LEGAL POSITION OF EMPLOYERS WHO HAVE PAID FOR MATERIALS OFF SITE, WHERE THE CONTRACTOR BECOMES INSOLVENT

BY JOSEPH KIKIOWO It is a common practice in the construction industry for contractors to be paid for works executed as the execution progresses. This is because of the capital intensive nature of the industry where it is generally recognized that it would be unreasonable to expect contractors to finance construction operations without assistance from employers (Ramus and Birchall, 1996).1 To this end, the standard forms of contracts that are used for construction contracts usually make provisions for such payments, often known as interim payments in the industry. Such payments usually cover materials off-site. Hence, the legal position of employers who have paid contractor for offsite materials where the contractor have subsequently become insolvent would derive from the provisions of the applicable contract as well as common law; as Roberta Vella2 has noted that some presumptions have been evolved by common law to ascertain intention where the parties did not express an intention nor had no intention.

Ramus, J., and Birchall,S., Contract Practice for Surveyors. (Laxtons: Roberta Vella Ownership of Materials June 2009

Woburn, 1996) p.177

2

<http://www.charlesrussell.co.uk/UserFiles/file/pdf/Construction%20& %20Engineering/Ownership_of_Materials_Briefing_Note.pdf> accessed 12/05/11.

Position Under the Contract On receiving notice of the Contractors insolvency, the Employer is entitled to terminate the Contractors employment as provided in 8.5.13 and suspend further payment to the Contractor pending when the amount owed by the contractor to the Employer can be determined and recovered as a debt in accordance with either Clause 8.7.54 or 8.8.25 If the contractor has provided a bond, then the Employer can make claims to the bondman for the value of the materials, subject to the bond clause and the contract. Alternatively if there is insurance policy covering the employer in this regard, claims can be made to the Insurance Company for the value of the materials. In the absence of Bond or insurance policy that protects the interests of the employer, the employer can make claims to recover the debt from the Receiver and manager or liquidator (Seeley 1997)6 Guarantor or parent company where available may also come to the aid of the Employer. Clause 2.227 provides that where materials are Listed Items property will pass to the Employer. David Savage has however pointed out that this is at the risk of the Employer.

JCT Design and Build Contract (Thomson Reuters: London, 2005, Rev 2 Ibid Clause 8.7.5 Seeley I, Quantity Surveying Practice (Macmillan: London, 1997) p.236 Op. cit. Clause 2.22

2009) Clause 8.5.1

4 5 6 7

Ibid Clause 8.8.2

Clause 4.158 of the JCT has the following provisions in respect to conditions to be satisfied before payment can be effected for off-site materials and goods: The amount stated .have been fulfilled: .1 the Listed items are in accordance with the Contract; .2 the Contractor has provided the Employer with reasonable proof that: .1 the property in the Listed items is vested in the Contractor; and This requirement is impracticable in some instances as sub-contractors or suppliers often seek to retain title in materials delivered to contractor until they have received payment for them. They do this by inclusion of retention of title provision in the sub contract agreement (Weare 2009)9 The case of Dawber Williamson Roofing Limited v Humberside County Council10 in which a developer failed in an attempt to defend the title in some goods on the fact that title to the goods had not passed to the contractor is relevant. However, if the contractor contractually transfers the materials to an employer and the employer not knowing that the supplier has retained title in the goods, and then acts in good faith, ownership will pass to the employer.
8 9

Op. cit Clause 4.15 Weare, D., Construction News Ownership of Materials 16 June 2009

<http://www.olswang.com/newsarticle.asp?sid=141&aid=2649> accessed 12/05/11.

10

Dawber Williamson Roofing Limited v Humberside County Council

(1979) 14 B.L.R. 70.

 .2 the Listed items are insured against loss or damage for their full value until they are delivered to, or adjacent to, the Works; If this requirement was complied with before payment was effected by the Employer to the Contractor, then it should not be difficult for the Employer to retain the title to the goods, if only the Employer is able to produce documentary evidence to that effect. As a policy of insurance protecting his interest would not have existed if he did not have title to the goods. .3 at the premises where the Listed items have been manufactured or assembled or are stored, there is in relation to those items clear identification of: .1 the Employer as the person to whose order they are held; and .2 their destinations as to the Works, and the items either are set apart or have been clearly and visibly marked, individually or in sets, by letters or figures or by reference to a pre-determined code; and While this requirement could be valuable in assuring the Employer that indeed, the off-site materials are actually meant for them before effecting payments for the materials; it may not always be a guarantee that they would be able to claim title to the goods invariably if the contractor becomes insolvent. This is because the identification could subsequently be removed by the third party in case of insolvency of the Contractor, more so if the Contractor owes the third party some money. It may even be more difficult for the Employer to gain access to the premises of the third party now than when the going was good when the 4

