| OUTER HOUSE, COURT OF SESSION [2011] CSOH NUMBER 151 |
| CA143/10 | OPINION OF LORD HODGE in the cause (FIRST) WILMINGTON TRUST COMPANY and (SECOND) ORIX AVIATION SYTEMS LIMITED Pursuers; against (FIRST) ROLLS-ROYCE PLC and (SECOND) IAE AERO ENGINES AG Defenders: ________ |
Pursuers: Lake QC, Watt; Maclay Murray & Spens LLP
2nd Defenders: Lindsay; Biggart Baillie LLP
9 September 2011
[1] The pursuers are, first, Wilmington Trust Company ("WTC"), which is a Delaware banking corporation and trustee company and has its chief executive office in Delaware, United States of America, and, secondly, Orix Aviation Systems Ltd ("Orix"), a company which has its registered office in the Republic of Ireland. They are respectively the legal and beneficial owners of certain Airbus A320-200 aircraft which WTC leased to Companía Mexicana de Aviación SA de CV ("Mexicana").
[2] Orix purchased two airframes (Aircraft 291 and 292) and aero engines and transferred them in trust to WTC. WTC is the registered proprietor. The first defender, Rolls-Royce plc ("RR") is an engine manufacturer which, among other activities, provides maintains and repairs aero engines with facilities within Scotland. The second defenders, IAE Aero Engines AG ("IAE"), is a Swiss company which has a place of business in Connecticut, USA. It is a joint venture company owned by various aircraft and aero engine manufacturers, including RR.
[3] The aircraft comprise airframes and aero engines. WTC leased two Airbus aircraft to Mexicana under leases which were extended to 31 March 2013. Mexicana got into financial difficulties and was unable to pay sums due under the leases. WTC terminated the leases on 5 August 2010. On 7 September 2010 an administrator was appointed to Mexicana to allow it to restructure its debts.
[4] The pursuers aver that Mexicana had contracted with IAE to manage the maintenance of the aero engines and IAE had placed the work with RR. On IAE's instructions, two aero engines were removed from the air frames, which remained in Mexico, and were shipped to East Kilbride where RR serviced them. RR completed the work on the engines and has been paid therefor by IAE. RR retains the engines in secure premises in East Kilbride on the instructions of IAE, which asserts a lien over them in security for payment by Mexicana of the sums due to it for their maintenance and repair. IAE avers that the value of the maintenance and repair work is US $2,318,513.22. Each of the aero engines has a value of about US $ 4 million.
[5] The pursuers seek declarator that the aero engines are the property of WTC as owner trustee on behalf of Orix. That is not disputed. The pursuers also seek delivery of the aero engines from RR. The principal issue between parties is whether IAE has relevantly averred that it is entitled to a lien over those engines for payment of sums due to it under its agreement with Mexicana. The matter came before me for debate on the pursuers' plea to the relevancy of the defences.
[6] In the debate the pursuers argued that the defences against their application for delivery were irrelevant and sought decree de plano. Failing that, they sought the court to delete certain averments in the defences. IAE offered a proof before answer. The pursuers have a separate claim for damages which they aver are due for losses which they have incurred through the retention of the aero engines which has prevented them from recovering one airframe (Aircraft 292) from Mexico and which kept another airframe (Aircraft 291) out of service from 5 August 2010 until 8 March 2011. At this stage I am concerned only with the application for delivery. The only issue for determination is whether the defenders have relevantly pleaded a case of lien which could prevent the pursuers from enforcing their normal rights of property in relation to the aero engines.
The contracts between the parties
[7] The contracts between the parties which are relevant to the debate are as follows.
(i) Aircraft Leases:
These are Aircraft Lease Agreements between WTC and Mexicana dated 25 September 2000 and later extended to 31 March 2013 ("the Leases"). They are governed by the laws of the State of New York, USA.
(ii) Renewed Fleet Hour Agreement:
This is an agreement between Mexicana and IAE dated 10 March 2006 ("FHA") under which IAE arranged for the maintenance of specified aero engines for its Airbus A320-200 aircraft. It is governed by law of the State of Connecticut, USA.
(iii) Repair Contract:
This is a contract between IAE and RR for the repair, modification and testing of the IAE V2500 aero engines dated 21 May 2005 ("the RR contract"). Under this contract RR carried out maintenance and repair work on the pursuers' aero engines used by Mexicana in accordance with "Workscopes" which IAE devised. It is governed by the laws of the State of New York, USA.
(iv) Maintenance Cost Guarantee:
This is a contract between IAE and Orix dated 25 March 1998 ("MCG") under which IAE guaranteed that the costs of the off-wing maintenance of Orix's V2500-AI engines would not exceed specified amounts. It is governed by the law of the State of New York, USA.
(v) Maintenance Cost Guarantee Settlement Agreement:
This is a contract between IAE and Orix dated 30 June 2010 ("MCGSA") under which the parties terminated the MCG and established terms by which IAE assisted Orix to control the maintenance costs of the aero engines.
IAE's Defences
[8] IAE advanced the following arguments in support of its defence:
(i) It had a valid and enforceable artisan's lien under laws of the State of
Connecticut and the laws of the State of New York;
(ii) It had a valid and enforceable lien under Scots law;
(iii) Clause 13 of the Leases obliged Mexicana to maintain the engines and by so
contracting WTC impliedly consented to the creation of the lien. Mexicana paid a maintenance reserve to Orix under clause 13.4 of the Leases;
(iv) The MCG and MCGSA also implied such consent;
(v) The Law of the State of New York governed the interpretation of the Leases.
Under that legal system the Leases did not prevent a lien being created. The provision created a new ground of default by Mexicana if it did not exclude a lien in the contracts into which it entered for the repair of the airframes and aero engines;
(vi) If that were incorrect, the clauses in aircraft leases were void for uncertainty;
(vii) A court order for delivery of the aero engines would infringe IAE's rights
under Article 1 of Protocol Number 1 to the European Convention on Human Rights ("A1P1");
(viii) Finally, by analogy with South African law, IAE had an unjustified enrichment lien.
