To assist with counterparty risk in the current climate, liens can work to protect your interests in work supplied before payments are made, by ensuring that property in the goods does not pass until payment is made in full.
What is a lien?
Broadly speaking, a lien is the right of one party to hold or retain possessions as security for performance of an obligation owed by another party. This right expires upon performance of the obligation. However, it must be noted that by simply performing work a lien is not, of itself, instantly formed. Liens are limited in their application and are difficult to establish unless there is an express right under the contract governing the supply or by the power of statute. Notably, liens may only apply to property that is physically transferable.
Generally, there are four types of liens:
- contractual liens;
- statutory liens;
- common law liens; and
- equitable liens.
Contractual liens are a creature of negotiation, although by and large they are uncommon. A provision for a lien within your contract can protect you from suffering from non-payment (or some other pre-agreed situation) and presumably would generate the rights and entitlements of a common law lien (see below) – provided you are either in possession of the property or in a position to take possession of that property. Either way, it is sufficient to say for the purposes of this blog that parties should review their terms and conditions and contractual position for the presence of a lien and consider whether a lien should be included in their contractual arrangements moving forward. If you are unsure, we can assist with that.
Statutory liens include those under the Carriage of Goods Act 1979 (carriers liens) and Sale of Goods Act 1908 (unpaid sellers liens) and Security of Payment legislation in all jurisdictions except Queensland, Northern Territory and Western Australia (although we note that in Western Australia this may change with the Building and Construction Industry (Security of Payment Bill 2020).
Liens under the Building and Construction Industry Security of Payment Act 2002 (Vic)
Under this legislation, when a payment claim is issued by the claimant, the respondent must make payment in full by the due date or provide a payment schedule within 10 business days. If the respondent:
- neither provides a payment schedule nor pays the whole of the ‘claimed amount’ (the amount claimed in the payment claim) on time; or
- provides a payment schedule and the ‘scheduled amount’ (the amount the respondent proposes to pay) is less than the claimed amount; or
- provides a payment schedule but does not pay the scheduled amount by the due date,
then the claimant may exercise a lien in respect of the unpaid amount over any unfixed plant or materials that they have provided to the respondent in connection with works under the construction contract.
Under this legislation, the claimant will retain ownership of the unfixed plant or materials until the respondent pays any outstanding progress payment that is due. In order to effect a lien, the claimant will have to serve a Notice of Intention to exercise a lien. Once served, the respondent is not entitled to fix, remove, sell or otherwise deal with the property specified in the notice.
One of the benefits of this legal tool is that the claimant becomes a secured creditor with priority access to the unfixed plant or materials over any unsecured creditors in any distribution of assets by an administrator. However, the lien does not give the claimant any right against a third party who becomes the owner of the property in question.
Once the requested payment is made the lien expires.
But how does this statutory lien ensure that payment is made? Well, in the same sense that a court order cannot physically force a company to make payment, a lien cannot either. However, as the respondent cannot remove, sell or otherwise deal with the unfixed plant or materials until payment is made, the claimant’s right to payment is at the very least secured against an asset and will be prioritised in the event of the respondent entering administration.
Common law liens
At common law, liens may be general or specific. Regardless, the lien is a right to retain possession of certain property of another party until their obligations are discharged. These liens arise by implication of law regardless of parties’ intentions. Actual possession of the property in question is crucial. Without possession there is no lien. Further, the rights afforded to the lien holder are only applicable while the lien holder is in possession of the property. Similarly, the lien holder cannot steal the property in question in order to assert a lien over it, the property must have been given to the lien holder with the express or implied authority of the owner.
A general lien allows you to retain possession of (but not sell or otherwise deal) any goods until all sums payable by the owner of the goods are satisfied; not just those sums payable in respect of work performed on those particular goods held hostage. These general liens, which can arise by trade, custom or express contract, are broader than specific liens as they can attach to a broader class of goods. However, general liens are harder to establish and must be established by strict proof of custom or usage. Unless the common law has recognised a relationship as generating a right to a general lien, establishing such a lien is a question of fact.
Much of the difficulty in proving a general lien lies in the fact that the custom must be so obvious such that everyone in that trade who enters a contract with that usage as an implied term. The term must be uniform, certain and reasonable. Most examples of recognised relationships include professional services such as a solicitors’ lien where a solicitor may hold onto client’s documents until all debts owed to the solicitor by the client are paid. Accountants have a similar right.
In comparison, a specific lien only secures obligations that are incurred in respect of the goods that you hold hostage. Therefore, unless you can hold, or obtain possession of, all items of property related to the sums of monies you seek, the general lien is more favourable – although more difficult to establish. A common everyday example of a specific lien is for payment in respect of improvement work done on a chattel. For instance, a mechanic has a right to hold your car until you, the owner or driver of the car, have paid the mechanic for the work performed.
If you are able to demonstrate a common law lien they are generally exempt from the operation of the Personal Properties Securities Act 2009 (Cth) (PPSA), which means that you will have priority over any registered security interests held by other creditors of the respondent (see Other Interests below).
Equitable liens are those created by the law of equity by the courts, on a case-by-case basis, in order to maintain, or restore, a degree of fairness or justice. It is a right to have a demand (such as that for payment) satisfied from all or part of a particular piece of property or fund to pay a debt. An equitable lien arises by a court implying its existence as a result of general considerations of fairness and justice as applied to the parties and their conduct. Equitable liens can however be void by the express or implied agreement of the parties. Unlike common law liens, equitable liens do not require actual possession of the party and can apply absent a contract providing for a lien.
Oftentimes, the necessary equitable interest will arise where one party spends money improving the property for another where there was either express or implied agreement that the performing party should have an interest in the improved property. The party who performed the work and is owed the debt may then acquire an equitable interest in the property proportionate to the improvement.
In the construction context, however, an equitable interest in the work does not arise merely because work has been performed at the request, and for the benefit of, another party. It would be unusual to see an equitable lien awarded to a contractor in this sense. Furthermore, equitable liens are a tool of last resort as they require a significant investment with the juridical process.
Establishing a lien is only part of the picture; competing interests may be held by other parties. You must be cognisant of the fact that there may be multiple interests over the relevant property. For instance, security interests under the PPSA will trump any contractual (but not common law) liens that may have been negotiated. Therefore, despite any efforts to the contrary, secured creditors will have priority under the PPSA.
If you have any questions about liens, please contact a member of our national Construction and Infrastructure team.
Roderick Reynolds | Law Graduate