Preventing Factory Retention Claims over Customer Owned Injection Moulds
Preventing factory retention over customer injection moulds demands PRC fapiao tax invoices, steel asset stamping, and pre-suit court preservation clauses.
Right of Retention
Meaning
Statutory authority granted to a creditor to hold possession of a debtor’s movable property until the associated debt is paid in full provides an essential security interest in commercial and civil transactions. Under Chinese civil law, the right of retention allows a party who lawfully possesses property belonging to a debtor to refuse to return that property if the debtor fails to perform their obligations under the contract. This legal remedy is commonly used in manufacturing, warehousing, transport and repair contracts where the service provider holds the customer’s goods or equipment during a payment dispute.
The application of this right is bounded by the requirement that the possession of the property must be lawful, and the retained property must generally belong to the same contract as the unpaid debt, with specific exceptions for transactions between commercial entities.
Legal Enforcement
Procedural steps and statutory notice requirements must be followed to legally enforce a lien and eventually liquidate the retained property to satisfy the outstanding debt. To execute a right of retention, the creditor must first issue a formal notice to the debtor demanding payment of the unpaid balance. Under the PRC Civil Code, the creditor must allow the debtor a grace period of at least sixty days to settle the debt, unless the contract or the nature of the goods requires a shorter or longer period.
If the debtor does not pay within this period, the creditor can agree with the debtor to keep the property as payment or can sell it through an auction or a direct sale, using the proceeds to satisfy the debt and returning any leftover money to the debtor.
Contractual Waivers
Strategic inclusion of waiver clauses in commercial agreements allows buyers of manufacturing and logistics services to protect their critical assets from being held during disputes. To avoid the disruptions that can occur when a supplier exercises a right of retention over molds, tooling or raw materials, buyers should negotiate explicit waiver clauses in their service contracts. These clauses state that the supplier waives any statutory or contractual lien over any property provided by the buyer, ensuring that the buyer can recover its assets at any time, even if there is an ongoing payment dispute.
These waivers are legally enforceable and are highly effective for protecting the continuity of the buyer’s supply chain and production lines.
Supply Chain Impact
Credit risk management policies and inventory control procedures must be designed to account for the potential exercise of liens by transport and warehousing partners. To manage the risk of a right of retention being exercised against their inventory, companies must maintain clear records of all payments and ensure that any disputed invoices are resolved quickly. If a transport company holds a shipment of goods because of an unpaid transport bill, the delay can disrupt the production schedule of the factory and cause significant losses.
Having a structured process for handling payment disputes and maintaining buffer stocks of critical materials helps to minimize the operational impact of these legal disputes on the overall supply chain.
Moulds Held against an Unpaid Invoice and Getting Them Out
Extracting held moulds requires isolating tooling payments from component claims, deploying lien waiver clauses, and securing court preservation orders.