Pursuers: Howie, QC; HBJ Gateley Wareing LLP

Second Defender: Lake; Maclay Murray & Spens

9 November 2007

[1] The second defender claims a lien over the Motor Yacht "Keleco of Southampton". This is disputed by the pursuers, who are the statutory mortgagees of the vessel. They have raised the current action to sell the vessel in order to recoup their loan after the borrower's default. The relevant circumstances are as follows. The first defenders bought the vessel from RYB (Marine Sales) Limited ("Sales"). The pursuers lent monies to the first defenders under a Loan Agreement and Deed of Consent. In respect thereof the pursuers' security interest over the vessel was registered in the Registry of Shipping on 19 December 2005, shortly after registration of the Bill of Sale in favour of the first defenders. The following month, despite having already sold the vessel to the first defenders, Sales purported to sell the vessel to the second defender. In return for the price, the vessel was delivered to him in Scotland. Both the sale to the first defenders and the purported sale to the second defender were carried out by a Richard Lumley, a director of both the first defenders and Sales. In early course the first defenders defaulted on the loan, and the pursuers have raised the current action, firstly for payment against the first defenders, and secondly for declarator that the pursuers are entitled to enforce the mortgage, sell the vessel, and use the proceeds to satisfy the debt.

[2] The second defender avers that Sales was in material breach of contract through failure to give him title to the vessel. As a result the second defender has suffered loss, namely the purchase price of the vessel. The second defender's damages claim against Sales is outstanding. In these circumstances the second defender pleads that he is entitled to exercise a lien over the vessel pending satisfaction of his claim for damages for breach of contract by Sales.

[3] The validity of the claimed lien was explored at a procedure roll hearing which involved the pursuers, represented by Mr Howie, QC, and the second defender, who was represented by Mr Lake. Although the first defenders entered appearance in the action and lodged defences, subsequently their agents withdrew from acting. When the first defenders failed to respond to a court order requiring them to intimate whether the defences were maintained, decree of payment in terms of the first conclusion was granted in January 2007. Thus the procedure roll hearing focussed on the competition between the pursuers and the second defender for the vessel as security for their respective claims.

[4] The present case does not fall within any of the well established categories of general lien. Also, although the action concerns a vessel, the second defender does not enjoy a maritime hypothec, such as that of a salvor. In the course of the discussion Mr Lake accepted that he was seeking to extend the right of special lien beyond any previous case. In particular he contended that it could cover a claim for damages for breach of warranty of title in a purported sale. Mr Howie drew my attention to English authority in which it was held that a ship-repairers possessory lien over a vessel did not extend to a claim for damages for breach of the contract of repair. In The "Katangaki" [1976] 2 Lloyds LR 372, Brandon J said: "In my judgement there is no possessory lien, and there never has been a possessory lien at common law for damages for breach of contract." The question before me is whether the common law of Scotland allows a different approach.

[5] Special lien and special retention are terms which are sometimes used interchangeably. Strictly, the former applies to property owned by another, and the latter to property belonging to the possessor, but which is subject to a personal obligation requiring the owner to convey it to another. Using the phrase in the general sense, Bell described special retention as arising in the course of a particular contract and operating as a security for fulfilment of the counterpart. "The effect of retention of corporeal subjects is to deprive the owner of the use and benefit of the thing retained till the counterpart be performed or the debt satisfied" (Principles 10^th ed. 1417). Special retention "is part of the law of mutual contract entitling one to withhold performance, or retain possession of that which forms the subject of the contract, till the counter obligation be performed" (1419).

[6] The law of special lien in Scotland was settled in the latter part of the 19^th century in a series of opinions of Lord Young. In Meikle & Wilson v Pollard 1880 8R 69 at 71 he said:

"All liens arise primarily from contract, and the name is not an inconvenient one to express the right of certain parties to keep articles belonging to a person with whom they have contracted, until he has fulfilled his part of the contract."

By way of example he explained that a carrier or a stabler is entitled to keep articles which have come into his hands under a contract until he is paid for his work.

"All the people who carry on lawful business 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" (page 72).

Lord Young returned to the subject the following year in Miller v Hutcheson & Dixon 1881 8R 489:

"Lien is just a contract of pledge collateral to another contract of which it is an incident. If the principal contract be about a horse - that it 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 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 ... 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."

In Robertson v Ross 1887 15R 67 Lord Young 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 may 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. 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."

