PART III: OWNERSHIP OF MATERIALS

Briefing note Author: Roberta Vella Date: June 2009

1 1.1

INTRODUCTION On the insolvency of the contractor the question arises as to who can claim ownership in materials that are intended for incorporation into the works.

Contents

This paper considers the question of ownership of materials in the context of those on site and those off site: with reference to the common law, JCT Standard Design & Build Contract 2005, Revision 1 (2007) and NEC3 (June 2005).

Introduction Materials on site Materials off site Conclusion

2 2.1

MATERIALS ON SITE As discussed by Andrew Keeley in his paper, it is important that on the contractor's insolvency the site is secured so that materials on site are not removed by unpaid subcontractors or other possible creditors. This, of course, must be the starting point for an employer keen to complete the project and avoid as much delay as possible. However, as will be seen an employer does not have an automatic right to ownership of anything and everything on site. It is suggested that to begin with a distinction has to be made between materials affixed to the property and those merely placed on or adjacent to the works.

2.2

In the absence of any express terms, the common law position is that where materials are affixed to a building ownership will pass to the freeholder1. In the context of a building contract, the materials will become the property of the employer: note that where the employer is not the freeholder the materials will become his property for the duration of his estate or interest in the property. The contractor is not permitted to reclaim or remove the materials even where the employer or a third party has subsequently severed them from the property2.

2.3

Where materials are not affixed but on site then under common law ownership of the materials will pass as intended by the parties. This principle is contained in s.17 of the Sale of Goods Act 1979 (SGA). In determining the intention of the parties s.17(2) provides that regard should

be had to the terms of the contract, the conduct of the parties and the circumstances of the case. 2.4 Common law has evolved a number of presumptions as to ascertaining intention where the parties had no intention or did not express an intention. These presumptions can now be found in s.18 of the SGA, Rules 1 to 5, which can be summarised as3: Rule 1: where the goods are specified and there are no conditions, property will pass when the contract is made, regardless of time of payment or delivery or both; Rule 2: where the goods are specified and the seller is bound to put the goods in a deliverable state, property will pass when the goods are put in a deliverable state and the buyer has been informed; Rule 3: where the goods are specified and the seller is bound to weigh, measure, test or do some act to ascertain the price, property will pass when that act is done and the buyer has been put on notice; Rule 4: where the goods are specified and the buyer is to give his approval of the goods, property will pass when the buyer signifies his approval or the buyer retains the goods without giving notice of rejection within a specified time or a reasonable time has lapsed; Rule 5: where the goods are unascertained or future goods sold by description, are in a deliverable state and unconditionally appropriated to the contract (where goods are delivered by the seller to a carrier or bailee for the purpose of transmission to the buyer and does not reserve the right of disposal), property will pass when either the buyer or the seller gives their assent. 2.5 Where ownership has passed to the buyer then he may claim the goods if the seller becomes insolvent. In the case of the buyer becoming insolvent then the seller can claim the goods only if ownership has not passed. However, where the goods have been delivered to the buyer then the seller is only entitled to claim as a creditor for the price. 2.6 A contract may contain a Romalpa 4 or retention of title clause. As a minimum these clauses state that a seller is to retain ownership of the goods until he receives payment5. Such clauses may simply retain ownership until

the goods have been paid for in full6, or go as far as to reserve the right of the seller to retake possession of the goods agreed to be sold in the event that payment is not made or in the event that a petition is presented to wind up the buyer (in such circumstances the seller is entitled to re-sell the goods)7. Under s.19 of the SGA the seller may reserve the right of disposal of the goods until the conditions imposed by the seller have been fulfilled. 2.7 However, such a clause will not be effective where goods have been affixed to the property and a sub-contractor will not be able to assert such a provision as against an employer8. 2.8 Clause 2.21 of the JCT Design & Build Contract 2005 deals with the question of the passing of property where materials are on site. Under this clause, materials do not need to be affixed to the property before ownership transfers to the employer, they merely have to be delivered to, placed on or adjacent to the Works, with the important element that they are intended for the works unless consent to remove them is given by the employer in writing. 2.9 It is noted in Benjamin's Sale of Goods, 7th Edition, paragraph 5-157, footnote 69 that: Certain standard forms of building contract provide that unfixed materials delivered to the site are not to be removed without the consent of the architect of supervising officer, but such provision in the main contract would not be binding on a sub-contractor who was not a party to the main contract: Dawber Williamson Roofing Ltd v Humberside CC (1979) 14 Build. L.R. 70. 2.10 This clause also makes provision for where materials have been paid for: providing that ownership passes to the employer but that the contractor shall remain responsible for loss or damage to them (depending on insurance options B or C having been elected). 2.11 But would this clause be effective against a sub-contractor who supplies goods and materials to a main contractor under a contract of sale which is subject to a Romalpa clause - the goods are delivered to site but not affixed and the main contractor then becomes insolvent? 2.12 The sub-contractor may not be able to recover the materials and goods from the employer if it is successfully argued that the main contractor had good
3

