Possessory liens over IP or data

I recently caught up on some UK legal developments, and was struck by a decision which held that the English common law did not recognise a lien over intangible property. Much of what the Court of Appeal had to say in its decision is likely to be influential in Australia.

The case involved two parties who had entered into a services contract akin to a “cloud services” agreement under which the service provider, Your Response Limited, agreed to provide database management services to a publisher, Datateam Business Media Limited. The database in issue contained details of subscribers to the publisher’s magazines. The parties fell out. The publisher purported to terminate the contract and refused to pay fees that the service provider claimed were payable. In response the service provider refused to provide a copy of the database to the publisher until payment was made. The service provider claimed that it was entitled to exercise a lien over the database pending payment of its outstanding fees.

The Court of Appeal described the common law possessory lien as a “primitive remedy”:

“it is a remedy for breach of contract which the common law confers upon an artificer to whom the possession of goods is lawfully given for the purpose of his doing work upon them in consideration of a money payment. If, pursuant to the contract, the artificer does his work, he is entitled to retain possession of the goods so long as his charges, whether agreed in advance or (if not so agreed) payable upon a quantum meruit, are satisfied. … It is a remedy in rem exercisable upon the goods, and its exercise requires no intervention by the courts, for it is exercisable only by an artificer who has actual possession of the goods subject to the lien.”

The Court held that the ability to possess the goods was an essential element of the remedy. Because it was not possible to possess the information contained in the database (as opposed to the medium in which the database was stored), the remedy could not apply to the database. The Court considered, but rejected, an argument that the service provider was able to exercise control over access to the database vis-à-vis the publisher, akin to the control that may be exercised over goods in the possession of a person.

The Court was also concerned about the unintended consequences which may have resulted had they allowed the service provider to exercise a lien:

“If a common law possessory lien can arise in a case such as the present, it would be a right in rem, not a right in personam. Probably, I would have thought, it would not be registrable as a charge. At all events, the right to such a possessory lien, if it exists, could have an impact on other creditors of the company (or individual) concerned and could confer rights in an insolvency which other creditors would not have. Further, the position of lenders could be affected: for they may well have ordered their lending arrangements and drafted their securities on the law as it is currently understood to be. Overall, given the number of IT companies and businesses in existence and the number of IT contracts being made the impact of the respondent’s arguments – if accepted – could therefore be significant. Moreover, if, as [counsel for the service provider] says as one part of his argument, a database is to be regarded as tangible property, that may have possible implications for other areas of the law altogether – for example, the law of theft (as contrasted with the legislation relating to misuse of computers).”

The decision is relevant to any services contract – whether a cloud computing services agreement or more traditional outsourcing agreement – but also to any contract under which a party will create intangible deliverables, such as reports, software or digital artworks.

A software developer who had provided services to one of our clients in Australia sought to rely on such a lien in a case I was involved in late last year, so this sort of claim does arise from time to time. It would have been handy to have the Court of Appeal judgment to point to, but it was not decided until March 2014.

The best advice is to deal expressly in the contract with the issue of access to data (or other intangible deliverables) in existence on the date of termination. Even in the case of a contract to which the possessory lien applies, the remedy yields to any inconsistent term of a contract. See here for much more detail about planning for termination of services contracts.

Readers with a particular interest in this decision should also see a recent article in Law Quarterly Review entitled “The perils of misusing property concepts in contractual analysis” by Kelvin FK Low of Singapore Management University. Professor Low considers that the Court of Appeal ought to have reached a different result in this case by applying established principles of contract law and treating the publisher’s obligation to pay and the service provider’s obligation to return the data as interdependent (meaning that the service provider’s obligation would be contingent on receipt of payment). He does, however, consider that “the reasoning of the Court of Appeal in resisting the conceptual expansion of the idea of possession is otherwise impeccable”.