[9] Mr Lindsay for IAE supported its assertion of a lien by submitting that it had civil possession of the aero engines and RR merely had custody of them. RR and the operators of the other maintenance centres, which IAE designated and Mexicana approved, were shareholders in IAE. The FHA, which had provided that Mexicana would arrange the transportation of the aero engines, had been altered by letter dated 27 September 2007 so that IAE would be responsible for the transport of the engines to and from the maintenance centres. IAE also directed the work which RR carried out on the engines. It thereby gained possession of them and kept possession of them when they were in RR's custody. Mexicana's Administrator had recognised IAE's repairer's lien and given it privileged creditor status. Orix, which is a creditor of Mexicana, had not challenged that decision. He pointed out that the pursuers were intimately involved in the arrangements by which the engines were to be repaired. Orix had entered into the MCG with IAE in 1998 by which IAE guaranteed that the costs of the performance of off-wing maintenance of the engines would not exceed specified limits and Orix undertook that, among others, Mexicana would comply with the approved maintenance management plan agreed between Orix and IAE. In 2010 IAE and Orix had replaced the MCG with the MCGSA by which IAE provided Orix with certain credits and services in return for the termination of the MCG.
[10] Mr Lake QC for the pursuers submitted that each of the defences which IAE advanced was irrelevant. I set out his position in my discussion of the defences below.
Discussion
(i) The Lex Situs: Scots law in relation to liens
[11] Parties agreed that the validity of a lien is governed by the lex situs. I agree. It is clear that that law governs the creation of a real right in moveable property. See Inglis v Robertson & Baxter (1898) 25 R (HL) 70, Lord Watson at p.73 ; Mitchell v Burnet and Mouat (1746) Mor. 4468; Armour v Thyssen Edelstahlwerke AG 1986 SLT 452, Lord Mayfield at p. 455, and his view was not questioned in the House of Lords: 1990 SLT 891, Lord Keith at p.893I-L.
[12] The first area of contention accordingly concerned the Scots law of lien. Mr Lake submitted that as the lien arose out of a contract, its existence and exercise had to be consistent with the contract between the parties. I think that he is correct in that submission in the context of this case. Whatever the origin of the special lien in Scots law, by the early twentieth century it was established that, in most circumstances, a special lien arises out of a contract and is treated either as an implied term or a collateral contract. (I discuss another special lien which has been recognised in Scots law in paragraph [56] below.) Lord Young's opinions on this issue have come to be regarded as authoritative. In Meikle & Wilson v Pollard (1880) 8 R 69, he stated (at p.72):
"All the people who carry on lawful businesses under which the property of others comes into their possession are not exceptionally privileged, but under the common law are entitled to retain possession of that property until the true proprietor performs his part of the contract."
In Miller v Hutcheson and Dixon (1880) 8 R 489, he said (at p.492):
"Lien is just a contract of pledge collateral to another contract of which it is an incident. If the contract be about a horse - that is to be fed and kept by one man for another - to that contract there is the incident called lien - that is, an agreement that the person to whom the possession of the horse is committed shall have the right to retain the possession till his claim for the food and attention given to the horse shall be satisfied. That is a special lien, and it stands like general lien, ... upon contract, express or implied. The law always, in the absence of evidence of an agreement to the contrary, assumes that the owner of the horse shall not reclaim possession until he has satisfied the claim of the other party for what he has done under the contract."
Finally, in Robertson v Ross (1887) 15 R 67 (at p.71) he said:
"I expressed more than once during the argument my opinion that every right to retain property belonging to another, whether you call it retention or lien, must stand on paction express or implied. The owner can make any lawful contract he likes respecting his property. He may pledge it on any terms agreed on between him and the other party to the contract. ... But the law, in the absence of an express contract, implies a right of retention in a variety of circumstances. The most familiar instance is where property comes into the possession of another than the proprietor under a contract which creates rights hinc inde [i.e. reciprocal rights]. The law then implies a right to retain possession until the debts under the contract are paid. The debt, however, must arise out of the contract on which the possession was obtained and is held. That is the explanation of all the ordinary liens. I do not know how else they can be accounted for. The right must proceed from the owner of the property or someone in his right."
[13] In National Homecare Ltd v Belling & Co Ltd 1994 SLT 50, Lord Penrose analysed the case law and presented the law of lien as a general principle based on mutuality of contract and not as a doctrine tied to the specific contract of locatio operarum. Lord Malcolm's opinion in Air & General Finance Ltd v RYB Marine Ltd [2007] CSOH 177, in which he reviewed the authorities and presented a special lien as an incident of mutual or reciprocal rights under a contract, is consistent with this view. See also Bell's Principles at section 1419, Gloag & Irvine at pp.202 and 330, and Gloag, The Law of Contract (2nd ed.) at p.630. Most of the parties' contentions, which I discuss below, were consistent with this approach to the law of the special lien.
(ii) The effect of a contractual prohibition from creating a lien
[14] Each of the Leases imposed on Mexicana the obligation to ensure that the aircraft was maintained and repaired by an "Approved Maintenance Performer", such as RR, on a specified basis (clause 13.1(d)). It also contained the following prohibition in clause 11.3:
"The Lessee further undertakes with the Lessor that it will:
(a) Disposal and Encumbrance of the Aircraft
not attempt or hold itself out as having any power to sell, charge, lease or otherwise encumber or dispose of the Aircraft (save as provided in Clause 12 (Sub-Leasing)), nor create, incur or suffer to exist any Encumbrance over the Aircraft (other than Permitted Liens which, in the case of Permitted Liens of the type referred to in paragraphs (b) and (c) of the definition thereof set forth in Clause 1 which do not relate to items in respect of which maintenance reserves are applicable pursuant to clause 13.4, do not, in aggregate, exceed at any particular time $1,000,000);
(b) Prevention of Arrest
not do, and will use its best endeavours to prevent, any act which could reasonably be expected to result in the Aircraft being ... detained in exercise or purported exercise of any possessory lien or other claim or otherwise taken from the possession of the Lessee and, if any such ... detention occurs, the Lessee will give the Lessor immediate notice and will procure the prompt release of the Aircraft; ..."
