Shipyard was entitled to exercise possessory lien

In 2007, the English owner of the ship, Southern Explorer, concluded a rebuilding agreement with a Polish shipyard that was to convert the ship into a seismic ship. The owner was to deliver several technical designs and specifications for the rebuilding. The owner used a subcontractor for the preparation of these documents.

Already one month after the ship had arrived at the shipyard, disputes arose between the parties regarding the technical designs and specifications. The shipyard declared that the documents were not compliant with the agreement and therefore demanded that the owner’s subcontractor redid them. This resulted in a delay compared to the original timetable, and the parties drafted an addendum to the original contract which i.e. changed the date of delivery.

Hereafter, the agreement was amended twice. These amendments resulted in the date of delivery being postponed almost six months compared to the original date of delivery. The parties had diverging views on why the delivery date had been postponed. The shipowner argued that the delay was caused by the shipyard’s conditions – i.a. by the fact that the shipyard had not put enough workers on the job. The shipyard on the other hand claimed that the postponement could be attributed to the delay of the technical designs and specifications for which the owner was responsible.

The owner chose to terminate the agreement just three months after the conclusion of the latest addendum. The shipyard argued that it had a claim for the work performed prior to the termination. Thus, the shipowner refused to return the ship before he had received the outstanding payment from the owner. The shipyard justified the withholding of the ship by a right of possessory lien. The owner sued the shipyard claiming that the possessory lien was illegitimate and that the ship had to be returned.

The principle of concurrent performance

The principle of concurrent performance is a fundamental principle in Danish law. In a sale of goods-situation the principle means that the buyer and the seller are to perform their obligations at the same time unless otherwise agreed. In other words, the seller is not obliged to hand over the goods to the buyer until the buyer pays the purchase price to the seller and vice versa. The principle provides both parties with a security that the other party will perform under the contract.

The principle also applies in relation to contracts of repair, transportation, storage etc. In a contract of repair or rebuilding the principle of concurrent performance for example provides the repairman / rebuilder with a right to withhold the item in question until payment is effected; this right is called a possessory lien. In this case a possessory lien would provide the shipyard with a right not to hand over the ship, until the owner paid the charges due. A possessory lien is of course always conditional on the possessor having a legitimate claim against the owner.

The views of the parties

The shipowner claimed that his current payments sufficiently covered the work performed by the shipyard. Therefore, the shipyard had no claim against the owner and thus the lien was illegitimate. Furthermore, the owner claimed that the shipyard had failed to maintain the ship while in the shipyard’s possession. In the owner’s opinion, the ship had undergone a decrease in value due to this neglect, which the shipyard was liable for.

The shipyard argued that the owner had not paid for the work performed. Thus, the shipyard had a claim against the owner which justified the lien until payment came through. Additionally, the shipyard claimed that the ship had been maintained sufficiently.

The Maritime and Commercial High Court: The possessory lien was legitimate

The Maritime and Commercial High Court found that the owner had not paid a sufficient amount for the work. Thus, the shipyard had a legitimate claim against the owner, which justified the possessory lien.

However, at the same time the court found that the shipyard had had a duty to maintain the ship while withholding it. This duty had only been partly fulfilled. The lack of maintenance had resulted in a decrease in value estimated to 100,000.00 USD, for which the court found the shipyard to be liable.

IUNO’s opinion

The possessory lien can be exercised in most contractual relationships where services or goods are exchanged, e.g. contracts of sale, rebuilding and repair. The lien is similar to a pledge; both provide a party with a security that the other party performs contractually.

However, there are several important circumstances to pay attention to before exercising a possessory lien. Here we will mention three of them. First, the possessor must be sure to actually have a legitimate claim against the owner of the withheld item. If this is not the case, the possessor may be held liable for any losses suffered by the owner due to him having to make do without the withheld item.

Secondly, the possessor must keep the item sound and safe and maintain it properly. All costs incurred in relation to keeping and maintaining the item can be claimed from the owner. If proper care is not taken, the possessor might be held liable for the decrease in value caused by the lack of maintenance. That is what happened in the case referred above.

Thirdly, troubles may arise if another creditor (usually the bank) has a floating charge, e.g. on the owner’s inventory. If the possessed item is included in the bank’s floating charge, the question arises whether the bank or the possessor has the primary right to security in the item. This conflict is very complex and has yet to be decided under Danish law as the rules on floating charge are relatively new.