HONG KONG AIRCRAFT ENGINEERING CO LTD v. THE JOINT AND SEVERAL LIQUIDATORS OF OASIS HONG KONG AIRLINES LTD (IN LIQUIDATION)

HCCW 132/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 132 OF 2008

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BETWEEN

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(HEARD TOGETHER)

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J U D G M E N T

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Introduction

1.  I have before me 2 applications both of which require me to determine whether or not the applicant, Hong Kong Aircraft Engineering Company Limited (“HAECO”), has a lien over documents relating to 4 Boeing 747-400 aircraft (“Aircraft”) and cabin inventory assets (“Cabin Inventory Assets”), which are presently in its possession.

2.  HAECO is a Hong Kong company, which provides aeronautical engineering services.  Oasis Hong Kong Airlines Limited (“Oasis”) was a budget airline and part of a group owned by Oasis Growth and Income Investments Limited (“OGIL”).  Both companies went into compulsory liquidation in 2008.  Oasis leased the Aircraft.  Two were leased from subsidiaries of OGIL, which had granted mortgages over them.  Two were sub-leased from OGIL.  The leasing and financing structures in respect of the Aircraft were such that they were not available to satisfy any of Oasis’s debts.

3.  By a service agreement dated 5 October 2006 HAECO agreed to provide Oasis with aircraft engineering services for the Aircraft (“Service Argeement”).  The Service Agreement was supplemented by 3 side letters.  The services included the following:

(1) Fleet technical management, which was essentially planning engineering services required to maintain the Aircraft’s airworthiness and meet regulatory requirements.

(2) Inventory technical management (“ITM”), which involved purchasing and maintaining inventory.

(3) Base maintenance services, which involved comprehensive checks at intervals of upwards of 2,400 flight hours.

(4) Line checks, which involved lighter and more frequent checks.

(5) Aircraft reconfiguration services, which involved upgrading and improving Aircraft cabins.

(6) Landing gear services, which is largely self-explanatory.

4.  At the time Oasis and OGIL were wound up the total amount owed to HAECO in respect of these services was $77,965,431 (“Pre-appointment Debts”). During the currency of the Service Agreement HAECO had, as one would expect, intermittent possession of the Aircraft.  The Aircraft were not in HAECO’s possession at the time the winding-up petitions were presented.  HAECO were at this time, and had been through-out the currency of the Service Agreement, in possession of the various documents, which recorded the maintenance and repair work carried out on the Aircraft.  These documents, which I shall refer to as “the Aircraft Documents”, were not just records of work done, but manuals that were required to demonstrate that the Aircraft were airworthy and complied with relevant regulations.

5.  On 2 May 2008 Kwan J. (as she then was) ordered by consent that the Aircraft Documents should be delivered by HAECO to the liquidators of Oasis and OGIL in order to facilitate sale of the Aircraft and without prejudice to liens HAECO asserts over the Aircraft Documents in respect of the Pre-appointment Debts.

6.  HAECO purchased materials outside the scope of the ITM services described above in order to perform reconfiguration work on the Aircraft.  The materials constitute the Cabin Inventory Assets.  HAECO paid for the Cabin Inventory Assets.  At the date of the winding-up order HAECO was owed $10,594,814.19 in respect of the Cabin Inventory Assets (“Inventory Debts”).  HAECO claims that it has a lien over the Cabin Inventory Assets, which is separate and distinct to the liens claimed in respect of the Aircraft Documents.  HAECO and the liquidators agreed that HAECO should sell the Cabin Inventory Assets that it had in its possession and place the proceeds in an interest bearing account pending the outcome of this application.  As at 31 August 2009 this totalled $2,981,963.94.  At the commencement of the hearing before me HAECO applied to amend its summonses in respect of the Cabin Inventory Assets issue.  The application was contentious, but I allowed it.  I deal with the claim in respect of the Cabin Inventory Assets separately at the end of this judgment.

7.  HAECO accepts that no contractual lien arose from the Service Agreement.  HAECO claims a common law possessory lien over both the Aircraft Documents and the Cabin Inventory Assets.  If it is successful in its claims it will recover the Pre-appointment Debts and the Inventory Debts out of the sale proceeds of the Aircraft and the Cabin Inventory Assets respectively.

8.  HAECO puts its claim for a common law possessory lien as follows.  First, and principally, that it has a common law possessory particular lien (which I shall refer to as a “particular lien”) over the Aircraft Documents in respect of the Pre-appointment Debts.  Secondly, that it has an agent’s lien over the Aircraft Documents and Cabin Inventory Assets in respect of all debts arising from work done as agent of Oasis or OGIL.  Thirdly, that it has a general lien over the Aircraft Documents and Cabin Inventory Assets for all work done by it in its capacity as professional engineering adviser.  I shall deal with each of these claims in turn.

Particular Lien

9.  I do not understand it to be in dispute that the following requirements, which I take from HAECO’s submissions, must be satisfied for a particular lien to arise:

(1) The person asserting the lien must be in possession of the chattel;

(2) The possession of the chattel must be “lawful”: the transfer of possession to the person asserting the lien must have been with the express or implied authority of the chattel’s owner;

(3) The possession of the chattel must be continuous. The surrender of possession of the chattel usually results in the extinction of the lien. The lien is not regained if possession of the chattel is regained.

(4) The person asserting the lien must have done work on the chattel in respect of which he asserts the lien;

(5) The work on the chattel must usually have been completed and the sum in respect of which the lien arises must be due to the person asserting the lien.

10.  This type of lien allows a person who has done work on a chattel to retain it until his charges for work done on the chattel have been paid.  The workman cannot, as he may in the case of a general lien, retain the chattel until all monies owing to him have been paid: Halsybury, 5^th edition, 2008, vol. 68, §818, Palmer on Bailment, 3^rd edition 2009, § 15-072 and Dinmore Meatworks Pty. Ltd. v Kerr [1962]108 CLR 628 at 632.  It is HAECO’s case that it has a particular lien over the Aircraft Documents for the charges for work done on the Aircraft, because the Aircraft and the Aircraft Documents constitute a single, composite chattel.  If this is wrong and they constitute separate chattels, as HAECO’s charges were incurred in respect of work carried out on the Aircraft, it follows that HAECO does not have a particular lien over the Aircraft Documents.

11.  Mr. Strachan, who appeared for the liquidators, accepted that there is a relevant qualification to the general principle that a particular lien only covers the charges incurred in respect of the retained chattel, namely, that if what may initially appear to be more than one chattel is properly characterised as one composite chattel, charges incurred in doing work on one part of it will, unless paid, give rise to a particular lien extending to all parts of the composite chattel.  Thus if part of a composite chattel has been returned to the customer and the charges for work done on that part of it remain unpaid, the workman has a particular lien, in respect of the unpaid charges, over that part of the chattel, which he has retained.  The cases in which the courts have accepted that there is a composite chattel include the type that one would expect.  They include a tailor who delivered part of a suit to his customer and cobbler who has delivered one of a pair of shoes to his customer: Halsbury, supra, §841 and footnote 11 and Palmer on Bailment, supra, §15-089 and 15-072.  In other cases the position has been less clear.

12.  In Fraser v Equitorial Shipping Co. Ltd. (“The Ijaola”) 1979 1 Lloyd’s Rep. 103, a consulting engineer was held to be entitled to a particular lien on the main engine bearings of a vessel in respect of his charges incurred for work done on both the bearings and the vessel as a whole.  It appears from the judgment at pages 115 to 116 that the court treated the engine bearings and the vessel as one composite chattel and, therefore, the charges incurred in respect of the vessel, which was no longer in the consulting engineer’s possession, gave rise to a lien over the engine bearings, which had been retained.  In Dinmore Meatworks Pty Ltd v Kerr, supra, the High Court of Australia reached a different conclusion holding that a slaughterer was not entitled to a lien, over meat in his possession, for the whole of the amount of the bailor’s indebtedness, but only for those charges, which related to the preparation of such of the meat as he retained.  The court held at page 633 that, for such a lien to exist:

“Except in trades and callings where the law recognizes that by usage general liens exist, a lien for work done upon goods is a particular lien only. It attaches to the thing, or to a part of the thing, on which work was done. It is not essential to the creation of a particular lien that every part of the postulated thing be delivered at the one time. But, if there be separate deliveries, they must not be of separate things but of several parts making up the whole thing on which work is to be done. That thing may be a single chattel or a specific quantity or parcel of goods. But 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.”

