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POSSESSORY LIENS IN SALE OF GOODS TRANSACTIONS: NAVIGATING THROUGH THE FOG

Before advising on a client's rights regarding a possessory lien, a practitioner needs to be clear about the distinctive features of such a lien and how it operates in competition with other rights or securities over goods. By Ross Becroft – Published in the April 2004 Law Institute of Victoria Journal

A client contacts you with a difficult question. They are holding goods ostensibly belonging to another party and are owed money by that party. They want to know if they can lawfully continue to hold the goods as security for payment. The client also queries whether they can sell the goods. The directors of the debtor have also recently appointed a voluntary administrator. Another party has since contacted the client and is claiming ownership over the goods and is threatening injunctive proceedings. What do you advise?

Providing meaningful advice to a client in the above situation involves an understanding of the main principles concerning possessory liens. A possessory lien is the right conferred on the holder of goods to retain possession as security against money owing. 1 A possessory lien therefore may be of great relevance to parties that retain possession or control over goods during the course of a sale of goods transaction. A party may lawfully refuse to relinquish possession of goods until debts owing to it by the owner of the goods are paid out. A possessory lien is hence a powerful form of security for certain classes of creditors. It is a right that is often going to be of interest to carriers, freight forwarders, customs agents, warehouses, banks and, of course, the buyer and seller of goods. . Possessory liens are part of a wider family of liens, such as equitable or maritime liens, that are exercisable against specified property independently of actual possession of goods or documents. A proper understanding of the law of possessory liens also requires an appreciation of competing security interests such as retention of title clauses and registered securities.

The common law position and extension of rights

A lienee, being the party claiming a possessory lien, must have possession of goods, or documents entitling the lienee to possession of goods (e.g. an original bill of lading). 2 If the goods leave the possession of the lienee, then these rights are lost. 3 Further, the goods must have been lawfully acquired from the owner or with the authority of the owner. 4 A possessory lien most often arises as a result of services being provided in connection with the sale of goods.

The general common law position is that the lienee may retain the goods as security for unpaid money in respect of the actual goods being held; the goods may not be held as security for all debts owing to the lienee. This restricted form of lien is also known as a special or particular lien. A common law lien will not exist in circumstances where the debt is not currently due and payable, such as where any period of credit has not yet expired or where damages are claimed.

This common law position may be varied by statute or by contract. The most frequent extension of the common law rights occurs through the creation via contract of what is termed a ‘general' lien. A general lien goes further than a particular lien, and grants the lienee the right to retain possession of a debtor's goods as security for all outstanding charges owed to the lienee. 5

This is extremely practical for a service provider such as a carrier, freight forwarder or customs agent, all of whom may handle multiple consignments for a buyer or seller over a period of time, and who may be owed considerable amounts of money in respect of earlier shipments. A general lien may exist through the adoption of standard transport documentation, such as bills of lading and air waybills, but the most frequent means by which a service provider obtains a general lien is through the use of standard trading terms.

When a lienee claims a right to hold goods, it is not unusual – given that there may be a large difference between what the debtor would be required to pay to satisfy a general versus a particular lien – for the validity of such trading terms to be challenged. In this regard, the normal principles of contract law will apply to determine whether the trading terms are binding upon the debtor.

Rights of Sale

At common law a lienee does not have the right to sell the goods in order to recover payment of the debt. A lien only grants the lienee the right to hold goods. This may give rise to a stalemate between the lienee and the party claiming the goods (“lienor”) where the lienor does not wish to tender payment and the lienee will not release the goods until receipt of payment. As a result of the limitation of a lien, many service providers have drawn into their standard contracts a power to sell the goods where the lienor refuses to pay out money owing.

Such a clause will permit the lienee to sell the goods by auction or private treaty after the expiry of a reasonable period of time following notification to the lienor of the lienee's intention to sell. The clause will also usually enable the lienee to recoup costs it has incurred in exercising the lien and right of sale, including storage costs and selling costs. The giving of notification is often of practical significance, in that the party holding the goods may have no ready means of disposing of them and the lienee will usually prefer some kind of commercial payment in exchange for which the goods are released to the owner. If a sale does occur, it should preferably be on an arms-length basis and, should the proceeds of sale exceed the value of the debt (or debt plus costs), the excess must be repaid to the lienor.

