Introduction of Recent Korean Supreme Court Decision : While the general rule is that the law of the ship’s nationality governs the existence and priority of maritime liens, if there is another law from a different country to which such lien is the most closely connected with, then the law of that country will apply.

1. Legislation on Secured Claims and Distinctiveness of Maritime Liens

Maritime liens are unique in that, unlike other secured claims, a request for auction of the ship can be immediately made without executive titles such as judgments, that there is no prescribed mechanism for providing public notice and that these maritime liens take priority over ship mortgages, which are distinct characteristics not commonly found in the Civil Execution Act. Therefore, exercise of a maritime claim depends on whether such claim can be recognized as a maritime lien and the applicable scope and priority of such claim.

Each country’s legislation regarding the scope of secured claims under maritime liens varies greatly from country to country, and thus, a wide discrepancy exists in the scope of secured claims between each country. For example, the United Kingdom, compared to other countries like Germany, France, and the United States, has the narrowest scope while the United States recognizes the broader scope of maritime liens than any other countries. International treaties regarding maritime liens, on the other hand, recognize maritime liens on a limited basis by restricting their scope of the secured claim in line with the universal trend, which is more inclined to protect a ship mortgagee.

2. The Governing Law of Maritime Liens (Principles of the “Law of the Country of the Ship’s Nationality” and its Exceptions)

Article 60, Paragraphs 1 and 2 of the Private International Law Act of Korea (hereinafter the “Private International Law”), as the governing law of maritime commerce in Korea, state that “the ownership and the mortgage on a ship, the maritime lien, and other real rights on a ship and the order of priority of security interests on a ship are governed by the law of the country of the ship’s registry.” Pursuant to these provisions, the issues on recognition of a maritime lien in Korea and the order of priority of such lien are in principle governed by the law of the country of the ship’s nationality. This approach is in sharp contrast with that of the  United Kingdom and many other countries’ that apply lex fori (the positive law of the state or jurisdiction within which a legal action is brought) to resolve the issues of the recognition and priority of maritime liens.

Article 8, Paragraph 1 of the Private International Law, however, provides an exception to the above choice-oflaw provision. It states that, “in case the applicable law specified by this Act is less related to the corresponding legal relations and the law of another country, which is most closely connected with such legal relations, evidently exists, the law of the other country shall govern.” However, because the arbitrary application of such exception can cause legal instability, this provision must be strictly construed and applied only under very stringent conditions. In the cases of ships with a flag of convenience, a problem arises as to whether this exception should be recognized in such cases, and if so, what will be the standard that determines the application of this exception. If the ship is the only connection to the country of the ship’s registry for purposes of lex fori, the law of a different country to which it is mostly closely connected to may act as the governing law (over the law of the country of the ship’s registry). Yet, arbitrarily applying the foregoing exception solely on the basis of the ship’s flag may cause legal instability to the whole “flag-ofconvenience” system, details of each case must be carefully examined to ascertain whether or not this particular case at hand satisfies the requirements prescribed under Article 8 of the Private International Law.

3. Introduction of the Korean Supreme Court Decision 2014Da34389 Rendered on July 24, 2014

A. Main Points of the Decision

Article 60, Paragraphs 1 and 2 of the Private International Law stipulates that the law of the country of the ship’s registry is the governing law of maritime commerce for matters relating to “the ownership and the mortgage on a ship, the maritime lien, and other real rights on a ship” as well as “the order of priority of security interests on a ship.” Article 8, Paragraph 1 of the Private International Law describes the exception to this rule by stating that “in case the applicable law specified by this Act is less related to the corresponding legal relations and the law of another country, which is most closely connected with such legal relations, evidently exists, the law of the other country shall govern.”

