Legal update: Aircraft Liens – The Oasis Judgment

The word “lien” can be described in layman’s terms as a right, often arising by operation of law rather than under contract, to retain the property of another party until that other party pays his debts. The word also enjoys a second, rather more obscure, medical meaning as a synonym for “spleen”. A new decision of the High Court of Hong Kong regarding aircraft liens may well have left aircraft service providers full of spleen.

Background

The winding-up orders granted by the High Court of Hong Kong on 9 April 2008 against Oasis Hong Kong Airlines Limited (“Oasis“) and its associated company Oasis Growth and Income Investments Limited (“OGIL“) marked the end of the legendary but short-lived budget airline. Disappointed passengers who bought air tickets from Oasis suddenly became unsecured creditors of the Company. Instead of getting a boarding pass, they were given a proof-of-debt form to fill in the details of their debts.

The size and complexity of the liquidation has meant that, almost three years since the making of the order, important legal issues are still being resolved. On 25 February 2011 the Honourable Mr. Justice Harris handed down his judgment in Hong Kong Aircraft Engineering Company Limited and The Joint and Several Liquidators of Oasis Hong Kong Airlines Limited (in Liquidation) andHong Kong Aircraft Engineering Company Limited and The Joint and Several Liquidators of Oasis Growth and Income Investments Limited (HCCW 132/2008 and HCCW 133/2008) (“HAECO v Oasis/OGIL“). Tanner De Witt acted for the joint and several liquidators as the successful respondents in HAECO v Oasis/OGIL. The case has done much to clarify the position of parties providing aircraft maintenance services to an airline which goes into liquidation. With the price of oil (and consequently airline operating expenses) once again spiking, aircraft service providers will no doubt be reading this judgment with some dismay.

The Dispute

Under a service agreement dated 5 October 2006 (the “Service Agreement“), Hong Kong Aircraft Engineering Company Limited (“HAECO“) agreed to provide various types of maintenance services for four aircraft owned by OGIL. Oasis agreed to pay HAECO for such services. As of the date of the winding-up order, the total amount of the outstanding debts owed by Oasis concerning the work and services pursuant to the Service Agreement was HK$77,965,431 (the “Pre-appointment Debts“).

Furthermore, HAECO had also purchased certain items of cabin inventory (the “Cabin Inventory“) on Oasis’s behalf in order to perform various work on the Aircraft. Before Oasis and OGIL were wound up, the total amount of debts in relation to the Cabin Inventory was HK$10,594,814.19 (the “Inventory Debts“).

So as to try to avoid standing as an unsecured creditor in relation to the Pre-appointment Debts and Inventory Debts, HAECO claimed that it had various types of liens over the Cabin Inventory and over various documents consisting of records of the work done on the Aircraft and manuals demonstrating that the Aircraft were fit to fly and complied with relevant regulations (the “Aircraft Documents“). The types of liens claimed by HAECO were as follows:

1. A common law possessory particular lien over (i) the Aircraft Documents in respect of the Pre-appointment Debts and (ii) the Cabin Inventory in respect of the Inventory Debts.
2. An agent’s lien over the Aircraft Documents and Cabin Inventory in respect of all debts arising from work done as agent of Oasis or OGIL.
3. A general lien over the Aircraft Documents and Cabin Inventory for all work done by it in its capacity as professional engineering adviser.

As HAECO had physical possession of the Aircraft Documents (but not the Aircraft) at the time of the winding-up orders, it initially refused to release the Aircraft Documents unless Oasis and OGIL settled the outstanding debts. Subsequently, HAECO agreed to surrender the Aircraft Documents in order to facilitate the sale of the Aircraft. The parties agreed that the proceeds of sale of the Aircraft were to be deposited to an escrow account pending the determination of the Court with regard to the claimed liens.

The claims by HAECO against the joint and several liquidators of Oasis and the joint and several liquidators of OGIL were heard together, with Tanner De Witt acting for the joint and several liquidators of both Oasis and OGIL. On 25 February 2011 the Honourable Mr. Justice Harris handed down his judgment in HAECO v Oasis/OGIL and found that HAECO did not enjoy any of the claimed liens.

Common Law Possessory Particular Lien

Aircraft Documents

(i) Did the Aircraft and the Aircraft Documents together constitute a composite chattel?

