Norton Rose’s Charlotte
Winter explains the importance of a lien to
leasing.
Go deeper with GlobalData
A lien
is the right to retain possession of a thing until a claim is
satisfied, according to Stroud’s Judicial Dictionary of Words
and Phrases.
The aviation leasing
industry, like many other industries, has suffered from recent
economic lows, with some of the less financially secure airlines
collapsing. Either in anticipation of a collapse or as a result of
a collapse, lessors have terminated the leasing [agreement] and
have looked to repossess their aircraft from the defaulting
airline.
A collapsing airline will,
however, also inevitably owe money to other creditors as well as
the lessor. Where the leased aircraft, engine or part is undergoing
maintenance or repair, a maintenance, repair and overhaul provider
(MRO) may also be a creditor.
If the airline collapses when
the asset is in the MRO’s possession, can the MRO assert a lien and
refuse to release the asset to the owner until paid?
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By GlobalData
What law
applies?
It is important first to
identify which law determines this question because the MRO’s
rights can be different depending upon the applicable
law.
As against the owner, as
opposed to the lessee airline, with whom the MRO has no contractual
relationship, the applicable law is likely to be the law of the
place where the asset is located. However, different jurisdictions
take different approaches to this question.
The English law
approach to liens
There are two primary
requirements for the maintenance provider to assert a
lien.
The first is that the lien
will only arise, at all, if a person has expended labour and skill
to improve or repair, as opposed to maintain, the asset bailed to
him. So in other words, mere maintenance is not enough.
Where the line is drawn
between maintenance, and repair or improvement, will depend on the
facts of the case.
However, as aircraft
maintenance often involves an element of repair or improvement, it
is likely that this first hurdle will be overcome.
The second is that there has
to be express, implied or apparent authority on the part of the
owner for the work to be done.
In Green vs All Motors,
Limited [1917] 1 KB 625, a hirer sent a car to a mechanic for
repair and then defaulted. It was held that the owner’s authority
for the car to be repaired was implied as the hire purchase
agreement required the hirer to “keep the car in good repair and
working condition”.
It was implicit therefore
that the hirer would have to send the car to the garage and had
authority to do so. Such clauses are invariably found in an
aircraft operating lease between the owner and lessee.
In Tappendem (t/a English
and American Autos) vs Artus [1964] 2 QB 185, the court found
that giving possession of a motor vehicle to a mechanic for the
purpose of effecting repairs was an act reasonably incidental to
the bailee’s, or lessee’s, reasonable use of the vehicle and if the
owner wished to exclude the bailee’s authority he must do so
expressly. But how effective will that exclusion be?
Exclusion from creating
a lien and apparent authority
Operating leases will
invariably exclude the lessee’s right to allow a lien to be
created.
This however conflicts with
the situation where the lessee has been given apparent (or
ostensible) authority to allow a lien for work done to be created
over the aircraft or part.
An example of this situation
arose in the case of Albemarle Supply Company vs Hind and
Company [1928] 1 KB 307. Here, despite the express agreement
providing that the lessee could not create liens without the
owner’s consent, it was held that the owner had held out the lessee
as having sufficient authority to create liens.
As the express limit on that
authority to create liens had not been communicated to the third
party, that third party was not, therefore, bound by it. The fact
the third party knew the lessee was not the owner of the asset in
question did not matter.
It may be argued that in the
aviation market the MRO will know, or should know, the market
practice to exclude expressly the right of the lessee to allow the
creation of a lien and that this knowledge should prevent the
lessee from having the authority to allow a lien for work done to
be created.
However, this has not been
tested in the English courts and so, as the law stands, it is not
clear whether the owner’s or the MRO’s rights will override the
other.
Other
jurisdictions
Other jurisdictions have had
different approaches to the problem and in some there is more
certainty as to the outcome.
In France, for example, we
understand that a lien for work done will usually override
ownership rights, whereas in Scotland, where there is a specific
prohibition on creation of a lien in the lease, this will override
the MRO’s rights to create a lien, even if it was not aware of the
prohibition.
Enforcement
If the circumstances result
in the rights of an MRO overriding those of an owner, then the lien
for work done only provides the MRO with the right to detain the
aircraft or parts until the debt is paid.
The benefits for the MRO that
derive from a lien are therefore limited to this passive right of
retention. It may provide some incentive on the owner to make a
payment, but does not necessarily provide the MRO with the
opportunity to actively pursue payment from the owner.
Charlotte Winter is ‘Of
Counsel’ at law firm Norton Rose
