Modular construction and off-site manufacturing
Scenario: You are a main contractor, expecting a number of bathroom pods to be delivered to site imminently, but before that happens the modular sub-contractor becomes insolvent. What can you expect to happen?
One likelihood is that the sub-contractor's liquidator will wish to claim ownership of the bathroom pods, if possible, which could cause delays, disruption and additional costs in dealing with the liquidator's claim, even if the liquidator is unsuccessful. And that is before you take into consideration the delay, disruption, and additional cost of finding a replacement modular sub-contractor and the lost manufacturing time. Worse still, it could result the occurrence of loss if you have paid for some or all of the pods, but ownership has not legally transferred to you or to the client.
To reduce the time taken dealing with the liquidator and/or securing the delivery of the pods manufactured so far, it is important to be aware of the rules regarding ownership of off-site materials so that you can assert your rights at an early stage. Equally, those involved in negotiating contracts should be aware of the issues that may arise, so that these can be taken into consideration in the drafting.
Who owns the pods?
Identifying the owner of off-site modular structures or components can be a complex task given that there are usually several parties with intertwined contractual relationships, and the rules for ownership of off-site materials differ from Scotland to England.
In England, ownership of (or title to) the bathroom pods can be transferred to the client upon payment (e.g., by listing the item in an interim payment application / certificate) or via a Vesting Certificate. This would potentially leave the liquidator without a claim on the pods.
Under Scots law, ownership and title centre around the concept of possession and therefore, title to the pods does not transfer to the contractor upon payment alone - even if your construction contract says otherwise. This means that the contractor cannot lawfully transfer title to the client on payment unless the goods are then delivered or are incorporated into the works. This is because a construction contract is both a sale of goods contract and a supply of services contract, and different rules apply to each type. Unless dealt with correctly the liquidator could claim ownership of the pods even if they had been paid for by the contractor or the client.
In the case of Stirling County Council v Official Liquidator of John Frame Ltd  SLT 37, it was made clear that mechanisms equivalent to the Listed Item Interim Payment or Vesting Certificates, valid in England, have no jurisdiction in Scots Law - they are part of a "foreign system of law".
Clause 4.15 of the standard Scottish Building Contract (SBCC) deals with this by specifying that if parties enter into a separate contract (e.g., a Sale of Goods contract) for the purchase of materials/modular elements in which ownership will transfer ahead of delivery, then the purchase of those elements shall be removed from the Contract, and the Contract Sum must be adjusted accordingly. These separate contracts are commonly known as Offsite Materials Agreement (OSMAs) and are intended to manage risk by ensuring that title of the materials vests in, and transfers to, the client upon payment rather than the default position - upon delivery and incorporation.
In contrast the Clause 2.22 of the JCT permits the transfer of ownership under an English construction contract - provided that a 'Listed' item has been included within an interim payment. Under these circumstances ownership of that item shall transfer to the Employer, and the Contractor is responsible for any loss or damage until items are delivered on site. An alternative route is via Vesting Certificates.
Whilst OSMAs are a useful contractual mechanism to ensure transfer of ownership, a consequence is that materials will be in the custody of another party until they are delivered onsite and could become damaged or destroyed. This risk may be mitigated by, for example, ensuring the appropriate insurance is in place.
In the current marketplace with high rates of inflation and contractor insolvencies on the rise, those involved in dealing with disputes should ensure that they understand who owns off-site materials and modular structures and when, and check that the correct agreements are in place. Equally, those involved in negotiating contracts should consider what arrangements should be in place as part of any new contracts.
A key takeaway: understand the law which governs each particular contract as well as the contract itself. Jurisdictional differences mean different methods of transferring ownership. If ownership is not adequately dealt with, it may lead to disputes should the modular structures become destroyed or damaged, or if the modular contractor becomes insolvent.
This is the third article in our modular construction disputes series. Our introductory article on the types of disputes which can arise can be found here and our article on smash and grab adjudications in modular construction can be found here.