Practical Law

We all have our favourite points when it comes to contract drafting. Some people are busy thinking up solutions to the conundrum of concurrent causes of delay. Others focus on how reasonable skill and care limitations can survive in complex contracts.

Some purchasers of construction services have a policy of not paying out more than the value received. One of the ways of managing this is to make sure that they own whatever they have paid for or, better still, whatever has been brought to the site.

The problem is that, at the other end of the supply chain, there will be somebody who has the opposite (but equally worthy) aim. Suppliers don’t want to part with ownership of their products until they have been paid.

Retention of title

Even with the prohibition of pay-when-paid, and the best intentions all the way down the supply chain, the time interval between the employer paying the main contractor and that money reaching a second or even third tier supplier will be significant. That time interval is the province of contract clauses that sometimes don’t get as much attention as they deserve (until now).

For example, clause 2.15.2 of the JCT Design and 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.”

That’s all very well but (when lawyers were allowed to use Latin) the response might well have been Nemo dat quod non habet! which means, in effect, that you can’t give away what you don’t have. If title in the property never passed from the supplier to the sub-contractor (typically because of a retention of title clause in the supply contract) then neither a provision in a sub-contract to which the supplier is not a party nor the sub-contractor’s enforced silence on the topic will be sufficient to pass ownership in the site materials to the employer. The Latin maxim was replaced by section 21(1) of the Sale of Goods Act 1979, which enshrined the concept in statute law.

In fact, the most cautious suppliers will put an “all monies” clause into their supply agreements, which says that title only passes when the supplier has been paid all monies owing, even for other materials on other projects. The status of such clauses is somewhat uncertain.

At the “supply only” end of the supply chain, section 25 of the Sale of Goods Act 1979 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 a retention of title clause and this is the reason why suppliers insist on labelling their materials as their property with ownership details and putting a right to inspect the materials from time to time to check 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 suppliers and sub-contractors.

What does the contract say?

My experience in practice has been that the contractual documentation is not always clear. I have seen retention of title clauses fail because they were never properly incorporated into the supplier’s contracts. One example was a supplier referencing a version of its standard terms and conditions that did not have retention of title clauses.

The problem (especially in a multi-tier supply chain) is that it is often impractical to carry out a due diligence exercise on each sub-contractor and supplier, regardless of tier, to make sure that title will pass when needed. Probably the best approach is to focus on the most important items, especially those which could delay the project if they are “repossessed”. One of the most difficult retention of title problems I have experienced related to a large number of items (from multiple suppliers) being assembled by a sub-contractor that became insolvent shortly before the assembly was complete.

What else can a RoT clause protect?

Generally speaking we are talking about retaining title to goods. But what else, besides an RoT clause, might you protect by retention of title?

It is possible to create and retain similar rights using intellectual property rights. An architect or engineer can (in theory) prevent their clients (and others) from using drawings and designs if their fees have not been paid.

They can also retain ownership of paper drawings – if there are any – and I remember having a very pedantic, but surprisingly useful, discussion about the difference between owning a drawing and having the right to use it. The context was the supply of equipment with a long design life. The manufacturers expected to make most of their profit by supplying consumables and spares over a long period of time. The equipment was bespoke and so were most of the consumables and spares. The manufacturers were happy for the purchaser to own the drawings but only to use them for operation and maintenance and a few other activities, such as getting insurance and regulatory permits. What the manufacturers were worried about was that the purchaser would get somebody to reverse engineer the consumables and spares. The deal that was reached involved a “value for money” promise in relation to spares and a right to reverse engineer, but only in the event that the manufacturers either refused  or ceased to supply consumables and spares.

This is one of the most difficult areas of the law to get your head round. However, lawyers have a saying that the best way to get round an unhelpful bit of law is by relying on a helpful bit of fact. If you are a supplier and your contracts are clear, your goods are clearly marked and you have proclaimed your ownership to all those who are prepared to listen (and a few who are not), then you are ahead of the pack.