In today’s uncertain economic climate, marked by inflation and high interest rates, many industries are struggling with clients who are late on payments. The transport and logistics sector is no exception. However, these companies may mitigate their risks by including contractual liens in their service agreements.
What is a lien?
In essence, a lien allows a creditor who is owed money to acquire or maintain possession of property to ensure payment or fulfilment of a debt obligation. Liens can be powerful tools for obtaining invoice payments when a client is unable or refusing to pay but wants the release of their goods.
What is a contractual lien?
A contractual lien is created by incorporating a lien provision into a contract. It enables the service provider in possession of the goods to maintain possession of those goods until all outstanding invoices are paid in full and if not paid, to sell the goods. It not only operates as an additional layer of security but may also deter clients from falling behind on their financial obligations.
The Personal Properties Securities Act 2009 (Cth) regulates contractual liens and their enforceability.
A valid contractual lien requires either:
- possession of the goods; or
- a registered security interest on the Personal Property Securities Register.
In most instances, transport and logistics operators would possess goods (or be able to secure possession) whilst providing their services.
It is worth noting that even in circumstances where contractual liens are not drafted into agreements or are found to be unenforceable for some reason, a common law lien that applies to warehousemen/storage operators may provide alternative avenues to hold onto goods and not release them until payment is received.
What is a warehousemen’s/storage lien?
The warehousemen’s lien, also known as a storage lien, is a type of lien established by the common law. Unlike a contractual lien which must explicitly be drafted into a contract, a common law warehousemen’s/storage lien arises by operation of law. The only limitation with a common law lien is that, unlike a contractual lien, it does not grant the holder of the goods the power to sell them.
In Victoria, the warehousemen’s/storage lien has been codified into a statutory lien under the Warehousemen’s Liens Act 1958 (Vic) (the Act). According to the Act, the lien arises when a person is lawfully engaged in the business of storing goods for payment and can only secure the payment of outstanding invoices for charges relating to the storage/preservation, insurance, transportation, labour, weighing, packing and reasonable charges for the sale of the held property. Therefore, unlike a warehousemen’s common law lien, which does not have a power of sale, the statutory warehousemen’s lien in Victoria, does have a power of sale, subject to some limitations under the Act.
Despite its limitations in some circumstances, if a transport and logistics operator does not have the benefit of a contractual lien drafted into the relevant services contract, the use of a warehousemen’s/storage lien can nevertheless be beneficial.
An overview of Nick Scali Ltd V Lion Global Forwarding Pty Ltd
In the recent case of Nick Scali Ltd v Lion Global Forwarding Pty Ltd [2024] FCA 1247, the Federal Court of Australia addressed the complex issue of contractual liens in the context of freight forwarding. The outcome of this case highlights the strengths of contractual liens and their significance in transport and logistics disputes.
Background
The case centred around Lion Global Forwarding Pty Ltd (Lion), a freight forwarder, which exercised a contractual possessory lien over approximately 240 shipping containers filled with pre-ordered furniture from Asia to Australia on account of the fact that Nick Scali Ltd (Scali) had significant outstanding unpaid invoices. A contractual possessory lien clause within Lion’s standard terms and conditions allowed Lion to retain possession of the transported goods until the debt was paid.
As a consequence of the contractual possessory lien exercised by Lion, Scali made an interlocutory application seeking urgent court orders that it would pay the amount claimed by Lion to the Court and that Lion would then be compelled to release the containers. Scali argued amongst other things that it had refused to pay Lion’s invoices because it had concerns over the delivery of the goods due to an ongoing dispute between Lion and the Chinese shipping company that was withholding Scali’s goods on the basis that Lion had not paid its invoices.
Key findings
- Scali’s concerns about the non-delivery of goods did not provide a contractual justification for withholding payment on valid invoices and did not displace Lion’s contractual possessory lien.
- Scali’s decision to withhold payment of invoices based on the assertion that Lion breached the agreement and that the value of the breach may have exceeded the amount owed, was not a valid justification.
- The costs associated with exercising the lien (eg. storage costs) are recoverable by the party asserting a lien.
For these reasons, among others, the Court refused to make an order compelling Lion to release the goods on the basis that the justifications provided by Scali were insufficient to override the existing contractual lien, which remained in effect.
Post-decision
Since the decision in Nick Scali v Lion Global Forwarding Pty Ltd, Lion has subsequently gone into liquidation. From this, Scali has successfully obtained court orders that require the shipping companies engaged by Lion to release to Scali the shipping containers that were subject to Lion’s contractual lien, subject to some conditions.
Conclusion
The decision in Nick Scali v Lion Global Forwarding Pty Ltd illustrates the considerable strength of a contractual possessory lien. It is important to note that this decision was an interlocutory decision, meaning that it was made at an early stage of the proceedings with the substantive issues of the dispute yet to be decided.
This outcome of this interlocutory application further stresses that it is highly desirable to have your terms and conditions incorporated into all of your agreements, which can be included for example, by a link within your agreement’s terms or within your onboarding documents.
By incorporating a well-drafted contractual lien into your service agreements and terms & conditions of trade, transport and logistics companies can reap the benefit of having a mechanism to help secure payment of outstanding invoices.
Contact us
If you would like to discuss how your business can benefit from a contractual lien, or if you have had a supplier claim a lien against your goods, please contact a member of our Transport and Logistics team.
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