In light of the legislative purpose and details of each of the above provisions, it can be said that the governing law for determining whether or not a maritime lien, based on the ship’s crew’s claim for wages, has been established and the order of priority between a maritime lien and a ship mortgage is, as a general rule, the law of the country of the ship’s registry. However, if the ship’s only connection to the country of the ship’s registry is its flag of convenience and if there are relevant factors, such as (1) the country and main location of business of the actual owner and operators of the ship, (2) base location and place of voyage of the ship, (3) nationality of the crewmen, (4) the laws applicable to the employment contracts of the crewmen, (5) the place in which  the ship mortgagee’s secured claim was legally established and laws applicable to such claim, and (6) location of the court in which the auction of the ship takes place or the interested parties who partook in the auction process, that clearly make the law of another country most closely connected to the legal relations concerned in this case, then the law of such country should be the governing law of the maritime lien.

The trial court in this case determined that the Korean Commercial Code should be applied pursuant to Article 8, Paragraph 1 of the Private International Law because the Korean Commercial Code, not the law of Panama (which is the country of the ship’s registry), is the law most closely connected with the outstanding issues in this case regarding existence of the plaintiffs’ maritime lien based on their claim for wages and the order of priority between such maritime lien and the defendants’ ship mortgage, in comprehensive consideration of the following factors: (1) the owner of the ship at issue, Emerald Line Overseas Incorporation, established a paper company with the purpose of registering its ship under the flag of convenience and thus there was no significant connection with Panama, the country of the ship’s registry; (2) the actual owner and charterer of the ship at issue was a Korean company called First Shipping, in which the CEO and executives were all Korean nationals; (3) the ship at issue was used only to transport cargo from Korea to Singapore and other countries in Southeast Asia and the Panama port did not appear to be the ship’s base; (4) the ship’s captain and the chief engineer, the plaintiffs in this case, and all of the crewmen were the nationals of Korea and other countries in Southeast Asia, and did not include any national of Panama; (5) the crewmen’s employment contracts, as drafted by First Shipping, contained a provision which stated that matters beyond those determined in the contract would follow the Seaman Act of Korea and the Labor Standards Act of Korea, and thus Korean law would govern the employment relationships of the plaintiffs, the captain and the chief engineer of the ship; and (6) the auction process of this case took place in Korea, and most of the creditors who partook in the distribution of the proceeds from the auction, including the defendants, were either Korean citizens or companies with no particular relation to Panama. Accordingly, the trial court concluded that since the plaintiffs’ claim for wages is a maritime lien that takes priority over the defendants’ mortgage under the Korean Commercial Code, the distribution table, which was created based on the premise that the defendants’ ship mortgage had priority over the plaintiffs’ claims, was unlawful. In review of such legal principles, the Korean Supreme Court upheld the trial court’s judgment finding that there was no misapplication of the legal principles concerning the existence of a maritime lien and the determination of governing law, as contended by the defendant as the grounds for appeal from the trial court’s decision.

B. Commentary

Article 777, Paragraph 1 of the Korean Commercial Code stipulates that “a person who has any of the following claims shall have a lien on a ship, its appurtenances, the freight for a voyage in relation to which such claim has arisen, and any claim incidental to such ship and freight” and includes “claims arising out of employment contracts for crewmen or any other employee” as one of those claims under Sub-paragraph 2, which means that such crewmen’s claim for wages is recognized as a secured claim under a maritime lien.

Meanwhile, in the case of Panama, Article 244 of Maritime Section of the Panamanian Commercial Code concerning the type and priority of maritime liens provides the list of claims that constitute liens and the order of priority according to which the sales proceed of a ship will be distributed. In this regard, because Article 244, Paragraph 3 of the Panamanian Commercial Code only covers “the salaries, payments, and compensations that are owed to the Captain and crew members for the last voyage,” the recognition of secured claims under maritime liens under the Panamanian Commercial Code, unlike the Korean Commercial Code, is limited to the claims for crewmen’s wages for the last voyage. 

The foregoing Korean Supreme Court decision is significant and necessary for the protection of creditors regulated under Korean law in that the legal reasoning employed by the Korean Supreme Court worked to expand the limited scope of maritime liens under the law of Panama, where only the claims for crewmen’s wages for the last voyage is recognized as secured claims under maritime liens, by determining that Korean law was most closely connected to the legal relations concerned in this case through application of the exception under Article 8, Paragraph 1 of the Private International Law.