IX. WHAT SHOULD BE THE PRIORITY RULES BETWEEN COMPETING LIEN CLAIMANTS?
The Alberta Report recommended that the priority among perfected lien claimants should be determined in reverse order to the order in which the liens were created (see: pp. 90 and 91). This marks a departure from the Western Garagekeepers Acts which grant priority according to which lien was registered first, but does follow the Ontario Repairers' and Storers' Liens Act, s. 16. (Indeed, the Ontario approach received favourable comment on this point from Mr. Close in his article referred to earlier (see pp. 368-71).) The Alberta Report justified its recommendation on two grounds. First, it permits a lien claimant to provide services without being required to conduct a search of the Registry. Second, the repairs or services usually result in an enhancement of, or preservation, of value of the goods. The Alberta Report went on to say the reverse order rule would only apply if the lien was continuously perfected.
Some reservations to this approach were expressed by some members of the Committee. Issue was taken primarily with the assumption that all work enhances or preserves value. It was said a reverse order priority rule encourages careless or negligent repair. The last repairer need have no regard for the relationship between the repair and the value. With such a rule, prior repairers would remain vulnerable to subsequent repair over which they have no control. It would also be a reversal of the standard PPSA priority rule which relies on the registry to determine priority.
Having said this, a first to register priority rule for lien claimants is unfair to subsequent lien claimants who add value and but for their value the first lien claimant may claim little or nothing. Assume a fact situation where a vehicle has been repaired at a cost of $5,000 and, as a result, is worth $10,000. The vehicle is involved in an accident requiring $6,000 worth of repairs. The repairs are effected. The vehicle is again worth $10,000. But for the intervention of the second repairer, the first repairer would not have been able to satisfy its bill, but with a first in time priority rule the first repairer will be fully paid before the second repairer. With this scenario in mind, the Committee decided to recommend a modified priority rule which would favour a first in time priority rule except where a subsequent repairer enhances the value, in which case, the subsequent repairer would have priority to the extent of the increase in value brought about by its repairs.
A further complication arises when determining priority among lien claimants where one or more lien claimants fails to register or allows its registration to lapse. As indicated, the Alberta Report would determine priority on the basis of the order of perfection (registration or possession) and, if both or all liens are unperfected, according to the order of attachment. The Committee agreed with this approach subject to the caveat above referred to regarding a repairer which enhances value.
(1) Priority among lien claimants should follow the priority structure of the PPSA as closely as possible.
(2) In a competition between two lien claimants, the first will take priority according to the time of registration, unless it can be proven that the second lien claimant has enhanced the value of the collateral, in which case, the second repairer will take priority to the extent of the increased value.
(3) Subject to the recommendation immediately stated above, if the lien is not continuously perfected, priority should be based on the order of perfection. A perfected lien should have priority over an unperfected lien. Priority between two unperfected liens should be determined by the order of attachment of the liens.