Type: Client Alerts
When goods are delivered to a professional storage operator (we will refer to them as a warehouseman) for safe keeping, they may become subject to a lien. A lien is a security right which gives the warehouseman rights over the goods that can take precedence over the rights of others, including the owner. The warehouseman is entitled to exercise the lien when he or she is left unpaid for services rendered and in so doing will gain legal control over the goods. This may prevent the owner disposing of the goods or any financing bank realising the value of the goods, where they are used as collateral for a loan. Knowing when and against whom the lien can be exercised, particularly when one of the parties becomes insolvent, is therefore important for the owner and its bank, as well as the warehouseman.
When does the lien arise? The position depends on the legal regime that applies. In some locations, such as the U.S., the warehouseman’s lien is provided for by legislation, so when the conditions of that legislation are satisfied one can be sure the lien will exist. England and Singapore do not have similar legislation, but the lien may arise under the common law if a number of important qualifying criteria are satisfied. Liens may also be created by a contract between the warehouseman and the goods owner and those “contractual liens” will usually override any “legal lien” arising by law.
What rights does the lien create? The lien-holder has the right to detain the goods, i.e. prevent them being delivered to the owner or any other person that claims possession. They do not have the right to do anything else with those goods whilst they are detained, including selling the goods in satisfaction of the payments that are due, which makes the lien different from other security rights, such as a pledge. The right to sell may, however, be created by contract – and is often included in warehouseman’s general trading terms. In the case of perishable goods, the warehouseman may also be entitled to apply to a court for an order that the goods be sold, whilst they are detained. The right to detain can be exercised without a court order, which makes it a good remedy for the lien-holder but not for those with interests in the goods.
Issues for the warehouseman The warehouseman faces risks in detaining the goods. He or she may be liable – known as “conversion” – for failing to deliver the goods to the owner if no lien actually existed or the lien existed but had subsequently been extinguished. Under English and Singaporean law, in order for a legal lien to exist the warehouseman must have had continuous and uninterrupted possession of the goods at the time he or she exercised the lien. The lien will not exist generally if the goods belong to a third party who is not the debtor, for example where goods are sold but the original owner remains liable for the storage charges. Once created, a lien may be lost by waiver if the warehouseman’s actions are inconsistent with the lien, such as if the warehouseman claims a different amount to the amount secured by the lien or another form of security is provided in respect of the debt.
The warehouseman should also take care to ensure that their lien gives an effective security in the event the owner becomes insolvent. Insolvency proceedings may have the effect of preventing the warehouseman from exercising the lien without approval from the insolvency administrator or a court. He or she may then have to prove that the lien ranks in priority to the interests of others with security in the goods. As a matter of English law, the lien will not be registerable as a charge on corporate registers against the owner (being deemed to be “perfected” by the giving of possession to the warehouseman) and will be enforceable in priority to holders of certain registered security interests. However, in the U.S. a lien created under the Uniform Commercial Code may be subordinated to a security interest that was created and registered before the lien.
Issues for the goods owner Some liens – known as particular liens – secure only the payment of storage fees due in respect of the particular goods stored by the warehouseman at the time the lien is exercised. In other words, once storage fees have been paid for those goods, the lien no longer exists. However, this need not be the case. Either legal or contractual liens may secure the entirety of an account between the warehouseman and the debtor, giving the warehouseman the right to detain goods for payments due for other goods, which may have already left the storage facility. These liens are known as general liens and are more useful to the warehouseman but more troublesome for the goods owner.
For example, where a general lien exists (as is often the case with a warehouseman’s general trading terms) the sale of the goods to a financing bank could make the bank’s ability to get possession of the goods subject to that general lien for all sums due by the seller. Where the warehouseman engages a sub-contractor to perform the storage service, the goods could become subject to a general lien in favour of that sub-contractor, even if no such lien were included in the owner’s agreement with the warehouseman. The owner should also consider the impact of any liens created, particular or general, on its financing arrangements, to ensure that negative pledges or events of default are not unwittingly triggered.
Liens in China Though not as developed as the English mercantile law on liens, Chinese law does recognise a warehouseman’s lien. The rules are found within three pieces of legislation:, the Contract Law of 15 March 1999; the Guaranty Law of 30 June 1995; and the Property Law of 16 March 2007. Collectively they provide for a system that recognises legal liens. The legislation provides that a lien may arise over the goods under lawful possession of the warehouseman when sums are due from the debtor to the warehouseman and the lien has priority over previously created mortgages or pledges. A warehouseman is required to give the debtor not less than two months within which to pay the debt before action can be taken to sell the goods. All of these rights may be excluded by appropriate wording in the warehousing agreements.
Conclusion A warehouseman will usually maintain standard terms and conditions that incorporate rights of lien, so focus should be on identifying and, if necessary, modifying the contractual arrangements that will apply. For owners, this should include an analysis of the warehouseman’s sub-contractual deposit arrangements and the terms of any restrictive covenants in financing arrangements. For banks, knowing the extent of the lien is key and how this sits against the bank’s ownership or security interest. Warehousemen should focus on ensuring liens are validly created, maintained and enforced, which means taking care over actions at the time of contract creation, performance of the storage service and enforcement of the lien.
Client Alert 2014 - 091