The reference in clause 11.3(a) to maintenance reserves was a reference to clause 13.4 of the Lease which obliged Mexicana to pay WTC regular sums of money which the latter would hold as separate maintenance reserves for the airframe, engines, and engine life limited parts respectively. In relation to the engines and the engine life limited parts, WTC was obliged to pay Mexicana funds to meet the costs of maintenance when Mexicana submitted the relevant invoices or receipts. In the definitions clause (clause 1) "Encumbrance" was defined to include a lien. In the same clause "Permitted Lien" was defined, so far as relevant, in respect of the aircraft or any engine as follows:
"... (c) airport hangar keepers', mechanics', material men's, carriers', employees' or other similar Encumbrances arising in the ordinary course of business or by statute or by operation of law in respect of obligations which are not overdue or which are being contested in good faith by appropriate proceedings (and for the payment of which adequate reserves have been set aside) so long as any such proceedings or the continued existence of such Encumbrance do not, in the Lessor's reasonable opinion, involve any likelihood of the sale, forfeiture or loss of, or of any interest in, the Aircraft or any Engine."
[15] Mr Lake submitted that because of those prohibitions, Mexicana did not have the power to enter a contract by which the other contracting party could acquire a special lien over the aero engines. He founded on Mitchell v Heys & Sons (1894) 21 R 600 and Lamonby v Arthur G. Foulds Ltd 1928 SC 89.
[16] In the former case the owner of copper rollers, A, leased them to calico printers, B, who sent their cloth together with the rollers to C for printing. B falsely represented to C that the rollers were their own property. When B became insolvent, C asserted a general lien over the rollers. But the First Division held that A was entitled to recover the rollers because (i) B had had no power to subject A's rollers to C's lien and (ii) A had done nothing to cause C to believe that the rollers were B's property and was thus not personally barred from recovering them. Lord Kinnear (at p.610) expressed the law in these terms:
"The general rule is perfectly well settled that the possessor of corporeal moveables can give no better title to a purchaser or pledgee than he has himself acquired from the owner."
[17] In Lamonby B possessed a lorry under a hire purchase agreement from A. In the agreement B undertook to keep the lorry "in good repair and working condition (but this shall not authorise the hirer to create any lien thereon for repairs)." B handed over the lorry to motor engineers, C, for repairs but did not disclose the nature of his title to the lorry or any limitations on his title. The First Division held that C had not acquired a lien over the lorry as B's title excluded the right to create a lien. The Lord President (Lord Clyde) stated (at pp.95 and 96):
It is clear that [B]'s title to possession of the lorry was that of hirer only, and that his right and duty qua hirer to keep the lorry in repair were expressly exclusive of any right or power to do anything with the lorry whereby it might be made subject to a lien for repairs executed upon it. In order to respect this exclusion, it would no doubt have been necessary for him, when contracting for the execution of repairs, to make a special stipulation excluding the repairer's lien. There is nothing in law to prevent exclusion of a lien by such a stipulation, although no doubt it might have resulted in the repairer demanding a deposit or other security before undertaking the work.
...
"[I]n both pledge and lien the principle that the possessor of a moveable can give no better title therein or thereto to a third party than he has himself acquired from the owner applies unless the owner has personally barred himself, by some actings of his own, from founding on the limited character of the title he actually gave to the possessor.
...
But mere possession of a moveable does not give the possessor even an apparent authority to dispose of it, and the defenders cannot found upon the simple fact that the owner placed the possession of his motor lorry in the hands of [B] as implying any representation as to the extent of the latter's powers to dispose of it."
Lord Sands, Lord Blackburn and Lord Ashmore delivered concurring opinions, the latter founding on Lord Kinnear's opinion in Mitchell v Heys & Sons.
[18] Gloag & Irvine at p.349 stated:
"Possession obtained from a party who had no right to the subject, or no right to transfer the possession of it, will not found a lien against the true owner, unless he is bound by his actings in the matter, or the case falls under the Factors Act."
In a footnote on the same page the authors stated, without citing authority:
"This rule, however, is probably not applicable to the case of a claim to retain a subject for labour performed upon it. Thus if A sent goods which belonged to B. to be bleached, without any right to do so, it is conceived that the bleacher would have a lien over them in a question with B. for the expense of bleaching them, though not for an outstanding bleaching account due to him by A."
The general statement is good law in my view but the qualification in the footnote is not consistent with the decision in Lamonby. Some commentators have questioned whether Lamonby was correctly decided on the basis either that the owner under the hire purchase agreement could be taken as having held out that the hirer had authority to instruct repairs and enter into contracts of which a lien would be an incident or that the hire purchaser was in substance the owner (see Gow, The Law of Hire Purchase (2nd ed.) pp.162-164, Wilson, The Scottish Law of Debt (2nd ed.) paragraph 7.8). But a more recent commentator, A.J.M. Steven, Pledge & Lien (2008) at paragraphs 13.42-13.47 sees the question as one of policy. In any event, the case remains a binding authority.
[19] In my opinion it is possible to derive three rules from Lamonby. First, possession of moveable property belonging to another does not by itself confer a right to create a lien by instructing another to repair it. That depends on the title which the owner has conferred on the possessor. This is an application of the principle, nemo dat quod non habet. Secondly, the owner of moveable property who instructs or authorises the hirer of the property to contract with another to carry out repairs on it thereby authorises the creation of lien, unless he excludes the hirer's authority to allow a lien to be created. This is because the authorised contract of repair has a special lien as one of its incidents. Thirdly, if the hire contract excludes the right to create a lien, the hirer will have no actual authority but the circumstances may be such that he has ostensible authority to do so. The application of the nemo dat principle appears to be similar to English law (viz. The London Joint Stock Bank v Simmons [1892] AC 201, Lord Herschell at p.215 which Lord Kinnear cited in Mitchell v Heys & Sons) but there is a different approach in English law as to the circumstances in which an owner gives a hirer implied or ostensible authority to allow a lien to arise on instructing repairs.
