Off-site materials agreements: title to goods and materials through a Scottish lens

Financial uncertainty increases the risk of contractor and supplier insolvency, which in turn raises concerns in respect of the ownership of goods and/or materials which have been paid for upfront and that are to be used in construction projects.

There is an emerging trend towards modular construction or off-site manufacturing and recent concerns over timely supply of goods/materials and price fluctuations has resulted in an increase in early procurement of goods/materials to achieve price certainty. Against this backdrop, we are regularly giving advice on retention of title and ownership of goods/materials in construction projects. This blog summarises the basic position under Scots law which is markedly different from south of the border.

Ownership – the position under Scots Law

The Scottish common law position is that ownership of materials transfers to the employer when materials are incorporated into the works whether payment has been made or not. Where materials are on site but not physically incorporated into the works, the situation is more complex. Typically, under a construction contract governed by Scots law, ownership of goods/materials for use in the project can pass from contractor to employer where the materials have been included in within an interim payment certificate and are physically on the site of the works.

If the Contractor requires payment for goods/materials that are to be held off site prior to delivery and/or incorporation into the works, the employer will typically want to ensure that upon payment, it gains title or ownership to those goods/materials, wherever they are held. If the employer does not have ownership of those goods/materials and if the contractor or supplier becomes insolvent the employer will rank as an ordinary creditor with no legal right to the actual goods/materials. Transfer of ownership cannot be achieved under the terms of a construction contract in these circumstances. A construction contract is not a sale contract governed by the sale of goods legislation and so even if the parties intend title to pass upon payment where the goods are held off-site, that is not sufficient. The items held off-site could be claimed by the liquidator of the insolvent contractor or supplier despite the employer having made payment in full.

The common solution to this problem is for parties to enter into a separate contract for the purchase of the goods/materials from the contractor (and/or sub-contractor/ supplier) so that these items are "carved out" from the construction contract. These contracts are known as "off-site materials agreements" or "OSMAs". Because these contracts are for purchase only (without the services covered by the construction contract) they fall under the sale of goods legislation. This provides that the ownership can transfer independently of possession when the parties intend it to (i.e. when is provided for under the OSMA).

Difference between Scotland and England

Under English law, as with Scots law, ownership of materials transfers to the employer when materials are incorporated into the works whether payment has been made or not. However, the position is different where goods/materials are procured under a construction contract title can pass regardless of whether they are on site or not. Note also that vesting certificates are often used to transfer the title in goods/materials. However, these certificates are not valid under Scots law and will not be sufficient in Scotland to pass title.

Practical considerations – what should an OSMA cover?

The SBCC forms of contract contain template 'Contracts of Purchase' for off-site goods/materials from either a Contractor (between employer and contractor) or a Sub-Contractor (among employer, contractor and subcontractor). Many parties chose to amend these or create their own style of OSMA to reflect their circumstances and provide for additional requirements.

An OSMA will typically cover:

• The price to be paid by the employer for the goods/materials and the date of payment;
• A description of the goods/materials that the OSMA is subject to, where they will be stored until they are brought to site and any identifying markers or numbers;
• Instructions for how the goods/materials are to be stored and labelled;
• Confirmation that the property in the goods/materials will pass to the employer upon payment;
• Responsibility for insurance of the goods/materials together with storage and transportation costs;
• A right for the employer or its representative to inspect the goods/materials at the place they are being stored;
• Any other project specifics – for example, different payment dates for various batches of good/materials as and when they are procured or manufactured.
• Great care should be taken when parties are considering paying in advance for good/materials for a construction project. The key take away is that payment alone is not sufficient to transfer ownership in goods/materials under a construction contract governed by Scots Law.

For more information on off-site material agreements please contact Jane McMonagle, Claire Mills, or Sandra Jurak.