Last edited 27 Aug 2018

Retention of title in construction

Typically on construction projects, goods, materials or plant are not paid for until after they have been delivered to site. Even then, the contractual chain may mean that the client pays the main contractor at agreed intervals, and then the main contractor pays sub-contractors and so on.

This can put the supplier at risk, if the buyer (typically the contractor) defaults or becomes insolvent before payment is received. If the contractor has delivered the items and the client has received them in good faith then ownership may be disputed even if the supplier has not been paid in full.

A ‘retention of title’ clause (‘RoT, ‘Romalpa clause’ or ‘reservation of title clause’) allows a supplier to retain ownership of until specified conditions have been met, for example, until payment has been made. This is permitted under the Sale of Goods Act or the Supply of Goods and Services Act which provide that title passes from the seller to the buyer when the parties intend it to, which can be, for example; upon delivery, upon payment or upon use. This can override the general principle that title passes on delivery and can give an unpaid supplier’s title priority over the client’s.

Such clauses need to be clearly worded, it must be established that they prevail over other documentation (such as purchase orders), and they must be drawn to the attention of the contractor and client by the supplier. If the contractor becomes insolvent, or seems likely to become insolvent, the supplier should act quickly to establish their case, giving notice of retention of title, and making clear that payment has not been made.

However, even when properly prepared, retention of tile clauses can be difficult to enforce, as generally, title passes to the client once items are incorporated into the development anyway, irrespective of whether payment has been made, and it can be difficult to establish whether payment has been made, as the client may make stage payments rather than paying in total for specific items.

Other measures a supplier might take to reduce their risk include:

Checking the financial status of the contractor to assess the likelihood of insolvency before accepting an order.
Arranging for items to be marked and stored separately to make clear title remains with the supplier.
Entering into a direct contract with the client.
Seeking advance payment.

Advance payment can be secured with an advance payment bond and the client’s title established with a vesting certificate, although vesting certificates can be similarly difficult to enforce.

NB: The term ‘Romalpa clause’ refers to the case of Aluminium Industrie Vaassen BV v Romalpa Aluminium (1976) which established the principle of extended reservation of title.