DMC Category Rating: Confirmed

Facts
In 2005, Samsun Logix, as disponent owners, and Deval Denizcilik, as shipowners, chartered their respective vessels to Oceantrade. Oceantrade encountered financial difficulties and in September 2005, became subject to bankruptcy proceedings in New York. At that time, Oceantrade owed both Samsun and Deval substantial amounts of hire. Samsun obtained a freezing order from the English High Court against Oceantrade, pursuant to which, on 7 September 2005, certain sub-freights due from voyage charterers of the Deval vessel were paid into an escrow account of Oceantrade’s English solicitors (Mills & Co) and held to the order of the court. Samsun went on to obtain an arbitration award for the outstanding hire in the amount of US$1,244,667 and was then given permission to enforce the award as though it were a judgment.

Meanwhile, on 9 September 2005, solicitors for Deval wrote to Mills & Co, giving notice that Deval exercised a lien on the sub-freights the latter were holding, in purported exercise of the lien on sub-freights given by clause 18 of the standard form New York Produce Exchange form of charterparty. At the end of September 2005, Deval obtained from the English High Court a freezing order against Oceantrade. It then took its claims to arbitration and obtained an award in the amount of US$783,026. The award also declared that Deval had validly exercised its right of lien upon the sub-freights held in the Mills’ account. Oceantrade did not appeal the award.

Although the final disposition of the funds in the Mills’ account was clearly a matter for the New York bankruptcy court, both Samsun and Deval asked the court to determine, as between them, their respective priorities to the funds in the Mills’ account.

For Samsun it was argued that Samsun was not and could not be bound by any ruling made in the Deval arbitration to which it was not a party; no finding made in arbitration was capable of creating a right in rem, nor did the clause 18 lien confer any proprietary interest. It was merely a right to intercept freight payments before they reached the charterer. If the lien did give rise to proprietary rights, how could Samsun not be heard on this issue? Conversely, if the lien did not give rise to proprietary rights, how could Samsun be bound by it? Further, by the time that Deval purported to exercise their lien (on 9 September 2005), it was already too late, as the sub-charterers had discharged their obligation to pay freight by paying the funds to Mills, regardless of the capacity in which Mills held the funds. Samsun, as a judgment creditor, enjoyed priority over Deval.

For Deval it was argued that the arbitrator, who alone had jurisdiction to determine the question, had held that Deval had validly exercised its right of lien over the sub-freights, having intercepted the money in time. There had been no appeal of that award and the court had no jurisdiction to rule upon it. As between Deval and Samsun, Deval accordingly enjoyed priority in respect of the funds in the Mills account.

Judgment
The judge dealt first with the issue of utility, namely, did it make sense for the English court to consider issues of priority when it was not disputed that the ultimate destination of the funds in the Mills account lay with the bankruptcy court in New York? On this point, the judge held that, even if a decision of the English court would not bind the US Bankruptcy Court, it was likely to be of assistance to that court to know the view of the English court on the issue of priorities, given that the Deval charterparty was governed by English law, the funds were in England, were in the bank account of English solicitors and were subject to a freezing order imposed by the English court.

As regards the status of the Deval arbitration award, the judge held that it could only bind the parties to it and could not of itself, affect the rights of Samsun. The judge agreed with the statements in Wilford on Time Charters to the effect that the liens provided by clause 18 of the New York Produce Exchange Form of charterparty were not maritime liens but were contractual only. As such, they created a right only between the parties to the charterparty. They operated simply as a right to intercept that which was moving from a third party to the charterer.

The judge then considered the issue of timing. He held that it was settled law that the right to lien is lost if the sub-freights have already been paid to the charterers or their agents, quoting from the judgment of Rix L.J. in The "Spiros C" [2000] 2 Lloyd’s Rep 319 at p.323. He then found that such payment had in fact been made on 7 September 2005, when the sub-freights were paid to Mills & Co. It was clear from the facts of the case, in particular the terms of the freezing injunction, that Mills & Co received the sub-freights as agents for Oceantrade (emphasis added); it made no difference that the funds so received were subject to a freezing order. That did not alter the underlying nature of the payment; it simply regulated the uses which could be made of it.

As a result, the judge held that Deval did not enjoy any priority over Samsun in respect of the escrow funds and that, as a matter of enforcement under English law, Samsun, as a judgement creditor, was "procedurally a step ahead of Deval".