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12 August 2020
Under the Maritime Code, a shipyard which constructs or repairs a ship may retain physical possession of that ship until it has been paid by the relevant shipowner. This retention right creates a security or lien over the vessel which has priority over secured creditors and may therefore be of great value to a shipyard in incentivising owners to pay.
While the retention right exists as a general non-statutory rule for movable goods, it is also specifically codified in Section 54 of the Maritime Code for ship construction and repairs, which provides that "anyone who builds or repairs a ship, may exercise right to retention in the ship to secure their claim in respect of the building or repairing as long as they still have the ship in his possession".
In other jurisdictions, similar rights might be referred to as a 'possessory lien' or a 'builder's lien'. In most cases, these terms refer to the same concept (ie, a right to refuse to hand back an object which belongs to another party until it has paid the amounts due and owing).
A key feature of a retention right in accordance with Section 54 of the Maritime Code (as is also the case in many other jurisdictions) is that it ranks ahead of all other encumbrances in the relevant vessel, save for maritime liens.
There are three requirements which must be strictly adhered to for a retention right to exist.
First, the yard must have the vessel in its physical and legal possession. Several court cases on retention rights have concerned possession and how strictly it should be interpreted. The Norwegian courts have generally been quite restrictive, finding continuous possession – so as to exclude the owner's disposal – to be required. If a yard allows an owner to use a ship temporarily, this requirement is no longer fulfilled.
Second, the relevant payment must be due and payable. If the due date for payment falls after the agreed time for redelivery to the shipowner, the ship cannot be lawfully retained. Therefore, if a shipyard has offered credit or otherwise agreed to postpone payment until after redelivery, it generally cannot retain the ship on the grounds that payment did not happen on the delivery date or earlier. Similarly, provisions that entitle shipowners to delivery against security in case of disputes on final settlement may affect the right to retain a vessel.
Third, the claim and possession of the object must stem from the same legal relationship (ie, from the same contract). In Norway, this requirement is interpreted rather strictly. By way of an example, if a ship goes in for repair, the yard would not normally be able to exercise a retention right due to a default in payment for any previous repair.
Owners occasionally remain unwilling – or unable – to pay. The question is then whether a yard can recover its debt by selling the relevant ship. Retention rights generally do not imply an automatic right to sell a ship that belongs to another party. Contrary to a mortgagee, a shipyard must obtain a judgment or award before it can put a vessel up for sale to recover its claim. The reason for this is that the courts require an opportunity to decide on the merits and quantum of a yard's claim before authorising any such sale.
If a judgment is secured, a retention right under Section 54 of the Maritime Code will give the yard's claim for payment priority over all other encumbrances in the ship (save for maritime liens), including mortgages. With a judgment in hand, the next step for the yard would be to initiate proceedings for the ship's sale by judicial auction; the yard's claim against the proceeds would then rank ahead of other claims.
The right of retention for non-payment is one of the key weapons in the arsenal of shipyards and enables them to exert a significant amount of pressure on both shipowners and other creditors to require prompt payment as and when it is due.
For further information on this topic please contact Øyvind Axe, Morten Valen Eide or Andreas Slettevold at Wikborg Rein by telephone (+47 22 82 75 00) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Wikborg Rein website can be accessed at www.wr.no.
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