O is for ownership, P is for performance

O is for Ownership

Even with its current reduced output, the UK construction industry will use materials in 2011 that have a value of somewhere in the region of £40bn. With the continuing threat of business failures in the current market, it is important to understand who might own these materials at any given time.

The only time that ownership becomes certain is the point at which materials are incorporated into the works or are considered to be annexed or fixed to the land, but what do these concepts mean?

Once cement, sand and aggregates are mixed to form concrete and laid on a site, they can no longer be separated into their constituent parts and are considered to form part of the works. Even if a cement supplier has not been paid for materials used like this in a project, it is not able to claim that it still owns those materials and thus demand their return. The supplier is only able to claim for the value of those materials, which becomes problematic if the buyer has become insolvent.

There have been cases through the courts that have considered the point at which materials are fixed to the land; these cases have looked at such things as sheds, greenhouses and bungalows. A greenhouse bolted to the ground might not be annexed to it, but a bungalow resting on the ground without any fixing might be. While these examples seem outdated, they have implications for modular construction and need careful consideration.

Whether materials are incorporated or annexed can be a grey area. Many suppliers try to maintain ownership of their materials until they have been paid for (using what is often called a “Romalpa clause”), whereas many buyers will try to obtain ownership at the point that the materials are delivered to a site (if that occurs before payment is made). Buyers will often look to make a distinction between ownership (which they want to pass as soon as possible) and risk (which they want to pass as late as possible).

Materials stored off site can be high risk for a buyer who agrees to pay for them before they are delivered to site. Where a buyer makes such payment, they need to be sure they own the materials for which they have paid; devices used to achieve this include vesting certificates.

P is for Performance

Contracts are said to be discharged by performance: where the parties involved have done those things required by the contract.

For a client this will usually be the point at which they have paid the final money due; for a consultant it will be when the last of the services have been performed, and for a contractor it is when the last duties in relation to making good defects have been completed.

Failure to perform obligations further to a construction contract can have severe implications. Where a contractor does not complete the works by the contract completion date, it is often exposed to the risk of liquidated damages, the agreed rate of damage which the contractor pays for each day or week that the work runs late.

In some contracts a contractor may be subject to performance damages if the project does not achieve certain designated standards. The most straightforward examples of this are the damages levied where the project does not achieve required floor areas (which may, in turn, lead to termination of the contractor’s engagement under the contract). Other examples include facilities that involve manufacturing or some other process where performance damages are measured by reference to certain performance standards, such as where the facility does not produce the required tons of product in a given period.

A feature common to the contract structures for PFI and PPP projects is the regime of performance deductions. This is the process by which agreed deductions are made for specified failures in the performance of services. Typically this used to apply for the facilities management stage of those projects but those concepts are now being found in construction agreements themselves, particularly in framework agreements where performance is measured by key performance indicators (or KPIs, covered previously).

It is likely that performance measures will become increasingly central parts of construction contracts.

There are various assurances that are given for the performance of a contract (such as bonds and guarantees, also covered previously) that should be kept in mind when considering performance in the round.

Michael Conroy Harris is a senior legal manager at Eversheds