13.  The liquidators argue that the Aircraft and the Aircraft Documents are not composite in the sense described in the authorities.  Mr. Strachan points to In the Bankruptcy of Merrill Engineering Ltd. [2004] BCSC 493 as demonstrating this.  In that case an artificer had carried out substantial work on a helicopter.  The artificer has parted with the helicopter and so could not claim a lien in respect of his outstanding charges.  He had, however, retained the helicopter’s technical log and claimed a particular lien over it for the full amount of his charges for carrying out work on the helicopter.  The court rejected the artificer’s claim that he had a lien over the technical log for the charges incurred in carrying out work on the helicopter.  The court referred to the general principle that “If a claimant delivers up part of the goods on which there was a lien, the claimant will lose the lien with respect to the goods delivered up but will retain the lien on goods which are still possessed.  However, the lien will be limited to the amount of the account with respect to the goods retained”: see paragraph 47 of the judgment.  As the artificer had parted with the helicopter he had lost his lien over it in respect of his unpaid charges for work undertaken on the chattel.  The court concluded that all the artificer had was a lien over the technical log for the work done on that document, which was minimal.  Mr. Strachan argued that it is clear from this judgment that court took the view that the helicopter and the technical log were distinct chattels rather than one composite chattel.  He says, unsurprisingly, that the case is on all fours with that before me and that I should reach the same conclusion.

14.  Mr. Chua S.C. submitted that this was an incorrect reading of the judgment and that the court found that the helicopter and the technical log were part of one chattel under one entire contract.  He said that this is apparent from paragraphs 50 and 51 of the judgment, which read:

“[50] It should be noted that it is said that the lien rests on one or two articles “… in the possession of the lien claimant ….” (emphasis added) Accordingly, if both the Helicopter and the Technical Log had remained in the possession of Hill, Hill would have a particular lien against each for the entire amount of the work undertaken. Having given up possession of the Helicopter, the particular lien could only attach to the Technical Log and only for the work undertaken on the Technical Log.

[51] As well, it should be noted that the statement deals with circumstances which are not present here as it deals with an “entire contract” dealing with goods delivered in “different parcels and at different times”. While the Helicopter and the Technical Log were delivered at the same time under one contract, I find that the second main rotor head was delivered to Hill under a separate contract.” (Mr. Chua S.C.’s emphasis)

15.  As I understand Mr. Chua S.C.’s argument it is this.  The passages quoted distinguish between the helicopter and technical log on the one part and the rotor head on the other.  It follows that the court must have concluded that the helicopter and the technical log constituted one chattel and the rotor head another.  I disagree.  It seems clear to me that the court was discussing the principle that if more than one chattel is delivered under an entire contract the artificer has a particular lien over all chattels that he retains for all charges incurred in carrying out work on any of them.  The only sensible reading of paragraph 51 is that the distinction that the court was drawing between the helicopter and the technical log on the one hand and the rotor head on the other was that the work to be undertaken in respect of them was carried out under 2 different contracts.  Rather than suggest that the court took the view that the helicopter and the technical log constituted one chattel, the passages quoted, and those that proceed it, demonstrate that the court thought that it was dealing with 2 chattels; a conclusion, which is made all the more obvious by paragraph 52 in which the court found that the decisions referred to in Mechanics Lien Laws in Canada, which deal with composite chattels, were not applicable and also that Blake v Nicholson (1814) 3 M&S 167 was not applicable because it did not deal with separate chattels.

16.  Mr. Chua S.C. sought assistance from Barry J.’s judgment in T.D. Keegan Ltd. v Palmer [1961] 2 Lloyd’s Rep 449, which he suggested has some similarity to the present case.  The defendant had carried out repairs on an aircraft, which had then been released to the owner.  The defendant retained the radio and some of the aircraft documents and demanded payment of its charges in return for their release.  The defendant was unsuccessful because the charges related to piloting services rather than repair work.  Barry J. said this at page 457 column 2:

“In the present case, Mr. Palmer or Orion Aircraft Services, Ltd., were wholly misconceived in their contention that this aircraft could be held pending the payment to them of moneys owing to them by Trans-Avia. There is possibly some ground for the suggestion that there might have been a lien on the aircraft for repairs carried out on it, but no such lien has ever attempted to be exercised. No part of the £575 which was demanded for the release of the aircraft or its equipment and papers related to repairs. Thus it seems to me that, as against the true owners of the aircraft, Mr. Palmer and this company have not the slightest right to demand this sum of money as a condition of handing over the radio equipment and the papers.”

17.  Mr. Chua submitted that this suggests that the court thought that the aircraft and the aircraft papers were one chattel.  I do not think that this passage can be read in this way.  There are references to a possible lien over the aircraft for repairs done to it, but nothing to suggest that such a lien extended to the documents alone if the aircraft had been returned to its owner.

18.  As I understand HAECO’s case, it argues that in considering whether or not the Aircraft and the Aircraft Documents constitute one composite chattel regard should be had to the statutory and regulatory regime, which requires such documents to be maintained.  The Air Navigation (Hong Kong) Order 1995 (Cap. 448C) (“1995 Order”) is the primary statutory instrument for the regulation of civil aviation in Hong Kong.  It mandates that certain documents be kept in respect of aircraft registered in Hong Kong including a certificate of airworthiness, maintenance schedules in a form approved by the Chief Executive and a certificate of maintenance review.  In addition the airline operator must satisfy the stringent regulatory requirements of the Civil Aviation Department (“CAD”) including “Air Operator’s Certificates Requirements Documents” and the “Registration, Certification and Maintenance of Aircraft Handbook”.  Without these documents the Aircraft could not lawfully fly.  In addition to these mandatory documents the Aircraft Documents include other documents including the aircraft log, engine logs, weight schedules and a number of ancillary documents required by AN(HK)O and the CAD.  The reason that HAECO was in possession of the Aircraft Documents is because HAECO maintained them. 

19.  I do not understand any of the foregoing to be in dispute.  It is also agreed that the absence of the necessary aircraft documents restricts the usage of an aircraft and its value. Similarly it is accepted that if significant aircraft documents are lost for any reason reconstituting them is an expensive and time consuming exercise. The difference between the parties arises in relation to the consequences of the importance of the Aircraft Documents to the composite chattel argument.  HAECO says, and I quote from paragraph 56 of Mr. Chua S.C.’s written submissions, “There is an industry-wide understanding and practice that Aircraft Documents form an integral part of an Aircraft – largely because the Aircraft Documents are key to the legal airworthiness of an Aircraft”.  HAECO has filed evidence supporting this contention.  Mark Hayman, HAECO’s director of engineering, says in paragraph 154(a) of his affidavit what I have quoted from Mr. Chua S.C.’s submissions.  Mr. Hayman does not explain what he means by “an integral part of an Aircraft”.  The Aircraft Documents are not physically part of an aircraft; on the contrary they are kept separately.  Neither are they in any physical sense necessary, as I understand it, in order for an aircraft to fly. They may, I accept, be integral in the sense that an aircraft cannot lawfully be operated without them or in the sense that in order to maintain an aircraft’s commercial value they must be kept and maintained. 

