American Club updates on OW Bunker Group legal rulings

“The new BIMCO lien clause is insufficient to protect an owner against a lien for unpaid bunkers under US law and caution should be exercised by any owner who is advised that a BIMCO lien clause is all that is needed”, American Club has warned in its update on recent US appellate court rulings on the collapse of OW Bunker Group, which led to legal disputes relating to lien.

The litigation in the US related to competing maritime lien claims against vessels whose charterers contracted with OW Bunker & Trading A/S or its affiliates (OW Bunker) in October-November 2014. That litigation continues.

James Power and Marie Larsen of Holland & Knight LLP assisted, reviewed and contributed to the document.

Last year, litigants in the OW Bunker interpleader and vessel arrest cases received slightly differing rulings from District Judges Valerie Caproni and Katherine Forrest. . The arrest actions:

The matters before Judge Forrest arose from ING Bank N.V.’s (ING) arrest of vessels seeking to enforce a maritime lien for the supply of bunkers by OW Bunker. In many of the cases, the physical suppliers then intervened and also filed maritime lien claims against the arrested vessels.

The arrests were made in various US jurisdictions but then transferred to the Southern District and assigned to Judge Forrest.

ING and the physical suppliers filed cross motions for summary judgment on the validity of their maritime liens and OW Bunker’s purported assignment of its maritime lien to ING.

Judge Forrest held that the physical supplier was not entitled to a maritime lien, because it failed to meet the requirements of the Commercial Instruments and Maritime Lien Act (CIMLA, or the Lien Act), because it did not act on the authority of someone authorized to bind the vessel. Instead, it acted on the instruction of OW Bunker, who was not an agent of the vessel.

Judge Forrest noted that it was possible that neither entity possessed a lien. Judge Forrest found that OW Bunker never acquired a maritime lien under the Lien Act because it did not “provide” necessaries to the vessels where it did not pay the underlying physical supplier, or extend credit in any way relating to the transaction. Given her decision on the lien issue, Judge Forrest did not reach a decision on whether any maritime lien held by OW Bunker had been validly assigned to ING based on the English law assignment.

ING and the physical suppliers filed cross-appeals; oral argument was held on March 15th 2018.

The interpleader actions:

In the interpleader actions Judge Caproni ruled consistently with Judge Forrest that the physical suppliers did not hold maritime liens against the vessels with respect to the fuel deliveries.

Judge Caproni noted that the physical suppliers did not provide the fuel “on the order of” the vessel interests or any other entity authorized to bind the vessels to a maritime lien. Importantly, Judge Caproni noted that the physical suppliers merely acted as subcontractors at the instruction of OW Bunker, with no contractual privity with the vessels, their owners or agents.

Additionally, he rejected that any of the acts taken by the vessel interests upon delivery, such as the signing of the bunker delivery note, or the mere knowledge as to the identity of the physical supplier, was enough to ratify the supplier relationship or to bind the vessel to a maritime lien.

However, Judge Caproni did find that the contracting OW Bunker entity possessed a maritime lien for the fuel deliveries. Judge Caproni found it significant that OW Bunker, as a party to the sales contract with the vessels, bore a financial risk, and that if the physical supplier had not performed then OW Bunker would have been responsible for finding a substitute supplier, or alternatively would have been liable for damages.

Judge Caproni said that this analysis was not inconsistent with Judge Forrest’s earlier ruling against OW Bunker, because Judge Forrest noted the lack of record in the arrest cases as to the financial risk borne by OW Bunker, whereas in the interpleader cases Judge Caproni found that the extensive factual background of the transactions supported her finding.

Judge Caproni emphasized that, while there may have been equitable defences available against OW Bunker’s lien, that the physical suppliers did not plead or support any allegations of fraud or bad faith by OW Bunker in entering into the contracts and failing to pay their suppliers.

The physical suppliers appealed Judge Caproni’s ruling to the Second Circuit; oral argument was held on April 19th.

US appellate courts’ rulings:

On June 13th 2018 the US Court of Appeals for the Second Circuit issued an opinion, reversing in part, affirming in part and remanding the case back to the District Court to determine further issues.

In a victory for vessel owners and charterers, the Court of Appeals agreed with the District Court that CEPSA as physical supplier did not meet the requirements of the Lien Act because it provided bunkers at the direction of OW Bunker, rather than on the authority of the vessel or charterer.

