New Zealand: Lien vs Security Interest - who wins?

Brief Counsel
Last Updated: 8 November 2011
Article by Michael Arthur, Fiona Bennett, Michael Harper and Matthew Yarnell

A lien is the right to hold on to goods, and in some cases sell them, in order to ensure payment.  Often the debt will be connected with services related to the goods.

A lien can be obtained by contract, or in certain specific situations the law creates it automatically.  The difference can be significant.

Under the Personal Property Securities Act (PPSA), the holder of a common law or statutory lien may in some cases have special priority over a company's secured creditors.

Types of lien

There are, generally speaking, three categories of lien: contractual, statutory and common law.  Different rights will be available depending on the type of lien claimed.

A contractual lien will simply provide such rights as are stated in the contract.

In contrast to contractual liens, there is a range of specific types of statutory and common law liens, each with its own set of rights.  The more common statutory and common law liens include:

Statutory liens

  • Seller's lien – a seller of goods may have a lien over goods that have been sold but remain in the seller's possession, securing the purchase price (Sale of Goods Act 1908).
  • Carrier's lien – a carrier may have a lien over goods that have been transported, securing the freight charges accrued against the particular goods in possession (Carriage of Goods Act 1979).

Common law liens

  • Worker's lien – a person who has improved goods by performing work on those goods may have a lien securing the costs of the work performed.  Mere maintenance of the goods is not enough.  In Stockco Limited v Walker (CIV 2011-441-110), the High Court recently confirmed that a worker's lien will arise where the work has resulted, or is intended to result, in an overall improvement to the goods.  In that case, the express purpose of the contract was to improve the goods (livestock), so a common law lien was created.
  • Shipowner's lien – a ship owner may have a lien over goods that have been transported, securing the freight charges accrued against the particular goods in possession.  In addition, the ship owner has the right to deliver the goods to a wharf or warehouse for storage subject to the lien.
  • Banker's lien – a banker may have a lien over a customer's securities deposited with the bank, securing the customer's general account with the bank.  There is no lien over money held by the bank, and this will generally be subject to contractual rights of set off.
  • Solicitor's lien – a solicitor may have a lien over client documents securing payment of all fees incurred after the date on which the documents came into the solicitor's possession.

Common law and statutory liens each give rise to a specific set of rights and have different limitations.  Those rights can be extended by contract, but there is a risk that by imposing additional rights of lien in a contract, the common law or statutory lien may be displaced by the contractual lien.

McKay v Toll Logistics [2011] NZCA 188, held that there is no common law lien for work done by a packer (a logistics supplier who repackages and distributes goods).

Priority of a lien in relation to other interests in property

Contractual liens vs other interests

It is now clear that a contractual lien is a security interest under the PPSA.  As a result, the priority of a contractual lien relative to other security interests will be determined according to the priority rules under the PPSR and the contractual lien will obtain priority according to the date of registration or possession.

Common law or statutory liens vs other interests

The Court of Appeal has recently confirmed in McKay v Toll Logistics that section 93 of the PPSR gives special priority to common law and statutory liens ahead of security interests governed by the PPSA.  Contractual liens will not gain special priority under section 93.  To obtain special priority under section 93:

  • the materials or services relating to the lien must have been provided in the ordinary course of the lien holder's business, and
  • the lien must not have arisen under an Act which provides that the lien does not have priority, and
  • the lien holder did not, at the time materials or services were provided, know that a competing security agreement prohibited the debtor from creating a lien.

Priority where the circumstances give rise to common law and contractual liens simultaneously

Often, statutory, common law and contractual liens may arise together.  In these circumstances, it will be necessary to determine which lien can be relied upon by the party in possession of goods.

In the Toll Logistics case, the Court of Appeal confirmed that a party may not be able to claim a common law lien where they have contracted for a lien on different terms.  It will be necessary to consider whether the contractual lien and the common law lien are sufficiently at odds to warrant the exclusion of the common law lien.  Where there is a sufficient inconsistency between the liens, the lien holder will not be able to rely on a common law lien.  The lien holder will not be able to take advantage of section 93 of the PPSA and will be required to rely only on the contractual lien.

It is less clear whether the presence of a contractual lien will negate an inconsistent statutory lien.  The Court of Appeal was not required to consider this point in the Toll Logistics case.  In our view, as with common law liens, this question will need to be determined on a case by case basis.  However, we think it is unlikely that a court would be as willing to remove express statutory rights. 

Liens – key points to remember:

  1. A contractual lien is a security interest.  As a result, its priority relative to competing security interests will be determined by the PPSA. 
  2. Under section 93 of the PPSA, common law and statutory liens will have special priority ahead of competing security interests, provided certain conditions are met.
  3. A party who has contracted for a lien may not be able to rely on common law or statutory liens in order to obtain special priority under section 93.  Instead, the contractual lien will sometimes prevail to the exclusion of other liens.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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Authors
Michael Arthur
Michael Harper
 
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