contractor could always facilitate such access on behalf of the Employer. It would be prudent for an Employer if as soon as practicable after being informed of the insolvency of the contractor, he proceeds to take possession of the materials. On noticing any signs of the impending insolvency of the contractor, the Employer should arrange for an audit of offsite materials. .4 in the case of uniquely identified Listed Items, the Contractor, has provided a bond in favour of the Employer from a surety approved by the Employer this clause 4.15-4; or .5 in the case of Listed Items which are not uniquely identified, for this clause 4.15.5. If the Contractor has provided a bond to the Employer in this respect, then the Employer should make claim to the bondman for the amount that has been paid to the Contractor in respect of off-site materials. However, it is very important to mention that the wordings of the bond must have been put together in a professional manner to enhance the success of the Employers claim. The requirements listed above are valuable in protecting the interest of the Employer; however, the requirements are not without limitations. Weare (2009)11 has observed in an article that such provisions do not fully remove the risk to a developer that makes payment for
11

Op. cit.

materials prior to their delivery to the site explaining that where a contractor has not complied with the requirements to identify of off-site materials, the Employer can not derive good value from the breach of this requirement if the Contractor becomes insolvent as the efforts that 5

would be required to pursue the insolvent contractor for this breach may not be worthwhile. Position Under Common Law On receiving notice of insolvency of the contractor, the employer is entitled to repudiate the contract by repudiation (Uff 2009)12 whereby termination operates prospectively (Mckendrick 2008)13 as in the case of Photo Production Ltd v Securicor Transport Ltd (1980) AC 827) Consequently, the employer may suspend further payment to the contractor. This is closely related to the Employers right of set-off; it involves balancing of accounts which allows a creditor who owes an insolvent entity to set-off the debt in full as security in the insolvency as held in

12 13

Uff, J., Construction Law (Sweet & Maxwell: London, 209) p.341 Mckendrick, E., Contract Law Text, cases and Materials (Oxford: New Photo Production Ltd v Securicor Transport Ltd (1980) AC 827)

York, 2009) p.817

14

the case of Bouygues (UK) Limited v Dahl-Jensen (Uk) Limited15 (2000) BLR 522 (Turner and Townsend 2009)16 In the absence of Bond or insurance policy that protects the interests of the employer, the employer can make claims to recover debt from the 6

Receiver and manager or liquidator (Seeley, 1997)17 The Employer may take lien of the contractors plant and equipment that are on the site pending the payment of the Employers claim in respect of the amount of the off-site materials. (See Hewett v Court (1983) 57 ALJR 211)18 In the absence of a bond or insurance policy that covers the employer, the assets of the contractor or their guarantor should be investigated. If the asset is non existence, then the debt may be unrecoverable, hence, it may be advisable for the Employer to write off the debt.

15

Bouygues (UK) Limited v Dahl-Jensen (Uk) Limited15 (2000)

BLR 522
16

Turner and Townsend, Contractor Insolvency Contract Risk

Management article 2009 <http://search.yahoo.com/search;_ylt=A0oG7kmwS9JNNTsAfjZXNyoA? p=contractor+insolvency+contract+risk+management&fr2=sbtop&fr=yfp-t-701&type_param=> Accessed 12/05/11

17 18

Op. cit. Seeley I, P.236

Hewett v Court (1983) 57 ALJR 211

The position of the common law is that ownership of off-site materials passes as intended between the parties as stipulated in s.1719 of the SGA.

It would be useful for the Employer if similar requirements that are stipulated Clause 4.1520 are complied with before the Employer effects payment for off-site materials. There are rules contained in s.1821 of the Act that determine the party that is in ownership at any point in time as follows: Rule 1.Where there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery, or both, be postponed If the contract for the sale of goods has vested ownership of the goods in the Employer, then the Employer will be in a position to recover the items, this may however be impossible if the insolvent contractor has not paid the third party as s.21(1)22 of the Sales of goods act provides that ownership can not be transferred by a party that does not possess such ownership.

19 20 21 22

Sale of Goods Act 1979 s.17 Op. cit. Clause 4.15 Op. cit. s.18 Ibid. s.22 Rule 2.Where there is a contract for the sale of specific has notice that it has been done. Rule 3.Where there is a contract for the sale of specific goods in a deliverable state but the seller is bound to weigh,

 property does not pass until the act or thing is done and the buyer has notice that it has been done. Rule 4.When goods are delivered to the buyer on approval .. the property in the goods passes to the buyer: (a)when he signifies his approval or acceptance to the seller or does any other act adopting the transaction; (b)if he does not signify his approval or acceptance to the been fixed, on the expiration of a reasonable time. Rule 5.(1)Where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally and the assent may be express or implied, and may be given either before or after the appropriation is made

Other means of providing better protection for the Employer The followings are additions to the suggestions that have been made earlier towards proving better security for the Employer.

