18 December, 2022
In the import and export practice, one can often encounter a forwarder (or an agent) that delays goods (places a lien) and refuses to issue a delivery order due to debts. For example, when the sender did not pay the forwarding fees for the cargo, and the shipping agent refuses to issue a delivery order. Another example is when the sender has a previous debt for other cargos, and the shipping agent seizes the current cargo (which was paid for in full) as a “hostage”. A customs agent may also be involved at times: for example, when the shipping agent refuses to provide a delivery order for an importer’s cargo due to the customs agent’s debt to the shipping agent from a previous transaction, or – in an extreme case – when the shipping agent refuses to issue a delivery order to the customs agent for importer A’s cargo due to a debt from importer B, where the only connection between the two is that they happen to work with the same customs agent. This is a type of conduct that one may encounter in practice, but that does not necessarily mean that it’s legal. So, what does the law have to say on the matter?
What is a lien?
The right to place a lien and delay cargo is a legal right to act in a manner that would allow the creditor to hold assets of the debtor as a guarantee until full repayment of the debt, without need to turn to a court. It’s intended to address the commerce needs of suppliers and service providers that cannot be expected to turn to the Registrar of Mortgages every time they provide a service in order to place a lien on the debtor’s assets, and who may refrain from transactions without their rights being guaranteed vis-à-vis the debtor.
In this respect, the right of lien actually streamlines transactions and enables swift, dynamic and efficient commerce.
The right of lien can be formed on the basis of the law or on the basis of the contract between the parties. The general legal arrangement for the right of lien is based on the Movable Property Law, which sets the general guidelines for the right’s activation, essence and scope. Section 11(a) of the Movable Property Law sets the right of lien on the basis of the law: “lien is a right based on the law for the delay of movable property, as a guarantee for the debt until the debt is cleared”. Even so, in order for an individual to have grounds to use the lien right based on the law, his case must fall under one of the specific laws that grant a unique lien right. For example, such rights are granted under section 31 of the Sale Law, Section 5 of the Contract for Services Law, Section 12 of the Agency Law, Section 8(c) of the Trust Law, Section 19 of the Contracts (Remedies for Breach of Contract) Law and others.
What is a contractual lien?
In addition, parties may set conditions within a contractual agreement that can overcome the provisions of the law. This option is secured by the law itself, under section 11(e) of the Movable Property Law, the legal basis for the right of lien: “in addition these provisions will apply to lien according to an agreement, whereas there are no other provisions therein that relate to the subject”. In this respect it should be noted that according to case law, lien based on an agreement requires a clear and explicit written agreement and cannot be derived of a general understanding, market practice or parties’ conduct.
Of note in this regard is the 2002 ruling in the Rondoplas vs. Cargo Amerford case. In this case, Rondoplas (which was in the midst of a stay of proceedings), sued the customs agent through which it imported raw materials from foreign suppliers. The customs agent delayed three bills of lading, refusing to release three cargos and citing lien due to a debt from the company. The agent argued that his right derived from the contractual agreement between the parties. The court rejected the agent’s argument and ruled there was no contractual lien, as such can only be formed by a clear and explicit written agreement between the parties, not an estimated opinion. On the other hand, the court accepted Rondoplas’ arguments that each of its transactions with the agent should be viewed separately, and not as one framework agreement, and therefore there was no right of lien under the law.
In another case from 2004, the Haifa District Court issued a ruling that eased the creation of a contractual lien.
In this case, forwarders/agents Lucy Borchard Shipping and Allalouf & Co. Shipping delayed the assets of Electrochemical Industries (1952) Ltd. (which faced financial difficulties at the time) due to previous debts. As mentioned above, it is difficult to base a lien on the law, as it is difficult to prove the existence of a framework agreement. Therefore, the forwarders based their claims on contractual liens, and each had to defend its action separately.
Lucy Borchard Shipping showed that its bill of lading, which is often used as evidence for the forwarding contract between the parties, includes a broad right of lien that applies not only to the specific forwarding but to other debts as well.
Allalouf & Co. Shipping failed to substantiate its contractual lien claim. Its bill of lading did not include a broad right of lien clause similar to Lucy Borchard Shipping’s clause, and it failed to present a different written agreement. The court addressed this with the following words: “contractual lien must explicitly appear in the agreement between the parties and cannot be derived of a general understanding, market practice or parties’ conduct, particularly when Allalouf failed to prove that such a practice exists”.
Contractual lien cannot provide a solution to all the situations described earlier. While it will enable a forwarder to delay a new cargo due to a debt on a previous cargo, it would not be possible to delay an importer’s cargo due to a customs agent’s debt or the debt of a different importer that works with the same customs agent. An agreement, no matter how detailed, will not allow a lien on an asset of an unrelated third party. While this happens in practice, it has no legal basis, and the forwarder / shipping agent would be exposed to tort claims for illegal delay of cargo.