[20] The issue therefore is the correct construction of clause 11.3 of the Leases. I do not think that clause 11.3 amounts to a blanket prohibition on Mexicana from entering into contracts for the repair of the aero engines which might give rise to a lien. I have two reasons for this view. First, and obviously, the clause does not impose a ban on all liens because it allows Mexicana to enter into "permitted liens". Secondly, the definition of "permitted lien" in clause 1 (a) permits liens which are similar to the mechanics' lien and the other liens specified in that definition which arise in the ordinary course of business, (b) prevents the creation of such liens in respect of obligations which are already overdue and (c) adopts the Lessor's reasonable opinion as to the likelihood of the loss of the engine as a criterion for the continuance of the permission to the Lessor to allow the existence of a lien and not for its initial validity. I expand on (b) and (c) of the second reason in the following paragraphs.
[21] As in Scots law a lien is an incident of a contract, C obtains a right to assert it against B and others once the parties have entered into the contract and C has obtained possession of B's moveable property, although C will not have cause to assert a lien until he has performed his part of the contract and B has not performed his reciprocal obligations. The definition of "Permitted Lien" in clause 1.1, which I quoted in paragraph [14] above, speaks of "Encumbrances arising in the ordinary course of business ...or by operation of law in respect of obligations which are not overdue... ." That, when read with clause 11.3, in my view does not prohibit the existence of any lien in respect of sums which are overdue. Rather it seeks to forbid B from allowing the creation of a lien in respect of sums which are overdue when the contract, which has a lien as one of its incidents, is entered into and when the moveable property comes into C's possession. Were it otherwise, the words in paragraph (c) of the definition of "Permitted Lien" would prevent the liens described in that paragraph from taking effect in the only circumstances in which they were required, namely to secure C against B's non-payment of sums which were overdue. Construing the contract in that way would be to treat the reasonable businessman as someone inclined (in the words of Otis P. Driftwood in "Night at the Opera") "to stuff spaghetti with bicarbonate of soda, thus causing and curing indigestion at the same time." I am not persuaded that that is a sensible interpretation of the provision.
[22] Further, the reference in the definition of "Permitted Lien" to the Lessor's reasonable opinion as to the likelihood of loss of the engine points to clause 11.3 being concerned with creating a ground of default by the Lessee through the continuance of a lien rather than a prohibition against the creation of the lien in the first place. It does not amount to a retrospective invalidation of the lien. At the outset, when the contract is entered into and moveable property is handed over for repair, there will normally not be sums outstanding in respect of the repairs. The assertion of a lien by any repairer will involve a chance of loss of the item repaired and the likelihood of loss of the aero engines will increase the longer A asserts a lien and B does not make payment of the sums due.
[23] From that it appears that the Leases envisage that a contractual right to a lien can arise in respect of sums which are not overdue at the time of the particular maintenance contract or, in the context of an overarching agreement which does not require separate maintenance contracts, at the time Mexicana releases the engine into IAE's custody. Both at the time of the contract to carry out the maintenance works and also when the engines come into the possession of IAE there may be no sums due in respect of the particular maintenance transaction. If, thereafter, there is a failure to pay IAE the sums due under that transaction, it may, if in possession of the engines, assert a special lien.
[24] Mr Lake did not found on clause 11.3's US $1,000,000 cap on the permitted liens, where there are not available maintenance reserves. But it is appropriate that I address the point at least on a provisional basis. That cap does not invalidate a lien if larger sums become due but the existence of a lien in security of such debt would put Mexicana in default. It may, if construed as a limitation of authority (and I reserve my opinion pending hearing any evidence on the construction of the clause according to the law of the State of New York), limit the aggregate amount secured by such liens to that sum on the approach in Lamonby; but it would not invalidate the lien. The aim of such clauses is to prevent or at least discourage liens for large sums arising in respect of repairs, and devices (other than outright prohibition) which might achieve that result are (i) putting the Lessee in default and (ii) capping the sum in respect of which a lien may be claimed.
[25] For the reasons set out above I am satisfied that there is not, as in Lamonby, an outright prohibition on the creation of liens and I cannot determine the application of the relevant provisions to IAE's claim without enquiry into the facts. Those facts include, among others, whether or not WTC held a maintenance reserve in respect of the repair of the engines.
[26] In reaching this view, I have considered and rejected Mr Lindsay's submission that the ratio of Lamonby is that a stipulation in a contract between an owner and a hirer that there shall be no lien, which is unknown to the repairer, will not prevent a lien from being created in circumstances where it is impossible to get the thing repaired without subjecting it to a lien. That view involves taking out of context a passage in the opinion of Lord Sands (at p.98) and elevating it into the ratio when that did not form part of the reasoning of the other three judges.
(iii) Mutuality of obligation
[27] Mr Lake submitted that IAE's claim to have a lien also failed because there was no relevant mutuality of obligation under the FHA. In particular, he submitted (a) that IAE did not carry out the maintenance and repair works but merely instructed, facilitated and audited the work which RR carried out; (b) with the exception of "Excess Work", it was IAE and not Mexicana who paid RR; and (c) with the exception of "Excess Work", the amount of the payments was not directly related to the work which was carried out on an engine but was an ascertainable sum paid in advance of the maintenance work. There was not therefore the needed degree of reciprocity between Mexicana's obligation to pay any specific sums and IAE's obligation to redeliver the aero engines to it.
[28] It is not necessary to set out the extensive provisions of the FHA to which Mr Lake referred. In my opinion the FHA, the Leases (in particular clause 13), the MCG and the MCGSA provided a framework by which (i) Mexicana was to put IAE in funds to enable IAE to organise the maintenance and repair of the aero engines by one or more of its shareholder companies, (ii) Orix was to secure Mexicana's ability to pay through collecting from it the maintenance reserves, and (iii) Orix capped the costs which would be incurred on the work to maintain and repair them. The facts that
(a) Most of Mexicana's payments were calculated by reference to the flying hours of the aero engines and not by the specific works of maintenance and repair which IAE instructed on a particular visit to a maintenance centre,
(b) RR and not IAE carried out the works, and
(c) IAE's obligations were principally to arrange the transfer of the aero engines from Mexicana to RR and back, define the scope of the works and audit what RR did,
do not, of themselves, exclude mutuality of obligation so as to prevent a special lien from coming into existence.