Frequently, contractual documentation will also refer to the debtor granting the creditor a pledge over goods held. A pledge is a form of security that shares many of the characteristics of a lien, but there are key differences. A pledgor is a party that pledges an asset as security for money advanced or services undertaken. While the pledgor retains general ownership in the goods, the pledgee receives “special property” in the goods, being a right of possession of the goods and a power of sale where the pledgor defaults in making payment. Therefore, it is a characteristic of a pledge (unlike a lien) that the creditor has a right to sell the goods pledged in the absence of payment being made. 6

Many contracts will contain a clause granting a party a pledge in addition to a general and particular lien. In most cases, the granting of a general lien and a contractual right of sale may have the same basic legal effect as the granting of a pledge. However, a pledge is in concept a different type of security to a lien coupled with a power of sale, and practitioners should be mindful of any differences in legal consequences. There is authority for the proposition that a pledge may defeat a competing claim of a secured lender. 7 It is less clear whether the same rights of priority will apply for a lien.

Competing Claims

A lienee will frequently have to deal with other parties who either contest the validity of the lien or argue that their rights rank in priority to those of the lienee. The following represents some of the more common scenarios that practitioners may encounter.

Scenario 1: Deciding ownership of the goods

Where a third party contacts the lienee claiming ownership over the goods it is important to first ascertain proof of ownership. A common example is that of an unpaid seller claiming the right to repossess the goods pursuant to a retention of title clause.

In the event that ownership can be proven and it is clear that the lienee has not acted on behalf of the third party in carrying out its services, then it is likely that the third party will be able to successfully reclaim the goods. This is because the owner does not owe money to the lienee, nor is it bound by the contractual terms that may give rise to a general lien. In addition, if the customer is not the owner of the goods, it is not in a position to pledge the goods as security.

However, the question of whether the rights of an owner or lienee take priority may become complicated. For example, in international sale of goods transactions it is not always clear whether a lienee is acting on behalf of the buyer or the seller, or whether the party instructing the lienee is an agent of the owner. Some commentators also take the view that the holder of the goods has, at the very least, a particular lien against the owner of the goods, since a lien is a right in rem and as such is exercisable against the world at large. 8

Further, it is arguable that possession and ownership are co-extensive rights and that the owner's rights may be limited to suing in conversion rather than extending to compelling immediate delivery up of the goods.

Scenario 2: Competing with registered securities

A secured lender may try to challenge the validity of a lien or a pledge and may argue in the alternative that the rights conferred on the lienee amount to a charge over the assets of the debtor.

This point was dealt with in the Victorian Supreme Court decision of Australia and New Zealand Banking Group Limited v Curlett, Cannon and Galbell Pty Ltd. 9 In that proceeding, a customs broker claimed goods as security for debts owing by the clothing importer Najee. The broker relied on a clause in its standard trading terms that granted it a particular and general lien and pledge over goods and documents held. The ANZ Bank, as a debenture holder, issued proceedings against the broker seeking a declaration that the broker had no security or proprietary interest in the goods, or alternatively that the bank's interest ranked in priority. Ormiston J upheld the validity of the pledge and, significantly, found that as the pledge arose prior to crystallisation of the bank's charge, it had priority over the bank's charge.

Scenario 3: Dealing with an administrator

When a voluntary administrator is appointed under Part 5.3A of the Corporations Act 2001(Cth) in respect of a debtor company and the creditor claims a lien over goods held, the administrator will ordinarily investigate the validity of the creditor's rights, as the exercise of a lien will affect the value of assets potentially available for distribution to other creditors.

The urgency with which an administrator negotiates with a lienee will often depend on how essential the goods are to the continuance of the business that the administrator has assumed. An administrator may attempt to restrain a lienee from dealing with the goods held during the ‘decision' period, at the end of which the future of the company is determined. Section 437A(1)(a) prescribes that an administrator has control of the company's ‘business, property and affairs'.

However, an administrator is not permitted to destroy property rights created prior to the company being placed into external administration. 10 Therefore, the rights of a pledgee, being in the nature of ‘special property rights', are unaffected by the administration. 11 The position of a party without a pledge, but with a general lien and right of sale, is less clear.

Legislation that may impact on rights

There are several commonwealth and state statutes that modify or influence the rights of parties to retain or recover goods in sale of goods transactions. The following discussion covers some of the major pieces of legislation likely to affect outcomes.

