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’. With such implacable competing claims on the same materials, how does the law decide who owns what? The reason this matters is that 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).

It should be noted from the outset that when materials become fixed to 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 disputes concerning materials have reduced. The primacy of proprietary rights therefore means that goods cannot be recovered, leaving only monetary claims to be resolved between contracting parties. But what about materials that are held on site but not yet fixed to the land, or materials which are being held off site, or may even be in the course of being prefabricated, as with modular building projects? I hope this article demonstrates that 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.

It is important to understand three factors at work here; payment, possession and title to the goods. Payment ought to be straightforward, but in construction this is complicated by the chains of contracts, and that fact that most materials are obtained on credit one way or another. Possession and title (i.e. ownership of goods) generally go together, and are governed by common law and statute, but contracts seek to modify that. Title will usually pass on payment.

The first complication comes from a debate over which statutes govern construction contracts. For a builder, buying, say, a van, 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 (perhaps, in our van example, because the seller has not paid their hire purchase funder in full). This statutory provision creates an exception to the rule in the title of this article, and has done since the Sale of Goods Act 1893 and under previous common law rules.

In construction contracts, there will be many instances where goods are on site and the employer has paid for them, but the contractor has not paid its subcontractor, or a subcontractor has not paid its supplier. 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 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, unlike that builder buying his van. 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.

This was illustrated in Dawber Williamson Roofing Ltd v Humberside CC, in the Divisional Court of the English High Court, 22 October 1979, (reported at 14 B.L.R. 70), where it was held that construction contracts were not sales of goods contracts, so the previous ‘good faith’ provision in the Sale of Goods Act 1893 did not apply (following the House of Lords in Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454 about ‘Somerset 13’ titles and warranties of fitness for purpose and satisfactory quality implied by statute). When the unpaid subcontractor sued the employer, delivery up of the materials was refused due to their incorporation into the land, but subcontractor’s claim for damages against the employer for conversion succeeded.

For this reason, standard forms of construction contract are drafted in such a way as to define site materials and 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’. JCT Standard Building Contract (SBC) 2016 clause 2.24 ‘Materials and goods – on site’ provides:

‘Site materials shall not be removed from storage on or adjacent to the works except for use on the Works without the Architect/Contract Administrator’s consent. Where their value has…been included in any Interim Certificate under which the amount properly due to the Contractor has been paid by the Employer, they shall upon such payment become the Employer’s property…’

The first sentence of this clause is intended to create a lien - a contractual right of control - over the unfixed materials in the contractor’s possession. The second sentence purports to confer title to the employer on payment being made.

SBC 2016 also seeks to ensure that the contractor protects the employer’s interest in site materials in its dealings with subcontractors, through clause 3.9.2.1. Therefore, down the chain, JCT Standard Building Contract Subcontract (SBCSub/C) 2016 clauses 2.15.1 and 2.15.2 replicate 2.24 in SBC so that title passes to the employer, and further provide, at 2.15.3, that where the contractor pays the subcontractor for materials before they are included in any interim certificate, they become property of the contractor.

Standard forms also cater for materials off-site, which is just as well given the increasing popularity of off-site construction. The JCT suite seeks to govern this by use of what it calls Listed Items. Under SBC 2016 these are ‘…materials, good and/or items prefabricated for inclusion in the Works which are listed as such items by the Employer in a list supplied to the Contractor and annexed to the Contract Bills’ (or Employer’s Requirements in DB 2016). Clause 2.25 provides:

‘Where the value of any Listed Items has…been included in any Interim Certificate in which the amount properly due to the Contractor has been paid by the Employer those items shall become the Employer’s property and thereafter the Contractor shall not, except for use upon the Works, remove or cause or permit them to be moved or removed from the premises where they are.’

SBC clause 4.14 then provides further safeguards for the employer in relation to Listed Items, such as clear identification and separate storage of this employer property, and provision of a bond in case of default. In this way, the employer’s interest in the off-site materials is protected in the event of contractor insolvency or other creditor action e.g. enforcement of judgments by seizure of goods held at the contractor’s premises.

In SBCSub/C the definition of Listed Items is ‘stepped down’ to the Subcontractor by listing them in the Sub-Contract Particulars, and clauses 2.15.4 and 4.11 are the equivalent clauses which seek to confer on payment, and then protect, the contractor’s title in off-site materials.