20.  HAECO has filed an affirmation of Richard Stock, who practices aviation law in Hong Kong, addressing the question of whether or not aircraft documents and the aircraft to which they relate are treated by the industry as one composite chattel.  His evidence can be summarised as follows.  It is normal for aircraft financing and leasing documents to define aircraft as including aircraft documents.  He says (paragraph 15) this “merely reflects commercial reality” and (paragraph 17) “reflects not only the value inherent in aircraft records, but also the way in which an aircraft financier/aircraft lessor envisages an aircraft.  When an aircraft financier or lessor envisages an aircraft, he or she envisages not only the alloys and materials that comprise the aircraft, but also the associated paperwork that underwrites the quality of those alloys and materials.  This conceptual unity is reflected by the fact that the transaction documentation used by aircraft financers and aircraft lessors subjects those alloys and materials, and that paperwork, to the same contractual obligations (save where the context does not permit).  No amount of semantic contextual analysis should be allowed to obscure this commercial reality.”

21.  The respondents do not dispute the way in which aircraft financing and leasing documentation is normally drafted or the importance of aircraft documents.  They say that it is unclear in what way the practice that is asserted is said to be relevant.  The question I have to decide is whether or not there is a particular lien over the Aircraft Documents, which allows them to be retained until all charges incurred in connection with the Aircraft have been paid.  Mr. Strachan points out that it is not suggested that it is commonly understood that such a practice exists. He also points out that such an argument was advanced and rejected in Merril Engineering Ltd.  I think HAECO’s argument amounts to saying that this practice is a necessary corollary to the understanding described by Mr. Stock: which seems to be what is suggested by Mr. Hayman in paragraph 154(b) of his affidavit.  As a matter of fact the problem that has arisen in the present case may be sufficiently uncommon that a practice cannot, in the normal sense in which the term ‘practice’ is used, be said to have arisen.  In Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd (1973) 1 ALR 1 Gibbs J. said that “the burden of proving a custom which is so notorious that everybody in the trade contracts on the basis that it forms a term of the contract is a difficult one to discharge” and that, in the case before him, which concerned an alleged general possessory lien over goods, said to arise either as a matter of common law or by custom and usage and inuring to the defendant as a warehouseman, the evidence relied to prove the custom “was lacking in detail and precision, was not sufficient to discharge the onus of proof that lay on the appellant.”  Mr. Strachan says that this is the case here as HAECO’s evidence does not go to the material question, namely, whether or not there is an established custom that an aircraft maintenance company has lien over aircraft documents for work done on an aircraft.

22.  It does not seem to me necessarily to be fatal to an attempt to prove a custom that a lien arises in particular circumstances, that those circumstances themselves are rare and give rise to few, if any, relevant examples, if it can be demonstrated with adequate precision, that the way in which the relevant business is conducted necessarily points to the conclusion that, if and when those circumstances arise, it would be readily accepted that the possessor of goods has a lien over them.  The difficulty with the case advanced by HAECO is that the examples that Mr. Hayman and Mr. Stock give all concern financing and leasing documents.  Although it may be rare for an aircraft maintenance company to find itself unpaid for work on an aircraft of whose documents it retains possession, I would have thought that given the sophistication of the industry the drafters of the service agreements entered into between aircraft operators and maintenance companies would, if it was thought to be fair and appropriate, include an express lien of the type asserted in the present case.  Of course no such lien was included in the Service Agreement and HAECO has produced no evidence that such a lien is normally included in similar agreements.  I do not accept that HAECO has established that it is industry practice that an aeronautical engineering services provider has a lien over aircraft documents for unpaid services provided in connection with the aircraft itself.

23.  HAECO also draw support from the way in which the liquidators have characterised the Aircraft Documents at the time when they were seeking to sell the Aircraft and wished to have the Aircraft Documents delivered up.  In the correspondence written at that time both by the liquidators and their solicitors, the Aircraft Documents were described as essential for the sale of the Aircraft.  Not only, argued Mr. Chua S.C., did this demonstrate the intimate connection between the Aircraft and the Aircraft Documents, he went further and argued that the liquidators could not now put forward the case advanced by Mr. Strachan because this was to approbate and reprobate and this they are not entitled to do: see Express Newspapers PLC v News (U.K.) Ltd. [1990] 1 WLR 1320 at 1329F-H.  I disagree.  The liquidators are not disputing the commercial value of the Aircraft Documents and the need for them to be sold with the Aircraft if the Aircraft’s full value is to be realised.  They are saying that despite this the Aircraft and Aircraft Documents are not a composite chattel.

24.  I accept Mr. Strachan’s submission that neither the authorities relied on by HAECO nor Mr. Hayman and Mr. Stock’s evidence demonstrate that the Aircraft and the Aircraft Documents can properly be characterised as one composite chattel and that as a consequence HAECO has a particular lien over the Aircraft Documents in respect of the Pre-appointment Debt or the Inventory Debt.  As I have already noted in Dinmore Meatworks Pty Ltd the court explained that “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.”  It seems to me to be artificial to suggest that HAECO and Oasis treated the Aircraft and Aircraft Documents as one thing on which work was being carried out by HAECO.  Further even if the Aircraft and the Aircraft Documents are properly treated as one composite chattel, it seems to me that the fact that HAECO did not have the right to possession of the Aircraft, is fatal to any claim for a particular lien, for reasons I shall now explain.

25.  It is an essential component of the right to a lien that the person claiming it should have possession, and the right of continued possession, of it: Halsbury, supra§826.  For example in Forth v Simpson (1849) 13 QB 680 it was held that the trainer of a racehorse, who would on general principles have a lien because of his care and skill in improving the horse, has no lien if the owner can remove the horse to send him to run in races. Patteson J. said at para 685 “… to complete the right of lien there must be the continuing right of possession.  Whether there is such a right of possession in any case must depend on the nature of the particular contract or custom applicable to the subject matter.”  In Hatton v Car Maintenance Company Limited [1915] 1 Ch 621 Sargant J. held at page 624, that there could be no lien over a motor car “by virtue of the arrangement under which the owner was to be at liberty to take the car away, and did take the car away, as and when she pleased.  The existence of a lien seems to me to be inconsistent with an arrangement under which the article is from time to time entirely out of the possession and control of the contractor”.

26.  There is no dispute that HAECO did not have the right to possession of the Aircraft.  Self-evidently the intention always was that the Aircraft would only be with HAECO for maintenance and repair and that Oasis would otherwise be using them.  I suggested to Mr. Chua, S.C. during argument that if the Aircraft and the Aircraft Documents constituted one composite chattel then in order for HAECO to have a particular lien it must have the right to possession of the entire chattel notwithstanding that it might release part of the composite chattel when work on it had been completed in the manner envisaged in cases like those referred to in the passage from Dinmore Meatworks Pty Ltd referred to above.  If I understood Mr. Chua S.C. correctly, he suggested that HAECO was in the position of a person who completes work on part of a chattel and delivers the completed part up whilst continuing with the remainder of the work required on that part which he retains; a submission which necessarily involves the assumption that prior to delivery up of the Aircraft HAECO had a right of possession over them.  I do not accept this.  HAECO’s services primarily involved maintenance and repair work on the Aircraft (which in itself gives rise to another objection to the asserted lien that I address later) and the situation was very different to that of a tailor completing part of a suit.  It was never intended that HAECO had right to possession of the Aircraft.  In my view if a person has no right to possession of a large proportion of a composite chattel on which he does work, then no lien can arise in respect of the composite chattel.  It certainly seems to me wrong and inconsistent with established principle that, if this is what is suggested, HAECO can have a particular lien over the Aircraft Documents in respect of the charges for work done on the Aircraft if HAECO had no right to possession of the Aircraft.

