Matthew Reeve gives a brief analysis of the law of possessory liens applicable to aircraft especially as they affect aircraft managers, AMOs and owner/clients.
The law of liens is not a topic with which many in the aviation industry are particularly familiar or comfortable. This is understandable for a number of reasons. Lien is an ancient construct of the Common Law which has never been codified nor shaken off its historical roots – cases about stabling of horses by innkeepers are still cited as important authorities (including by the Supreme Court recently in The Kos). The applicable principles are synthesised from contract, bailment, unjust enrichment and customary law. With a few exceptions, there is no real body of aviation cases. Any proper analysis requires one to dip into a number of other areas of law.
The problem is compounded by the fact that in the commercial environment the lien is not recognised by aircraft maintainers, at least at the contract negotiation stage, as a primary form of security. Lien clauses seem to be inherited or pasted from standard forms rather than consciously planned as credit risk mitigation. The lien typically first arises as a topic of conversation towards the end of a shockingly expensive maintenance project when the AMO starts to worry that that the client cannot or will not pay the price. It is then that the yellow marker finds its way to the standard lien clause. Nevertheless, in a stressed market, the lien is an increasingly important tool in credit management.
There are four issues typically confronted by aircraft maintainers, and their owner/clients:
- The components of an effective demand for the purpose of exercising a lien.
- Recent cases which suggest a loosening of the types of charges which can be secured by way of a lien.
- How and when the lien can be lost by way of a surrender of possession.
- The problem of the third party lien – circumstances in which a sub-bailee can properly acquire a lien enforceable against the ultimate owner.
(1) The requirements of an effective demand
It is not unusual, when opening a new set of instructions, to find letter by a maintainer refusing to return the aircraft to the owner, asserting a lien and promising a full account of charges shortly.
The key question which arises is whether lien holder can claim a lien for sums due without immediately specifying the amount of the payment demanded. It is a question of considerable consequence. A lien is not a proprietary interest. It is no more than a limited passive defence to a claim of possession by the true owner. If a mistake is made, and the exercise of the lien is defective, it will be a wrongful denial of possession, exposing the aircraft maintainer to a very substantial claim for damages for conversion.
The law is that, for the demand to be effective, the lien holder must either specify the sum to be paid or, at least, provide the owner of the aircraft with sufficient information from which he can make his own calculation.
There was a practical application of the principle by the Court of Appeal in Singh v Thaper . Mr Thaper was an accountant for Mr Singh personally and his companies. He worked over about three years without submitting an invoice. On several occasions, Mr Thaper said his fees “had reached £20,000 plus VAT”. In his Defence, Mr Thaper claimed that he was entitled to £31,110. The figures were not reconciled. The Court rejected his claim to have exercised the lien properly.
The Court relied on a dictum of Scrutton LJ in Albemarle Supply Co. Ltd. v. Hind & Company (1928):
“A person claiming a lien must either claim it for a definite amount, or give the owner particulars from which he himself can calculate the amount for which a lien is due. The owner must then in the absence of express agreement tender an amount covering the lien really existing. If he does not, unless excused, he has no answer to a claim of lien. He may be excused from tendering (1) if he has no knowledge or means of knowledge of the right amount; (2) if the person claiming the lien for a wrong cause or amount makes it clear that he will not release the goods unless his full claim is satisfied, and that claim is wrongful. The fact that the claim is made for more than the right amount does not matter unless the claimant gives no particulars from which the right amount can be calculated, or makes it clear that he insists on the full amount of the right claim.”
What is important about the Thaper case, is that Mr Singh does appear to have specified a figure due, albeit a very rounded figure of £20,000, but that was not good enough for the Court of Appeal. Its reasoning appears to have been that it was plain from the circumstances that Mr Thaper’s figure was a rough figure offered before any proper invoicing calculation had been attempted. It was more of an estimate rather than a specific figure, and the client was given no explanatory invoice from which he could make his own assessment. It was therefore not a valid demand.
In the light of the Thaper case, it may not be enough for AMOs simply to identify a balance due when asserting a lien. It is safer for them to provide a full supporting statement of account showing their workings.
(2) A loosening of the types of charges which can be secured by way of a lien?
There have been two recent cases which appear to signal a change in the conventional understanding of the limits on the charges which can be secured by way of the lien; The LEHMAN TIMBER and The KOS.
Before going there, it is worth laying out the traditional understanding of the possessory lien. There were two related principles:
- There was no lien for the maintenance of a chattel. The lien could only be claimed for the improvement of the chattel. The prevention of deterioration should not be equated with “improvement” (Albemarle v Hind).
- The lien holder could not include within the lien the cost of storage and maintenance after the exercise of the lien (Somes v BES).
These two limitations have been perceived to be a weakness in the possessory lien over aircraft. It is very difficult in the aviation context to apply the distinction between “improvement” and the “prevention of deterioration”. Even if an aircraft is kept in a hangar, it requires potentially expensive scheduled maintenance to remain airworthy. If the schedule is not observed, the value can drop dramatically. Furthermore, the price of maintenance work is reflected positively in the aircraft value as much as pure “improvement” work. Nevertheless, it has been assumed that the distinction was valid and that maintenance and hangarage charges could not be claimed by way of lien.
The judgment of Rix LJ in The LEHMANN TIMBER may signal a change of direction. It suggests that the conventional limits on the possessory lien were intended for the protection of consumers and may not apply in a purely commercial context.
In The LEHMANN TIMBER¸the owners of the vessel claimed a lien over a cargo of steel coils. Significantly, the charges claimed under the lien included a reasonable charge levied by the owners for the storage of the coils on board for the period after the exercise of the lien. The cargo owners argued, relying on the Somes case, that there could be no lien for simple storage charges, as distinct from the cost of “improvement”, especially where those charges relate to the period after the exercise of the lien.