[29] The pre-arranged payments by reference to flying hours, which were made as to 30% monthly in arrears and as to 70% on induction of the aero engine into RR's maintenance facility (see clause 7.4.3 of the FHA), were an attempt to calculate in advance the likely cost of maintaining the engines and to allow IAE to recover that cost. I also note that clause 4.2 of the FHA obliged Mexicana to pay separately for services which were not included in the specified services covered by the Maintenance Service Rate and which were designated as "Excess Work".
[30] Standing back for the detail, the pursuers and Mexicana agreed with IAE that it was to be IAE as manufacturer of the engines which arranged for maintenance and repair of the engines and Mexicana agreed to pay IAE for performing that service. Those payments were designed to cover the cost of the maintenance and repair work. In my opinion Mexicana's obligation to pay IAE the pre-arranged sums, including both a monthly amount and the balancing 70% figure when the engines arrived at RR's facility, and also to pay any sum for "Excess Work", was a precondition or counterpart of IAE's obligation to return the maintained and repaired engines to Mexicana. It is clear that in Scots law, the special lien is not confined to contracts in which the possessor of the corporeal moveable himself carries out work on it. Nor is it confined to contracts which provide for payment only on redelivery of the repaired item.
[31] Mr Lake also submitted that clause 8.6 of the FHA, which gave IAE certain remedies in the event of Mexicana's non-payment of the sums due, including the right to instruct RR to stop all work on the aero engines, prevented IAE from authorising RR to carry out the work and then asserting a lien. I am satisfied that this submission is incorrect. The remedies specified in that clause were stated to be "in addition to any other remedies available under statutory or common law".
(iv) Time of payment
[32] Mr Lake also argued in his written submissions that the timetable for the payment of IAE under the FHA prevented a lien from arising because IAE was under an obligation to re-deliver the aero engines to Mexicana before the airline was obliged to pay the 70% instalment of the Maintenance Service Rate payment to it. It was not disputed that, as Gloag & Irvine stated (at p.346), for possession to give rise to a lien, "the possession must be on a contract not inconsistent with a right to retain." Thus if a sum for work carried out under a repair contract did not become due until after the repairer was obliged to return the item to its owner, the contract would not be consistent with the repairer asserting a lien immediately after the works had been completed. As I have said, under clause 7.4.3 of the FHA, which applied to the aero engines in question, Mexicana paid a certain sum (30%) towards the pre-calculated maintenance costs monthly in arrears and a balancing figure (70%) on the induction of the particular aero engine into the restoration shop. Clause 8.4 of the FHA gave Mexicana 30 days to pay an invoice. When this contractual arrangement was compared with the contractual timetable for the maintenance and repair of the engines (which IAE produced at or shortly before the hearing), it became clear that Mexicana was obliged to pay invoices due in respect of such maintenance and repair before IAE was due to return the engine to it. Having seen the relevant provisions, Mr Lake withdrew this submission.
(v) Whether IAE had possession to give rise to a lien
[33] Mr Lake submitted that IAE was not the repairer of the aero engines, that the FHA did not contemplate it ever possessing the engines, and that IAE never possessed the engines. Physical detention of a thing was not sufficient to create possession; there needed to be a demonstrable intention to exercise control over the thing for the possessor's own use: Stair Memorial Encyclopaedia Vol.18, paragraphs 123 and 125. IAE's responsibilities were of a managerial, supervisory and financial nature. Under the FHA, Mexicana paid IAE to organise the maintenance and repair of the aero engines. The actual work of maintenance and repair was carried out by a service provider, such as RR, which was listed in the Lease, designated by IAE and accepted by Mexicana. It was thus, he submitted, RR and not IAE who possessed the aero engines when they were in its facility. IAE had custody of the engines when it delivered them to, and returned them from, RR's facility. But as it held them only for those specific purposes, that custody did not amount to possession. Mr Lindsay accepted that IAE did not have physical possession of the aero engines when the engines were in RR's facility but argued that in the circumstances it had civil possession.
[34] I am satisfied on the averments and contractual documents that it would incorrect to conclude that IAE did not have sufficient possession to assert a special lien so as to render its claim to a lien irrelevant. I am not persuaded that it is appropriate to take a narrow view of the requirement that the possessor has control of a thing for his own use; otherwise a repairer would not be able to assert a lien. In my view the averments, if established, may well justify the conclusion that IAE had sufficient possession to assert a lien when it did. While initially it was for Mexicana to arrange the transfer of the aero engines to and from RR's facility, the arrangements were, as I have said, altered in September 2007 to provide that IAE would arrange for the transport of the aero engines from Mexicana's base to RR's facility and the return of the engines once serviced to Mexicana. IAE arranged a schedule for the removal of engines from Mexicana's aircraft for maintenance and determined the work which had to be carried out in the designated maintenance centre. RR carried out works according to IAE's specification in the "Workscope", IAE provided parts for that work and set out the requirements for testing the engines in its manual, and IAE had the right under clauses 4 and 5 of the RR contract to inspect and audit RR's work by site visits. IAE averred that, rather than organising the return of the engines to Mexicana, it instructed RR to retain the engines after RR had completed its works in order to allow it to assert its lien. Whether or not there is any significance in IAE's averment classifying RR as its sub-contractor, in my opinion it has averred enough to be allowed a proof before answer covering its averments of possession of the aero engines.
(vii) Holding out
[35] Mr Lindsay also submitted that, even if, contrary to his submission, the provisions of the Leases prohibited or restricted the creation of liens, IAE was unaware of those provisions. Clause 13.1 of the Leases required Mexicana to enter into a maintenance agreement and have the engines serviced by an approved maintenance performer, such as RR. The maintenance agreement was to be reviewed by WTC. It was not asserted that IAE had seen clause 13 of the Leases as it was IAE's position that it had not seen the Leases at all. But the MCG and the MCGSA, to which IAE was a party, showed that the pursuers were fully aware of the role which IAE played in the maintenance of the engines. IAE was entitled to conclude on the facts known to it that the pursuers had consented to the maintenance and repair work and also to the creation of a lien if Mexicana did not pay IAE for that work.
[36] Mr Lake challenged the assertion that IAE was not aware of the "permitted lien" provisions of the Leases and produced extracts of engine lease agreements between Orix and IAE from 1996 and 2004 which contained similar provisions to the clause 1.1 definition of "permitted lien" and clause 11.3 of the relevant leases. Mr Lindsay informed me that those contracts related to spare engines and not to engines leased to airlines. He told me of IAE's instructions that it was not aware of the terms of the Mexicana leases, which were subject to commercial confidentiality, and that IAE's personnel had relied on the law of Connecticut, which governed the FHA, to infer that it could assert a lien.
