The article examines the distinction between the Right of Lien and the Right of Retention in construction and energy contracts, both in Pakistan and international jurisdictions.
While these terms are sometimes used interchangeably in contracts, they are, in fact, two separate concepts, though their practical impact as security mechanisms in contracts remains uncertain. The Right of Lien is a common law principle and can only be exercised by a creditor, whereas the Right of Retention is based on statutory law and can potentially be utilized by both parties.
In certain industrial practices globally, the retention right of the owner for accounts payable in the construction industry is typically limited to 5% by statute. Service providers in the energy and construction sectors, such as garages or storage companies, can also exercise retention rights, demanding return of goods when services have been paid for.
Regarding Preferential Creditors in liquidation scenarios, confusion may arise concerning the priority of distribution of a company’s liquidated assets. In contracts (not winding up cases), a contractor may seek a lien over a client’s property for non-payment. To address this, clients can include a lien-waiver clause not only for contractors but also for subcontractors. A retention clause can then operate to withhold milestone payments, bank guarantees, certificates, etc., in case of a contractor’s default.
To differentiate these principles, control becomes a crucial factor. Lien generally implies the party holding the right to payment for work on goods retains control until payment is made. On the other hand, a right of retention concerns title in delivered goods, where the party with the right to payment no longer has control over the goods. Proper wording should be incorporated to ensure recoverability of goods in cases of insolvency or non-payment.
In common law systems like the UK, the two concepts are distinct, while in civil law systems, like France, they are considered separate and unique from each other. In situations where the seller no longer possesses the goods covered by the right of retention, the law automatically grants the seller the right to recover the money if the goods are resold to a third party. In such cases, additional agency-type wording in the contract may not be required to secure payment upon resale. However, returning the goods to the seller might be expected, unless the third party acquired them in bad faith, knowing about the retention right attached to the goods at the time of resale.