title9. Such an argument may be defeated where the sub-contractor successfully argues that: 2.12.1 his contract with the main contractor was not one of sale of goods but a contract for work and materials, in which case s.25(1) of the SGA would not apply; or 2.12.2 the facts may be such that there was no sale, pledge or other disposition of the goods by the main contractor to the employer sufficient for the employer to assert that he has acquired good title in the goods pursuant to s.25(1) of the SGA; or 2.12.3 the employer may be on notice of the terms of the sub-contract as required under s.25(1) of the SGA (the sub-contractor may have been nominated by the employer). 2.13 Note that under clause 8.5 of the JCT contract, on the insolvency of the contractor the employer is entitled to take all reasonable measures to ensure that the Site Materials (defined as all unfixed materials and goods delivered to and placed on or adjacent to the Works which are intended for incorporation) are retained on site and that the contractor shall not hinder or delay the employer taking these measures. 2.14 NEC3 provides limited guidance compared to the JCT contract. Pursuant to clause 70.2 the employer will be able to assert whatever title the contractor has to the materials once brought within the Working Areas. It is suggested that the same rules as above apply: so that, if the goods have been fixed property passes to the freeholder. Where goods are not affixed, the intention of the parties will have to be ascertained; this will involve considering the terms of the contract (does it contain a Romalpa style clause?), the conduct of the parties and the circumstances of the case. 2.15 Clause 70.2 is similar to the JCT contract, if slightly more prescriptive, in stating that title will pass back to the contractor if materials are removed from the Working Area with the consent of the Project Manager. Note that as mentioned in paragraph 2.11 above such a clause may be ineffective as against a sub-contractor.

3 3.1

MATERIALS OFF SITE An employer is in a weaker position where goods are held off site because he has no control over them and because they may not necessarily have been ascertained or identified as being required for incorporation into the works.

3.2

The common law position is that ownership of materials held off site will pass as intended between the parties (see s.17 of the SGA). As mentioned above, the presumptions contained in s.18 of the SGA - Rules 1 to 5 - will assist in determining when ownership of materials has passed between the parties.

3.3

Clause 2.22 of the JCT Design & Build Contract 2005 deals with the question of the passing of property where materials are off-site. Pursuant to this clause where items are Listed Items defined as materials, goods and/or items prefabricated for inclusion in the Works which are listed as such items by the Employer in a list supplied to the Contractor and annexed to the Employers requirements then such items shall be the property of the employer where in accordance with clause 4.15 the items have been included in any Interim Payment. The contractor, however, will bear the risk until such materials are delivered to, placed on or adjacent to the Works.

3.4

Note also clause 4.15 which sets out the provisions to be fulfilled for Listed Items to be included in an Application for Interim Payment: such as, the contractor provides reasonable proof to the employer of his title to the goods and that he has maintained insurance for them, as well as showing that the items have been clearly identified for the works.

3.5

Under clause 70.2 of the NEC3 contract, where materials are off site but marked by the supervisor then the employer will be able to assert whatever title the contractor has to the materials. Marking the items means that they have been separately identified10 under the contract for payment or the contractor has prepared them for marking as identified in the Works Information (see clause 71.1 of NEC3).

3.6

It appears that the employer must pay for the materials in order to claim ownership of them but it is not clear where the identification for payment should be made11.

3.7

The best way in which an employer can protect his position is to obtain an off site materials bond as a pre-condition to payment. This would entitle the employer to make a demand up to the value of the off site materials.

4 4.1

Conclusion In essence, the employer is in a stronger position to claim ownership in materials where they have been delivered to site (particularly, where they have been affixed to the property). The employer, contractor and subcontractor should all ensure that they are adequately protected by the express terms of the contract or by obtaining a bond.

Elwes v. Maw (1802) 3 East 38 Lyde v. Russell (1830) 1 B & Ad 394 Note this is a summary only and does not include Rule 5(3) and (4) relating to goods forming part of a bulk as amended by the Sale of goods (Amendment) Act c. 28 s1(2) (September 19, 1995) 4 Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd [1976] 1 W.L.R. 676 5 Benjamin's Sale of Goods, 7th Edition, paragraph 5-141 6 Ibid, paragraph 5-146 7 Ibid, paragraph 5-145 8 Aircool Installations v. British Telecommunications [1995] C.L.Y. 821 (Cty. Ct.) 9 Section 25(1) Sale of Goods Act 1979 10 See Guidance Notes to NEC3, Chapter 7 Title, page 82 11 The NEC3 Engineering and Construction contract, a commentary by Brian Eggleston, 2nd Edition, pages 284 and 285
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More information Roberta Vella +44 (0)1483 252545

Roberta.Vella@charlesrussell.co.uk

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