27.  Mr. Strachan made an additional point, which is a refinement of the one which I have been discussing, namely, that HAECO does not have a right to possession of the Aircraft Documents themselves and this is fatal to its claim for a particular lien over them.  Mr. Strachan submitted that HAECO had no right of continued possession of the Aircraft Documents for 2 reasons.  First, Oasis, as operator of the Aircraft, was under a statutory duty, which was personal to Oasis, to keep, preserve and to produce to an authorised person for inspection and (as necessary) surrender the various Aircraft Documents pursuant to the provisions of the 1995 Order.  This would have been well known to HAECO, says Mr. Strachan, and in these circumstances it must have been understood that HAECO did not have a right to possession of the Aircraft Documents.  Secondly, the Service Agreement expressly acknowledges that, in accordance with the regulatory regime, Oasis remained accountable for all aspects of the work done by HAECO.  As a consequence Oasis retained responsibility for overseeing and managing all such work.  Clause 1 of the Service Agreement expressly recognises this:

“1. INTRODUCTION

Oasis Hong Kong Airlines (Oasis), a newly established passenger carrier based in Hong Kong, will be operating B747-400 aircraft on long-haul routes to Europe and is planning to have a strong presence in the global network. Oasis seeks a long term partner in providing total care support to its operating fleet; whereby HAECO as the chosen party has agreed to establish a long term strong business relationship with Oasis, building on growth, cost effectiveness and improved operational efficiencies which brings direct and/or indirect benefits to both parties.

Oasis is a Hong Kong based airline focused on being a cost efficient long-haul airline, governed by biblical principles and the pursuit of excellence. It is committed to operating reliable scheduling without compromising safety and providing a high level of customer satisfaction.

To draw on the expertise and the economy of scale of specialised organizations, as a business strategy, Oasis intends to outsource its engineering in its entirety; as long as that continues to meet the organizations business strategy and to establish long term relationships with engineering, maintenance and overhaul organizations.

However, as pursuant to the regulatory requirements of the Hong Kong Civil Aviation Department (CAD 360), Oasis remains accountable for all aspects of engineering and maintenance. As such, Oasis will be responsible for overseeing and managing the contracted external engineering and maintenance service provider; and reserves the right to override the decision of the contracted service provider at any time in the interest of safety, its business and/or in order to satisfy the requirements of the Hong Kong Aviation Authority.

In keeping with business objectives and regulatory requirements, Oasis will limit the number of contracted service providers to as few as possible; but reserves the right to divide the engineering and maintenance functions as it believes is appropriate to meet the business needs and safety and operational requirements of the Airline.”

28.  The relevant regulatory requirements are contained in CAD 360 “Air Operator’s Certificates Requirements Document”, which provides that an air operator may contract out full maintenance support to a separate organization, but “Contracted arrangements for engineering support and maintenance do not absolve the Operator from the overall responsibility of ensuring the safe operation and continuing airworthiness of the aircraft”: Part 2, Chapter 3: Contracting-Out Maintenance, clause 1.1.  Consistent with this the relevant appendices to the Service Agreement, which each separately deal with the classes of services to be provided by HAECO, each contain an express provision that Oasis will oversee and or manage HAECO’s provision of such services.

29.  The Aircraft Documents are not specifically mentioned or defined in the Service Agreement, but to the extent that there is reference to them it is expressly stipulated that they are to be made available on request.  Appendix 3 to the Service Agreement deals with the inventory technical management.  Clause 2.1.7 deals with quality assurance and sub-clause (a) provides “Each Component made available to Oasis under this Agreement shall have a current EASA Form 1 or FAA Form 8130-3.  HAECO shall maintain all records and will make such records available to Oasis on request included traceability for such components as required by Oasis quality standards.  The applicable documents issued under this clause shall conform to the requirements of HKCAP”.

30.  I agree that it seems clear from the regulatory regime and the Service Agreement that HAECO was not intended to, and did not have a right to, possession of the Aircraft Documents and for this reason it could not have a particular lien over them.

31.  Mr. Strachan advanced a number of other reasons why he submitted HAECO did not have the particular lien it asserts.  In the light of the decision that I have reached for the reasons explained previously it is unnecessary for me to deal with them, but in the light of the comprehensive arguments advanced before me and the importance of this case, I think it is desirable that I say something about them.

32.  It is common ground that the existence of a lien may be negatived by the terms of the relevant contract.  I do not understand it to be in dispute that it is not necessary in order for a lien to be displaced, that the contract should expressly exclude it.  The question is whether or not the existence of a lien is consistent with the terms of the contract or whether those terms render it inapposite: see generally Palmer on Bailment, Third Edition 2009, paragraph 15-080. 

33.  Mr. Strachan accepts that the Service Agreement does not expressly exclude the existence of a lien over the Aircraft Documents.  He submits that the exercise of such a lien is plainly inconsistent with the terms of the Service Agreement.  The Service Agreement is a comprehensive and sophisticated contract made between experienced parties. Mr. Strachan submits that where a contract “prescribes a detailed catalogue of the parties’ rights and obligations that (coupled with an entire agreement clause) makes no reference to lien” (Palmer on Bailment, ibid§15-074) it impliedly excludes a lien.  Mr. Chua S.C. argued that the court does not lightly infer a waiver and that the liquidators must show that it is clear and unequivocal the HAECO was giving up its right to a particular lien and knew that it was giving up that right.  He attempted to illustrate this by reference to 2 cases: Wade Sawmill Pty ltd v Colenden Pty Ltd [2007] QCA 455 and Kilners Ltd v The John Dawson Investment Trust Ltd (1935) 35 NSWLR 274.  I do not find either of these cases, the facts of which bear no relationship to those before me, add materially to the statement of principle to be found in Palmer on Bailment.  As the editors of Palmer on Bailment observe in paragraph 15-074, on balance it seems more likely that parties to commercial contracts intend to merge a contractual right to retention and the protection provided by a lien with the result that the common law remedy is subsumed into the contractual rights that the parties expressly agree between themselves.  It does not seem to me that an assumption that sophisticated parties to a comprehensive contract are to be taken to have intended their relationship to be governed largely by reference to what they have expressly agreed, is inconsistent with the broad proposition that Mr. Chua S.C. emphasised and which is derived from older cases, which pre-date the type of written contracts now common between commercial men, such as Kirkman v Shawcross (1794) 6 T.R. 14, Jacobs v Latour (1828) 5 Bing. 132 and Scarfe v Morgan (1838) 4 M. & W. 270, which emphasise the favourable and liberal view the courts have traditionally taken of liens.  I can see no reason why, as Mr. Chua S.C. seemed to suggest, it needs to be demonstrated that HAECO actually knew that it was giving up a lien.  It would in practice be almost impossible to do this unless there was an express provision stating that a party did not have a lien.  Parties to a contract must be assumed to be familiar with their legal rights.  The question is whether or not on a fair reading of the Service Agreement in the context in which the parties must have expected it to operate, the terms of the Service Agreement demonstrates that the parties cannot be assumed to have intended that HAECO would be able to retain the Aircraft or the Aircraft Documents if its fees were outstanding at the time delivery of the Aircraft was sought.

34.  In my view it is clear that the Service Agreement was intended to contain not only a comprehensive, but also an exhaustive agreement.  This is apparent from the terms of the Service Agreement itself, which appears to cover all material matters (and Mr. Chua S.C. did not suggest otherwise) and in particular the inclusion of an entire agreement clause in clause 15.1.  There is no inclusion of an express right to a lien. It is difficult to see why commercial lawyers drafting such an agreement would have excluded express liens unless they appreciated that it was not intended that the Aircraft and Aircraft Documents could be retained by HAECO pending payment of outstanding charges.  I note that there does not seem to be any dispute between the parties that it is common for express liens to be included in aircraft contracts: see, for example, McBain, Aircraft Liens & Detention Rights, paragraph 7.2 and the evidence of HAECO’s own expert Mr. Stock in paragraph 7 of his affirmation.  It seems to me highly likely that the omission of an express right to retention of either the Aircraft or the Aircraft Documents was intentional and reflected the fact that it was known that the Aircraft would be in continuous operation and that there would be no question of the parties monitoring where the account between them lay at a time when an Aircraft was to be released after maintenance or repair work.  Instead the Service Agreement contains conventional provisions for payment of much of HAECO’s charges 30 days after presentation of invoices and in schedule 1, clause 3, for the payment of default interest.  Presumably the practical position was that if Oasis proved unacceptably dilatory in paying HAECO’s charges, HAECO would stop providing their services and this would bring Oasis’s operations to a halt.  As observed by Jordan CJ in Kilners Ltd. v John Dawson, supra an agreement to give credit normally destroys a lien because it almost necessarily involves the artificer parting with the goods, which is inconsistent with the existence of a lien.  This was clearly the position in the present case.

