Materials on site
Generally, the law considers that, unless the contract states otherwise, title (ownership) of materials passes from the contractor to the client at the time of delivery, irrespective of whether payment has been made. However, some forms of contract may state that ownership transfers upon payment. It is important therefore that the intention of the parties is clear and that these intentions cascade down through the contractual chain.
If delivered materials have been ‘affixed to the land’ or ‘incorporated into the building’, then ownership of the materials will transfer to the client even if they have not been paid for. If they have not been affixed to the land, that is, they can be easily removed without damage to themselves or their surroundings, but have been paid for, ownership only transfers to the client if the contractor themselves had title and so were in a position to transfer it.
This situation is complicated by the fact that the client generally only pays the main contractor at pre-agreed intervals, not every time something is delivered to site, and the complexity of the contractual chain means that the client may pay the main contractor, who pays a sub-contractors, who pays a supplier and so on.
This can put the actual supplier at risk, for example, if the contractor, or any intermediate part of the supply chain defaults or becomes insolvent before payment is received. Depending on the terms of the contract, if the contractor has delivered the materials and the client has received them in good faith then ownership may be consider to have transferred to the client even if the supplier has not been paid.
A ‘retention of title’ clause (‘Romalpa clause’ or ‘reservation of title clause’) allows a supplier to retain ownership until specified conditions have been met, for example, until payment has been made. This can override the general principle that title passes on delivery and can give an unpaid supplier’s title priority over the client’s. However, there may be some risk to the client if they accept such clauses, for example, if the supplier becomes insolvent, and the receiver attempts to recover the materials. Standard fittings and stock items such as copper piping, electrical switches and ironmongery are items that might be removed from the site following the first sign of insolvency.
Before certifying payment for materials therefore, it is very important to be clear where the title lies. Consideration should also be given to whether materials are actually required at the time they are delivered. There may be circumstances in which it is useful to receive delivery in advance of the actual requirement (for example so that goods can be secured if supply is short, or so that shipments can be combined to reduce costs), but this should not be used simply as a mechanism to improve the contractor’s or supplier’s cash flow.
It can sometimes be appropriate for the client to pay for items even though they remain ‘off-site’, for example, where a contractor has made a large payment for plant or materials that have yet to be delivered to site, or if the client wishes to ‘reserve’ key items in order to protect the programme
Paying for off-site goods or materials can put the client at risk, for example if the contractor becomes insolvent and the items are then not delivered, even though payment has been made. There are a number of mechanisms for dealing with this risk, but none of them are completely fool proof. See Off site materials for more information.
NB Project bank accounts (PBAs) have emerged as a means of enabling faster payments through the construction supply chain, with payments being made direct to subcontractors and suppliers as soon as 5 days from the due date.
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