29 Sep 2014

SECURING STORAGE PAYMENT CLAIMS UNDER THE LAWS OF THE DUBAI INTERNATIONAL FINANCIAL CENTRE (“DIFC”) – BAILMENT AND LIENS

Authored by: Nicholas McGrenra

SECURING STORAGE PAYMENT CLAIMS UNDER THE LAWS OF THE DUBAI INTERNATIONAL FINANCIAL CENTRE (“DIFC”) – BAILMENT AND LIENS

Senior Legal Consultant, Nick McGrenra from the Banking & Finance team discusses the legal considerations surrounding bailments and liens when securing storage payment claims under laws applicable in DIFC and what the potential rights and duties are of the respective parties.
 
In many common law jurisdictions the relationship between a professional storage operator and its clients is one which involves the concept of bailment, and the bailment property is frequently subject to a security right known as a lien. Some jurisdictions legislate for a lien in favour of a person providing such storage services. This is not the case under the provisions of DIFC or English statutes, although a common law lien may arise (subject to satisfaction of certain criteria), and the parties can create a contractual lien.
 
Set out below are the potential rights and duties of the parties in respect of the bailment relationship, and the occurrence and exercise of any lien, in the context of laws applicable in the DIFC.
 
Why choose DIFC?
 
The choice of English law as the governing law of commercial contracts remains one of the most popular in the Middle East for international companies. Precedent established by a developed body of cases over many years has created a relatively predictable position under the English common law as to the interpretation of contractual provisions, and the consequences of breaching the same. However, there has been a recent trend for contracting parties in the region to choose the laws of the DIFC to govern their contractual relationship.
 
The DIFC is a geographically defined financial free zone established in Dubai in 2004. It is an autonomous jurisdiction within the UAE (exempt from all federal, civil and commercial laws within the UAE, save for criminal, administrative and anti-money laundering laws) and has its own DIFC Judicial Authority and DIFC Court System. The DIFC laws are modelled closely on the well established principles of English common law, and the DIFC Courts (which are largely based on the English Commercial Court and operate in the English language) provide a convenient common law forum within Dubai. The judges of the DIFC Courts are drawn from all over the common law world.
 
Article 8 of the Law on the Application of Civil and Commercial Laws in the DIFC (DIFC Law No. 3 of 2004) provides a certain order in which the Court or an Arbitrator will determine the law applicable to a particular matter, that is:
 
“(a) so far as there is regulatory content, the DIFC Law or any other or any other law in force in the DIFC; failing which,
 
(b) the law of any Jurisdiction other than that of the DIFC expressly chosen by any DIFC Law; failing which,
 
(c) the laws of a Jurisdiction as agreed between all the relevant persons concerned in the matter; failing which;
 
(d) the laws of any Jurisdiction which appears to the Court or Arbitrator to be the one most closely related to the facts of and the persons concerned in the matter; failing which,
 
(e) the laws of England and Wales.”
 
Therefore, Article 8(2)(e) above provides the DIFC Courts with an existing body of persuasive case law authority, which supplements the DIFC Law. Although the DIFC Courts remain, relatively speaking, in their early days it is quite clear that they will look to the experience of other common law countries, and that in appropriate cases the Court can rely upon Article 8(2)(e) to take advantage of the already developed body of cases in various common law jurisdictions.
 
Previously, the DIFC Courts could only be engaged to resolve civil or commercial disputes if there was a specific link to the DIFC whereby its “exclusive” jurisdiction could be invoked. In the absence of any such link, the contracting parties did not have the option to choose to have their disputes resolved in the DIFC Courts. However, the jurisdiction of the DIFC Courts has now been extended pursuant to Dubai Law No. (16) of 2011 Amending Certain Provisions of Law No. (12) of 2004 Concerning Dubai International Finance Centre Courts. This new law extends the scope of the exclusive jurisdiction of the DIFC Courts, although arguably the more significant development is the introduction of a “consensual” jurisdiction whereby the DIFC Courts may now be engaged to hear civil and commercial claims by the contracting parties expressly submitting to such jurisdiction at the time of contracting, even where there is no connection.
 
Therefore, this is a development which should give contracting parties the freedom, where applicable, to agree DIFC as both the jurisdiction and governing law to be applied to any dispute arising under the contract. It is easy to understand the attraction of this particular jurisdiction and choice of law to international companies entering into transactions in the region, although issues such as domicile of the contracting parties and the specific facts and circumstances pertaining to any transaction (including location of relevant assets) must always be borne in mind. It should also be borne in mind that the Law Relating to the Application of DIFC Laws (Amended and Restated) (DIFC Law No. 10 of 2005) sets out certain conflict of law provisions, and Article 14 provides inter alia that the law of the jurisdiction where property is located governs the validity and extent of interests in the property, and so it will be necessary to consider any such applicable laws.
 
Bailment
 
The Law of Obligations (DIFC Law No. 5 of 2005) sets out certain obligations relating to bailment, although these statutory provisions only apply to any bailment of property possessed or owned by any person within DIFC. In the absence of any DIFC laws which are applicable to the particular circumstances, then the Court may well consider the common law position.
 