35.  The liquidators also argue that it is fatal to HAECO’s argument that clause 6 of schedule 1 of the Service Agreement and side letter no. 1 provide for a security deposit to be provided of initially US$500,000 and a further US$250,000 per additional aircraft up to a maximum of US$2,000,000.  In Re Leith’s Estate, Chambers v Davidson (1866) LR 1 PC 296, Lord Westbury said:

“If, therefore, a mercantile relation, which might involve a lien, is created by a written contract, and security given for the result of the dealings in that relation, the express stipulation and agreement of the parties for security exclude lien, and limits their rights by the extent of the express contract that they have made”.

36.  Similar statements of principle appear in Cowell v Simpson 16 Ves. Jun 275 and In re Taylor Stileman & Underwood [1891] 1 Ch 590.  This principle is one I would expect to be known to aviation lawyers tasked with drafting or vetting a contract such as the Service Agreement.  The provision of security along with the payment provisions that I have already mentioned point compelling to the conclusion that it was not intended by the parties that HAECO have a lien over the Aircraft or Aircraft Documents.  In the case of the Aircraft Documents this conclusion is reinforced by the express provision in clause 2.1.7 of Appendix 3 to the Service Agreement that the Aircraft Documents are to be made available to Oasis on request.

37.  HAECO argue that there are a number of clauses in the Service Agreement that envisage the parties having rights other than the express rights contained in the Service Agreement and that Clause 14.4 says that the termination of the Service Agreement is without prejudice to accrued rights of any party.  It seems to me that this is simply a conventional provision making it clear that accrued contractual rights are not extinguished on termination.  It does not say anything material about the existence of a common law lien.  Clause 16 states that “The rights of the Parties under this Agreement are cumulative and do not exclude or restrict any other rights ….”.  I do not read this as suggesting that the parties intended HAECO to have the benefit of a lien.  Finally HAECO rely on clause 1(D) of Appendix 3, which deals with transfer of ownership of components incorporated into Aircraft.  I agree with Mr. Strachan that this provision simply specifies when title to a component passes from HAECO to Oasis and confirms that no lien arises in such circumstances.  I do not think that this can be taken as indicating that in other relevant circumstances HAECO does have a lien.

38.  The liquidators also say that a lien that might otherwise have existed is destroyed by the relevant statutory provisions.  I do not understand Mr. Chua S.C. to dispute the principle stated in Halsbury, supra, §806: “Statute law may also destroy or nullify a lien which would otherwise be enforceable”. The issue is whether or not the relevant Hong Kong legislation has this effect.

39.  The Aircraft Documents include documents that are required to be kept by an airline operator (in this case Oasis).  The 1995 Order identifies the documents that have to be kept and also provides for the documents to be produced or surrendered in certain circumstances.  For example the certificate of maintenance review must be produced to an authorised person within a reasonable time on request and if revoked or varied it must be surrendered: 1995 Order articles 59(2)(d) and 62(2).  The certificate of release to service or airworthiness release certificate must be surrendered if revoked or varied: 1995 Order article 62(2). The aircraft log and engine logs must be produced to an authorised person within a reasonable time on request: 1995 Order article 59(2)(b).  Similarly the aircraft weight schedule, certificate of airworthiness and operations manual must be produced to an authorised person within a reasonable time on request: articles 59(2)(c), 59(2)(a) and 59(2) (d) respectively.

40.  In DTC (CNC) Ltd. v Gary Sargeant & Co [1996] 1 WLR 797 it was held that a company’s accountants did not have a particular lien over accounting records that section 221 of the Companies Act 1985 required to be available for inspection by its directors. The reason being that no lien arises in respect of documents that must be available for public inspection or for use in a special way: see page 801D to E.  Mr. Strachan argues that by virtue of the provisions of the 1995 Order, it is clear that Aircraft Documents, or a substantial part of them, must be available to the aircraft operator in order that he can deal with them as required by statute and this is inconsistent with the existence of a lien.  Mr. Chua S.C. argues that the position in the present case is very different from that in DTC. The Aircraft Documents were always intended to be in HAECO’s possession as it was the party which was maintaining them.  He says that there is no more problem in complying with the 1995 Order if a lien is being exercised, then there would be in the normal course of events.  I am not persuaded that this is true.  Presumably HAECO could refuse to cooperate with Oasis if access to them were to be required.  It also seems to me that what is relevant is the extent to which the statutory provisions indicate that the arrangements between the parties cannot sensibly be construed as one in which a lien arises.  To that extent the existence of the statutory provisions bolsters the more general argument that the parties cannot have intended that HAECO have a particular lien.  My conclusion is that both by virtue of the provisions of the 1995 Order in its own right and by virtue of its more general interplay with the other factors, which have been discussed previously, the particular lien asserted by HAECO does not arise.

Aircraft Documents “mere tools”

41.  The liquidators say that in any event HAECO could not be entitled to a lien over the Aircraft Documents as they were mere instruments used to carry out work on the Aircraft and were not themselves the subject of any work of improvement. As I have explained above the Aircraft Documents consist of records, some required by statute, containing information about the maintenance and use of the Aircraft.  It is correct that one could not describe the Aircraft Documents as being improved in the sense in which the term is normally used.  They record work done on the Aircraft or other technical information about them.  The liquidators take a further point that the work on the Aircraft themselves was maintenance work rather than an improvement and for that reason a possessory lien could not be created.

42.  Although argued by Mr. Strachan as a self-contained issue, in my view the question of whether or not the completion of the Aircraft Documents constitutes work of the sort capable of creating a lien is subsumed into a number of other issues.  It would seem to me odd, for example, if the work done on the Aircraft is not capable of creating a lien, that a lien could arise in respect of the Aircraft Documents, which record that work.  I also understand that what HAECO is concerned to establish is that it has a lien over the Aircraft Documents in respect of the charges incurred in respect of the Aircraft work and that it accepts that in order to succeed with its claim it must demonstrate that the Aircraft and the Aircraft Documents are a composite chattel, which I have decided that they are not.  Similarly, I have found that by virtue of the intention of the parties as revealed by the terms of the Service Agreement and also the statutory regime, which in part is the reason why such documents are kept, no lien has been created. Therefore, the question of whether or not HAECO has a lien over the Aircraft Documents in respect of the work done on those documents is academic and I do not think that it can be sensibly or usefully be analysed as an independent objection to HAECO’s claim.

Does work done on a chattel need to improve it for a particular lien to arise?

43.  The liquidators say that even if the Aircraft and the Aircraft Documents are a composite chattel and the Aircraft Documents are not “mere tools”, HAECO cannot claim a lien over the Aircraft Documents in respect of their charges amounting to HK$77,965,431 as those charges relate to maintenance of the Aircraft and not to works of improvement.  Mr. Strachan submitted that this is because a particular lien only arises if the retained chattel has been improved by the work carried out on it and that no lien arises where the work consists merely of maintenance or upkeep of the chattel.  The law is summarised as follows in Palmer on Bailment, supra, §15-077-8

“15-077 It is established that for a possessory lien to take effect the labour or skill of the artificer must improve the condition of the chattel. The repairing of a car, or a ship, or an aircraft, or the mending, dyeing or printing of textiles or garments, all satisfy this requirement, and in such cases a lien has been recognised at common law. Other examples include the packing of goods, the breaking of horses and (semble) the treatment of sick animals. The owner of a stallion, to whom a mare is sent to be served, has also been held to enjoy a lien at common law, and it seems that a similar right may extend to the racehorse trainer, and the castrator of bulls, at least in those circumstances where the difficulties of establishing possession can be overcome. It has been suggested obiter that a right of lien should also apply to a jeweller weighing a diamond or to a goldsmith assaying gold.

