Vesting certificate for construction goods plant or materials

[edit] When might vesting certificates be required?

When specific goods, plant or materials are in high demand, or lead-times are long, it may be necessary to make advance payments to secure an order and prevent delays to the programme, even where the goods, plant or materials remain off-site and so not in the possession of the client. Such items should be agreed with the contractor (or sub-contractor or supplier) in advance of executing the contract and listed in an annex to the contract bills.

Paying to secure such items can be useful, however, it does 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.

Under such circumstances, a ‘vesting certificate’ or ‘certificate of vesting’ may be required from the contractor (or sub-contractors or suppliers), certifying that ownership of the goods, plant or materials listed in a schedule will transfer from one party to the other upon payment (eg from the supplier to the client) and confirming that the goods, plant or materials will be will be properly identified, separately stored and insured and that they are free from encumbrances such as retention of title.

Vesting certificates can be used as evidence that ownership vests in the client upon payment, defeating third party claims such as claims of retention of title, and can help to identify items, if for example, the contractor becomes insolvent before the items have been delivered to site.

[edit] What are the problems with vesting certificates?

The need for and effectiveness of vesting certificates has been questioned for a number fo reasons.

Contracts such as the JCT standard building contract and NEC contracts already include provisions requiring that the contractor provides reasonable proof that off-site property is vested in the client, materials are set apart or clearly marked and that they are insured.

Whilst a vesting certificate may be appropriate for use with contracts that do not include such provisions, the status of such certificates relative to other provisions of the main contract may not be clear (ref Olswang, Contractor Vesting Certificates - what legal protection do they provide?).

In addition, it is difficult to sue an insolvent contractor, and despite best endeavours, items may simply be removed or disappear in the event of insolvency, or even if there is a rumour that insolvency might occur. This is particularly true for items that have yet to be fabricated, items that have still to be worked on, or items that are abroad.

[edit] What are the alternatives to vesting certificates?

An advance payment bond (an on-demand bond) might offer better protection than a vesting certificate under some circumstances, with the value of the bond matching the value of the off-site items, its value reducing as deliveries to site are made.

Other precautions might include:

Checking the financial status of the contractor to assess the likelihood of insolvency before orders are placed.
If the contractor is part of a larger group, then a parent company guarantee could be required from the holding company.
Entering into a direct contract with the supplier.

In a perfect world, items would be delivered to site and affixed to the property before payment is made, but where this is not possible, a judgement is necessary to assess the risk to the project, against the potential loss to the client if items are not paid for in advance.