Subrogation in shipping disputes

The term “subrogation” refers to the right whereby a creditor may, if and when a debtor neglects to exercise a property right against a third party, thereby jeopardizing the creditor’s claim, exercise the property right in the debtor’s stead, with a view to ensuring the repayment of his claim.

Pursuant to Article 73 of the PRC Contract Law, which is the foundation of the creditor subrogation system in China, a creditor may exercise his right of subrogation only by means of a lawsuit. Pursuant to the relevant judicial interpretations, to institute a subrogation suit, the following conditions should be satisfied: (1) the creditor’s claim against the debtor must be lawful; (2) the debtor’s negligence in exercising his own matured claim must have caused damage to the creditor; (3) the debtor’s own claim must have matured; and (4) the debtor’s claim must not be personal to the debtor.

In addition to protecting the interests of creditors in general, subrogation suits have a practical and positive significance in resolving particular situations such as debts and debt chains, and in circumstances where difficulties are encountered in enforcement. In practice, subrogation suits are also quite effective in resolving international shipping disputes, particularly charter party disputes.

Better than liens

In the international shipping business, it is common for one vessel to be subchartered several times. Once a problem arises in respect of a party at any link in the chain, making it impossible for him to pay the hire or freight fees, the subrogation system helps the lessor to one of the charter parties to institute legal action against the debtor of the charterer (e.g. a charterer under a subcharter party), demanding that the secondary debtor pay the hire fees for the subchartered vessel or freight to the lessor directly.

Furthermore, a pre-trial application may be made to the Chinese court for preservation measures over the secondary debtor’s property, such as the cargo, thereby giving the Chinese court jurisdiction over the secondary debtor even if the debtor is a foreign party.

In general, a charter party will specify that if the charterer fails to pay to the lessor the hire fees or other amount stipulated in the contract, the charterer will have a lien over the revenue derived from the subchartered vessel.

The PRC Maritime Law also provides for liens over subcharter revenue. However, the liens over subcharter revenue provided for in the PRC Maritime Law are different from the liens on movable property under the PRC Security Law, and there is no complementary system in procedural law.

Accordingly, there remain many difficulties and uncertainties in current judicial practice with respect as to how such liens are to be exercised and realized.

It is our opinion that in terms of specific application and enforcement, liens on subcharter revenue are far less convenient and effective than the direct institution of a subrogation suit by a lessor against the charterer of a subchartered vessel (the secondary debtor).

Case studies

For example, in a case that we handled, a Singaporean lessor trip-chartered a vessel on a time basis to a charterer from the British Virgin Islands (BVI), and that charterer further chartered the vessel on a voyage basis to an Indian trader to carry iron ore to a port in China.

The BVI charterer experienced financial difficulties and was unable to pay the hire fee of US$1 million to the Singaporean lessor, and the Indian trader owed freight and demurrage charges of close to US$2 million to the BVI charterer in respect of several past voyages.

When the vessel docked in a Chinese port, the Indian trader still had not located the buyer of the iron ore and was still in possession of the entire set of bills of lading for the iron ore cargo. We applied for pre-trial attachment of the Indian trader’s iron ore on the Singaporean lessor’s behalf, and instituted a subrogation suit directly against the Indian trader in a Chinese maritime court in the Singaporean lessor’s name.

In another case, our client was a Hong Kong company. It trip-chartered a vessel on a time basis to a Greek company, and the Greek company further chartered the vessel on a voyage basis to a Chinese company to carry cement clinker from a Chinese port to Italy.

The Greek company failed to pay the Hong Kong company hire fees of US$2.4 million. Pursuant to the charter party, the Hong Kong company notified the Chinese company that it was putting a lien on the freight and requested that the Chinese company directly pay it the US$2.2 million in freight fees payable to the Greek company.

The Chinese company agreed not to pay the freight fees to the Greek company, but did not agree to pay the freight fees directly to the Hong Kong company.

The Hong Kong company instituted arbitration proceedings, naming the Greek company as respondent. However, as it appeared likely that the Chinese company would raise an objection in the course of enforcement of the arbitration award, and as the PRC Civil Procedure Law specifies that once a third party raises such an objection, a court may not enforce against it, we revised our strategy and directly instituted a subrogation suit against the Chinese company in a Chinese court.The suit demanded that the Chinese company pay the US$2.2 million in freight fees directly to the Hong Kong company, and the Chinese company’s property was attached so as to ensure future enforcement of the judgment.

Cooperation desirable

Subrogation suits provide an effective method of resolving disputes in international charter party chains. However, creditors should find a way to obtain the cooperation of the debtor in order to secure sufficient evidence of the debt relationship between the debtor and the secondary debtor.

Yu Feng is a lawyer at LC & Co.