            Conversely, there will be no lien where a garage owner merely stores, washes and maintains a car or where the bailee of an animal merely feeds and takes care of it. In such a case, the necessary element of improvement is lacking. The same observation is probably true of the factor or bailee for sale, although the factor apparently has a general lien and may well enjoy a lien in any event by virtue of express agreement.

15-078 The necessity for an improvement was explicitly articulated by Von Doussa J. of the Federal Court of Australia (South Australia District Registry) in Bell and Bell v Clare. The applicants delivered possession of their mare Bold Storm to the respondent. The agreement was for the mare to be served by the respondent’s stallion Brazen Bay once Bold Storm was delivered of the foal she was currently bearing. It was further agreed that both mare and foal should be agisted with the respondent for reward. The applicants sought mandatory injunctions ordering the return of their horses, and the respondent asseted a lien in respect of his agistment charges, together with the costs of certain farriering and worming treatments. No lien was asserted in relation to the serving charges themselves. Having accepted that a contract of agistment gives rise to no customary general lien, Von Doussa J. went on to hold that an agister does not gain a particular lien over an animal merely by feeding it, caring for it and maintaining it. The judge pointed out that in Judson v Etheridge the right to a particular lien was denied even where the horse was stabled; the present case could hardly be stronger. Von Doussa J. distinguished such cases as Scarfe v Morgan (where the farmer had a particular lien over a mare which had been covered by his stallion), and Bevan v Waters and Forth v Simpson (where racehorse trainers were held entitled to particular liens). Likewise, the mere improvement of an animal by the delivery of offspring (or the act of supervising such natural increase and delivery) was insufficient to generate a particular lien:

“… a farmer did not improve a flock or a herd of animals by the mere supervision of the natural increase, however much skill and care was employed in the process”.

            The respondent also failed to establish the right to a lien in relation to the worming and farriering. Von Doussa J. conceded that the delivery of a horse for a specific medical purpose, such as the trimming of its hooves by a farrier, or its worming by a veterinary surgeon, “could probably” generate a lien:

“In those cases, having regard to the purpose for which the animals were bailed, and to the intended duration of the bailment, it is not difficult to conclude that the bailees have expended labour and skill in the immediate improvement of the animal although the benefit of the improvement may gradually disappear with time.”

            Von Doussa J. believed the position to be different, however, where a horse was delivered to an agister to be fed, cared for and maintained on a long-term basis. There, the agister’s incidental carrying out of such treatment as worming and hoof trimming could be regarded as no more than the discharge of his ordinary duty of reasonable care. Relying on Hatton v Car Maintenance Co Ltd and Helton v Sullivan, the judge concluded that such treatments are part and parcel of maintaining the horses, and in no relevant sense bring about an improvement.” The judge hinted that the position might have been otherwise had the horses been in for training.”

44.  A similar statement of principle is to be found in Halsbury, supra, §843:

“Improvement. There is no lien for the mere maintenance of a chattel, however much care and skill may be expended ….

If the claim to lien is based on both maintenance and improvement and the two bases of claim cannot be severed, the claim as a whole will fail ….”

45.  The extent to which this principle is entrenched in the common law, submits Mr. Strachan, is demonstrated by Pennycuick J.’s judgment in In re Southern Livestock Producers Ltd. [1964] 1 WLR 24 in which he said this at page 28:

“It is perfectly clear that unless the bailee can establish improvement he has no lien. If this matter were free from authority it would, I think, be tempting to draw the line in a rather different place s as to cover the case where a person by the exercise of labour and skill prevents a chattel from deteriorating in contradistinction from improving it. ... However, it is quite impossible for me at this time of day to introduce that sort of modification into a well-established principle.”

46.  In a more recent case than those mentioned in the footnotes to paragraphs from the texts quoted above Von Doussa J. of the Federal Court of Australia in Bell and Bell v Clare (1989) 23 F.C.R. 274 held that an agister does not gain a particular lien over an animal merely be feeding it, caring for it and maintaining it as these services do not contain any element of improvement of the animal as would be the case if a mare had been provided to farmer to be covered by his stallion: Scarfe v Morgan (1838) 4 M.&W. 270, or in the case of racehorse trainers Bevan v Waters (1828) M.&M. 235; 173 E.R. 1143 and Forth v Simpson (1849) 13 Q.B. 680; 116 ER 1423. 

47.  Mr. Strachan points to these cases and says that the law is quite clear: there is no lien without improvement to the chattel.  Whether or not work amounts to repairs, improvement or maintenance, he accepts, is a matter of fact and degree: Halsbury, supra, §843.  However, he says it is clear that for repair work on, for example, a car to give rise to a particular lien the work carried out must do more than maintain the car in its former condition: Hatton v Car Maintenance Company Limited [1915] 1 Ch 621.

48.  Mr. Strachan submits that there is a further relevant principle.  If under a long term contract, which is primarily for maintenance, there are individual items of work that might, viewed in isolation, constitute improvements, such work does not give rise to a lien because they are properly viewed as part and parcel of the maintenance contract.  In Bell v Clare, supra, Von Doussa J. held that a lien might arise if a horse was given to a farrier to trim its hooves or a veterinary surgeon to worm it, but if such work occurred periodically and as part of a more general obligation to care for and maintain horses it did not, in a relevant sense, amount to improvement and did not give rise to a lien in circumstances in which one would not otherwise exist: page 279.  Mr. Strachan says that this is relevant in so far as it is suggested by HAECO that some of the work, which they carried out resulted in some improvement to the Aircraft.

49.  Mr. Chua S.C. takes issue with these submissions.  In summary he says that various other authorities demonstrate that the distinction identified by Mr. Strachan does not exist and, if he is wrong about that, the distinction between maintenance and improvement or repair is archaic and should not be followed by me as there is no authority in Hong Kong which binds me.  Mr. Chua S.C. supports the first part of his submissions by reference to various general statements in authorities, which do not draw the distinction relied on by Mr. Strachan.  They include the following, which give a flavour of Mr. Chua S.C.’s approach to arguing this issue:

“(1) China Pacific SA v Food Corporation of India [1982] AC 939 [H.L.] [Tab 23] per Lord Diplock (at 962G-963A) :-

“where a lienee remains in possession of goods in the exercise of his right of lien only (i.e., one who has refused a demand by the lienor for redelivery of the goods with which, in the absence of the lien, the lienee would be under a legal obligation to comply), he cannot recover from the lienor loss or expenses incurred by him exclusively for his own benefit in maintaining his security as lienee and from which the lienor derives no benefit as owner of the goods. I would not seek to suggest that this authority has become outdated for the proposition that was then laid down; but I would deny that it is authority for anything more and, in particular, for the further proposition that expenditure necessary for the preservation of the goods from deterioration from which the owner does derive benefit is irrecoverable, where such expenditure is made by a bailee at a time before possession of the goods has been demanded of him by the owner and his only right to retain lawful possession of them thereafter rests upon his own election to continue in possession, after such demand, in the exercise of the rights of lienee.” (emphasis added)

(2) Dinmore Meatworks Pty Ltd v Kerr (1962) l08 CLR 628 (High Court of Australia) [Tab 17] per Kitto, Windeyer, and Owen J.J. (at 632) :-

“It is a long established principle that if a chattel be delivered to a man so that he may for reward do work upon it, as for example by repairing or altering it or making something of it, he may, having completed the work retain possession of it until he has been paid for his work.” (emphasis added)

(3) In re Westlake (1881) 41 ChD 604 [Tab 24] per Bacon C.J. (at 610, 611) :-

“Nobody can dispute the general proposition that an artisan has a lien upon the goods on which he works until he has been paid the amount due to him …”

“… I cannot, therefore, distinguish this from the most ordinary case of an artisan who undertakes to work upon goods for the benefit of the man who employs him - an artisan who is to be paid a price, and who, until the price is paid, has a right to retain the goods.” (emphasis added)

(4) Bleaden v. Hancook (1829) 172 ER 648 [Tab 25] per Tindal C.J. (at 650) :-

“This is not the case of a lien claimed by a person who has bestowed labour, or expended money upon an article, and who may detain it till he is paid. Everybody knows, that, by the common law, a man may detain the commodity on which he has bestowed labour or money”.

