysk a lien on a debt owed to itself. Interpreting the charter in this manner, the Court observed, would render the term meaningless in so far as it would be "useless to assert a security interest in the very debt owed."

The Court went on to state that a more meaningful interpretation would be that the term "all freights" afforded Novorossiysk a lien on the subfreights owed by Westway. The Court reasoned that this was so because (1) such an interpretation would render the term "all freights" meaningful; (2) it was consistent with the definition of "freight" and "subfreight"; and (3) many courts have regularly used the terms "freight" and "subfreight" interchangeably regardless of whether the money was owed by a charterer or subcharterer. The Court concluded that the "term ‘subfreights’ has not become, by custom and usage, the only way to refer to compensation payable by a third party to a charterer", and that the term "all freights" in the Novorossiysk-Chemex time-charter was sufficiently explicit to provide a lien on all subfreights. Thus, the Court held that Novorossiysk had a maritime lien on the subfreights that took priority over Chembulk Trading’s Rule B attachment.

The Court’s decision was handed down over a vigorous dissent by Circuit Court Judge Garza who opined that the Court’s opinion went against the basic canon of contractual interpretation that terms in contracts be given their plain meaning. Judge Garza argued that the terms "freight" and "subfreights" have distinct meanings in the context of admiralty contracts and that the case was simply one of contractual error for which there was no judicial recourse. Judge Garza wrote, "Novorossiysk was well aware at the time it entered into the charter with Chemex of the clear distinction between freights and subfreights. If it wanted to exercise a lien over the freight promised by Westway, Novorossiysk could (and arguably should) have expressly stated so in its contract. For whatever reason, it chose not to avail itself of this opportunity."

*A Rule B attachment is generally available where a plaintiff has an in personam maritime claim against a defendant and it allows the plaintiff to assert jurisdiction over a defendant through attachment of property in a jurisdiction in which the defendant cannot otherwise be found. The attachment procedure serves both to obtain jurisdiction over the defendant (to the extent of the attached property) and to secure the plaintiff’s claim.



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