[7] It can be taken from these passages that the security right inherent in a special lien is an incident of mutual or reciprocal obligations under a contract, whereby one party cannot expect performance from the other until he has complied with his corresponding contractual obligations. Thus, if a contract obliges X to return Y's property, X can retain possession of the property until Y performs any outstanding obligations under the contract. The lien is a means of enforcing performance of the contract. However, that is a different thing from security for a damages claim for breach of contract, especially when the breach consists of delivering property belonging to another. In such a case there is no room for implying something akin to pledge. The second defender avers that he did not receive title to the vessel from Sales. There is an inconsistency in simultaneously asserting that Sales could nonetheless give him a right to retain the vessel, in effect as pledge, pending payment of compensation from Sales and in the face of the pursuers claim as statutory mortgagees. The second defender is under no obligation to return the vessel to Sales. Indeed there is no suggestion that Sales are demanding return of the vessel. The party in right to the vessel is the pursuers, as statutory mortgagees. The second defender pleads a lien over the vessel in order to fend off the claim of the statutory mortgagees, someone with whom he has no contractual relationship. Given the terms of section 24 of the Sale of Goods Act 1893, no doubt the second defender could resist a claim for possession by the first defenders, although he would not require to rely on lien or any equivalent; but Mr Lake expressly conceded that that statutory provision is of no avail against a statutory mortgagee. The second defender can point to no agreement, either express or implied, with any party to the effect that he is entitled to retain possession of the "Keleco of Southampton" until Sales pays him damages. It would be highly artificial to say that Sales impliedly agreed that the second defender could keep the vessel pending damages for breach of warranty of title. In any event, even if the purported contract of sale is assumed to contain such a provision, that could not bind or defeat the statutory mortgagees. Mr Lake also sought to draw comfort from the fact that in the above cases a lien was enforced against a trustee in bankruptcy, as opposed to the original contracting party. However I do not consider that this assists him, in that the trustee stood in the shoes of the bankrupt, and thus was subject to all pleas available against the bankrupt.

[8] In essence, in security of his claim against Sales the second defender seeks a right to retain property which, as statutory mortgagees, the pursuers are entitled to sell. That would require the agreement, either express or implied, of the pursuers. There is no room for such on the present facts; nor for the second defender to rely on retention rights flowing from the principle of mutuality. There are certain situations where the law does recognise a lien enforceable against a third party owner, for example a shipbuilder's or an innkeeper's lien. However these and other examples are exceptions to the norm, and have no application to the present case. The authorities describe them as general liens based on usage of trade or custom, and which are restricted to established and restricted circumstances. My overall view is consistent with Lord Penrose's consideration of the law in National Homecare Limited v Belling & Co Limited 1994 SLT 50. At page 53 his Lordship said:

"In my opinion the authorities as a whole support the proposition in Gloag & Irvine at the bottom of p. 350 in these terms:

'The actual cases in which a plea of special retention has been taken may be divided into two classes: first, where the subject retained is that actually enhanced in value by the work bestowed upon it; and, secondly, where the subject was delivered and received only as a means to the performance of the contract'".

[9] Mr Lake referred me to various other cases. The only case mentioned which lends any support to his submission is Moore's Carving Machine Co v Austin, (1896) 33 SLR 613. However I refer to Gloag & Irvine's discussion of this case at 353. The authors note that the decision appears to carry retention further than had been done before by admitting it for damages for breach of contract. The contract in question is described as of "an exceptional nature". After a brief discussion it is said,

"This judgement, although it would seem to be new law, is in accordance with the well-established rule that a party is entitled to withhold payment of a debt due by him under a contract, in security of a claim of damages for breach of that contract."

The decision is not authority for Mr Lake's proposition in the present case.

[10] In the result I shall repel the second defender's plea in support of the claimed lien, namely his third plea in law. In these circumstances it is unnecessary for me to deal with a subsidiary argument for the pursuers, which was to the effect that the second defender had in any event given up any lien when he lost control and possession of the vessel by virtue of an earlier court order. Had I required to determine this point, I would have resolved it in favour of the second defender on the basis that the second defender did not act in such a way as to indicate that he was relinquishing any right which he had over the vessel. However before pronouncing an interlocutor, I shall put the case out By Order for the purpose of being addressed by the parties on the appropriate next step. At present I am reluctant to grant decree in terms of the second conclusion in the absence of further discussion, given that the pleadings reveal that there are ongoing English proceedings in which the pursuers' right to enforce the statutory mortgage would appear to be in issue.