The purchase of off-site materials has always been an area fraught with risk for contractors and employers; even more so with the increasing threat of supplier insolvency.
Many contractors will enter into contracts with suppliers whereby the purchase of materials will take place prior to their delivery onto site. The materials might be stored at the supplier's factory or at a third party warehouse. Purchasers should be aware, however, that if the supplier becomes insolvent ownership may not have passed under Scots law if the contract is not subject to the Sale of Goods Act 1979, even where payment has been made. Further, even if the Sale of Goods Act applies, if the purchaser cannot identify his goods with any certainty, no title will pass and he will be unable to recover them from a liquidator or receiver. This is a particular problem after insolvency when, suddenly, identifying stickers may disappear, goods may be mixed up with other goods or may be sold to third parties.
Although English contractors and sub-contractors are familiar with the use of vesting certificates to pass and protect title, they do not always have the same effect if used in a contract subject to Scots law. Therefore, they must be treated with caution, although they can be helpful for the purpose of identifying goods.
Given the legal and practical problems which arise on supplier insolvency, contractors and employers should think carefully about taking steps to manage the risk and reduce their exposure. Some suggested measures are:
- Enter into a contract for the supply of goods, separate to that for any service to be provided. This will bring the contract under the Sale of Goods Act and so that title can pass in the goods as soon as payment is made as opposed to delivery.
- Check whether the supplier actually holds title to the goods. Try to enter into contracts directly with the party who holds title.
- Keep the time between payment and delivery as short as possible. If you can, transfer the goods to a storage facility under your control prior to delivery onto site.
- Insist that goods purchased are clearly identified as belonging to you and are separated from the supplier's other goods where possible. Ask for access to the goods to ensure this has been done. If you are advised of supplier insolvency, demand immediate entry and photograph your goods pending their release to you.
- Research the financial position of the supplier. Ask for up-to-date information rather than relying on Companies House records.
- Consider asking for a parent company guarantee or a performance bond in return for payment.