Title to materials, plant and equipment in construction contracts

Introduction

In an uncertain economic climate, contracting parties may be well served by dusting off their contracts and reviewing when title in goods which are supplied or sold passes to the buyer. In large scale construction projects, it is not uncommon for inconsistent provisions to exist down the contractual chain, such that one party is purporting to pass better title to goods than it in fact has as a result of a retention of title (“RoT”) clause. This article considers when RoT clauses and the passing of title in the context of construction projects and the specific issues which may arise in the event of the insolvency of a contractor.

Object and form

A basic RoT clause provides that title in goods purchased by a buyer does not pass from the seller to the buyer until the goods have been paid for. The aim of such a clause is to give the seller of goods priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods.

The general rule in English law is that people cannot transfer a better title to goods than they themselves possess. This means that, where a party does not have title to the goods because, for instance, it has received them subject to an RoT clause and has not paid the seller for them, then that party cannot pass title to the goods on to another.

Sale vs Supply

As construction projects are likely to involve lengthy contractual chains, in order to determine who has title to particular goods, it is important to differentiate between those contracts which only sell goods from one party to another and those whereby goods are sold as part of a contract. The latter are likely to be governed by the Supply of Goods and Services Act 1982 (“SGSA”), whereas the former will fall within the Sale of Goods Act 1979 (“SGA”).

There are important differences in these two Acts which may affect whether or not good title has been passed along the contractual chain. First, section 18 of the SGA sets out rules for ascertaining the intentions of the parties as to when title to goods shall pass, and how the rules operate depends upon the state of the goods, whether the goods are specific and if anything needs to be done to the goods to make them deliverable. There are no such rules in the SGSA.

Secondly, section 25 of the SGA provides that a buyer who buys goods in good faith and without notice of the original seller's interest acquires ownership of the goods, despite the seller not having good title. This would nullify the effect of an RoT clause. There is no equivalent provision in the SGSA 1982.

Accordingly, when parties assert competing rights over materials, plant or equipment, it is important to consider the whole contractual chain and to distinguish sale of goods contracts from supply of goods and services contracts, as this will not only affect when title passes (although it is not anticipated this should lead to substantial differences), but will also determine whether a supplier who sells without good title can nevertheless provide the buyer with good title pursuant to section 25 of the SGA[1].

For example, a seller supplies a product to a subcontractor, who uses the goods in its works. If the main contractor pays the subcontractor, but the subcontractor does not pay the seller and the subcontractor then becomes insolvent, it is likely that the supplier will be entitled to rely on an RoT clause to assert title to the goods and the main contractor will have no recourse. This is because the subcontractor’s contract will likely be a contract for the supply of goods and services and, therefore, the main contractor will not be entitled to rely on section 25 of the SGA 1979.

If, however, seller A sells the goods to seller B for onward sale to a subcontractor and the subcontractor paid seller B without knowledge of the RoT clause in the contract between seller A and seller B, although seller A had not been paid it is unlikely that seller A could assert title to the goods against the subcontractor by relying on the RoT clause. This is because pursuant to section 25 of the SGA 1979, the subcontractor will likely obtain good title.

RoT in construction contracts

In the construction context, the “goods” which are of interest are the materials, plant and equipment used to carry out the works. Employers often want title to the materials on site in order that they can be used to carry out the works without the risk of such goods having to be returned in the event of a main contractor or subcontractor insolvency.

In relation to plant and equipment, during the course of the works, employers are less concerned about title passing, as long as such plant and equipment can be used to complete the works. However, following the insolvency of the contractor, the employer will likely want to be able to continue to use the plant and equipment to complete the works and may wish to assert title to such goods in order to off-set any losses the employer will incur as a result of the contractor’s insolvency.

The standard form construction contracts reflect this, by tending to deal differently with materials on the one hand and plant and equipment on the other. In general terms, the standard form contracts provide for the passing of title in relation to materials, but make express provision for the use of equipment following an insolvency event. Whilst the precise terms of the contract will be determinative, the courts have generally tended to differentiate between materials which are said to “be and become” the property of the employer, which has the effect of transferring title, and equipment which is “deemed” to be the property of the employer, which does not generally have the effect of transferring title[2]. Each of the standard forms is considered below. However, it must be remembered that even where the contracts provide for title to pass, the employer will obtain no better title than the contractor purporting to transfer the same.

