Beware of the Personal Property Securities Act 1999

By Barbara Versfelt

Do you fully understand the implications of contractual liens when
it comes to storing goods for a third party?

You are storing $2.5 million worth of goods in your warehouse for a customer who owes you $300,000 for storage fees, and fees for packing and arranging for carriage of the goods. Then the customer goes into receivership. The customer’s bank has a general security agreement over all of the customer’s assets. Its security interest is registered on the register established under the Personal Property Securities Act 1999 (PPSA). The question is, can you rely on a lien (in law or under your contract, if a lien is stipulated in your contract with the customer) and keep some of the goods to satisfy your outstanding bills, or is the customer’s bank entitled to the entire value of the goods stored at your premises?

This was the question the Court of Appeal had to decide on the application of the receiver of the customer, in its judgment of 16 May 2011, in the case Toll Logistics (NZ) Limited v McKay.

Security interests

Section 93 of the PPSA includes the provision that “a lien arising out of materials or services provided in respect of goods that are subject to a security interest in the same goods has priority over that security interest if – (a) the materials or services relating to the lien were provided in the ordinary course of business; and (b) the lien has not arisen under an Act that provides that the lien does not have the priority.”

It was common ground between the parties that, if the warehouse only had a contractual lien, its claim would be postponed to the bank’s interest, because a contractual lien itself is a security interest in terms of the PPSA and thus, not having been registered, ranks in priority behind the bank’s registered security interest.

In the circumstances, the warehouse argued that it had a ‘packers’ lien’, not by virtue of its contract, but under the common law, so that its claim would have priority over the customer’s bank’s security interest pursuant to section 93 of the PPSA.

After traversing the history of the ‘packers lien’ and case law from Australia and England and other authorities on common law liens, the Court of Appeal decided that New Zealand law does not recognise a packers’ general lien in the absence of custom (and that no such custom exists in New Zealand).

The receiver had further argued that, in the event that the court held that there was a packers’ lien, the warehouse could no longer invoke this lien because it had been excluded by the terms in which the contractual lien had been framed in the contract between the warehouse and its customer. The Court of Appeal agreed with that submission on the facts of this particular case.

Lessons learnt

Accordingly, a few things can be learnt from this decision. The best way to avoid bad debts is to operate a tight credit control. Secondly, when providing for a lien in a contract, it is important to draft the clause in such a way that it cannot be construed by a court as excluding possible common law liens.

Thirdly, if the warehouse wishes to rely on a contractual lien, it should be aware that this contractual lien must be registered on the PPSA register. However, in such a case, it will only take priority over prior registered security interests, if the parties already secured agree to have their interests postponed to the warehouse’s security interest. In practice, it may be difficult to obtain such consent.

Incidentally, it may be noted that section 23 of the Carriage of Goods Act 1979 (COGA) provides that a carrier has a lien over goods in its possession, for recovery of freight and expenses incurred in respect of the carriage of those goods. Although the COGA generally applies to all services of carriage, including services incidental to carriage (which may include warehousing), the lien is only available to persons who (also) perform carriage in the ordinary sense of the word. The lien is not available to recover sums incurred with services incidental to carriage alone.

Barbara Versfelt is a special counsel in the litigation team of the New Zealand commercial law firm Lowndes Jordan who have particular expertise in maritime law, transport and international trade; she can be contacted at bcv@lojo.co.nz