A decision issued by the U.S. Court of Appeals for the Third Circuit on April 20, 2016, affirms the ability of ocean carriers and their customers to extend and/or modify the possessory lien that carriers have on cargo under common law. Subject to certain regulatory concerns addressed below, this decision should provide ocean carriers with valuable support for their efforts to protect themselves against customers who default on their freight payments.
Under common law, carriers have a possessory lien on cargo in their possession for freight and charges payable on that cargo. That lien is waived by the carrier upon unconditional release of the cargo. The decision of the Third Circuit in World Imports, Ltd., et al. v. OEC Group New York (Docket No. 2:13-cv-05085) addressed a dispute between the customer and carrier about the application of a maritime lien.
OEC is an NVOCC that provided ocean transportation services to its customer World Imports. In 2009, early in their relationship, World Imports signed a credit application that acknowledged that OEC’s services were subject to the terms of OEC’s bill of lading and general terms and conditions of service. Those documents granted OEC a general lien and security interest in any and all property of World Imports then or thereafter in the possession, custody or control of OEC. These documents also provided that the lien would survive delivery of the cargo.
In addition to the general terms and conditions and bill of lading, each invoice issued to World Imports by OEC indicated that it constituted a contract and provided for a general and continuing lien on any and all property for monies owed on shipments on which the lien is claimed, or prior shipments, or both. The OEC tariff contained the terms and conditions of its bill of lading, which included relatively standard language providing for a lien on cargo covered by the bill of lading for amounts due under that bill of lading or any other contract between carrier and shipper, and providing that the lien would survive delivery of the cargo.
In 2013, World Imports filed for bankruptcy. OEC asserted a lien on cargo then in its possession for $1.4 million in unpaid freight. Of that unpaid freight, approximately $450,000 related to the cargo in the possession of OEC, and approximately $995,000 related to shipments that had already been released by OEC. World Imports argued that OEC could not hold the cargo in its possession as security for amounts due on previous shipments that had already been released. The bankruptcy court and the U.S. District Court held for World Imports, and OEC appealed.
The Court of Appeals Decision
The Court of Appeals reversed the lower courts and ruled that OEC had a valid maritime lien for amounts due on the cargo in its possession, as well as for amounts due on previous shipments that had been released.
The court noted that a carrier’s common law lien on cargo is possessory, and that a maritime lien may not be created by contract. However, the court emphasized that the possessory common law lien is waived only when cargo is released unconditionally and, relying upon Supreme Court precedent, found that while parties may not create a maritime lien by contract, they can extend or modify the common law lien by contract. In this regard, the court noted that it is common practice for other security (e.g., money) to be substituted for cargo that is in the possession of a carrier so that the cargo can be released and the carrier’s lien preserved.
Applying the foregoing principles to the facts of the case, the court held that the parties in this case had not created a maritime lien by contract. Rather, the court found that the parties had contractually agreed (in the credit application, invoice, bill of lading, and tariff) to modify the common law possessory lien to provide OEC with a lien on cargo in its possession for amounts due on previous shipments. In light of this contractual lien modification, the court found that the previous shipments had not been released unconditionally, and that OEC had not waived its lien on those shipments. In other words, the court found that OEC had a valid lien on the cargo in its possession for amounts due on that cargo as well as previous shipments that had been released for the full $1.4 million in unpaid freight.
World Imports had argued, and the lower courts had agreed, that allowing a contractual extension of the common law possessory lien could prejudice third parties to whom the previous shipments had been released. The court noted that this could be a concern in some situations, but was not an issue in this case. The court also indicated that while as a policy matter allowing shipments to be held based on the customer’s failure to pay freight charges on previous shipments could be viewed as impeding commerce, permitting contractual lien modifications was more likely to facilitate commerce than to inhibit it.
The Federal Maritime Commission (FMC) has held that an attempt by a common carrier to hold shipments covered by a bill of lading based on amounts due on previous shipments is a violation of the Shipping Act’s prohibition on unreasonable practices in connection with the receipt, handling, storage and delivery of property. However, in light of the Third Circuit’s recent decision, it appears that the FMC’s decisions to this effect may be vulnerable to challenge as being based on an overly narrow interpretation of the ability of the parties to extend the possessory lien by contract. However, until such rulings are reversed or modified by the FMC, common carriers subject to FMC jurisdiction who wish to assert expanded liens would be well-advised to have a contractual extension of the lien based on a document beyond the bill of lading, such as a credit application, credit agreement or service contract signed by the customer. In light of the Third Circuit decision, it would likely be more difficult for the FMC to find a contractual lien extension to be unreasonable where it has been expressly agreed upon by the customer.
While the Third Circuit’s decision is not binding nationally, it is important and valuable precedent. The decision supports the ability of a carrier, through a contract with its customer, to extend its common law possessory lien to cover amounts due on previous shipments, as well as amounts due on the cargo in the possession of the carrier. Carriers interested in having such a lien are advised to consult legal counsel to assist in drafting appropriate contractual lien language.