[37] I would be surprised if it were to be established at proof that IAE was unaware of the practice of owners of aircraft and aero engines of attempting in the leases of their property to restrict the creation of liens for substantial amounts of money. Mr Lake referred me to a style aircraft operating lease agreement in The Encyclopaedia of Forms and Precedents (5th Re-issue) (2006) Vol.7 which contained a definition of "Permitted Encumbrance" which was in substance the same as the definition of "Permitted Lien" in the Leases. It also in clause 7.4 imposed on the lessee an obligation that it would:
"not do or permit or omit to be done anything which might endanger the title of the Lessor to the Aircraft or the Lessor's ability to recover the Aircraft in good condition on termination of this Agreement and shall take all such action as is necessary or reasonably required by the Lessor in order to establish and protect the Lessor's title to the Aircraft and shall not attempt to hold itself out as having any power to sell, charge, lease or otherwise encumber or dispose of the Aircraft, nor create, incur or suffer to exist any Encumbrance over the Aircraft (other than Permitted Encumbrances)".
This provision is clearly different from clause 11.3 of the Leases in a number of respects. But it is an example of a practice of attempting to restrict the encumbrances which the lessee might allow others to create over the leased property.
[38] It is usually necessary when a case of holding out is pleaded, as in other cases of personal bar, to ascertain the facts before deciding on its relevancy. Although holding out emerged more in Mr Lindsay's submissions, for example in his references to English law, than in his pleaded defences, I consider that it is appropriate to hear evidence before deciding on the relevancy of this strand of IAE's defence.
(viii) The relevance of the law of the States of New York and Connecticut
[39] IAE's defences contained various averments on the effect of foreign law. For example, it averred in Answer 7 that
"the second defenders have a valid and enforceable artisans' lien over the Engines under and in terms of the Law of the State of Connecticut and in terms of the Law of the State of New York."
It expanded on that averment in Answer 10 in which it averred that under the Law of the State of New York an owner, who consents to his moveable property being repaired, cannot in a private agreement with a hirer prevent the creation of an enforceable artisan's or repairer's lien.
[40] IAE's legal advisers have produced reports from an attorney at law, Mr Thomas Goldberg, on both the law of the State of Connecticut and the law of the State of New York. He advised that under the law of Connecticut WTC would be taken as having impliedly consented to the creation of a common law artisan's lien. He also advised that under New York law an artisan's lien would arise and would not be restricted by the definition of a permitted lien in a contract to which IAE was not a party. As parties have agreed that the validity of the lien is governed by the lex situs, his views on these matters are not directly relevant. He also advised that under the law of the State of New York the lease provisions would have been unenforceable if they impaired the rights of the party claiming the lien. But he construed the relevant provisions not as invalidating the lien once a payment to IAE became overdue but as breaching a covenant from Mexicana to WTC, thus giving WTC the option of serving a written notice of the breach of a Lease covenant and, if the breach were not cured in time, of exercising certain termination rights. He stated:
"In sum, the lease prohibition on encumbrances other than Permitted Liens was intended to afford the Owner additional rights against the lessee (Mexicana), not to impair the rights of the lienors under applicable law."
[41] Mr Lake submitted that the law of the State of New York was relevant only for the purpose of identifying the canons of contractual interpretation which that law would apply to the construction of the Leases or the terms or trade usages which were to be implied. It was the task of the Scottish courts to apply those canons to the Leases in interpreting them: Diamond Offshore Drilling (UK) Ltd v Gulf Offshore NS Ltd 2005 SLT 589, at paragraph [14] and Dicey, Morris & Collins, Conflict of Laws (14th ed.) paragraph 32-192. Accordingly averments about how a foreign court would interpret the documents were irrelevant. So also was any averment that the law of the State of New York would not give effect to a contractual prohibition on the creation of an artisan's lien.
[41] Mr Lindsay submitted that the averments relating to the law of the State of New York were relevant because clauses 1.1 (the definition of "Permitted Lien" under head (c)) and 11.3 of the Leases were unenforceable under that legal system and the Leases should not be construed as having an effect which was not achievable under their governing law. He also submitted that English law, which was consistent with the law in other major English speaking jurisdictions, was relevant to an understanding of the ratio in Lamonby and, like the law of the State of New York, explained why IAE had a legitimate expectation that it would have a lien over the engines. He referred to Albemarle Supply Co Ltd v Hind & Co. [1928] 1 KB 307 and Tappenden v Artus [1964] 2 QB 185, Diplock LJ at p.200. Under those legal systems, a contractual limitation of authority which an owner imposed on a hirer which was not communicated to a repairer did not limit the hirer's implied (or ostensible) authority, which arose from his being allowed to possess and use the thing, to instruct repairs and so enter into contracts under which the repairer could assert a lien.
[43] In my view, averments which seek to support the view that the substantive law of a foreign jurisdiction governs the validity of a lien over moveables located in Scotland are irrelevant because the lex situs governs that issue. IAE's averments and Mr Lindsay's submissions included statements which cited the substantive rules of foreign law to undermine the pursuers' attack on the assertion of a lien. Thus in his written submissions he stated (at paragraph 81):
"Accordingly, as clauses 1.1 and 11.3 of the Mexicana Lease are unenforceable under the Law of the State of New York, which is the governing law of the Mexicana Lease, the second pursuers cannot rely on their provisions to prevent the second defenders acquiring a valid and enforceable lien under Scots law."
To my mind that assertion and the averments referred to in paragraph [39] above are incorrect in law as they seek to give direct effect to the substantive rules of the foreign legal system which was not the lex situs. I am reminded of Lord Kinnear's warning in Robertson v Brandex, Schönwald & Co (1906) 8F 815, at p.189 that one should not confuse
"two questions which are perfectly different and must be kept distinct - the question of the construction of the contract and the question of its legal effect once its meaning has been ascertained."
I also do not accept his submission that the averments and citation of foreign law assist in understanding the ratio in Lamonby.