Rix LJ rejected the argument. His reasoning, in essence, was that
- In the commercial context, there is less reason for restricting the lien to protect the lienor. Indeed, the lien holder may be more deserving of protection:
“Such a doctrine may work more or less satisfactorily in the typical case of an artificer's lien, but in a highly commercial setting such as ship-building or ship-repairing the case itself illustrates the harshness and uncommerciality of the limitations of the doctrine. Where the lienor cannot pay, the lien is worthless, because it does not bring with it a right of either expenses or sale; and where the lienor will not pay, he can blackmail the lienor with the expense of retention: even though he could choose, if he wished, to obtain the release of his chattel by giving adequate security for the lienee's claim (and nowadays by a payment into court).”
“A shipowner should not be required to abandon his lien because the only other choices facing him were the disastrous ones of turning his ship into a floating warehouse for an indefinite period, or throwing the cargo into the sea, or storing them on land at his own expense.”
It may be possible to apply this reasoning in the context of aircraft. Experience shows that AMOs can be easily intimidated by the cost and trouble of having to maintain the aircraft whilst the owners argue over the cost of discharging the lien. It is not unfair that the AMO should be able to add the costs of storage and ongoing maintenance to the lien.There is a promising argument that the AMO should not be left with the unpalatable choice between incurring further unsecured charges or abandoning the aircraft on a corner of the apron.
2. There is no good reason for the distinction between the unpaid costs of improvements and the costs of ongoing storage. Both arise as a result of a breach of contract by the debtor:
“Shipping is performed on the basis that time is money and that a ship is a floating and travelling warehouse for which cargo must pay either in the form of agreed freight or hire, or by way of damages for any breach of contract. If the ship is delayed by the cargo owner's failure to arrange timely discharge… , the cargo owner must pay …. That is the commercially just result, and the authorities reflect the search for the just and reasonable result. Thus the exercise of a lien must be reasonable ...”.
By the same reasoning, it might be said in the aviation context, that the cost the occupation of the maintainer’s hangar by the aircraft is as much of a cost for the aircraft owner as repairs or upgrades to the aircraft.
As a result of The LEHMANN TIMBER, there is an enticing opportunity to argue, in the aviation context, that all maintenance charges and hangarage is secured by the possessory lien, regardless of the question of whether the aircraft has been “improved”.
(3) How and when the lien can be lost by way of a surrender of possession?
This is another practical concern.
It is a truism that if the lien holder parts with possession, he loses the lien.
The first problem sometimes arises under operating or management agreements. Under the management agreement the owner gives possession of the aircraft to the manger and in return the manager agrees to supply flights to the owner. Does each flight represent a surrender of the possessory lien for prior charges? Probably not.
There seems to be a racing car case in every corner of the law of liens. This is no exception.
In Rose v CMS, the claimants owned two Chrysler Viper racing cars. They were kept at the defendant’s premises for the season and taken to race circuits for the claimants to race in them. It was held that the handing over of the cars for the races only, did not amount to a surrender of the lien. The temporary giving of possession did not interrupt the defendants’ legal right of possession.
By analogy, most aircraft managers can probably argue that they have uninterrupted possession of the aircraft for the purposes of claiming a possessory lien.
The second, related question is whether the aircraft manager loses the possessory lien if he sub-bails the aircraft to a maintenance organisation say to do maintenance work. It seems that the concept of constructive possession can be deployed. It obviously depends on the terms between the manager and the maintainer. If those terms require the maintainer to return the aircraft to the manager and are not inconsistent with the lien, the lien should survive. There is no reported English case. There is an unreported case, of Neil J in Densham v Fallon Aviation (1982) in which he upheld a decision of arbitrators that a sub-bailment of the aircraft for repair left the bailiors with constructive possession sufficient for them to maintain their possessory lien.
There is also a recent Scottish case concerning a Mexicana A320; Wilmington Trust v Rolls Royce. There Wilmington Trust had leased the aircraft to Mexicana with a limited prohibition against creating liens. Mexicana contracted with IAE for the maintenance of the engines. IAE sub-contracted the engine repair work to Rolls Royce. The engines were delivered to Rolls Royce. IAE paid RR for their work but the engines remained in the possession of RR. Mexicana went into liquidation without paying IAE. IAE claimed a lien over the engines in Rolls Royce’s possession. The Outer House held that the control IAE excercised over the engines in Rolls Royce’s hands was sufficient in law to found a claim for a lien by IAE.
Obviously, the issue is highly fact –dependent, but there is no reason in principle why a party having only constructive possession of an aircraft in the actual possession of a delegate should not be entitled to claim a possessory lien.
It is therefore possible at least in theory, in the Wilmington type case, to have two parties in the chain claiming a lien simultaneously. A party such as Rolls Royce in actual possession of the aircraft at the end of the chain claiming its lien – under the law of sub-bailment on terms. And an intermediate party such as IAE claiming a lien as constructive possessor.
The law applicable to aircraft liens is largely drawn from case-law in other areas.
Lien demands require a specific sum to be identified and, probably, the basis of the calculation to be set out.
There appears to be a shift towards loosening the limits on lienable charges, so as to include costs other than just the costs of improvement of the aircraft.
The possessory lien may not be lost as a result of providing flights on the aircraft nor when sub-delegating maintenance work.
(This is a summary of a talk given by Matthew Reeve as part of a seminar at Quadrant Chambers at on 6 February 2018 for selected guests in the Aviation community “The Aircraft as Property”.)