In addition to the advice from the project team, the Employer may need to obtain specialist advice from Accountants and to advice on best way forward (Turner and Townsend, 2009)23 Weare24 has expressed the opinion that dangers are always likely to be involved in making payments for materials before they are incorporated into the works. He went further to advice that reliance on provisions of contract such as retention of title clauses and vesting provisions should not override the need for a detailed and thorough due diligence on the covenant capability of those we contract with. Jenkins (2009)25 is even of the opinion that the standing of the parent company should also be considered. Before terminating the contractors employment for insolvency, the Employer should ensure that the right of termination will not prevent the right to pursue other rights (Jenkings 2009)26

23 24 25

Op. cit. Op. cit. Jenkins J, Contractor Insolvency be prepared Freshfields Buckhaus

Deringer March 2009 <http://www.freshfields.com/publications/pdfs/2009/mar09/25426.pdf> accessed 14/05/11

26

Ibid. s.22

The Contractor should be made to ensure that all its supply contracts vest title to the goods unconditionally in the contractor once the employer has paid for the goods.

10

Alternatively, the client could enter in supply contract. Before terminating the contractors employment for insolvency, the Employer should check that he is not prevented from pursuing its rights and remedies by its right of termination (Jane Jenkins 2009)27 John Starr28 in an article gave a highlight of steps that can be taken by the Employer to ensure better protection. Such steps include: Making provisions for the right to suspend further payment to the Contractor until the works are complete as well as the right to recover loss. It would be useful for the Employer to be aware of the underlying law of the jurisdiction and to ensure that the contract clauses are drafted in ay that the intended effect is achieved (Karen M, 2010)29

27 28

Op. cit.

Starr, J., Completion or Bust Boyes Turner article 2011

<http://www.boyesturner.com/news-article.html?id=1088> accessed 16/05/11

29

Karem, M., Propoerty and Infrastructure Retention of title issues in

construction contracts 31/3/2010 < http://www.shepwedd.co.uk/knowledge/article/1071-2732/retentionof-title-issues-in-construction-contracts/> Accessed 11/05/11.

Graham (2008)30 has warned that when the goods are in abroad, the situation may become more complicated as local laws may vary. 11

30

Graham, K., Construction Projects in distress (Stephen Harwood,

Newsletter London December 2008 <http://www.stephensonharwood.com/knowledge/publications/12_08_c onstruction_projects_in_distress_> accessed 14/05/11

BIBLIOGRAPHY Legislation 1. Sale of Goods Act 1979 s.17

12

Case Law 2. Bouygues (UK) Limited v Dahl-Jensen (Uk) Limited15 (2000) BLR 522 3. Dawber Williamson Roofing Limited v Humberside County Council (1979) 14 B.L.R. 70.

4. Mckendrick E, Contract Law Text, cases and Materials (Oxford: New York, 2009) p.817 5. Hewett v Court (1983) 57 ALJR 211 6. Photo Production Ltd v Securicor Transport Ltd (1980) AC 827) Internet Resources 7. Jenkins, J., Contractor Insolvency be prepared Freshfields Buckhaus Deringer. March 2009 <http://www.freshfields.com/publications/pdfs/2009/mar09/25426.pdf> accessed 14/05/11 8. Karem, M., Propoerty and Infrastructure Retention of title issues in construction contracts 31/3/2010 < http://www.shepwedd.co.uk/knowledge/article/1071-2732/retentionof-title-issues-in-construction-contracts/> Accessed 11/05/11. 9. Graham, K., Construction Projects in distress (Stephen Harwood, Newsletter London December 2008 <http://www.stephensonharwood.com/knowledge/publications/12_08_c onstruction_projects_in_distress_> 13

accessed 14/05/11 10. Vella, R,. Ownership of Materials. June 2009 <http://www.charlesrussell.co.uk/UserFiles/file/pdf/Construction%20& %20Engineering/Ownership_of_Materials_Briefing_Note.pdf> accessed 12/05/11 11. Starr, J., Completion or Bust Boyes Turner article. 2011 <http://www.boyesturner.com/news-article.html?id=1088> accessed 16/05/11 12. Turner and Townsend, Contractor Insolvency Contract Risk Management article. 2009 <http://search.yahoo.com/search;_ylt=A0oG7kmwS9JNNTsAfjZXNyoA? p=contractor+insolvency+contract+risk+management&fr2=sbtop&fr=yfp-t-701&type_param=> Accessed 12/05/11 13. Weare, D., Construction News Ownership of Materials 16 June 2009 <http://www.olswang.com/newsarticle.asp?sid=141&aid=2649> accessed 12/05/11

Other Resources 14. Joint Contract Tribunal, Design and Build Contract (Thomson Reuters: London, 2005, Rev 2 2009) Clause 8.5.1 15. Mckendrick. E., Contract Law Text, cases and Materials. 3rd ed. (Oxford: New York, 2009) p.817 16. Ramus, J., and Birchall, S., Contract Practice for Surveyors. 3rd ed. (Laxtons: Woburn, 1996) p.177 14

17. Seeley, I., Quantity Surveying Practice. 2nd ed. (Macmillan: London, 1997) p.236 18. Uff J, Construction Law. 10th ed. (Sweet & Maxwell: London, 209) p.341

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