Goods Act 1958 (Vic)

Section 46 of this Act grants an unpaid seller the right to retain possession of goods where the buyer is either outside payment terms or has become insolvent. This right presupposes that the seller has, directly or through its agents, retained control of the goods. An important consideration is that the seller has this right irrespective of whether or not title in the goods has passed to the buyer. Section 60 of the Act also grants an unpaid seller a right of stoppage in transit. This right to resume possession of the goods while they are in transit may only be exercised where the buyer has become bankrupt. The practical importance of unpaid seller's lien and rights of stoppage in transit has been diminished somewhat since the development of devices such as retention of title clauses and payment by documentary letters of credit.

Warehousemen's Liens Act 1958 (Vic)

This Act prescribes that if a person pays fees and charges owing to a warehouse in respect of the actual goods held, then the warehouse shall be required to release the goods. Recognition is therefore given to a specific rather than a general lien. It also grants the warehouse a right of sale where charges relating to the goods are not paid out. 12

This Act will only apply to a situation where goods are held by a ‘warehouse', which is defined as a facility where a person is lawfully engaged in the business of storage of goods as a bailee for hire or reward. 13

The Act is also likely to be overridden, in practical terms, where the warehouse has been engaged as an agent or subcontractor by another party, such as a customs broker, who claims a general lien over the goods.

Customs Act 1901 (Cth)

Goods may be held under bond by a licensed warehouse, meaning that they have not yet been entered for ‘home consumption' within Australia. Accordingly, the goods continue to be subject to the control of the Australian Customs Service. 14 This may pose problems for parties wishing to exercise a right of sale over the goods as the goods cannot be removed from bond without the authority of the owner of the goods, as a formal entry for ‘home consumption' must be generated. Customs duty, if applicable to the goods, would be payable at this point. Ideally, the customs broker could obtain an importer's prior agreement to enable clearance of goods held in bond to satisfy debts, but this rarely occurs in practice.

CONCLUSION

As can be seen from the above commentary, the area of law involving possessory liens is complex. No two situations are alike and this means that determining whether a party has a right to hold and sell goods needs to be thoroughly analysed in accordance with fundamental principles. It is important to establish what rights the holder of the goods may have at common law, by statute or by contract. Competing rights of parties also need to be assessed. The location of the parties may be a relevant consideration, especially in international sales where, for instance, a party possessing rights may be overseas and have less influence on outcomes. All of these factors need to be taken into account when solving complex legal problems of this nature.

Notes

ROSS BECROFT practises in the fields of customs and international trade law with the firm Louis Gross & Associates . This includes dealing with tariff, subsidy, anti-dumping and similar governmental issues as well as trade issues concerning sale of goods, transport and trade finance. He is a member of the Law Institute of Victoria's International Law Briefing Committee and a past editor of the Institute's Young Lawyers' Journal .

The views expressed in this article are solely those of the author. Further, it is not intended that this article be relied on as legal advice.

1. See basic description in Protean Enterprises (Newmarket) Pty Ltd v Randall [1975] VR 327 at 333-4; (1974) 33 LGRA 53 per Gillard J.

2. Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd (1973) 129 CLR 48. Note that it may also be possible to use other import documentation such as quarantine certificates or certificates of origin as security, where it may be impractical to reissue these documents.

3. Dinmore Meatworks Pty Ltd v Kerr (1962) 108 CLR 628 at 632.

4. Note 1 above.

5. Historically, certain classes of persons – such as solicitors, bankers and stockbrokers – have a general lien over, usually, documents without the need for a contract to grant these rights.

6. Walker and Sykes, The Law of Securities (5th edn) Law Book Company 1993 , p836.

7. Australia and New Zealand Banking Group Limited v Curlett, Cannon and Galbell Pty Ltd [1992] 2 VR 647.

8 Paul Budgen (ed), ‘Liens, possessory liens, general liens – an analysis', at www.forwarderlaw.com/scripts/bugden4.htm, 10/7/03

9. Note 8 above.

10. Robson's Annotated Corporations Law – commentary on s437A Law Book Company 2000 Vol 1, at pg 485 .

11. Osborne Computer Corp Pty Ltd v Airroad Distribution Pty Ltd 13 ACLC 1129, 17 ASCR 614.

12. Section 7.

13. Section 3.

14. Section 79(1).

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