Blog

Construction & Engineering

‘No-one gives what he does not have’: title in materials and construction insolvency in brief

As the effects of Carillion’s liquidation ripple outwards, it is highly likely that this will lead to disputes about the ownership of materials. Some of you will recall the above phrase, or even its Latin progenitor, ‘Nemo dat quod non habet’. When site activity ceases due to insolvency events, contracts will be pulled out of drawers and dusted off to see what they have to say about who owns which materials. Unpaid suppliers and subcontractors will contend that ownership of materials remains with them regardless of the litany of applications and interim certificates up the chain, and protestations follow from employers asserting that ‘According to the main contract, it’s ours’. How does the law decide who owns what? This matters because the party who owns the goods, but is not paid in accordance with their contract, is entitled to recover them from whoever possesses them, and if it cannot do so, it can bring claims in tort for damages for conversion (essentially, the civil law equivalent of theft).

When materials become incorporated into the land, they become property of the landowner regardless of how the contract governs ownership (or ‘title’) in the chain below.  With the advent of ‘just in time’ delivery, the lapse between despatch by a supplier and installation on site has reduced, which is why there are now fewer disputes concerning materials. On incorporation, only monetary claims are left to be resolved.   However, when materials held on site are not fixed to the land, or materials are being held off site, or are in the course of being prefabricated, they remain vulnerable to recovery action. If the drive for more off-site construction is to be sustained, supply chains and the contract structures underpinning them need to be more robust.

Section 25 of the Sale of Goods Act 1979 (‘SOGA’) provides that a buyer who buys goods in good faith and without notice of the original owner’s interest acquires ownership of the goods, despite the seller not having good title. This statutory provision creates an exception to the rule in the title of this article.  Does SOGA s. 25 prevent the unpaid subbie or supplier from whisking the materials back to the depot when a project goes into suspension due to insolvency?  The supply of materials by the supplier is clearly sale of goods under SOGA, so s.25 protection will normally apply. However, construction contracts concern the supply of labour and materials; the contractor does not agree to buy only the materials which a subcontractor supplies in the course of providing its services.  Although everyone agrees that construction contracts are now covered by the Supply of Goods and Services Act 1982, that statue contains no equivalent to SOGA s.25.  On this logic, an unpaid supplier who still has title in materials can reclaim them until they become part of the building, or claim damages in conversion against an employer, despite the lack of a direct contract between them. Case law from before 1979 indicated that the previous ‘good faith’ provisions did not apply because construction contracts were not sales of goods contracts, and subcontractor’s claims for damages against employers for conversion succeeded.

Standard forms of construction contract are therefore drafted to govern title in unfixed materials, both on and off-site, by means of ‘vesting clauses’.  The JCT suite defines site materials as ‘...all unfixed materials and goods delivered to and placed on or adjacent to the Works which are intended for incorporation therein’, and calls off-site materials ‘Listed Items’, and requires these to be listed in the contract if they are to be regarded as such.  The contracts firstly create a lien - a contractual right of control in favour of the employer - over the unfixed materials in the contractor’s possession, and then purport to confer title to the employer when sums are certified then paid.  Payments made prior to certification result in title passing to the contractor.  Payments in respect of Listed Items apply further safeguards for the employer, such as clear identification and separate storage of this employer property, with security in form of a bond in case of default.  By this, the employer’s interest in the off-site materials is protected in the event of contractor insolvency or seizure of goods to satisfy court judgments.

