The recent liquidation of Carillion has highlighted the financial vulnerability of those sub-contractors and suppliers who happen to be at the bottom of the construction development chain. One way of attempting to achieve some degree of commercial protection is to include a clause in the supply/service contract stating that ownership in the goods and materials supplied will not pass until payment has been received.
Such a clause, known as a “retention of title” clause (ROT) or Romalpa clause (after the case which established its validity) does not always offer the protection it promises to give at first glance.
Retention of Title Clause
To ensure proper compliance, consideration of the relevant legislation is required. The Sale of Goods Act and the Supply of Goods and Services Act both provide that title in the goods passes from the seller to the buyer when the parties intend it to pass to. This can be, for example, upon delivery, upon payment or upon use. This overrides the general principle that title passes on delivery of the goods, and can give an unpaid supplier the title priority he is seeking.
However, there is a potential obstacle. Where the contract is for the sale of goods or materials (as opposed to a contract for services), section 25 of the Sale of Goods Act 1979 applies This provides that a buyer who purchases goods in good faith, and without notice of the original seller’s retained claim to title, shall acquire ownership of the goods, notwithstanding that the seller does not have a good title to pass on. It is therefore imperative that the supplier labels his materials to confirm that they remain his property and includes ownership details. He should also reserve a right to inspect the materials from time to time to confirm that the labels are still there.
There is no equivalent provision in the Supply of Goods and Services Act 1982, so there is a distinction to be made between “materials only” suppliers and sub-contractors who are providing a service.
Even if the ROT clause has been properly worded and the goods have been labelled correctly and separately stored, the Employer may take action which has the effect of watering down its effect. It is not unusual for an Employer to include a clause in the main contract which seeks to provide similar protection to the Employer regarding the title of goods delivered to site. He may also insist that the clause is effectively “passed down” by the main contractor to any sub-contractor engaged by the main contractor. For example, clause 2.15.2 of the JCT Design & Build Sub-Contract Conditions, 2016 edition states that:-
“Where……the value of any Site Materials has been included in an Interim Payment under which the amount properly due to the Contractor has been paid to him by the Employer, they shall upon such payment become, and the Sub-Contractor shall not deny that they have become, the Employer’s property”.
Such a clause is clearly in conflict with the suppliers’ ROT clause which prevents property passing until the supplier himself has been paid. Generally, the law remains that a party can only pass on title to goods if the owner of those goods has previously passed title to him. As there is no separate contract between the Employer and the supplier who owns the goods, title will usually remain with the supplier, subject, of course, to the supplier properly labelling the goods and referring to the ROT etc.
Incorporation of Goods and Materials
The Employer may have one more trick up his sleeve to defeat the ROT where he is the owner of the development. If the goods have been incorporated into the building under construction they effectively become “fixtures” and as such, they become the property of the owner, even if payment has not been made for the goods. This rule “trumps” the ROT provisions. The supplier’s claim becomes a right to payment rather than a right to the return of the goods.
Other Steps that can be taken to reduce financial risk
As well as the inclusion of the ROT clause, sub-contractors/suppliers would be well advised to consider taking the following steps:
Whilst the ROT cannot provide a guarantee that a supplier will either receive payment or the return of his goods it is, at least, another tool in the supplier’s armoury to reduce the financial risk of non-payment. Given the recent financial demise of well-established construction companies all such tools must be welcomed.
If you would like further information about any of the above, please contact Graham Sutton