Under English law, a bailment relationship occurs when goods are transferred to the possession of another party (bailee) for a specific purpose on condition that the goods are returned to, or in accordance with the instructions of, the owner (bailor) or kept until the goods are reclaimed. A typical example is where there is an agreed contract which obliges or requires one party to have control of the other party's goods for a particular purpose, or for a limited period of time. Whilst an involuntary bailment can also arise where a person, without their consent, finds themselves in possession of goods belonging to another party, this is not regarded as a “true bailment”, as they do not voluntarily consent to holding the goods, and do not therefore owe duties to the same extent as a voluntary bailee.
 
Therefore, under storage contracts, the law of bailment is likely to be applicable and it is important to be aware of the obligations imposed on the parties in such circumstances. Perhaps the most significant common law duty which a bailee is under is to take reasonable care of the goods. Unfortunately there is little guidance from English case law about the standard required in this respect, but it has been suggested that it does not amount to an obligation to take every conceivable precaution to prevent loss or damage, rather to exercise the same degree of care that a person would take in respect of their own property.
 
If the person holding the bailment property fails to comply with its obligations, and the goods are then damaged or destroyed, the bailee could be liable for that damage or loss unless he can prove that either the damage or loss was not due to his breach of duty. The main common law duty of the bailor, in this context, is to pay for the services carried out. If payment is not forthcoming then the holder of the bailment property may retain the goods until he is in receipt of payment. This right arises pursuant to a lien.
 
Liens
 
DIFC laws provide for statutory liens under, for example, the General Partnership Law (DIFC Law No. 11 of 2004); the Insolvency Law (DIFC Law No. 3 of 2009); and the Personal Property Law (DIFC Law No. 9 of 2005). Legislation does not provide specifically for liens in the circumstances currently being considered.
 
The basic concept of a lien under English law is that of a right to keep possession of property until a claim has been met. However, the concept does extend to cover a number of analogous rights and different sub-categories have variously been identified as legal, non-possessory, equitable, general, particular, statutory, contractual, judicial and subrogatory. For the purposes of this article we are concerned with legal and contractual liens.
 
A legal lien means a right at common law for a party to retain that which is rightfully and continuously in its possession, belonging to another, until the present and accrued claims of the person in possession are satisfied. This is also referred to as a possessory lien, and arises by operation of the law, not by contract. It is also a feature of such a possessory lien that labour must have been expended on the asset which has improved it in some way. Merely maintaining or storing the asset is not sufficient to give rise to a legal lien.
 
A legal (or possessory) lien is essentially a passive remedy, which makes it different to many other security rights. The beneficiary of the lien has the right to detain the goods (that is, refuse to transfer/deliver to the owner or any other party claiming possession pending payment of a debt owed), but has no right to do anything else with the goods. This may prevent the owner from disposing of the goods, or any financier realising the value of the goods where they have been provided as security for a loan. Such a passive right to possession is exercisable without court order, and is therefore a valuable remedy for the beneficiary of the lien. However, without ownership rights, there are certain issues which can arise in exercising such a remedy, including liability for continuing storage costs, and ultimately how it is possible to dispose of such goods. Historically the position under English law has been that the costs of retaining possession of goods in exercise of a lien were not recoverable from the owner of the goods.
 
As the beneficiary of a lien will have possession of the property, the exercise of such rights exist in the context of a bailment relationship. A recent case (Petroleo Brasiliero SA v ENE Kos 1 Limited) demonstrates the evolving nature of the concept of bailment and, in particular, addressed the issue of whether a service provider can recover expenses incurred for the benefit of others whilst providing required care. The case concerned the rights of a ship owner to withdraw the vessel for non-payment of the proposed hire, following loading of the charterer’s cargo, and then to claim for the resulting expenses incurred whilst awaiting the unloading of the cargo. The Supreme Court recognised that the ship owner had a continuing duty to take reasonable care of the cargo, and held that the owners could recover their expenses of doing so under the law of bailment.
 
It is apparent that many storage arrangements are entered into with standard form contractual arrangements, and common law bailment rights and obligations can be expressly amended by contract. Likewise, regardless of whether a possessory lien exists at common law, parties may create and define a lien by express contractual provision, which is likely to override any legal lien that is present. Therefore, a contractual lien can be more extensive than a possessory lien and may, for example, include a power of sale in the event of non-payment (such a lien would, in some respects, bear a closer resemblance to a pledge), and/or that it will arise where an asset is stored rather than improved. If the exercise of a power of sale in a particular jurisdiction requires a court order (for example, in a jurisdiction where UAE federal law does apply) then it would be advisable to obtain a court order in DIFC before exercising such power. It may also be drafted as a general, rather than a particular, lien (although it is possible for a legal lien to be general). A particular lien would typically only secure payment of fees due for specific goods in respect of which the lien is exercised, so it is effectively discharged once payment for those goods is received. On the other hand, a general lien may secure all monies owing between the parties so that the right to detain goods may apply in respect of outstanding payments for goods which have already left the storage facility.
 
Again, it is suggested that any such provisions must be carefully drafted, or reviewed, as they are likely to be strictly interpreted by courts, particularly where there are competing interests, and it is unwise to assume that “one size fits all”.

 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE