In times of economic uncertainty, when the prospect of insolvency is prevalent, contracting parties need, more than ever, to be aware of issues that could have an unanticipated effect on their position. The existence of Retention of Title (RoT) clauses in contracts, particularly in the construction context, and the effect of the relevant legislation, need to be considered carefully.

Consider the position of an employer under a building contract whose contractor will be entering into a supply contract with a supplier for £200,000 worth of structural steel. The employer agrees to pay the contractor for the steel prior to it being delivered to the site. If the contractor becomes insolvent, the employer would naturally expect that he would own the steel, however, the passing of title in such goods is not necessarily quite as straightforward as that.

Sale of Goods

The Sale of Goods Act 1979 (SOGA) seeks to address the issue of when title, or in other words, ownership, passes, by providing that where there is a contract for the sale of specific goods, the seller of those goods can retain title to the goods if the parties to the contract agree that this will happen. Such RoT clauses override the general principle that title to goods under a contract for the supply of the goods passes to the purchaser upon delivery of the goods,and in their basic form, provide for a seller of goods to retain title to the goods until specified conditions are met, for example, payment in full. Provided that the RoT clause is valid, the seller's claim to the unused goods will be effective against an insolvency practitioner. In the absence of an RoT clause, if a purchaser of goods takes delivery of the goods and subsequently becomes insolvent prior to paying for the goods, the goods can become part of the purchaser's assets meaning the proceeds may be used by an insolvency practitioner to pay creditors.

Construction projects often involve goods and materials being transferred along the supply chain and it is important to provide for when title will pass, to ensure that the parties' interests are protected. In acknowledgement of this, many of the industry standard form contracts contain RoT clauses.

Supply of Goods and Services

However, not all contracts fall within the scope of the SOGA. One of the main factors in determining who owns goods or materials will be whether the contract is governed by the SOGA or by the Supply of Goods and Services Act 1982 (SGSA). The distinction between contracts for the sale of goods under the SOGA, and contracts for the sale of goods and services in Scotland under the SGSA presents some difficulties in the way in which the provision of goods and materials is managed in Scottish building contracts (which are covered by the latter Act). In essence, the transfer of title to goods under a sale of goods only contract occurs whenever the parties intend it to occur; but the transfer of title to goods sold under a combined sale of goods and services contract can occur only after delivery, when the goods are fixed to the structure. This delay in vesting of title to materials provided under a combined contract, is undesirable for a number of reasons, and the common solution to this problem is entering into a separate supply contract or off site materials agreement.

Distinctions between Scottish and English contractual effects

The distinction between contracts for the sale of goods, and contracts for the sale of goods and services does not exist in English contract law, where the sale of goods and services can be provided under one contract, and title passes regardless of whether or not delivery has been made. This makes things far easier in terms of drafting in building contracts. The Joint Contracts Tribunal (JCT) 2005 Building Contract deals with the purchase of off site materials within the building contract itself, with no need for separate documentation. On the other hand, due to the restrictions created by the operation of Scots law, the current Scottish Building Contracts Committee (SBCC) form of building contracts provides for the possibility of the employer entering into a separate agreement, either with the contractor, or with the sub-contractor with the consent of the contractor.

So, in Scotland, if the provision of goods was to form part of the overall building contract, it would not be possible for ownership in the goods to pass in advance of delivery. This causes problems particularly in respect of goods to be provided by a specialist sub-contractor/supplier, if the goods are to be held off site, or indeed on site in a compound prior to their use in the works, and need to be paid for in advance. The solution is to separate out the provision of goods from the provision of services, therefore characterising the provision of goods as a contract for the sale of goods governed by the SOGA, under which title may pass at any time as intended by the parties. This is achieved by entering into a separate agreement, an off site materials agreement, with the supplier of the goods.

Third party rights

An important point to note is that Section 25 of the SOGA provides that where a seller delivers goods to a purchaser and a third party then purchases the goods in good faith and is unaware of the seller's title to the goods, the third party will take title to the goods. For example, if a contractor orders materials from a sub-contractor, which are delivered to the site, and the employer pays the contractor for the materials, believing that ownership would then pass, but the contractor fails to pass the payment down to the sub-contractor prior to becoming insolvent, title may in certain circumstances pass to the employer without the sub-contractor receiving payment for the materials. However, there have been cases involving similar circumstances where the sub-contractor is deemed to have title to the materials and the employer is left 'out of pocket'.

Make sure that contracts are expressed to reflect the parties' intentions

The provisions of the contracts and RoT clauses therefore need to be carefully drafted to make sure that the intended effect for all concerned is achieved. Given the high incidence of insolvency presently being experienced in the construction industry, coupled with a greater inclination amongst parties to contracts to seek to enforce contractual provisions, it is important for employers to be aware of the underlying law, and it is imperative to ensure that RoT clauses and off site materials agreements are carefully drafted to ensure that title and risk in goods and materials passes when the parties wish it to occur.