(5) Hollis v. Claridge (1813) 128 ER 549 [Tab 37] where the headnote reads :-

“Every one, whether attorney or not, has by the common law a lien on the specific deed or paper delivered to him to do any work or business thereon, but not on other muniments of the same party, unless the person claiming the lien be attorney or solicitors.” (emphasis added)”

50.  It seems to me fairly clear that the authorities on which Mr. Chua S.C. relies are not inconsistent with those relied on by Mr. Strachan.  The difference between them is simply that they are not directly concerned with the distinction between improvement and maintenance and, therefore, do not use language which focuses on this distinction.  I accept that there are good reasons for suggesting that, in a world in which maintenance contracts may involve a considerable amount of highly technical work, it may be that there is no longer any justification for drawing a distinction between improvement and maintenance when deciding whether or not a particular lien has arisen, but like Pennycuick J. in Re Southern Livestock Producers Ltd, supra, I take the view that the principle is too well established for it to be disturbed at first instance.

Was HAECO’s work improvement or maintenance?

51.  HAECO argue that if there is a distinction between improvement and maintenance then all its work falls into the former category because it maintained the value of the Aircraft.  I accept that as broad statement of fact this is probably correct, but I note that this submission is inconsistent with a submission that Mr. Chua S.C. made in support of his arguments in relation to the previous issue that I have considered.  In that context Mr. Chua S.C. argued, relying on the House of Lords decision in Shalson v John Lyon’s Free Grammar School [2004] 1 AC 802, that improvement is a physical not an economic concept.  However, the authority has nothing to do with liens.

52.  In my view whether or not work constitutes improvement is generally to be assessed by reference to its physical character, although generally one would expect an improvement to increase a chattel’s economic value.  In the present case I do not accept that all the work carried out by HAECO can fairly be said to be improvement work simply because without it the value of the Aircraft would have diminished.  It is necessary to look at what was actually done.  In anticipation that I might take this view HAECO has, through Mr. Hayman’s evidence, divided its services into 5 categories, which allows for consideration, so it contends, of whether or not their services constituted repair or maintenance.  Mr. Hayman in paragraph 168 of his affidavit says this:

“If, however and contrary to this position, the Court was to consider that HAECO’s security interest was limited to only that part of the Pre-appointment Debt as is referable to work done by HAECO in the nature of “repair” (as distinguished from “maintenance”), then at Tab 34 is a schedule (“Invoice Reconciliation Schedule”) where HAECO have broken down all services which relate to the Pre-appointment Debt on this basis. I have been informed by Mr Craig Murdoch, Assistant General Manager (Base Customers) of HAECO and verily believe that he and his direct team of two have together reviewed each and every item of the services provided by HAECO and have categorized them as follows:

(a) Column A – Repair: work which is in the classic understanding of “repair” (i.e. to restore a defective object to the condition it was in before it was damaged). For example, repair or replacement of a mechanically defective component;

(b) Column B – Improve value: work which, on first glance, is not classic “repair” but nevertheless adds value to the Aircraft. For example, labour expended in reconfiguring and modifying aircraft’s cabin;

(c) Column C1 – Repair in greater sense: work which, on its own, is perhaps not classic “repair” but, when considered in the greater scheme of things, forms an integral and essential part of a process, the larger purpose of which is identifiable as one of “repair”. For example, the removal and replacement of landing gear to permit their overhaul;

(d) Column C2 – Improve value in greater sense: work which, on its own, may not be directly “value adding” but, when considered in the greater scheme of things, forms an integral and essential part of a process, the larger purpose of which is identifiable as one of which improves the value of the Aircraft. For example, flame testing fabric. While this is not directly related to repair, it is a necessary process to ensure cabin fabrics and covers are sufficiently fire-retardant which improves the value the Aircraft; and

(e) Column D – Maintenance:work which is not “repair” work nor work which increases the value of the aircraft; being work which only preserves the value of the Aircraft.”

53.  The schedule to which Mr. Hayman refers is 24 pages long and much of it consists of analysis of over 500 items of work explaining how and why it has been categorised in accordance with the above 5 categories.  By way of example I take the first item that is categorised as “repair”, which is from invoice number 08018147.  It is described as “APU Change Nov07” for HK$18,720 and the “reason” for so categorising it is stated as “Unscheduled task”.  Putting to one side the very real difficulty of even reading the schedule because the type face is so small, it is in my view unrealistic to expect the court to assess on the basis of such limited information how to categorise particular items of work unless there is a large measure of agreement between the parties.  This I pointed out to Mr. Chua S.C. during the hearing.  As it is the liquidators’ witnesses do not agree the categorisation or that any of the work can be said to increase the value of the Aircraft.  As matters presently stand I am being asked to conduct a trial on affidavit of this issue and I do not think that it can properly be determined in this way.

Agent’s Lien

54.  HAECO also contends that it has an agent’s lien.  I find HAECO’s case in this regard obscure.  It seems to be tacitly accepted by Mr. Chua S.C. that HAECO was not “Oasis’s agent in the full legal sense”: see paragraph 115 of HAECO’s submissions.  Mr. Chua S.C. argues, however, that agency may arise in a form short of the full legal sense.  He relies on ING Barings Securities (HK) Ltd v CIR (2007) 10 HKCFAR 417, in particular Lord Millet NPJ at paragraph 139, as demonstrating this.  I do not understand the relevance of this distinction in the present context. 

55.  It is clear that absent agreement the relationship of agent and principal does not give rise to a general lien.  The Lord Chancellor, Lord Campbell, described the law as follows in Bock v Gorrissen (1860) 2 DE G F & J 435 at para. 443:

“I do not think that a general lien can be claimed according to any general law of principal and agent. The law of England does not favour general liens, and I apprehend that a general lien can only be claimed as arising from dealings in a particular trade or line of business, such as wharfingers, factors and bankers, in which the custom of a general lien has been judicially proved and acknowledged, or upon express evidence being given that according to the established custom in some other trade or line of business, a general lien is claimed and allowed.”

Similar passages appear in Bowstead on Agency, 18^th edition, §7-073(2) and Halsbury’s Laws of England, Vol 1 (Agency) §114.

56.  In so far as HAECO argues that it has a general lien by virtue of agency it seems to me that the argument must fail.  HAECO has not attempted to demonstrate that there is any custom in the aviation industry by virtue of which an aeronautical engineering company, which provides its services as an agent (and I return to the question of whether or not HAECO is Oasis’s agent later) to an airline operator, has a general lien over the aircraft or aircraft documents in its possession in respect of its charges. 

57.  Mr. Strachan made comprehensive submissions as to why a particular lien as agent did not arise.  First, he says that it is clear from the Service Agreement that HAECO contracted as principal and not as agent.  I agree.  I also see nothing in HAECO’s argument that HAECO was an agent in something other than the “full sense”.  Mr. Chua S.C. cited no authority, which demonstrates that an agent’s lien can arise in circumstances other than those of a recognised principal and agent relationship.  It seems to me clear that an agent’s particular lien can only arise in clear cases of agency.  The authors of Bowstead & Reynolds, supra, at paragraph 7-074 summarise the position as follows:

“Clear authority for the general proposition as to the lien of an agent is difficult to find …. But in general it is established by the cases that an agent is entitled to a lien over the property of his principal in respect of payments, liabilities etc relating to matters connected with that property. This seems in many cases to be a development of the older lien of a craftsman who makes repairs to a chattel; but it was developed by cases on factors, brokers, auctioneers and other undoubted agents.”

