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Key Points
If you supply materials on a construction project and the main contractor becomes insolvent before you receive payment, a number of factors will determine whether you can recover the materials or not
Materials supplied under a supply only contract may be treated differently from a supply and installation contract
Once incorporated into the land, the materials will not be recoverable
It is important to always include a robust retention of title clause in your supply contracts and subcontracts
Background
We have been approached on a number of occasions recently regarding issues relating to material ownership. By way of example, say a steelwork subcontractor has been contracted by a main contractor to supply and erect a steel frame for a new student accommodation project. The steelwork subcontractor delivers a large portion of the steel to site, some of which is installed and the remaining materials are being stored at the subcontractors premises.
Subsequently, the main contractor becomes insolvent. The employer has paid the main contractor for the steelwork installed and the steel being stored both on-site and off-site, however, the main contractor has not paid the steelwork subcontractor. The steelwork subcontractor has a ‘retention of title’ clause in its subcontract which states title does not pass to the main contractor until payment is received by the subcontractor, however, the employer is not aware of this clause.
Who has title (legal ownership) to the materials?
Unfortunately, there is not a ‘one size fits all’ answer to this question….it depends!
Materials on site
Let’s start with the steel that has been delivered to site but is not yet installed. The answer will depend on the specific terms of the main contract and/or subcontract. In the example scenario, the steelwork subcontract is for supply and installation. This is important because who has title may be different depending on whether the contract is for supply only or supply and installation.
Supply and install contracts are governed by the Sale of Goods and Services Act 1982 which provides that title can only be passed on where that person/entity has title to pass it in the first place. In the current scenario, the steelwork subcontractor’s retention of title clause should operate to stop title passing to the main contractor. Accordingly, the main contractor cannot pass title to the employer. It is important to note that the retention of title clause may not be effective if the materials have been mixed with others and are not identifiable as the subcontractor’s.
Following the insolvency of the main contractor, the subcontractor should still be able to claim possession of the materials on site, although they may encounter difficulty when trying to recover the materials. They may not be able to enter site without permission as this would likely be considered trespass. If the employer is not willing to permit recovery of the materials, the subcontractor may have a claim for conversion i.e. interference with someone else’s property, against the employer.
The employer would have had more protection for materials purchased under a supply only contract, rather than a supply and installation contract. This is due to the protection offered by the Sale of Goods Act 1979 which provides that if someone buys goods in good faith and without knowledge of any rights of the original seller (e.g. a retention of title clause) then title will still transfer to the buyer irrespective of whether the transferor had title or not.
If there is no ROT clause in the subcontract, the default position is that title will pass when the parties intended it to pass, which will normally be on delivery.
Materials incorporated into the works
The above does not apply to the materials which have already been installed. Once materials are installed on-site, they are deemed to be incorporated into the land. In such a scenario, the installed materials become the property of the landowner (who may also be the employer) irrespective of whether the supply contract includes a retention of title clause or whether they have paid for the materials or not (provided there has been no bad faith on the part of the employer/landowner).
The employer may still be liable to the main contractor for the cost of supplying and installing the steel and the contractor would in turn be liable to the subcontractor, however, there is no contractual link between the employer and subcontractor and therefore no obligation for the employer to pay the subcontractor due to the contractor’s insolvency. In this situation, the subcontractor would likely have to register its claim as an unsecured creditor with the main contractor’s insolvency practitioner.
As an aside, if materials have only been installed on a temporary basis e.g. temporary piles, it is likely they will not be considered to have been incorporated into the land. In this situation, title for the materials will not have passed to the landowner and the subcontractor should be able to claim possession.
Materials off-site
It may be possible for ownership of materials off-site to pass from the subcontractor to the main contractor and/or employer, however, the contracts would need to contain a clear mechanism that facilitates this. For example, under JCT contracts, there is an option to include “Listed Items” in the contract. These are specified items that become the employer’s property following inclusion in an interim payment, however, care would need to be taken to ensure similar provisions are also included in the subcontract.
Such materials would normally need to be separated and clearly identified as the employer’s property, however, is unlikely a supplier/subcontractor would comply with the latter if they had not been paid for the materials. Under English Law, it may also be possible to use a vesting certificate to transfer ownership to the employer, however, such certificates are not valid under Scot’s Law.
In the current scenario then, it is unlikely the employer will be able to claim possession of the materials stored at the subcontractor’s premises, unless both the main contract and subcontract contain a mechanism such as that identified above and the materials have been separated and marked for the employer.
Recommendations for Subcontractors and Suppliers
What can you do to protect yourself from non-payment for materials following the insolvency of a main contractor?
Always include a robust retention of title clause in your contracts, whether for supply only or supply and installation.
Ensure you notify the employer and/or landowner in writing of the existence of such a clause
Include a notice with the delivery of materials and mark the materials confirming you retain title until payment received
Ensure materials are stored separately on site and marked as your property until payment received
Always carry out a credit check and undertake due diligence on main contractors before entering into contract with them
Negotiate shorter payment terms or advanced payment for materials prior to delivery
Ensure any payments for materials state the specific goods that are being paid for e.g. by reference to serial or batch numbers
If you believe you retain title to the materials but are not permitted to enter the site to take possession, you may wish to consider a claim for conversion. Alternatively, it may be possible to apply to the courts for an interdict/injunction to prevent the employer from interfering with the materials.
Always seek advice before deciding on a particular course of action and act quickly to maximise the likelihood of a favourable outcome
If you are experiencing difficulty with recovering payment for materials or would like further information on how you can protect yourself for future contracts, please get in touch.