Club’s Lien on Vessel for Unpaid Premium upheld by United States Eleventh Circuit Court of Appeals.

February 2007

In the context of the bankruptcy of a former Member of the Club, the United States Court for the Southern District of Florida upheld in November 2004 the Clubs lien on an owned vessel for amounts due to the Club in respect of unpaid P&I premiums on the vessel.The Court held there were two separate rights of lien available to the Club: a maritime lien on the vessel for necessaries in accordance with United States statute (the Federal Maritime Lien Act, FMLA); and a contractual lien as conferred by the Club rules.

The Relevant provisions considered by the District Court were contained in the Club Rules for the 2003/4 Policy Year. For ease of reference the equivalent provisions contained in the current year Rulebook for 2006/7 are set out below:

Rule 37 ii b - non payment of premium

provides:

Further, and without prejudice to its rights under this Rule, the Club shall have a contractual lien over each ship owned by the Member, whether entered in the Club or not, for outstanding premiums and any other sums whatsoever due to the Club in respect of that ship or any other ship entered by the same Member. That lien shall be without prejudice and in addition to any other rights of the Club, howsoever arising, including any maritime lien or right in rem available by statute or other law in any jurisdiction. The Club shall be entitled to enforce its contractual lien hereunder in any jurisdiction in accordance with the local law of such jurisdiction. Such lien shall continue in force notwithstanding that the entry of the ship has terminated until all sums due to the Club have been paid.

Rule 47 Dispute Resolution

provides:

vi Nothing in this Rule 47 including paragraph i, or in any other Rule or otherwise shall preclude the Club from taking any legal action of whatsoever nature in any jurisdiction at its absolute discretion in order to pursue or enforce any of its rights whatsoever and howsoever arising including but not limited to:-

c enforcement of its rights of lien whether arising by law or under these Rules.

vii These Rules and any contract of insurance between the Club and the Member shall be governed by and construed in accordance with English law.

The United States Court for the Southern District of Florida held there were two separate rights of lien available to the Club:

A maritime lien on the vessel for necessaries in accordance with United States statute (the FMLA); and a contractual lien as conferred by the Club rules.

1)      The maritime lien for necessaries.

The vessels mortgagee banks, who sought to resist the Clubs claims, argued that the Club rules state that English law governs the contract of insurance and that, since English law does not provide a lien for necessaries, there could be no such right of lien.

The Court held that such an argument rendered worthless the Clubs right of lien which was expressly conferred by the Rules. In order to give meaning to the entire contract as contained in the Rules, the Court found that when the Club asserts a maritime lien for insurance premiums in a foreign jurisdiction, Rule 47 vi c specifically provides an exception to English law to permit enforcement of the Clubs rights of lien arising otherwise than in accordance with English law, and Rule 37 ii b permits the Club to assert any maritime lien or right in rem available by statute or other law in any jurisdiction, when in rem jurisdiction can be obtained, as it was in Florida.

In accordance with the U.S. Statute, in order to obtain a maritime lien a person must provide necessaries to a vessel on the orders of the owner or its agent. Necessaries has been liberally constructed to include goods or services that are useful to the vessel to keep her out of danger and to enable her to perform her particular function. Because insurance is essential to keep a vessel in commerce, insurance is a necessary and unpaid insurance premiums give rise to a maritime lien under the statute. The insurance was provided pursuant to an agreement between the Club and the owners and insurance was delivered to the vessel for its operation while it was operating inside the United States at the order of the vessel owners. In particular, the Club demonstrably provided the necessaries in the U.S. by posting a Federal Maritime Commission bond to secure passenger liabilities, which is a requirement for passenger vessels making voyages to or from U.S. ports.

Accordingly the Court held that the Club had a maritime lien which was superior to the maritime lien based on the preferred ships mortgage held by the mortgagee banks.

2)      Contractual lien Rule 31 C ii b of the 2003/4 Rulebook ( now Rule 37 ii b in the current year Rulebook)

The Court found the language of the Rule sufficient to create a contractual lien in the Clubs favour, since English law recognizes contractual liens. However the contractual lien, not being a true maritime lien, would rank in priority below the preferred ship mortgage lien held by the plaintiff banks.

3)      Quantum

Although the Club was seeking to recover USD 305,059.95 in respect of unpaid P&I premiums due on the vessel, the Court only awarded the Club the amount of USD 61, 186.15, being the amount of premium invoiced and therefore due and payable at the time of the vessels arrest in Florida. The reason the Court gave for this was that once the vessel had been arrested, she was seized by the Admiralty Marshall. Such seizure revokes all authority to incur liabilities on behalf of the ship. The Club did not apply for and did not obtain permission from the Court to render insurance services in custodia legis. This was in fact because the Club could also assert an alternative administrative claim in the context of the Chapter 11 proceedings for U.S. Bankruptcy protection commenced by the vessel Owners. However the Court held that because the Club did not have permission to render insurance services in custodia legis, the Clubs lien was therefore extinguished on the date of seizure and the Club could not recover amounts which fell due beyond the date of seizure of the vessel.

A motion for reconsideration was filed with the United States 11^th Circuit Court of Appeal regarding this aspect of the judgment on the basis that it is incorrect to assert that premium only becomes owing, and hence a maritime lien can only attach, as and when instalments of premium are debited. The member is and remains liable for the full amount of mutual premium agreed at the beginning of the policy year, irrespective of the fact that such premium may be debited in deferred instalments. Accordingly it was argued on the part of the Club that it should be entitled to assert its lien for the full amount of outstanding premium.

The Court of Appeal has now found in favour of the Club that the maritime lien arises from the time the necessary (insurance) is provided to the vessel, and that the Clubs lien included the total value of the premium payable for the insurance provided to the vessel before her arrest, thus reversing the lower District Courts finding that the lien only attached to the amount of the premium which the Club had invoiced at the time of the arrest, which was a significantly lesser sum.