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A question of ownership

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Legal matters

The construction industry operates upon a regular rhythm of work carried out and paid for by interim payments which are intended to be more or less, but not precisely, right: final adjustment is made only when the project is over. The ebb and flow of materials and labour on the one hand and cash on the other works well enough when the contract is seen through to completion. This fluid situation can, however, give rise to real problems in ascertaining who owns construction materials when one of the parties is suddenly struck by insolvency.

One of the difficulties is that two legal regimes meet at the time that goods are delivered to site. Contracts for the supply of materials are governed by the Sale of Goods Act. Construction contracts are contracts to make up materials and fix them to a building: the Sale of Goods legislation does not usually apply. Further confusion is generated by the plethora of legal maxims used to describe half-understood concepts: Romalpa clauses, vesting clauses and 'Nemo dat quod non habet' (loosely: 'you can't give what you ain't got').

Contracts can be used to chart a path through this treacherous territory and to define where the risk of mid-project insolvency lies. Envisage the following situation:

Materials are supplied to a contractor by a supplier. Under the contract for sale, the supplier retains title in these goods until he is paid.

The contractor incorporates the materials into the works. Generally, if the contractor has good title, the materials then become the property of the employer, whether he has paid for them or not.

The materials are included in an interim valuation which is then paid by the employer.

The contractor goes into liquidation before paying the supplier.

So, who owns the materials? As always, it depends upon the facts of the particular case and the terms of the parties' contract. There are some surprises. So far as the employer is concerned, incorporation into the works is a key stage: after that, a contractor can sue for the price of the goods but cannot reclaim them. This is admirably illustrated by the rather macabre case of Sims v London Necropolis Co. The court held that a burial company, which had sold the plaintiff a burial plot and a monument, could not remove the monument even though the plaintiff had not paid for it, because it was fixed to his land.

Employers want the greater protection of owning materials as soon as they are delivered to site, particularly if they have been the subject of an interim payment. Many standard forms include vesting clauses, such as clause 16 of jct 80, which makes unfixed materials the property of the employer. A contractor cannot, however, pass on a better title than he has himself, so unpaid suppliers may still own the materials. Without the benefit of clause 16, the employer may find that he does not own unfixed materials even if he has paid for them.

Adopting the original theme that supply of materials and labour and payment for them flow through the project without crystallising precisely, the judge in W Hanson (Harrow) Limited v Rapid Civil Engineering decided that an interim valuation was merely 'a convenient means of determining the amount which should, in fairness to the contractor, be advanced to him from time to time against the contract sum', and did not necessarily mean that the employer had bought the materials so valued. These points illustrate the well-worn adage that, despite the complexities of the underlying legal principles, contractual precision is the best way to avoid being left high and dry when the tide unexpectedly rushes out.

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