Under both the SGA 1979 and SGSA 1982 the ownership of construction materials is likely to pass when the goods are delivered to site. This may leave the supplier or seller in a dangerous position if the buyer defaults on payment or becomes insolvent after delivery.
A ‘retention of title’ clause may be included in a contract to remedy the problem. It displaces the usual rule of law that title to passes to the buyer at the time of delivery and states that ownership of goods does not pass from a seller to a buyer unless and until the seller is paid for those goods.
There are various different types of retention of title clauses. A simple retention of title clause will provide for the basic principle outlined above. However, there are other types of retention of title clauses that may be included in a contract.
• An all monies clause retains ownership until payment of all money owed by the buyer to the seller has been made. This type of clause renders it unnecessary, in the event of an insolvent buyer, to reconcile invoices against specific goods to establish what has been paid for, and what has not, and hence what the buyer owns, and what it does not.
• In the situation where the goods supplied to the buyer are to be sold on, a proceeds of sale clause aims to allow the seller to claim the money paid to a buyer by a subbuyer when the buyer has sold on the goods.
Unsurprisingly all of the main standard form construction contracts contain retention of title provisions governing ownership of goods.
Retention of title clauses are undoubtedly useful in protecting a supplier’s position. However, the effectiveness of the clause will often depend on what the buyer has done with the goods.
It is possible that co-mingling may occur where the buyer has mixed the goods either with his own or those from another seller. Where it is possible to separate the goods the seller will retain ownership under a standard retention of title. However if this is not possible the buyer and seller will own the goods together.
A retention of title clause is likely to be defeated if admixture or annexation has occurred. There is a question over whether a ‘retention of title’ clause will amount to a charge over the company’s property.
• Admixture arises where the buyer mixes or combines materials with other materials in a non-reversible manufacturing process.
• Annexation is where the materials have become fixed to the land and it is of particular importance in the construction industry. Annexation occurs the materials become the property of the land owner, regardless of whether they have been paid for and the supplier cannot remove the materials. However, at which point materials become affixed can be a difficult issue to determine. This would depend on the facts of the case and the degree and object of annexation. Factors such as the degree of damage that removal would cause should be considered.
• A simple retention of title clause will not amount to a charge but it is possible that a complicated retention of title clause may do. If it does amount to a charge it must be registered with the Register of Companies. A charge that is not registered will be void and will not bind an administrator or liquidator. This is particularly relevant in an insolvency situation, where, under s234 of the Insolvency Act, if the insolvency practitioner correctly believes or has reasonable grounds for believing that he is entitled to use and dispose of goods then he is not liable to the true owner for any loss or damage that results.
In short, specific provision should be made for the transfer of ownership in the contract. A retention of title clause will help protect the seller’s position in the event of non-payment or insolvency. For more information on retention of title and other related matters, see our 'retention of title briefing guide' and visit the Publications section of our website.