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When is ownership passed on?

LAW - Subcontractors may be deemed to have handed over ownership before they are paid in cases of insolvency, writes Rudi Klein

I HAVE lost count of the number of times I have had to give advice to subcontractors and suppliers suddenly faced with the impending insolvency of a main contractor or another subcontractor upstream.

In the UK there is no insolvency protection for those who carry out work on construction projects. Once materials, plant and equipment have been incorporated into the building or structure, ownership or title passes to the owner of that building or structure.

The standard form contracts exacerbate the lack of protection. Clause 21.4.5.2 in DOM/1 and DOM/2 ? the old standard forms of domestic subcontract ? states that materials become the property of the employer, that is, the main contractor's client, once they are included in any interim certificate issued under the main contract.

The subcontractor is expected to give up ownership of the goods ? assuming he has such ownership ? before he has been paid. Also, clause 21.4.5.2 states that the subcontractor must not deny that ownership has passed to the employer.

This clause is ridiculous. If the subcontractor has not obtained title from his supplier he cannot pass on anything that he does not have.

This clause also encourages the subcontractor to lie. Let's assume that he does have title and the main contractor goes bust without having paid for the relevant materials or goods.

The subcontractor ? contrary to this clause ? asserts his ownership even though such materials or goods have been included in an interim certificate.

The subcontractor will want to bring an action ? known as conversion ? to recover his materials. This occurs where the other side ? the employer in this case ? is attempting to convert the materials to his own use. The employer cannot set up clause 21.4.5.2 as a defence because he was not a party to the subcontract.

As well as being unfair, the clause is unworkable. I was aghast that it has been carried into clause 1.18.2 of the JCT Domestic Form of Subcontract published in 2002.

Suppliers of goods and materials ? that is, those not involved in fixing them or incorporating them into on-site works ? are a little more fortunate.

They often include retention of title clauses in their supply contracts. In other words, title will be retained until payment has been received. But even retention of title clauses cease to have effect once the goods have been incorporated into the building or structure.

Some of these problems emerged in the recent case of P4 v Unite Integrated Solutions.

P4 supplied an emergency lighting system called Fastel to Tudor Mechanical and Electrical Services. Tudor was a subcontractor to Unite.

The subcontract was DOM/2. Unite was the main contractor on a redevelopment in Southampton to provide student accommodation.

In P4's conditions of sale there was a retention of title clause. After the equipment had been supplied ? but before it had been paid for ? Tudor went into liquidation.

P4 brought proceedings against Unite for conversion of the Fastel equipment. Unite sought to have the claim dismissed on the basis that P4 had no prospect of success.

Unite based its case on the Factors Act 1889 and the Sale of Goods Act 1979.

The relevant part of the latter Act is section 25(1). This aims to provide some protection to a purchaser of goods who has obtained them in good faith and without knowledge of any rights that the original seller may have had in the goods.

Where such goods are delivered or transferred by the seller ? or by an agent of the seller ? the purchaser is then given ownership provided that, under section 25(1), the delivery amounted to a 'sale?or other disposition'.

Mr Justice Ramsey in the Technology and Construction Court accepted that the Fastel equipment had been delivered to Unite's site but there was clearly no sale because no payment had been made to Tudor.

But Unite argued that there was, at least, an agreement to sell, which could be described as an 'other disposition'. This was reinforced by section 9 in the Factors Act 1889, the precursor to section 25(1), argued Unite. Section 9, in fact, referred to 'any agreement for sale?or other disposition'.

And so, according to Unite, P4's retention of title clause was defeated by section 25 which, in effect, passed ownership of the Fastel equipment to Unite.

The judge felt that Unite's arguments went too far. These statutory provisions were not aimed at transferring any interest in property other than that intended by the immediate supplier ? in this case, Tudor.

In the absence of anything to the contrary, ownership of the Fastel equipment would only transfer under the subcontract when payment was made. In this case ownership remained with P4, said the Judge.

But the judge was asked by Unite to delve into other issues, most of which were not pursued. For example, there was evidence indicating that Unite had made payments to Tudor, although it was unclear whether any had related to the Fastel equ ipment . This was not a matter the judge felt he could go into. To support its arguments, Unite had to show that it acted in good faith. Again, there was a lack of evidence and this point was not pursued.

P4's claim to the Fastel equipment succeeded and was not defeated by section 9 of the Factors Act 1889 and section 25 of the Sale of Goods Act 1979.

From this and previous cases, it seems suppliers with retention of title clauses can defeat the claims of a party higher up the contractual chain. For subcontractors, the rule is: if you do not have title or ownership you cannot pass it on.

KEY POINTS

There is no insolvency protection for those engaged in carrying out work on construction projects.

Under existing domestic subcontracts the subcontractor is expected to give up ownersh ip of the goods before he has been paid for them.

Materials suppliers, unlike subcontractors, can include retention of title in their contracts.

If you do not have t itle or ownersh ip, you cannot pass it on.