Deciding who owns goods and materials at a particular point in a construction contract can be a complicated task. The assumption tends to be that ownership will not pass to a purchaser until the goods have been paid for. However, title often passes at a much earlier point.
Common law position
If a contract is silent as to when materials pass from contractor to employer, certain common law rules apply. Once materials are affixed to the land, title passes from the contractor to the employer even when the materials have not been paid for. If however the employer has paid for the materials and they are not attached to the land, the employer will only own the materials if the contractor to whom he made payment had title.
The relationship between the main contractor and its sub-contractor or supplier is fundamental in understanding where ownership of unfixed goods lies. The general rule is that title transfers in accordance with the intention of the parties. In the absence of any terms to the contrary, the latest title will generally pass from the supplier or sub-contractor of the unfixed goods or materials to the main contractor at the time of delivery and it is not dependent on whether payment has been made.
Consequently, most sub-contractors will include a retention of title clause, or a 'Romalpa' clause in their terms and conditions. Romalpa clauses state that ownership of goods does not pass from a seller to a buyer unless and until the seller is paid. These clauses protect the sub-contractor on contractor insolvency so that the employer will only take ownership of unfixed materials if the sub-contractor has been paid.
The courts are hesitant to accept Romalpa clauses because they undermine the principles of insolvency law. In some cases the court has ruled that a right to recover the proceeds of sale may amount to a charge over the goods, which is not effective unless registered at Companies House. It is therefore recommended to insert a basic retention of title clause rather than one which is complex and uses language consistent with the creation of a charge.
Dawber Williamson Roofing Ltd v Humberside CC
Dawber, the roofing sub-contractor, stored his slates on site while he was waiting for instructions from the main contractors to start work on the roof. The contractor did not pay Dawber despite receiving payment from the employer and then went into liquidation.
Under the sub-contract, title did not pass to the contractor until the goods were incorporated into the works. The sub-contractor therefore claimed that he had a right to remove any unfixed slates from the site. The building contract contained a clause stating that goods paid for under an interim certificate became the property of the employer and any goods on site would pass to the employer upon contractor insolvency. The employer refused to release the slates to Dawber and argued that the provisions of the main contractor were intended to bind the sub-contractor as it included a clause stating that the sub-contractor was deemed to have notice of all the provisions of the main contract.
The court held as follows:
- there was no contract between the employer and sub-contractor and the sub-contractor could not be bound by and clause in the main contract;
- the sub-contractor had not been paid for the goods and therefore title had not passed to the contractor.
Therefore the contractor could not pass title to the employer and the employer was ordered to pay Dawber for the cost of the slates.
Drafting of principal building contracts
The JCT 2005 standard form contract passes ownership of goods and materials to the employer from the contractor upon payment, whether held on-site or listed materials stored offsite. JCT also seeks to prescribe conditions that must be included in the sub-contracts, including a clause which states that where the contractor has been paid for materials, such materials become the employer's property and the sub-contractor will not try to argue otherwise.
NEC3 Engineering and Construction Contract states that where the contractor has title to plant and materials on site, such title passes to the employer. The coordinating sub-contract provides that whatever title the sub-contractor has to plant and materials on site, such title passes to the employer. This means that on insolvency of the main contractor, the employer has good title to the materials on site.
NEC3 does not address the issue where the sub-contractor does not have title to plant and materials on site, for example where the materials have been purchased from a supplier. Whether title has passed to the sub contractor will depend on the issues discussed above.
- Retention of title is a difficult area for the construction industry and sellers should consider when they intend that title to their goods will pass.
- Courts will interpret the clauses depending on the facts of each individual case and the terms of the relevant contract.
- Employers will want to know that the main contractor's sub-contracts ensure that the employer has title to unfixed materials for which it has paid.
- Retention of title clauses might seem to be the answer but they do not always work and they need to be carefully drafted.