Stop the RoT: Retention of title and construction contracts
In the uncertain times in which we live and in circumstances where our sector accounts for ¼ of all UK insolvencies it is important to be clued up on what happens to goods and materials destined for use on projects in the event there is a failure in the construction supply chain.
Indeed the question of 'who owns what' when it comes to goods and materials used in construction projects is a tricky but extremely relevant one. So who owns materials to be used in a construction project? Is it:
- The Employer?
- The Contractor? or
- Someone else?
Of course the answer is that it depends.
As between the Employer and Contractor, the positions under the published form of the JCT Design and Build Contract (2016 edition) are straightforward. Rehearsing some scenarios:
- If goods have not been paid for under the JCT, are sitting on site but not incorporated into the works then title has not passed to the Employer, but the Contractor (or its insolvency practitioner) can't remove the goods from site (clause 2.21).
- If goods have been paid for (ideally being clearly marked on an interim payment) and are incorporated into the works then it is as clear as day that they form part of the land and are the Employer's (clause 2.21).
- If goods have not been paid for and are not on site then these do not belong to the Employer.
- If goods have been paid for but are not on site then if so stated in the ERs (or the JCT's Listed Item provisions are used) they are the Employer's property and the Contractor cannot allow them to be moved from where they are stored (clauses 2.22/4.1).
The JCT approach, which is based on the location of the goods and whether or not they have been paid for should be contrasted with the NEC approach, which is based on whether or not the Contractor itself has good title to the goods (clause 70.2, NEC4).
Simple enough, no? The key tension lies in the relationship between the Contractor and the company who have supplied the materials, the Supplier for our purposes.
What happens when the Supplier has delivered the goods to site but not received payment for them, in circumstances where the Contractor has been paid under their JCT and those items have been included in an interim valuation? Most supply contracts contain a 'retention of title' clause which provides that title in the goods does not pass to the Contractor until payment has been made to the Supplier. The position without such a clause is that title passes on delivery.
We're back to considering the status of the goods themselves. If the goods have been incorporated into the works the 'retention of title' clause will be largely ineffective and the Supplier will rank only as an unsecured creditor in the Contractor's insolvency.
However, things get tricky where the goods are sitting on site and have not been incorporated into the works. In these circumstances the 'retention of title' clause may offer some legal assistance to the Supplier. It does not mean that the Supplier can round up the heavies, walk on to site and recover its goods; that is likely to be a trespass - see "Old Fashioned Way".
Of course an Employer can always do nothing and rely on the fact that it is a bona fide purchaser for value without knowledge of the retention of title clause. However, there is a risk the Supplier can obtain an injunction or bring a civil theft claim (Conversion).
So what can an Employer do to mitigate the risk to goods for use in its project?
- While it might seem counter-intuitive to continue to make payments to contractors or sub-contractors who are facing insolvency, in some situations it may protect the payer’s position as regards ownership of valuable goods. And indeed it's possible that if the Contractor hasn't been paid by the Employer there will be a residual contractual liability to pay the Contractor for those bits under the building contract.
- It can contract directly with suppliers such that it retains control of payments for value goods for use in the works.
- Ensure its project team properly administers and supervises contracts where Listed Items or vesting certificates are used – if that means going to Bulgaria once every month to check up on the storage of goods and materials, then добре! [good]
- Ensure that there is sufficient security at the site, particularly in the event of insolvency of one party, to cover off the risk of the Old Fashioned Way.
- It is obvious to say so but it should do what it can to incorporate valuable items quickly into the works.