[44] Mr Lindsay also referred in the pleadings (Answer 10 p.5 lines 4-8) to the law of the State of New York as governing the meaning of the relevant clauses in the Leases "when considering whether or not those clauses prevent [IAE] from enforcing their lien under and in terms of Scots law." This may be an attempt to invoke the substantive law as a factor in the construction of the Leases. I note that Dicey, Morris & North (above) at paragraph 32-193 stated that
"the matters which may be taken into account in construing a contract will depend on the law governing the contract."
I reserve my opinion on whether averments concerning the substantive law of the State of New York law could be of some assistance in construing the relevant contractual provisions if, under that legal system, they cast some light on the intention of the parties. In particular, they might point to an intention to create a ground of default against Mexicana rather than a contractual prohibition if the parties were taken to know that, under that legal system, a private contractual limitation on the right to create a lien does not prevent a repairer from asserting such a lien. It is not necessary for me to decide that point as the current averments of the law of the State of New York are not presented as a relevant factor in construing the Leases under the applicable canons of construction, for example as a background fact which was known to the parties when entering into the Leases. If IAE wishes to make such assertions, counsel will need to disentangle the averments of foreign law and state the relevant rules of construction which make the substantive law relevant to the construction. Focused averments of the relevant matters of foreign law are needed: Kraus's Administrators v Sullivan 1998 SLT 963, Lord Eassie at pp.965L-966B. As pleaded, the averments about the law of the State of New York are irrelevant.
[45] I also see no basis for allowing any proof of the law of the State of Connecticut, which governs the FHA. The parties did not raise any issue relating to the construction of the FHA on which the substantive law of that State would cast any light. Mr Lindsay's only justification for references to that legal system was that it gave rise to a legitimate expectation under A1P1. As I reject the A1P1 submission (see paragraphs [49] to [51] below), it follows that the averments relating to the law of Connecticut are irrelevant.
(viii) Whether the prohibition against creating a lien was void for uncertainty under
Scots law
[46] I can deal with this fall-back defence briefly as it turned on an interpretation of clause 11.3 and the definition of "Permitted Lien" in clause 1 of the Leases which I do not accept. Mr Lindsay submitted that the definition of "Permitted Lien" in head (c) was impossible to interpret in any meaningful way because (i) one could not apply it to individual facts and circumstances and (ii) it appeared to forbid liens in all circumstances in which they could arise by operation of law and permit them in circumstances in which no liens could so arise. He submitted that head (c) of the definition of "Permitted Lien" was void for uncertainty and that its invalidity undermined the provisions restricting the creation of liens (clause 11.3 (a) and (b)). Those clauses were severable from the rest of the Leases and could be struck out. He referred to Lord Macfadyen's opinion in Ideal Services Scotland Ltd v Premier Glass Packaging Ltd 1999 SLT 134 at p.137.
[47] In my view it is very unlikely that the parties to the Lease intended the definition of "Permitted Lien", by its reference to obligations which were not overdue, to prevent all liens which arise in the ordinary course of business from having any effect. But if, on the construction which I favour, the phrase "obligations which are not overdue" is a reference to the circumstances at the inception of the transaction which gives rise to the lien, the provision is not a nonsense. The Lessee would be in breach of contract if it transferred possession of an engine to another when it owed money to that other and enabled that person to assert a lien in respect of a pre-existing debt. See my discussion in paragraphs [21] to [25] above.
[48] In the circumstances I consider that the defence that head (c) of the definition of "Permitted Lien" and, as a result, clause 11.3(a) and (b) are void for uncertainty is irrelevant.
(ix) A1P1
[49] Mr Lindsay submitted that if the court were to exclude the lien on the basis of the Lamonby decision, IAE would be deprived of a legitimate expectation that a lien had been created its favour. Such a lien would have existed under the law of Connecticut and that provided a yardstick with which to assess the expectation where WTC had not informed IAE of the prohibition. For Scots law to nullify the lien would be disproportionate and would amount to a breach of IAE's A1P1 rights. He referred to Aston Cantlow & Wilmcote with Billesley Parochial Church Council v Wallbank [2004] 1 AC 546, Lord Hope at paragraph 67 on the structure of A1P1; AXA General Insurance Ltd, Petitioners 2011 SLT 439 at paragraph [102], Boyajyan v Armenia [2011] ECHR 484 at paragraph 57, Wilson v First County Trust Ltd (No 2) [2004] 1 AC 816, Lord Nicholls at paragraph 39, and Rowland v Environment Agency [2005] Ch 1, Peter Gibson LJ at paragraph 85 on the nature of possessions which it protects; and, on proportionality, UE (Nigeria) v Secretary of State for the Home Department [2010] EWCA Civ 975, Sir David Keene at paragraphs 13-17.
[50] Mr Lake submitted that even if IAE had such an expectation, it was not a legitimate expectation. In the case law of the European Court of Human Rights (ECtHR") the concept of the legitimate expectation to which the court gave protection under A1P1 was something which arose out of or in relation to an identified property right and was not a free-standing concept. The expectation was of obtaining effective enjoyment of a property right. In this case, the nemo dat principle was a well-established rule of property law. If he was correct about the application of that rule, IAE had no property right from which it could construct a legitimate expectation. He referred to Pine Valley Developments Ltd v Ireland (1992) 14 EHRR 319 at paragraph 51, Stretch v United Kingdom (2004) 38 EHRR 12 at paragraph 32, Nerva v United Kingdom (2003) 36 EHRR 4 at paragraph 43, Janter v Slovakia (Application no. 39050/97) and Wilson v First County Trust Ltd (No 2) (above), Lord Hope at paragraph 106.
[51] It is not necessary for me to discuss this ground of challenge in detail (a) because I have not held that the claimed lien is invalid and (b) because I am satisfied that there is in any event no substance in this challenge. I see no basis on which IAE can pray in aid the law of Connecticut to create a legitimate expectation when it is not suggested that that legal system had anything to do with the interpretation of the Leases or that it was the lex situs which governed the validity of the lien. The fact that under that legal system a bar on the creation of a lien in a contract between A and B did not bind C, the party asserting a lien, if C was not aware of the bar, did not create a legitimate expectation of a similar result in another legal system. IAE has not identified any property right which could give rise to a legitimate expectation so as to bring itself within the ambit of the relevant case law of the ECtHR. I therefore consider that the averments in support of a defence under A1P1 are irrelevant and should not be admitted to probation.
