Off-Site Goods and Materials: Legal Issues

There is no doubt that off-site manufacture is being embraced by the industry. The key legal issues to address in a contract where off-site manufacture is contemplated are legal ownership of the goods manufactured off-site prior to delivery and risk of damage when those goods are in storage or transit.  Whilst paying for the off-site goods or materials may be necessary, it may put the purchaser/employer at risk if the supplier/contractor becomes insolvent and the goods are not then delivered.  Also, who will be responsible for damage caused to the goods or materials whilst they are in storage or during transit.  Another issue is quality control and monitoring progress during the manufacturing process which should be addressed in the supply contract.  These risks need to be addressed when drafting the contract.

Ownership

Most standard form construction contracts and parties’ terms and conditions deal expressly with what are known as retention of title provisions.  A retention of title clause, at its most basic, provides that title to the goods does not pass to the purchaser/employer until specified conditions have been met, which is usually when payment has been made.   Otherwise the starting point is that title passes to the purchaser/employer upon delivery regardless of payment.  The Sale of Goods Act 1979 and Supply of Goods and Services Act 1979 both provide that title will pass when the parties intend it to pass. There is a general rule that when materials are incorporated into the works, ownership passes to the purchaser/employer whether they had been paid for or not.

It’s sensible to check that the retention of title clauses are consistent throughout the supply chain to try and avoid a situation where title is not passed to the Employer despite payment having made to an insolvent supplier/contractor.

An example of a retention of title clause that deals with off-site materials is the JCT Standard Form of Building Contract 2011 and 2016 editions which provides for payment in respect of materials stored off-site and title to pass provided that certain conditions are met.  The contract identifies ‘listed items’ whose value is to be included in interim payments and states that when the value of such materials has been included in an interim payment, title will pass to the Employer.  There are also particular conditions that need to be satisfied before payment will be made which include: (i) the listed item is in accordance with the contract; (ii) proof that they are vested in the contractor and covered by an insurance policy covering them against loss or damage caused by specified perils until they are delivered to site; (iv) at the place of storage listed items are clearly and visibly marked as belonging to the employer and set aside from other materials; and (v) if required, the contractor must provide a bond from an approved surety (in a form provided by JCT) which enables the employer to recover the amount it has paid to the contractor if he is unable to obtain the relevant goods.