The Court also rejected that clause L.4 of the OW Bunker General Terms and Conditions, which purports to substitute the physical supplier’s terms in the contract between OW Bunker and the customer, served to create a contract or agency relationship between CEPSA and the customer that gives rise to a maritime lien.

However, The Court of Appeals did find that OW Bunker met the requirements of the Lien Act. It disagreed with Judge Forrest that some “financial risk” at the time of arrest or contracting was required in order to obtain a maritime lien.

The Second Circuit left wide open the issue of whether a factual finding that OW Bunker provided the fuel in bad faith (i.e. contracting while insolvent on the eve of bankruptcy, knowing that it could not and would not pay the physical supplier) would negate any such lien.

The issues of alleged bad faith and fraud of OW Bunker were not before the Second Circuit; they would be fully ligated on remand, provided that the Bank could overcome the threshold issue of whether it was assigned a US maritime lien claim from OW Bunker.

The Second Circuit also found that the District Court erred in its initial grant of summary judgment in favour of the vessels without providing OW Bunker an opportunity to submit additional evidence that OW Bunker had paid its downstream affiliate in the contract chain with the ultimate physical supplier.

The Second Circuit has remanded the case back to the District Court for further proceedings after full discovery into the alleged bad faith and fraud of OW Bunker. American Club said that the renewed District Court proceedings would likely address any additional defences or exceptions to the lien, such as “bad faith” or fraud, as significant developments and disclosures concerning OW Bunker’s activities had come to light since Judge Forrest’s original decision.

Additionally, the Court of Appeal’s finding that OW Bunker met the requirements of the Lien Act still left open the question of whether a maritime lien was validly assigned by OW Bunker to the Bank (the assignment being governed by English law, which does not give rise to a US maritime lien).

While the Second Circuit has not yet ruled in the interpleader appeals, the Court has since been joined by the US Court of Appeals for the Fifth Circuit in finding against the physical suppliers. The Eleventh Circuit has also so ruled.

Summary:

The named Appeal Courts held that a physical supplier of bunkers did not have a maritime lien under the Lien Act against the vessel where the vessel ordered the bunkers from a bunker trader.

The Appeal Courts made it clear that the liens could be created only by law, not by contract.

Therefore, the physical supplier’s argument that OW Bunker’s bunkering supply terms and conditions conferred a lien on the physical supplier, failed.

American Club said that, although the OW Bunker saga was not over, the havoc caused by the OW Bunker collapse in the maritime industry illustrated the need for owners to take every step possible to avoid allowing any lien for bunkers to attach to their vessels.

“Countless owners and 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”, the club said, noting further that liens for unpaid bunkers against a vessel were the largest threat to an owner’s bottom line and yet could be entirely avoided with good practices.

The Club observed that it was “no coincidence” that most bunker sales contracts incorporated US law with respect to the existence of a lien against the vessel for unpaid bunkers, because US law was “by far the most generous in terms of allowing a lien against the vessel in favour of the seller for unpaid bunkers”.

The Club said that the OW Bunker 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.

The Club said that the Lien Act 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 principle 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”, said American.

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 was simply that – a rebuttable presumption for the owner to overcome. “An owner must therefore in the eyes of US law take proactive measures in order to avoid being held responsible for a charterers’ debts”, the Club said.

Many charters included a “no lien clause” which stated that the charterer was not authorized to bind the vessel to a maritime lien. It could be argued these “no lien clauses” were 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” was contained within the charter. But, typically, where the fuel supplier did not receive a copy of the contract and had no notice of such a provision, this clause could not be relied upon by an owner when defending a maritime lien claim from the supplier. A supplier had to have “actual knowledge” of the relevant clause.

Additionally, even if a charterer was under a contractual obligation to communicate the “no lien clause” to the supplier, which the new BIMCO clause purports to require, it would be difficult to police this in practice, and a charterer’s failure to do so might result only in a breach of contract claim, which the owner would then have to pursue “against a likely defunct charterer”, the Club said.

“Thus, the new BIMCO lien clause is insufficient to protect an owner against a lien for unpaid bunkers under US law and caution should be exercised by any owner who is advised that a BIMCO lien clause is all that is needed”, the Club warned. http://www.american-club.com/files/files/MA_080118_OW_Bunker_Group_Collapse_US_Appellate_Court_Rejects_Bunker_Lien_Claims.pdf

http://www.american-club.com/page/OW_bankruptcy

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