As contractor insolvencies due to the Covid-19 pandemic hit the news, one contractual clause in particular will be getting a lot of consideration, namely that of ownership of goods and materials. It is a complicated area of law, so it is worth employers administering building contracts effectively to best protect their position by considering the following steps.
- Ensure goods and materials are clearly identified when included in interim payment certificates and that payment is then made promptly to the contractor. Even when contractors or sub-contractors are facing insolvency, in some situations this may protect the employer’s position by providing evidence that title in those items has passed.
- At the contract formation stage, consider adding provisions to ensure that payments due to flow down to sub-contractors have been made, such as evidence of payment downstream being required as a condition for payment being made to the contractor under the next interim payment certificate. This is intended to ensure the contractor makes payment to its suppliers and so has good title to pass on.
- Ensure the contractor passes obligations down in its contracts with sub-contractors and suppliers, but be aware that supply contracts are subject to a different statutory regime.
- Use any Listed Items or “marking” mechanisms where appropriate for goods which are still off site and ensure that the process is properly administered – typically vesting certificates, insurances and evidence of suitable labelling and storage may be expected prior to the costs being approved.
- Consider requiring a bond in respect of payment for off-site materials – this is included as an option in the JCT but the NEC4 will need amending to provide for this.
- Consider specific provisions in relation to materials and plant in the event that the contractor’s employment is terminated (and particularly if termination is due to insolvency) so that direct payment can be made to suppliers to secure goods and accounted for in the final account due to the contractor.
- Ensure that there is sufficient security at the site, particularly in the event of insolvency (actual or imminent) of one party, to limit the risk of materials being removed from site by sub-contractors before any dispute process can be followed.
DACB can assist both in drafting contracts with a view to protecting a party’s position and in advising after the event if issues and disputes arise.
