Shipyards’ right of retention for non-payment
Under the Norwegian 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 for works done. 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 the Norwegian Maritime Code section 54 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 “builder’s lien”. In most cases they refer to the same concept: i.e. a right to refuse to hand back an object which belongs to the other party until one has received rightful payment of amounts due and owing.
A key feature with of a retention right in accordance with the Norwegian Maritime Code section 54 (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.
Possession, claim and connection
There are three requirements which need to be strictly adhered to for a retention right to qualify.
Firstly, 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 is to be interpreted. Norwegian courts have generally been quite restrictive, and found continuous possession – so as to exclude the owner’s disposal – to be required. If the yard allows for the owner to use the ship temporarily, the requirement is no longer fulfilled.
Secondly, the relevant payment must be due and payable. If the due date for payment falls later than the agreed time for redelivery to the owner the ship cannot be lawfully retained. So if a shipyard has offered credit or has otherwise agreed to postpone payment until after redelivery, it may generally not retain the ship on the grounds that payment did not happen on the delivery date or earlier. Similarly, provisions that entitle the owner to delivery against security in case of disputes on the final settlement, may affect the right to retain the vessel.
Thirdly, the claim and the possession of the object must stem from the same legal relationship, i.e. from the same contract. In Norway, this requirement is interpreted rather strictly. By way of example, if a ship comes in for repair, that yard normally could not exercise a retention right due to a default in payment for any previous repair.
A right to sell?
Occasionally, the owner remains unwilling – or unable – to pay. The question is then whether the 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, the shipyard needs to get a judgment or an award before the vessel can be put up for sale to recover the claim of the yard. The reason for this is that the courts require an opportunity to decide on the merits and quantum of the claim from the yard, 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 ahead of all other encumbrances in the ship including mortgages, save for maritime liens. With a judgment in hand, the next step for the yard would be to initiate proceedings for having the ship sold by judicial auction, and its claim against the proceeds would then rank ahead of other claims.
For a shipyard, its right of retention for non-payment is one of the key weapons in its arsenal and enables them to exert a significant amount of pressure on both the owner and its other creditors to require prompt payment as and when due.