What are rights of lien and why are they important when it comes to supply chain disruption?

Supply chains remain in the news. Global events such as the Covid-19 pandemic, war in Europe, international labour and container shortages, fuel price inflation, technological revolution and changing customer demand amongst other factors have combined to present the industry with an exceptionally challenging operating environment over the past few years. This shows little sign of easing in the short term.

Global disruption has further accelerated the move from so called ‘just in time’ supply chains to less fragile ‘just in case’ arrangements. In practice, and closer to home, this has meant exceptionally high demand for warehouse capacity, in turn increasing storage rates across the market.

With, often business critical, goods sitting in warehouses for longer periods and in greater quantities, forwarders and warehouse operators enjoy not only increased commercial leverage but also retain a significant legal remedy to ensure that those higher rates are met by customers. This remedy is the exercise of a lien.

What is a lien and what does it do?

A lien is the legal right of a forwarder or warehouse operator to refuse to release goods or documents belonging to the owner of the goods while its charges remain unpaid.

The sudden exercise of this power can cause very significant issues for wider supply chains and especially smaller businesses dependant on seasonal or time sensitive goods or other business critical consignments. Delaying release, for instance, in a supply chain dealing with key component parts for use in a production line can have a devastating impact on a business. Importantly, it is cargo owners who are obliged to apply to the court for release. A lien can be exercised without court order. This accordingly provides a powerful incentive for a debtor to meet outstanding charges (often meaning payment is made albeit perhaps under protest).

Losses incur very quickly in such circumstances (subject to contractual terms, storage and other charges may continue to incur, business losses will flow from disrupted supply and supply chains may need to be urgently modified to mitigate losses) which mean it is essential to take immediate steps.

It is also important for businesses to keep in mind that not only can the forwarder or warehouse detain release of the goods but many contractual lien clauses go further, providing a right of sale after a defined period (usually only after express notice of sale has been provided) adding to the urgency and importance of taking pro-active steps to deal with the situation.

When is a lien used?

Liens exist under English common law subject to certain criteria being satisfied. More commonly liens will be exercised pursuant to contractual terms, very often contained within the forwarder’s or warehouse operator’s general standard terms (such as BIFA, Logistics UK or UKWA terms).

A particular lien is exercisable only against the goods involved in that specific contract. In other words it is not possible to exercise such a lien over goods which are subject to a different contract. The indebtedness must be in respect to the particular goods in question. A general lien is wider and exercisable against any goods of the customer even though they may not be the subject of the particular contract in respect of which sums are overdue. Many of the lien clauses within industry standard terms provide for a general lien.

As the exercise of the lien is a security right giving the warehouse rights over the goods which take precedence over the rights of unsecured creditors this can be very useful where suppliers or shippers are suspected of or are entering into administration or insolvency. If the goods are of key importance to the supply chain administrators are ordinarily willing to enter into commercial discussions to obtain release for the ultimate benefit of the wider creditors or survival of the business. If agreement is not possible it will be necessary for the lien holder to apply to the Court for permission to enforce the security held.

What are the implications of using a lien incorrectly?

The exercise of a lien is not something that a warehouse should, or, in practice will, do lightly. There are very significant implications for getting the decision wrong or making mistakes in seeking to exercise the lien. This can expose the warehouse or forwarder to significant legal liability for wrongful interference with the goods / conversion.

Businesses who find consignments are suddenly subject to imposition of a lien should check for common mistakes in their execution. The party seeking the benefit of a lien must strictly follow the prescribed contractual requirements for exercise of the lien. For instance, not providing notice or providing notice which is not in the prescribed form (an unexplained denial of delivery amounts to unlawful possession) or getting timings wrong are common errors made.

Businesses faced with the exercise of a warehouse lien should consider whether the warehouse or forwarder have acted prematurely, perhaps exercising the lien before any and all applicable invoices fall due (e.g. payment terms are 30 days) or before other credit terms have expired. If the goods have previously been sold by the party owing the storage charges it may be the lien is ineffective as against the third party. Again this may expose the warehouse to significant legal liabilities.

It is important to remember that even if a lien is validly executed the warehouse will remain at all times responsible for the safe custody and care of the goods for the duration of the lien. A failure to do so can also lead to potential claims. Busy warehouses operating at capacity can often find such consignments become side-lined and then overlooked leading to further issues without proper systems in place.

Given the capacity issues in the warehouse sector coupled with global economic and supply chain uncertainty we are seeing increasing disputes in this area. The operation of liens can give rise to some difficult legal issues and the purported exercise of a lien can have serious implications – for both parties. It is important that prompt legal advice is taken to ensure your position is properly protected.

If you have any questions about this topic, please get in touch info@ts-p.co.uk