Introduction
Dispute
Common law possessory particular lien
Agent's lien
General lien
Comment
The word 'lien' can be described in layman's terms as a right - often arising by operation of law, rather than under contract - to retain the property of another party until that other party pays its debts. The word also has a second, more obscure, medical meaning as a synonym for 'spleen' - an emotion felt by many aircraft service providers at a new High Court decision regarding aircraft liens.
The winding-up orders granted by the High Court on April 9 2008 against Oasis Hong Kong Airlines Limited and an associated company, Oasis Growth and Income Investments Limited, marked the end of a legendary but short-lived budget airline. Disappointed passengers who had bought air tickets from Oasis suddenly became unsecured creditors of the company. Instead of getting a boarding pass, they were given a proof-of-debt form to fill in the details of their debts.
The size and complexity of the liquidation mean that almost three years since the making of the order, important legal issues are still being resolved. On February 25 2011 judgment was handed down in Hong Kong Aircraft Engineering Company v Oasis/OGIL.(1) The case has done much to clarify the position of parties which provide aircraft maintenance services to an airline that goes into liquidation. With the price of oil (and consequently airline operating expenses) once again spiking, aircraft service providers will no doubt read the judgment with dismay.
Dispute
Under a service agreement dated October 5 2006, Hong Kong Aircraft Engineering Company Limited (HAECO) agreed to provide various types of maintenance service for four aircraft owned by OGIL. Oasis agreed to pay HAECO for such services. As of the date of the winding-up order, the total amount of the outstanding debts owed by Oasis concerning the work and services pursuant to the service agreement was almost HK$78 million - these were termed the "pre-appointment debts".
Furthermore, HAECO had purchased certain items of cabin inventory on Oasis's behalf in order to perform various works on the aircraft. Before Oasis and OGIL were wound up, the total amount of debts in relation to this inventory was around HK$10.6 million.
In an attempt to avoid standing as an unsecured creditor in relation to the pre-appointment debts and inventory debts, HAECO claimed that it had various types of lien over the cabin inventory and over various documents, consisting of records of the work done on the aircraft and manuals demonstrating that the aircraft were fit to fly and complied with relevant regulations. HAECO claimed the following types of lien:
- a common law possessory particular lien over:
- the aircraft documents in respect of the pre-appointment debts; and
- the cabin inventory in respect of the inventory debts;
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- an agent's lien over the aircraft documents and cabin inventory in respect of all debts arising from work done as agent of Oasis or OGIL; and
- a general lien over the aircraft documents and cabin inventory for all work done in its capacity as professional engineering adviser.
HAECO had possession of the aircraft documents (but not the aircraft) at the time of the winding-up orders. It initially refused to release the documents unless Oasis and OGIL settled the outstanding debts. Subsequently, HAECO agreed to surrender the documents in order to facilitate the sale of the aircraft. The parties agreed that the proceeds of sale of the aircraft were to be deposited to an escrow account pending the determination of the court with regard to the claimed liens.
The claims by HAECO against the joint and several liquidators of Oasis and the joint and several liquidators of OGIL were heard together. It was found that HAECO did not enjoy any of the claimed liens.
Common law possessory particular lien
Aircraft documents
Three key points were addressed in respect of the aircraft documents.
Did the aircraft and the aircraft documents together constitute a composite chattel?
One of the necessary elements for establishing the common law possessory particular lien is that the party asserting the lien must have done work on the chattel over which the lien is asserted. In this case, HAECO had done work on the aircraft, but asserted a lien over the aircraft documents. Therefore, in order to assert the lien successfully, HAECO had to convince the court that the aircraft and the aircraft documents together constituted a composite chattel. In considering this question, the judge referred to the test in Dinmore Meatworks Pty Ltd v Kerr, in which it was found that "for a particular lien to attach, the subject matter of the work must always be something that the parties treated as an entirety in their dealings with one another concerning the work to be done on it".
HAECO failed to satisfy the court on this point, as the court found that it was "artificial to suggest that HAECO and Oasis treated the Aircraft and the Aircraft documents as one thing on which work was carried out by HAECO".