But it’s not ‘game over’ for claims in conversion; there are problems.  Firstly, despite the rise of off-site construction and the perennial risk of insolvency, it is rare for parties to go to the trouble of agreeing what the Listed Items are. Hopefully, industry practice will improve in time.   Secondly, these vesting clauses only work if the materials concerned are adequately described in an interim certificate.  In P4 Limited v Unite Integrated Solutions plc [2006] EWHC TCC Mr Justice Ramsey, when considering the efficacy of provisions in the old DOM 2 subcontract, said: “In my judgment, …, the general valuation of a lump sum for work carried out does not indicate what materials or goods have been paid for and is insufficient for property in particular goods to pass. In this case, whilst there were express provisions for passing of property, I consider that to operate those provisions it is necessary to identify with particularity the materials and goods which are the subject of payment, if property is to pass. A general lump sum interim valuation is insufficient and does not lead, in this case, to certain goods becoming the property of Unite or the Employer....”  Because there was no evidence to show that any particular interim payment under the main contract identified on-site goods and materials, the court found that title only passed under a subsequent settlement agreement.

Vesting clauses do not confer the complete protection of title in materials that employers require.  Therefore, any failure to use Listed Items, any inadequacy of interim certificates, or shortfalls in a subcontract’s vesting clauses can and should be overcome by a tripartite vesting agreement between employer, contractor and subcontractor, in which the subcontractor agrees that title in specified materials passes to the employer as soon as payment is received from the contractor.  In this way, the employer’s interest in unfixed materials can be protected against insolvency far sooner than relying on vesting clauses in contracts.

Thankfully, case law concerning SOGA s.25 has developed since 1979.  Again in P4 Limited v Unite (see above) Mr Justice Ramsey said that SOGA s.25 goes wider than just sales, and “I therefore find that when goods and materials are “delivered to, placed on or adjacent to the works” the agreement that leads to the passing of property under clause 21.4.5.2 or 21.4.5.3 [of DOM 2] gives rise to a sufficient “disposition” within the meaning of Section 25(1) of the Sale of Goods Act 1979. That “disposition” is not however sufficient to transfer property unless and until payment has been made …”  While this issue has not been considered at Court of Appeal or Supreme Court level, it seems clear that delivery to site and payment will be a ‘disposition’ under SOGA s.25, so employers’ title to materials is now more secure. 

This may not help where materials which remain off-site though.   Title disputes can still arise where, right at the bottom of the chain, a subcontractor and its materials supplier agree to the supply of materials on the supplier’s terms, which often contain a Retention of Title clause (‘ROT’).  These clauses say that title in the goods remains with the supplier until he is paid for them, and so the maxim that ‘No-one gives what he does not have’ could still be in play.  Uncertainty surrounds ROT clauses’ legal status.  However, in practice, there is not a lot that suppliers can do in order to get the benefit of any ROT clause, other than insisting on separate storage, using appropriate labels asserting their ownership, and reserving a right to inspect materials from time to time to check they’re still labelled, so that the employer and/or contractor find it harder to deny they had notice of the supplier’s title.  Materials held off-site are more vulnerable to ROT-based title challenges than those held on busy construction sites.

What does this mean for you or your business?

While SOGA protects employers’ and contractors’ title in materials when contractors and subcontractors respectively go ‘pop’ and suppliers seek to recover what they believe they still own, vesting clauses in standard forms alone are inadequate protection due to the inherent limitations of interim certificates.   Materials off-site remain vulnerable to claims by suppliers due to doubts about whether a qualifying ‘disposition’ has occurred which defeats any ROT clause in a suppliers’ terms.

What do you need to be doing now?

Robust site security, prompt payment practices and soonest installation are the best practical steps. However, there are various contractual steps employers and contractors could take to ensure they get title in materials prior to incorporation in the building, regardless of where they are located.  Listed Items schedules should be used to cover off-site materials. Most standard forms specify a bond to support vesting clauses, which can be enforced if any signatory did not, in fact, have title to the goods. Explicitly identify valuable materials in interim certificates where possible to ensure ‘SOGA-qualifying’ dispositions are recorded. Use vesting agreements to supplement the contractual chain as necessary.  For specialist installations, direct payments to suppliers should be considered. My next article will look at direct payments to subcontractors and suppliers and the pitfalls of that and how to avoid them.

 

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.