Scenario: When the freight organisation that appointed you as their 3rd party, refuses to pay your account once you have delivered or warehoused their customer’s freight.
Most freight organisations are familiar with this scenario. Let’s use some fictitious freight company names to set out an example of this unhappy scenario.
Border Express contracts with Blue Sky Transport to act as their 3rd party agent, to warehouse and then deliver freight owned by Sportsgear. A consignment of goods owned by Sportsgear, is to be transported from Johannesburg to George on waybill BE1234.
Blue Sky has this consignment in their warehouse when they become aware that Border Express is having cash flow issues, and they inform Blue Sky that they won’t be able to pay for the warehousing and delivery of this freight.
What can Blue Sky Transport do to recover their losses, other than litigating?
One of the most effective mechanisms available to freight companies is exercising a lien over goods in their possession that have been placed there by the debtor.
In South African law, liens are legal rights that allow a party to retain possession of another’s property until a debt or obligation is satisfied. In South Africa there are 2 kinds of liens that apply:
- Specific lien or
- General lien.
In the above scenario, Blue Sky had possession of the goods belonging to Sportsgear on waybill BE1234 and could have exercised a Specific Lien over them until their warehousing bill was paid.
In order for a Specific lien to have validity it must be directly related to the goods that the debt arose from. In other words, Blue Sky can only have a lien over the goods that are related to the warehousing and freight charges for that particular consignment BE1234 from JHB to George.
A General lien states that Blue Sky can apply the lien to any goods in its possession that are handed over to Blue Sky by Border Express. So, if Blue Sky has other freight deposited with it by Border Express it can attach that freight as security for the original debt.
What if the lien is challenged on the basis of ownership of the goods ?
Bear in mind that a lien can only apply to the owner of the goods that the lien is applied to and not the 3rd party.
What happens if Sportsgear disputes the lien by stating that Border Express is the not the owner of the goods, or Border Express challenges the lien by confirming that they are not the owner of the goods in Blue Sky’s possession. If Blue Sky is holding goods that do not belong to Border Express, this could invalidate the claim for a general lien because although the debt belongs to Border Express the goods belong to Sportsgear.
So how can Blue Sky attach the goods legally?
Third party agency agreement
Border Express was acting as an agent for Sportsgear and therefore there may be circumstances where a lien can be asserted, depending on the specifics of the agency agreement and the nature of the services provided.
An agency relationship occurs when you act on behalf of a 3rd party and inccur costs on their behalf. In our example, Border Express acts on behalf of the principal (owner of the goods).In this case Sportsgear under an Agency Agreement.
If Border Express (acting as an agent) possessed goods that belong to the principal (Sportsgear) and deposited those with Blue Sky (the 3rd party), then Blue Sky may still seek to assert a general lien over those goods, even though their claim would primarily relate to the debts owed by the agent (Border Express) rather than the principal (Sportsgear).
Blue Sky must establish that the debt owed by Border Express relates to the agency relationship or services rendered. For instance, if Border Express incurred costs while acting on behalf of Sportsgear, Blue Sky could argue that these costs justify the lien.
In other words, Border Express contracted with Blue Sky on behalf of Sportsgear for both the costs and the benefits of Sportsgear. In the terms and conditions of Blue Sky they must state that if they act as the 3rd party agent ,the company they act for (Border Express) acknowledges that any debts incurred will be for the account of the owner of the goods (Sportsgear)and that they have informed the owner of the goods of this .
When Blue Sky decides to apply the general lien Sportsgear (owner of the goods) would not be able to argue that they gave the goods for delivery to Border Express and were unaware of the relationship between Border Express and Blue Sky, because this would have been covered in the terms and conditions of Blue Sky and it would have been the responsibility of Border Express to communicate this to Sportsgear.
Conclusion
While a general lien can provide a mechanism for a creditor to retain possession of goods when the debtor is acting as an agent, the application is heavily dependent on the circumstances surrounding the debt incurred and the acknowledgment of the principal (Sportsgear) that they are bound by the agency agreement entered into between Border Express and Blue Sky Transport.
This issue has not been comprehensively tested in South African law and so freight organisations can expect there to be a legal challenge to the application of this lien.
How can freight organisations attempt to circumvent this and further entrench their legal rights to apply the General lien?
It is suggested that freight organisations incorporate specific clauses into any agency agreement entered into with a 3rd party carrier or into their own credit application under their terms and conditions of contract.
Features of such General Lien clauses:
- Acknowledgment of Authority: The Agent hereby acknowledges that they have the authority to enter into this agreement on behalf of the Principal (the owner of the goods) and confirms that they have informed the Principal of the terms herein.
- Grant of Lien: The Agent grants the Freight Organisation a general lien over all goods and property in its possession that are held on behalf of the Principal, whether owned by the Agent or the Principal, as security for the payment of any and all debts owed by the Agent to the Freight Organisation, including but not limited to fees, charges, and costs incurred in relation to the transportation, storage, or handling of said goods.
- Scope of Lien: This lien shall extend to all goods and property in the Freight Organization’s possession, irrespective of ownership, until such debts are paid in full. The Agent acknowledges that the Freight Organization may exercise this lien without further notice.
- Indemnity: The Agent shall indemnify the Freight Organization against any claims, losses, or damages arising from the exercise of this lien, including any claims made by the Principal regarding the goods.
- Notification of Principal: The Freight Organisation shall not be required to notify the Principal of the existence of this lien, and the Agent acknowledges that such notification is not a prerequisite for the validity of this lien.