REUTERS | Bob Strong

Retention of title, vesting clauses and contractor insolvency

There was a good turnout for my talk to the Society of Construction Law on 4 June on retention of title and vesting clauses, despite the counter attraction of one of the first sunny days of summer.

As I said in the talk, this subject is notoriously a legal minefield where minute differences in clause wording are pored over in great detail in the case law and textbooks. However, the subject often arises rather more starkly in the context of insolvency, usually of the main contractor. Indeed, my first experience of this type of clause was against the background of sub-contractors clamouring for their goods back or other recompense, and pointing to the small print of their supply documents.

Contractor insolvency – what should you do?

In a case of main contractor insolvency, when sub-contractors are clamouring for their goods back, or other recompense, there are a number of things that an employer should do to preserve its position:

  • First, sit tight, security of the site is vital.
  • Then, try to take the heat out of the situation. Retention of title and vesting clauses are rarely straightforward and the full factual situation must be ascertained. An interim injunction will not normally be required, assuming the employer is solvent and holds the goods in question.
  • Ascertain what goods have been supplied and are already built into the works. It is long settled that, once the goods are incorporated in the works, they become the property of the landowner. The supplier loses its title, even if there is a retention of title clause in the parties’ contract.
  • Look at the state of accounts between the employer and contractor as well as between the contractor and sub-contractor. It will be necessary to ascertain which goods have been paid for at each level as this may determine entitlement. It may be impossible to be sure on this point until a full termination account is drawn up.
  • Look at the contractual clauses at each tier of contracting. What type of retention of title clause does the sub-contractor have? If the sub-contractor claims under one of the more complex clauses (for example, an entitlement to the proceeds of sale), it may be that it should have registered a charge against the insolvent contractor. Sometimes this type of clause has not been incorporated into the final contract terms between the contractor and sub-contractor, for example in a “battle of the forms” case.
  • Does the statutory exception under section 25(1) of the Sale of Goods Act 1979 apply? This effectively serves to pass title to a sub-purchaser for value of goods where they were bought without notice of the retention of title clause.
  • Check if the sub-contract contains a clause to the effect that the sub-contractor will not deny that title has passed to the contractor and then to the employer, as envisaged in clause 3.9.2 of the JCT Standard Building Contract.
  • Is there a vesting clause in any of the contracts? Or is there a vesting certificate signed by the contractor or sub-contractor? Even if only the contractor has signed, the certificate may be backed by a bond which can be enforced if the contractor did not, in fact, have title to the goods.

Of the above, perhaps the trickiest to establish is the extent to which goods have been paid for in interim certificates which may be in a lump sum, particularly in the case of advance payments. Additionally, there may be protection available through a bond to guarantee the contractor’s obligations to deliver goods paid for in advance.

And above all – DON’T PANIC!

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