Meaning
This common law security interest allows a manufacturing service provider to retain possession of a customer’s raw materials, tooling, and finished goods until the customer pays for the work performed. It operates on the physical possession of the assets, giving the manufacturer the legal right to hold them as leverage during a payment dispute. In international supply chain relationships, this lien represents a substantial risk for product developers, as a dispute over product quality or late payments can result in their critical molds and inventory being held hostage, bringing their global distribution to a halt.
The lien is bounded by the continuous physical custody of the assets by the manufacturer and ceases to apply once the items are voluntarily released to the customer or their freight forwarder.
Security Interest
The mechanics of this lien require the manufacturer to maintain uninterrupted possession of the assets that are the subject of the unpaid invoice. If the customer falls into arrears, the manufacturer can refuse to load the finished goods onto the shipping container or deny access to the tooling needed for production. This possessory lien foreign contract manufacturer is often recognized by local courts even in the absence of a written contract, as it arises from the performance of work that adds value to the customer’s property.
The manufacturer’s leverage is immense, as the cost of stopping a global product launch usually far exceeds the value of the disputed payment. To resolve the situation, the customer must either pay the outstanding amount or file a court action to post a bond or secure the release of the assets.
Operational Exposure
Product developers must manage this risk by incorporating specific terms into their manufacturing agreements that restrict the use of such liens. The contract should include an explicit waiver where the manufacturer agrees not to assert any lien, claim, or encumbrance over the customer’s property, including tooling and raw materials, for any reason. This waiver is a control term that protects the developer’s supply chain continuity, ensuring that any payment disputes must be resolved through arbitration or court proceedings while production and shipping continue.
Without this waiver, the developer has little leverage if the manufacturer decides to raise prices or demand changes to the delivery schedules mid-contract.
Credit Risk
The use of these liens is also common during the wind-down or insolvency of either party to the transaction. If the developer is unable to pay its bills, the manufacturer will use the lien to secure payment before other creditors can claim the assets. Conversely, if the manufacturer is facing financial distress, they may refuse to release the customer’s tooling in an attempt to extract cash to pay their own suppliers.
The contract protects the developer by stating that the title to all customer-furnished equipment and tooling remains with the developer at all times and that the manufacturer holds them solely as a bailee. This clear separation of title helps the developer secure a court order to recover their assets from a failing factory.