(x) Whether there was an unjustified enrichment lien
[52] Mr Lindsay submitted that IAE had an unjustified enrichment lien. He suggested that there was no Scots law authority to support the existence of such a lien but relied on South African authorities and argued that both legal systems based their law in relation to unjustified enrichment on the same principles. He referred to the decision of the Supreme Court of Appeal of South Africa in McCarthy Retail Ltd v Shortdistance Carriers CC Case no 110/99, 16 March 2001.
[53] In that case a garage, M, repaired a truck belonging to S in the mistaken belief that S's insurers had instructed the repairs. The Supreme Court held that the garage had a claim in unjust enrichment for necessary and useful expenses and that it could exercise an enrichment lien against the owner to procure recovery of those expenses.
[54] Mr Lake challenged the averments in support of this lien on the basis that (a) any enrichment of the pursuers was not unjust as it arose from the terms of the FHA between IAE and Mexicana and (b) Scots law did not recognise the existence of a lien for unjustified enrichment. In relation to the first point he referred to Thomson, Jackson, Gourlay & Taylor v Lochhead (1889) 16 R 373, Lord Young at p.376, Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd 1998 SC (HL) 90, Lord Jauncey at p.93B-G, and Lord Hope at pp.94D-F and 100A-C, Kirklands Garage (Kinross) Ltd v Clark 1967 SLT (Sh Ct) 60 and Gloag, The Law of Contract (2nd ed.) pp.320 and 330. In relation to his second point he submitted that in Scots law a special lien was an incident of a contract (Miller v Hutcheson and Dixon which I have quoted in paragraph [12] above and Gloag & Irvine at p.350) and that a lien was not a remedy to secure damages for breach of contract: Air & General Finance Ltd (above). In contrast with Scotland which developed its law of lien from the law of England, South African law has developed liens to protect claims in unjustified enrichment: Goudini Chrome (Pty) Ltd v MCC Contracts (Pty) Ltd Supreme Court of South Africa Case no 249/91 28 September 1992.
[55] I am not persuaded that the second point is an answer to IAE's claim for an enrichment lien. In Goudini Chrome (Pty) Ltd Nienaber JA explained that an enrichment lien was a form of security for the payment of expenses which were necessarily incurred by one party for the preservation or protection of someone else's property or usefully incurred for its improvement. Such a lien did not depend on contract and it was immaterial whether the work was done in terms of a contract. In either event the person who had done the work could retain possession of the property on which the work had been done against the true owner or the other party to the contract until he was reimbursed for his expenditure or the amount by which the owner had been enriched. A debtor and creditor lien in South African law was a contractual remedy available to anyone who had performed work pertaining to someone else's property and secured the full extent of the agreed remuneration.
[56] While the latter lien appears similar to the contractual special lien in Scots law which I have discussed above, I do not think that it can be said that all liens in Scots law arise as an incident of contract. There are indications that historically Scots law had recognised a special lien or right of retention where the bona fide possessor of someone else's property has improved that property before it recognised a claim for unjustified enrichment. This matter was not raised in submissions and it is not appropriate that I determine the point on this basis. But I refer to Bankton's Institute I,9,42, Reid, The Law of Property (1996), paragraph 173, and A.J.M. Steven, Pledge & Lien (2008) paragraphs 11.18-11.28, 13.46-13.49. Such a lien clearly differs from the South African enrichment lien; it is nevertheless a lien which has arisen to protect a person's claim to reverse unjustified enrichment.
[57] Where I have more difficulty with IAE's claim is in seeing how a claim for unjustified enrichment would arise where A carried out work on C's property in performance of his contract with B. The authorities to which Mr Lake referred in relation to his first point appear to support the view that in most circumstances there is not such a claim. But the present case is complicated by the existence of the various contracts which brought about the commercial reality of a tripartite relationship between the pursuers, Mexicana and IAE and the precise circumstances of this case have not been established. For example, it has not been agreed that, as Mr Lake asserted in his submission, WTC had not received periodic payments from Mexicana under clause 13.4 of the Leases to build up any maintenance reserves in respect of the aero engines. If WTC had a maintenance reserve in respect of the engines which it had retained on Mexicana's insolvency and default under the Leases and was seeking redelivery of the engines without using the relevant funds to pay for their repair, that might be a relevant fact to consider before deciding that the unjust enrichment claim was excluded because the works were carried out under the FHA. It would suggest enrichment. It may be that, on a proper analysis, the legal justification for WTC's enrichment would be the FHA, which obliged IAE to have the maintenance works carried out, and that Mexicana's insolvency was just a commercial risk which IAE undertook when it entered into the FHA. If so, the third issue in assessing a claim for unjustified enrichment, namely whether it would be equitable to compel WTC and Orix to redress the enrichment, would not arise.
[58] Thus, while I have doubts about the relevancy of the claim for an unjustified enrichment lien, I think that it is appropriate not to decide the matter as a question of relevancy at this stage. As I have decided to allow a proof before answer in relation to IAE's claim for a contractual lien, it is appropriate to give parties the opportunity to address the court further on the claim for an unjustified enrichment lien once the facts have been ascertained.
Conclusion
[59] As I have decided that the pursuers' root and branch attack fails, it will be necessary for there to be a proof before certain legal questions can be answered. I will exclude from probation the averments listed in the schedule below and will have the case put out by order to determine further procedure.
Schedule
(1) Averments about foreign law: Answer 7 p.2 lines 20-22 from "the
second" to "In addition";
Answer 10 p.4 lines 41-42 to "Engines."; p.5 line 8 from "Under the law" to "repair services." in line 25; and p.6 the words "both the law of New York and" in lines 9-10.
(2) Averments that Clause 11.3 of the Leases is void for uncertainty:
Answer 10 p.5 lines 25-27 from "Further" to "absurdity."
(3) Averments about A1P1: Answer 10 p.5 lines 34-42 from "In any
event" to "action."