I have recently become telepathic. A contractor called me the other day saying that he was engaged on a large M&E contract and that one of his sub-contractors had gone into administration. He wanted advice on terminating the sub-contract and getting someone else to finish the work. I asked whether any of the sub-contractor’s suppliers were claiming that they still owned various items that they had supplied because of a retention of title (RoT) clause, despite the fact that the contractor had paid the sub-contractor for them. “That was going to be my second question” he said. “How did you know that? You must be telepathic.” The truth is that it’s not telepathy but more like Bill Murray’s experience in Groundhog Day, as the situation keeps repeating itself.
The scenario goes like this…
The contract between the contractor and the employer says that title in any equipment must be passed to the employer either before or at the point of payment for the equipment. The contractor puts a similar provision in the sub-contracts. In some cases, the contractor insists on a vesting certificate from the sub-contractor, which it can show to the employer. The vesting certificate says that the sub-contractor has good title to the equipment and that, on payment, that title will pass to the contractor (and, in theory, on to the employer).
The sub-contractor goes into administration. Next, the contractor gets letters from suppliers saying that their terms and conditions provide for retention of title pending payment. They have not been paid. Either the contractor pays (again) or the suppliers threaten to remove the equipment from site. They threaten an injunction.
Nemo dat quod non habet
The problem is the old Latin saying nemo dat quod non habet, which means that you can’t give away what you don’t have. If title in the equipment never passed from the supplier to the sub-contractor, then the vesting certificate will be of no effect.
A couple of weeks ago I asked a supplier claiming under an RoT clause whether he was alleging that the vesting certificate was fraudulent. “I’ve no idea” he said. “It could be fraudulent, reckless, negligent or just a mistake”. In most cases I’d guess at a mistake. The same debate took place in relation to the big notices put on the equipment saying that it belonged to the contractor.
It’s not always that simple. The existence and validity of an RoT clause should not be taken for granted. There are a few legal obstacles to the successful use of an RoT clause. In practice, the biggest obstacle is usually establishing that the RoT clause has actually been incorporated in the contract between the supplier and the sub-contractor.
Was the RoT clause incorporated?
So my next request to the supplier was to ask him to prove that the RoT clause was incorporated. The reply was a bundle of documents revealing a classic battle of the forms concluding with (allegedly) an acceptance of the supplier’s terms by conduct. The administrator was not in a hurry to start delving through his papers to give us the other side of the story. The incorporation point was arguable either way and could not be resolved on a summary basis. So, in the end, a deal was struck. That seems to be the usual outcome, unless the numbers are too big. Generally, the need to keep the project going will override other considerations.
Another twist in this tale is the assembler – a contractor who is given components to assemble. He has what I would describe as a “dry cleaner’s” lien (if you don’t pay for the dry cleaning your suit gets sold). In this instance, the assembler never gets ownership of the components but has an implied right to keep them until he is paid for his work. He may be able to sell them. Again, it may be that the contractor has paid the sub-contractor but that sub-contractor has not passed the money on to the assembler.
Why does this situation keep occurring?
The problem is that it is impractical to carry out a due diligence exercise on each sub-contractor and supplier, regardless of tier, to make sure that their title has passed or their lien released. However, it would be possible (and worthwhile) for large, important or long lead-time items that could delay the project.