HAECO had asserted that there was an industry-wide custom of treating aircraft and their documents as a composite chattel. In support of the argument, HAECO drew the court's attention to:
- the legislative regime, which makes the correct documents a legal precondition to an aircraft being allowed to fly; and
- the fact that aircraft financing and leasing documents usually define the aircraft as including the relevant documents.
However, the court was not swayed by the arguments and appeared to give more weight to the fact that the aircraft documents were not physically part of the aircraft; nor were they physically necessary for the aircraft to fly.
Did HAECO have possession of the aircraft and the aircraft documents?
Furthermore, the court held that even if the aircraft and the aircraft documents had formed a composite chattel, HAECO would still not have been able to establish a common law possessory particular lien, as it would not have been able to establish a further crucial element necessary for claiming the lien - that is, possession by the party claiming the lien of the chattel over which the lien is claimed.
In this case, the court found that HAECO had no right of possession in respect of the aircraft or the aircraft documents. There was no right to possession of the aircraft because under the terms of the service agreement, the aircraft were used by Oasis when not with HAECO for maintenance and repair. There was no right to possession of the documents because the Hong Kong statutory regime for aircraft safety required HAECO to produce the aircraft documents to Oasis on demand.
Further arguments
Although the court felt the above factors established that there was no common law possessory particular lien, the judge went on to consider a number of further arguments as to why no possessory particular lien arose, as advanced by counsel for the liquidators for Oasis and OGIL. When considering these arguments, the judge again touched on (among other things) the terms of the service agreement allowing for the release of aircraft to Oasis, and appeared to accord significance to the fact that the service agreement did not provide for any express right to a lien on the part of HAECO. However, arguably these considerations were merely obiter (ie, in passing) as they were stated to be "unnecessary" to the decision.
Cabin inventory
HAECO also failed to establish a common law possessory particular lien over the cabin inventory, as it was unable to establish the necessary element of possession of the chattels. The judge held that the service agreement envisaged "situations in which the inventory is purchased by HAECO and possession passed to Oasis prior to payment, which is inconsistent with a particular lien".
HAECO was equally unsuccessful in arguing the existence of an agent's lien over the aircraft documents and cabin inventory. This lack of success was due to a number of reasons which included:
- the fact that it was impossible to establish that a principal-and-agent relationship existed between Oasis and HAECO; and
- the point that even if such a relationship had existed, "an agent cannot assert against a principal a lien which the principal has, by reason of third-party interests, no power to confer".
In this case, the third-party interests under various leases, subleases and mortgage deeds in connection with the aircraft would have prevented Oasis as principal from granting a lien to HAECO as agent.
General lien
HAECO failed to establish a general lien over the aircraft documents and cabin inventory. The common law will only recognise a general lien where it arises "either by express agreement or custom, and the latter must be strictly proved". In this case there was no express provision for a general lien in the service agreement and HAECO was unable to establish the existence of an industry-wide custom for aircraft engineers to have a general lien for their unpaid charges.
Comment
In light of this judgment, it is reasonably clear that aircraft service providers will not ordinarily be able to establish liens by operation of law for the work that they carry out on aircraft. There may be a tightening of the contractual terms on which these services are offered, with a greater emphasis on receiving full payment for inventory or services before possession is surrendered, or attempts to make explicit contractual provision for general liens on the part of the service providers. However, in the latter case, questions will undoubtedly be raised about the extent to which such general liens could be effective in view of the need for the airline to operate the aircraft and the regulatory requirements to hand over aircraft documents to the owners on demand. In the absence of such contractual protections, it seems that aircraft service providers will simply be left to vent their spleen.
For further information on this topic please contact Ian De Witt or Robin Darton at Tanner De Witt by telephone (+852 2573 5000), fax (+852 2802 3553) or email ([email protected] or [email protected]).
Endnotes
(1) Hong Kong Aircraft Engineering Company Limited and The Joint and Several Liquidators of Oasis Hong Kong Airlines Limited (in Liquidation) and Hong Kong Aircraft Engineering Company Limited and The Joint and Several Liquidators of Oasis Growth and Income Investments Limited (HCCW 132/2008 and HCCW 133/2008)