Defence 08 Sep, 2022

U.S Court of Appeals victory for West’s Defence Member in defeating a contractual bunker supplier’s claim for payment

Nicola Cox
Nicola Cox
Head of Defence Claims

1) West summary:

US Court of Appeals for the Fourth Circuit: West’s Defence Member defeats a contractual bunker supplier’s claim for unpaid bunkers – SING FUELS PTE LTD v M/V LILA SHANGHAI

Background to the dispute:

Owners, the Club’s Member, time chartered their vessel to Bostomar Bulk Shipping Pte Ltd. As is usual under the terms of a time charter party, charterers were responsible for supplying and paying for bunkers and the charter (which was subject to Singapore arbitration) also included a clause stating “Charterers will not suffer, nor permit to be continued, any lien or encumbrance incurred by them or their agents, which might have priority over the title and interest of the owners in the vessel.”

Bostomar subsequently sub time-chartered the vessel to Medmar who purchased approx. US$530,000 bunkers from Sing Fuels Pte Ltd via a Mr Mylonakis (linked with/employed by Windrose Marine). The bunkers were delivered to the vessel by physical bunker suppliers, South African Marine Fuels, in Port Elizabeth, South Africa, in July 2019.  

The vessel was redelivered by Medmar to Bostomar in August 2019. However, by October 2019, Sing Fuels was still unpaid and Sing Fuels approached owners for payment. When owners refused Sing Fuel’s demand for payment, Sing Fuels paid the physical bunker supplier and, in turn, pursued an action in rem against the vessel in the US District Court, seeking an arrest Order against the vessel and claiming to be entitled to a maritime lien over the vessel in accordance with the US Commercial Instrument and Maritime Lien Act (“the US Maritime Lien Act”).

The matter came to US district court trial in February 2021. The court found in owners’ favour. Sing Fuels then appealed to the US Court of Appeals, arguing that the district court was wrong to deny Sing Fuels’ request for a maritime lien under the US Maritime Lien Act.

The US Court of Appeals judgment:

The US Court of Appeals upheld the district court in finding in owners’ favour against Sing Fuels’ claim.

The US Maritime Lien Act grants the following statutory right to a maritime lien:

“(a) . . . [A] person providing necessaries to a vessel on the order of the owner or a person authorized by the owner -
(1) has a maritime lien on the vessel;
(2) may bring a civil action in rem to enforce the lien; and
(3) is not required to allege or prove in the action that credit was given to the vessel.”

The US Maritime Lien Act provides that certain parties are presumed to possess the authority from vessel owners to obtain a vessel’s necessaries (although this presumption can be rebutted), including:

(1) the owner;
(2) the master;
(3) a person entrusted with the management of the vessel at the port of supply; or
(4) an officer or agent appointed by (a) the owner or (b) a charterer.

Whilst it was accepted that Sing Fuels had provided necessaries to the vessel, the US Court of Appeals upheld the district court’s judgment that Sing Fuels had not proven that it acted “on the order of the owner or a person authorized by the owner”, as required by the US Maritime Lien Act. The Court concluded that no one with actual authority authorized the purchase of the fuel. As the Courts noted, Sing Fuels never contacted the vessel owners to advise owners about the bunker supply contract or its terms, nor did Sing Fuels check whether Mr Mylonakis, who approached Sing Fuels to purchase the bunkers, ever communicated with owners, yet alone whether Mr Mylonakis was authorised by owners to purchase the bunkers. (Neither Mr Mylonakis nor any witness for Medmar appeared at trial.) Therefore, it was held that Sing Fuels had not discharged its burden of proving that it had provided the bunkers “on the order of the owner or a person authorized by the owner”, as required by the US Maritime Lien Act.

In the US Court of Appeals, Sing Fuels raised a further argument, namely that Mr Mylonakis (the bunker broker) was Medmar’s (the sub charterer’s) apparent agent, thereby triggering the statutory presumption in favour of Mr Mylonakis having authority to bind the vessel under the US Maritime Liens Act. The US Court of Appeals held that this argument failed because, as the Court held, this presumption of authority relies on an agency relationship actually existing, namely the communication by the alleged principal (Medmar) to a third party (Sing Fuels) that the agent (Mr Mylonakis) had authority to act on the principal’s behalf, the Court of Appeals emphasising that an agent cannot create his/her own authority. In this case, however, Sing Fuels’ witness admitted at trial that he had never been in direct contact with Medmar, the alleged principal. Therefore, so the Court held, Sing Fuels could not prove that it had relied on any act or omission by Medmar (the alleged principal) to support Sing Fuels’ allegation that Mr Mylonakis had Medmar’s authority to act. The Court of Appeals therefore held that this presumed authority argument by Sing Fuels also failed.

Overall, the Court was critical of Sing Fuels’ lack of due diligence checks into Medmar and noted that, despite Sing Fuels alleging that they had had many previous successful bunker supply contracts with Medmar, Sing Fuels did not provide any documentary evidence for this. The Court also noted that Sing Fuels did not take the opportunity to arrest the vessel earlier, in other jurisdictions when they had the opportunity, including in the UK and India. 

A note of caution by the US Court of Appeals:

Judge Wilkinson, who agreed with the decision, wrote a cautionary note about the already increased freight costs and the potential dangers of making more difficult a supplier’s right to obtain payment for bunkers and other necessaries supplied to vessels. In particular, Judge Wilkinson warned against parties attempting to obscure contractual relationships in order to avoid paying their contractual debts.

Members’ Defence cover with WEST:

West Defence supported Members in this matter, both up and down the charter chain, in respect of Members’ legal and court costs.

The Club also provided a Club LOU in a substantial amount to Sing Fuels when the vessel was arrested, against counter security from Members.

2) Members’ summary:

This is a welcome decision for Owners, who were facing substantial exposure where the bunkers were ordered and to have been paid for by sub-charterers. The dilemma of owners’ exposure to an arrest for bunker claims is an old one, which the OW Bunker Group collapse threw a harsh light on. Here especially where long credit terms are extended by bunker suppliers to sub-charterers and the unmanageable risk of sub-charterers closing shop in the interim.

While in most jurisdictions, bunker supplies are not maritime liens and there is an argument to be made if owners are not liable in personam, it is particularly tricky in USA with their recognition of a maritime lien. SingFuels, for this very reason, waited only for the vessel to call at USA to exercise its claim. This judgment, though turning on facts, is an appreciated highlight that the right of maritime lien in USA is not absolute, and though derived from apparent or ostensible authority of the one placing orders, is still incumbent on such agency actually existing.

Owners are grateful to Vandventer Black (now Woods Rogers Vandeventer Black) for a great trial and successfully arguing the fine point of law.

Arjun Mital, Legal Counsel, GMS (Dubai)

3) US lawyers’ comments:

This case reflects the real risks that international shipowners face from the application of U.S. lien law on the supply of bunkers. U.S. courts do not hesitate to hold shipowners responsible for the bunker expenses of charterers, regardless of the provisions of the Charter Party and regardless of where in the world the bunkers were supplied. Shipowners must protect themselves from these risks through proactive monitoring of charterers. If claims are asserted in the U.S., however, shipowners should engage with experienced U.S. maritime counsel who have been involved in similar bunker disputes. As the owners of the M/V LILA SHANGHAI found, there may be defenses available that are not readily apparent until a thorough evaluation of the claims. Here, the agency issues only became apparent once Sing Fuels was forced to disclose their transaction documentation and explain how the order was taken.

With thanks to Dustin M. Paul and Ed Powers of Vandeventer Black (now Woods Rogers Vandeventer Black) who acted in the case for Members.