One of the necessary elements for establishing the common law possessory particular lien is that the party asserting the lien must have done work on the chattel over which the lien is asserted. In this case, HAECO had done work on the Aircraft but asserted a lien over the Aircraft Documents. Therefore in order to successfully assert the lien, HAECO had to convince the Court that the Aircraft and the Aircraft Documents together constituted a composite chattel. In considering this question, the Honourable Mr. Justice Harris referred to the test in Dinmore Meatworks Pty. Ltd. V Kerr:

“for a particular lien to attach, the subject matter of the work must always be something that the parties treated as an entirety in their dealings with one another concerning the work to be done on it”

HAECO failed to satisfy the Court on this point, as the Court found that it was “artificial to suggest that HAECO and Oasis treated the Aircraft and the Aircraft documents as one thing on which work was carried out by HAECO”. HAECO had asserted that there was an industry-wide custom of treating aircraft and their documents as a composite chattel, and in support of their argument they drew the Court’s attention to (i) the legislative regime making the correct documents a legal precondition to an aircraft being allowed to fly and (ii) aircraft financing and leasing documents usually defining the aircraft as including the relevant documents. However the Court was not swayed by the arguments and appeared to give more weight to the facts that the Aircraft Documents were not physically part of the Aircraft, nor were they physically necessary for the Aircraft to fly.

(ii) Did HAECO have possession of the Aircraft and the Aircraft Documents?

Furthermore the Court held that even if the Aircraft and the Aircraft Documents had together formed a composite chattel, HAECO would still not have been able to establish a common law possessory particular lien as they would not have been able to establish a further crucial element necessary for claiming the lien: possession by the party claiming the lien of the chattel over which the lien is claimed.

In this case, the Court found that HAECO had no right to possession of either the Aircraft or the Aircraft Documents. There was no right to possession of the Aircraft because under the terms of the Service Agreement, the aircraft were used by Oasis when not with HAECO for maintenance and repair. There was no right to possession of the Aircraft Documents because the Hong Kong statutory regime for aircraft safety required HAECO to produce the Aircraft Documents to Oasis on demand.

(iii) Further arguments

Although the Court felt the above factors established that there was no common law possessory particular lien, the Honourable Mr. Justice Harris went on to consider a number of further arguments advance by counsel for the liquidators for Oasis and OGIL as to why no possessory particular lien arose. When considering these arguments, the Honourable Mr. Justice Harris once again touched on, among other things, the terms of the Service Agreement allowing for the release of aircraft to Oasis and appeared to accord significance to the fact that the Service Agreement did not provide for any express right to a lien on the part of HAECO. However, arguably these considerations were merely obiter as they were stated to be “unnecessary” to the decision reached by the Honourable Mr. Justice Harris.

The Cabin Inventory

HAECO also failed to establish a common law possessory particular lien over the Cabin Inventory due to being unable to establish the necessary element of possession of the chattels. The Honourable Mr. Justice Harris held that the Service Agreement envisaged “situations in which the inventory is purchased by HAECO and possession passed to Oasis prior to payment, which is inconsistent with a particular lien”.

Agent’s Lien

HAECO was equally unsuccessful in arguing for the existence of an agent’s lien over the Aircraft Documents and Cabin Inventory. This lack of success was due to a number of reasons which included: (i) that it was not possible to establish that a principal-and-agent relationship existed between Oasis and HAECO and (ii) even if such a relationship existed, “an agent cannot assert against a principal a lien which the principal has, by reason of third party interests, no power to confer”. In this case the third party interests under various leases, sub-leases and mortgage deeds in connection with the Aircraft would have prevented Oasis as principal from granting a lien to HAECO as agent.

General Lien

Finally, HAECO failed to establish a general lien over the Aircraft Documents and Cabin Inventory. The common law will only recognise a general lien where it arises “either by express agreement or custom and the latter must be strictly proved”. In this case there was no express provision for a general lien in the Service Agreement and HAECO was not able to establish the existence of an industry-wide custom for aircraft engineers to have a general lien for their unpaid charges.

Conclusions

In the light of the judgment of the Honourable Mr. Justice Harris in HAECO v Oasis/OGIL, it appears reasonably clear that aircraft service providers will not ordinarily be able to establish liens by operation of law for the work they carry out on aircraft.

Therefore it is possible that in the wake of this judgment there will be a tightening of the contractual terms on which these services are offered to airlines, with a greater emphasis on receiving full payment for inventory and/or services before possession is surrendered and/or attempts to make explicit contractual provision for general liens on the part of the service providers (although there will undoubtedly be questions as to what extent such general liens could be effective in the face of the need for the airline to operate the aircraft and the regulatory requirements to hand over aircraft documents to the owners on demand). Absent such contractual protections, it seems that aircraft service providers will only be left to vent their spleen.