Retention of Title Arguments in Construction Insolvency

Whilst the government stated that construction sites were permitted to remain open during lockdown, activity in the construction sector plummeted by almost a third in April compared to April 2019 due to confusion as to the application of Government guidance, the difficulties of complying with social distancing procedures and the fall out from the changing economic climate. As such, there is a real risk that subcontractors and main contractors could be faced with insolvencies in their contractual chains.

Usually in construction contracts the parties are paid at agreed intervals as the works progress. However, what happens to goods on site where a main or sub-contractor becomes insolvent before they have paid the supplier for the goods?

The first step is always to dust off the contract. Most companies will have retention of title clauses in their contracts stating that title in the goods does not pass until the goods have been paid for in full, even if the goods have been delivered to the buyer. The general rule in English law is that you cannot give a better title to property than you possess. This means that if there is a retention of title clause in the supplier’s contract and the subcontractor does not pay the supplier, the subcontractor does not own the goods. Therefore, even if the Main Contractor pays for them in full, title will not pass to the Main Contractor and they may be seized by the supplier.  

If there is such a clause it is important to check that it is clearly worded and that it prevails over other documents such as purchase orders. If so, you should contact the relevant parties as soon as possible to notify them of your case and to make it clear that as payment has not been made in full you still own the goods.

However, even where you have a clearly worded contract these clauses are very difficult to enforce. For example, title passes to the client when items are incorporated into the development – you cannot turn up and remove bricks once they become part of the building. Equally, where stage payments are being made for multiple items at once it can be difficult to prove which sums are payment for which goods.

So, what should you do? Ideally, don’t get into this position in the first place. Suppliers should check the credit status of companies before entering into contracts with them, and if there are concerns about solvency consider requesting advance payments. Alternatively, ensure that items are stored separately and clearly marked to make them easier to identify if the worst happens.

Main contractors should ensure that when interim payments are made, any high value items are itemised on the payment notice to make it clear that these have been paid in full to resist any arguments about retention of title.

If the contract is purely for sale of goods and does not include services then s25 of the Sale of Goods Act 1979 states that where a purchaser buys goods in good faith and without knowledge of the retention of title clause then they acquire good title, even though the seller did not have it. However, the Sale of Goods Act doesn’t apply to most construction contracts as they are contracts for goods and services. As such, the Supply of Goods and Services Act 1982 instead applies and unfortunately there is no similar provision in this Act.

If you or your company are currently experiencing issues with retention of title clauses please contact Natalie Bradshaw on 0121 355 0011 to see whether we are able to assist you to resolve your dispute.