JCT

The JCT building contracts generally provide that title to the materials or goods passes on payment. Until payment is made by the employer, title remains with the contractor. Notably, the transfer of title is not dependent on delivery to site. Therefore, if payment is made but the materials are off-site, title will pass from the contractor to the employer (subject to the contractor having such good title to pass). This means that on insolvency of the contractor, the employer has good title to the materials on site.

In relation to equipment, however, title does not pass. Instead, the contracts provide that the contractor may not remove the equipment from site until permitted to do so.

NEC

In the NEC3 contracts, title to items which are to be incorporated into the works passes on delivery to site or, if the items are off site, when they are marked as for the works. Therefore, in contrast to the JCT contracts, title does not pass on payment, but on delivery. However, title can pass back to the contractor if the materials are removed from site with the project manager's permission, which would include in the event of non-payment.

Where an NEC contract is terminated for insolvency of the contractor, the contractor leaves the working areas and removes the equipment. This contradicts the normal position under the NEC3, which is that the contractor may only remove equipment from site when no longer needed. Therefore, in contrast to the JCT suite of contracts, an employer pursuant to an NEC3 contract may be left in a difficult position when he is unable to complete the works because the contractor’s plant and machinery has been removed.

IChemE

The IChemE form of contract provides that title to materials will pass on the earlier of either delivery to site or once full payment has been made. In relation to equipment, the employer is entitled to use the contractor's equipment post-termination, but does not pass title to the employer. The employer is required to notify the contractor once he no longer requires the equipment and the contractor is then permitted to remove it or the employer is entitled to sell the equipment.

In Re Cosslett (Contractors) Limited [1997] 4 All ER 115, the Court of Appeal held that as the plant and machinery was only “deemed” to be the employers, legal title did not pass. However, the employer retained a contractual right to use the plant and machinery to complete the works. Disappointingly for the employer, the court held that the effect of the clause permitting the employer to sell the plant and machinery on termination was such as to create a floating charge over the equipment, which should have been registered with the Registrar of Companies. As the charge had not been registered, it was unenforceable against the administrators of the insolvent contractor.

Therefore, whilst the employer was permitted to use the machinery to complete the works, it was unable to sell the equipment in the absence of registration.

FIDIC

The FIDIC standard conditions are more complex. Initially, title to plant and materials passes to the employer on the earlier of delivery to site or when the contractor is entitled to payment. In the event that the works are suspended for more than 28 days and the materials are marked as being for the works, the contractor becomes entitled to payment and, consequently, even if the materials have not been delivered to site, title in the plant and materials passes to the employer.

The FIDIC standard terms also provide that where the contractor's employment is terminated, the contractor is required to deliver any required “Goods” to site and the employer may use such Goods to complete the works. “Goods” includes both the contractor's equipment and temporary works. This is a more generous provision than that found in the other standard form contracts, as it potentially means that the employer can require the contractor to deliver plant and materials currently held off site and not yet paid for.

The FIDIC standard conditions also provide for the sale of contractor's equipment if the contractor has failed to make a payment due to the employer. However, the employer must account to the contractor for the proceeds of sale which exceed the sum due from the contractor. As in Re Cosslett above, it is likely that for such power to be enforceable against an administrator, the floating charge which the right to sell creates will have to be registered.

Conclusion

In summary, when considering who has title to materials, plant and equipment it is necessary to:

  1. identify any RoT clauses and determine their meaning and effect;
  2. consider the whole contractual chain between those asserting ownership and to determine whether the contracts fall within the SGA or the SGSA;
  3. determine whether title has passed in the goods in question or whether there is only an entitlement to use such goods to, for example, complete the works; and
  4. decide whether the power to sell goods amounts to a floating charge which required registration to be enforceable.

Please see link for original article's footnotes