58.  Secondly, HAECO did not obtain the Aircraft Documents in its capacity as agent.  In Dixon v Stansfield (1850) 10 Common Bench Reports 398 at page 418, Jervis CJ said:

“A man is not entitled to a lien simply because he happens to fill a character which gives him such right, unless he has received the goods or done the act, in the particular character to which the rights attaches.”

Mr. Strachan submits that HAECO received the Aircraft Documents pursuant to the Service Agreement, which it clearly did, and not in the capacity as an agent. I agree.

59.  Thirdly, Mr. Strachan points out that insofar as I find that HAECO was in some respects acting as Oasis’ agent any lien will be limited to the charges incurred in the capacity as agent.  It seems to me that this must be correct.  No attempt has been made by HAECO to apportion its charges on this basis.  If I had come to the conclusion, which I have not, that certain of HAECO’s work was capable of creating an agent’s lien, as I understand the evidence before me, there is no basis upon which I can carry out an apportionment.

60.  Fourthly, Mr. Strachan argues that an agent cannot assert against a principal a lien which the principal, has by reason of third party interests, no power to confer.  He says that Oasis was not the owner of the Aircraft Documents and was the lessee of Alpha and Bravo and the sub-lessee of Charlie and Delta.  The owners of the Aircraft had mortgaged their interests in the Aircraft as security for loans made to them.  The leases, sub-leases and mortgage deeds contained provisions to the effect that liens over the Aircraft could not be created or incurred save as specifically permitted.  The liens which by the terms of the leases, sub-leases and mortgage deeds, the ulterior third party interests permitted to be created are termed “Permitted liens”.  They include:

“Mechanics’, repairers’, or workmen’s Liens or employees’ or carriers’ or other like Liens arsing in the ordinary course of business by stature or operation of law for amounts not yet due and payable (or for the amounts which are only due and payable at the end of unexpired grace period) or the obligation for payment of which is being contested in good faith and on reasonable grounds (and for the payment of which adequate amounts have been collected) by appropriate proceedings which do not, in the reasonable opinion of the Lessor and the Security Trustee, involve any material risk of the sale, forfeiture or loss of the Aircraft, the Airframe, any Engine or any Part of any interest in any thereof.”

61.  Mr. Strachan points out that the liens that are permitted only arise in respect of “amounts not yet due and payable.”  This terminology might initially appear surprising, but, says Mr. Strachan, it is not accidental and is normal in aircraft documentation.  This appears to be accepted by HAECO’s own witness, Mr. Stock. It is also supported by the following passage in Aircraft Liens & Detention Rights, McBain in paragraph 7.2:

“In modern times, … most aircraft leases (whether operating or finance) and other financing documents prohibit aircraft operators from creating liens over the aircraft save for certain “permitted liens”. There liens are often defined to include repairers and similar liens arising in the ordinary course of business where payment is either not yet due (or is otherwise being disputed or contested in good faith).”

62.  HAECO’s claims are for money due and owing.  An agent cannot, as against third parties, exercise a lien, which the agent’s principal did not have the power to create: Halsbury, vol. 1, supra, §116 and Bowstead & Reynolds, supra, §7-086.  I accept that, as a consequence, HAECO cannot maintain an agent’s lien for the sums its claims.

General Lien

63.  HAECO argues in the alternative that it has a general lien over the Aircraft Documents and the Cabin Inventory Assets.  It thus claims a lien, which entitles it to possession of the Aircraft Documents and Cabin Inventory Assets until all claims it has are satisfied.  Mr. Chua S.C. accepted that English law does not favour general liens: Palmer on Bailment, supra, §15-090.  This is because general liens give special privileges against other creditors and tend to upset the equitable distribution of assets on bankruptcy: Halsbury, vol 1, supra, §817.  He also accepted that they arise either by express agreement or custom and the latter must be strictly proved: Majeau Carrying Co Pty Ltd. v Coastal Rutile Ltd. (1973) 1 ALR 1.  Mr. Chua S.C. does not cite any authority in support of, what I understand to be, an argument that I should recognise a custom that aircraft engineers have a general lien for their unpaid charges.  He suggests that given the sophisticated nature of aircraft engineering and its importance in the modern world it is appropriate for the court to recognise such a general lien. I disagree.  First, HAECO has failed to adduce any evidence to prove that such a practice is generally accepted in the industry.  Secondly, it seems to me that for the very reason Mr. Chua S.C. relies on, the sophistication of the industry, it is for the parties to expressly agree that the service provider has a general lien if they consider it commercially appropriate.  It is not necessary or apposite for the court to create one, because this is what I am being asked to do, in order to address, what on HAECO’s case it must accept, was an omission from the Service Agreement.

64.  It seems to me that in very general terms the primary weakness in HAECO’s case before me is that it failed to include in the Service Agreement the remedy for non-payment, which Mr. Chua S.C. has been arguing is so obviously appropriate and necessary.  It seems to me a compelling inference, given HAECO’s sophistication and, I think it reasonable to assume, strong commercial bargaining position, that the Service Agreement did not contain an express lien because HAECO well understood that this was not the practice of the industry and HAECO, if it has been asked at the time the Service Agreement was negotiated, whether or not it would have any of the liens advanced by Mr. Chua S.C. if its charges were unpaid, would have said no.

Cabin Inventory Assets

65.  At the commencement of the hearing HAECO applied for leave to amend its 2 summonses to add express reference to determination of the nature and extent of its security interest in the Cabin Inventory Assets.  The application was contested by the liquidators on the grounds that it was unclear what sums it was contending were secured by such security interest as it had in the Cabin Inventory Assets and that this should be made clear before any amendment be allowed.  Mr. Chua S.C. served further written submissions on 9 March 2010, which explained that the claim related to Cabin Inventory Assets purchased outside the scope of the ITM Services under the Service Agreement.  This inventory was acquired for cabin reconfiguration work and in 2 circumstances.  First, goods obtained pursuant to a consignment agreement made by HAECO with Aero Inventory (UK) Ltd, some of which have been used in connection with reconfiguration work.  HAECO has paid for that part used for the reconfiguration work, but has not been reimbursed by Oasis.  Secondly, goods purchased and paid for by HAECO from other suppliers for use in connection with the Aircraft for which Oasis has not paid.

66.  Since the companies went into liquidation HAECO has been able to use some of the inventory to the value of HK$655,327 for work required for other operators.  The parties have agreed that HAECO should continue to try and sell the remaining inventory and deposit the proceeds of sale in an interest bearing account.  HAECO asserts a lien over the remaining inventory.  The total invoice value of the Cabin Inventory Assets (the Inventory Debts) is HK$10,594,814.19.

67.  In my view HAECO’s argument that it has a particular lien in respect of the Cabin Inventory Assets is misconceived.  I have already explained in that in my view the assertion of a particular lien is inconsistent with the terms of the Service Agreement.  In my view this is all the clearer in the case of the Cabin Inventory Assets.  HAECO acquired the Cabin Inventory Assets pursuant to clause 2.1.8(e) of Appendix 3 to the Service Agreement, which provides “HAECO shall source, acquire and deliver materials outside the inclusion list as requested by Oasis.  In such case it will be charged on arising basis per Appendix 9 – Pricing”.  The inclusion list is contained in clause 2.1.8(a)(i).  Appendix 9 provides that “Purchase of material outside the inclusion list of Section 2.1.8” shall be charged at “8% on material acquisition price plus freight.”  Schedule 1 deals with payment and provides that HAECO shall invoice Oasis at the end of each month and payment shall be made within 30 days.  It follows that the Service Agreement envisages situations in which inventory is purchased by HAECO and possession passed to Oasis prior to payment, which is inconsistent with a particular lien.  I, therefore, find that HAECO does not have a particular lien over the Cabin Inventory Assets.

Conclusion

68.  I find that HAECO does not have a security interest in the Aircraft Documents or the Cabin Inventory Assets.  I will hear further submissions from the parties on the precise form of the order and costs.