One transaction or several transactions?
Lien provisions under the law usually require that the debt and asset will be related to “one transaction”, meaning that the delayed asset will reach the possession of the delayer under the same transaction that resulted in the debt. Even so, many contracting and services agreements are part of a long term commercial relationship, which form a sort of framework agreement. Therefore, it is important to know for the purpose of realizing the right of lien in the case of a long-term agreement, when is it considered “one transaction” and when are they several transactions?
Case law reached different conclusions in relation to this question in different cases. Even so, it seems most rulings were based on the factual circumstances of each case, with determining factors including: the content of the agreement, payment arrangements, the nature of the service and the time period over which services were provided, as well as broader judicial policy considerations beyond the case itself.
For example, in the case of Hamashbir vs. Logisticare, the Supreme Court adopted an inclusive approach, determining that the series of transactions between the parties forms a framework agreement. The Supreme Court based its ruling on the nature of the relationship between the parties, which led to a framework agreement for the provision of services over time according to dynamic needs, and the fact that the parties did not renegotiate terms before each shipment of a cargo. It was therefore clear to the parties that all shipments are subject to the same agreement signed by the parties.
In this ruling, as well as many others, a significant weight was given to judicial policy considerations. Such considerations in this respect note that without recognition of one continuous transaction, the service provider will be forced to act each time to secure a guarantee for payment of debts accrued due to its services. This is an unwanted situation, as it may lead to unnecessary price increases for services. It’s important to enable dynamic and efficient commerce that will grant a degree of certainty to the service provider regarding its guarantee, without requiring it to continuously reexamine whether the goods in its possession are related to one debt or another.
Even so, it is important to note that the Supreme Court emphasized in its ruling the fact that as time goes by, the thread connecting all the transactions into “one transaction” weakens. Therefore, it is important to take into account that even in complex, long term agreements that form a close, long lasting business relationship, as time goes by the definition of “one transaction” will be less applicable.
Therefore, in line with case law and in order to validate the right to lien between two parties, it is important not to rely on right of lien based on the law but to form one framework agreement with the entity to services are provided, through a clear, written agreement that explicitly grants the right of lien to the service provider, both with regard to shipments of goods related to the debt and to shipments of goods prior to the debt. The agreement should be for an extended period of time, in a way that makes renegotiation for each goods shipment redundant. In addition, its important to set payment arrangements that will attest to the existence of one framework transaction for all services provided, as well as a clause with agreed compensation if one party breaches the agreement.
Who is sued in court?
Let us consider the case of a forwarder who delays the goods of an exporter in the destination port, and the exporter wants to remove the lien. What is the best way to manage the proceeding?
Such a case was deliberated by the Jerusalem District Court in 2021 (the insolvency case of J. Brosh Marketing and Services Ltd. vs. the Official Receiver Jerusalem). In this case, the exporter and its court appointed receiver filed a request to the court in relation to four containers of goods exported by the exporter. The goods were shipped by an international forwarder and transported to a bonded warehouse in Georgia, USA. The exporter requested that the court order the forwarder to “act immediately to release all the goods”, in exchange for payment from the company’s funds for the cost of storage, release and transport of the goods in the USA, which have been accumulating from the time of Stay of Proceedings to the date the request will be approved.
But the international forwarder (in this case an Israeli company) did not possess the containers. They were in possession of an American corporation with which the forwarder had a business agreement. The American corporation refused to transfer possession of the containers, claiming a right of lien due to a debt. The exporter argued that the Israeli forwarder and American corporation are coordinating in order to receive preference over other creditors.
The court rejected the exporter’s request to order the forwarder to “act immediately to release all the goods”. The court determined that “it is impossible to deliberate the matter when the most relevant party, the party that possesses the containers, is not a party to the proceeding. The company (the exporter) and the receiver, which were aware that the American corporation possesses the containers and that it is holding them due to the contractual relationship and lading bill it possesses, were obligated to add it as a defendant, act to serve it the request and allow it to present its arguments. This situation, in which the party in possession of the containers is not a party to the proceeding, is impossible”. The court noted that it noticed “the alleged connection between the defendant and the American corporation, and it is obvious that there is communication between the defendant and its representative and the American corporation, but they are still two separate legal entities”.
In summary, the subject of lien involves complex legal issues, and its illegal realization may result in harsh consequences for the delayer. Therefore, when entering an agreement that stipulates a right of lien, as well as before realization of this right, it is recommended to consult with an experienced attorney in order to understand the legal actions that may be taken and avoid mistakes.
The content in this communication is provided for informational purposes only and is not intended to be comprehensive. It does not serve to replace professional legal advice required on a case by case basis. The firm does not undertake to update the information in this communication or its recipients about any normative, legal or other changes that may impact the subject matter of this communication.
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