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 had to consider the efficacy of provisions in the old DOM 2 subcontract which had the same objective of passing title from the subcontractor to the contractor. P4 had supplied lighting units to a subcontractor, Tudor, which went bust before paying P4. P4 alleged conversion against Unite, the main contractor, on the basis that title in the units remained with P4. After considering an Australian authority on the status of interim payments, Egan v. State Transport Authority (1982) SASR 481, Ramsey J said: “In my judgment, as set out in Egan and as summarised in Hudson, 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 under Clauses 21.4.5.3 or 21.4.5.2....”

In P4 v Unite, there was no evidence to show that any particular interim payment under the main contract identified on-site goods and materials, and it was held that the title only passed under a settlement agreement part way through the works, under which Tudor made various commitments to complete work by particular dates, and Unite agreed to make a further payment of £190,000 followed by a further payments to cover the costs of labour only. This was construed by Ramsey J to embrace the materials delivered to site, and confer title. Clearly, that finding was particular to the facts in that case, so despite the contract drafter’s best efforts, vesting clauses do not confer the complete protection of title in materials that employers require.

Any failure to use Listed Items, the inadequacy of interim certificates, or shortfalls in a subcontract’s vesting clauses can 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.

Is SOGA s.25 really of no help in construction contracts? Thankfully, case law has developed since Dawber Williamson Roofing Ltd v Humberside CC in 1979. In a Scottish case after SOGA was passed, Archivent Sales & Development Ltd. v Strathclyde Regional Council 1985 S.L.T. 154, the Outer House of the Court of Session refused to follow Dawber Wiliamson. Archivent had supplied materials to the contractor under terms which included a retention of title clause (see below). When the contractor went into receivership, Archivent brought a claim against the council for delivery up of the materials or, alternatively, damages for conversion. Instead of following Dawber Williamson the court held that s.25 SOGA did apply to the construction contract between the contractor and its employer, the council. It therefore held that the council was a bona fide purchaser without notice of Archivent’s title, so it had obtained good title in the materials and the claim in conversion must fail. The supplier was left without recourse against the employer and would have to see what dividend came out of the contractor’s receivership, if any. Keating on Construction Contracts (9th edn, para 20-088) suggests that the Archivent analysis is to be preferred over the Dawber Williamson analysis in England today. P4 Limited v Unite (see above) suggests Keating is right. Mr Justice Ramsey said that while a construction contract is not a ‘sale’ under SOGA because it is “…a contract for works and materials…”, 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 under clauses 21.4.5.2 or 21.4.5.3.” This issue has not, I believe, been considered at Court of Appeal or Supreme Court level. However, Archivent and P4 v Unite indicate that delivery to site and payment will together be a ‘disposition’ under SOGA s.25, so employers’ title to materials is now more secure.

This does not address the question of whether payment by the employer to the contractor for materials which remain off-site is also a ‘disposition’ within SOGA s.25 though, or whether citing them as Listed Items (or equivalent) in a contract resolves that uncertainty. Title disputes could can arise where, right at the bottom of the chain, a subcontractor and its materials supplier contract out of or otherwise limit the SOGA provisions and 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. A subcontractor may lawfully possess goods but not have title in them to confer on the contractor or employer, and that could be a big problem where off-site materials are concerned. Suppliers can use ROT clauses to try to ‘leapfrog’ the broken links in the contractual chain and attack employers or contractors directly with claims in conversion when a subcontractor debtor goes bust.

Uncertainty surrounds ROT clauses. This often starts with a typical ‘battle of the forms’ argument about whether the supplier’s terms were incorporated in to the supply contract or not, through the issue of whether they create a charge over the subcontractor’s assets which must be registered at Companies House and what status they have when that does not happen, to whether they can create a duty on the subcontractor to ring-fence the price when it gets paid, and finally whether they deprive the contractor or employer of title in the materials in a particular case. The reality is that because in most cases the materials are brought to site quickly, a SOGA s.25 ‘disposition’ occurs on payment to the subcontractor, and the employer or contractor then hold title in the unfixed materials.

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 therefore more vulnerable to ROT-based title challenges than those held on busy construction sites.

What does this mean for your 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 are located. Listed Items schedules should be used to cover off-site materials and improve the efficacy of vesting clauses. 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 where there may be doubt about how robust existing contractual and financial arrangements are. 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.