Another brick in the wall?

Perceived shortages of bricks and building materials have been making headlines, but there are contractual solutions that will ensure these fears are just “another brick in the wall”.

In recent months the construction industry press and the wider media have focused on the availability of building materials, with some claiming that the ramp-up in construction projects has come too quickly for the supply chain. In an article by Brian Green earlier this year, fears of a building materials shortage were dismissed as overstating the problem. Nonetheless, buyers have been advised to adjust their behaviour, i.e. to plan further ahead to avoid supply bottlenecks.

Procuring materials in advance comes with risks. Developers should ensure that they have title to goods when they make advance payments for them and should seek further security where necessary. The usual contractual mechanisms to achieve these aims are the use of vesting certificates and advance payment bonds.

Where materials are crucial to a development, or particularly costly, or the developer wants confirmation from a supplier that title to the goods vests in the developer, vesting certificates should be used. The recent case of The Governor of the Bank of Ireland vs Faithful & Gould v CBRE Limited sets out some practical principles to follow when using vesting certificates.

Procuring materials in advance comes with risks. Developers should ensure that they have title to goods when they make advance payments for them and should seek further security where necessary

Whilst the matter concerned negligent valuation, part of the judgment focused on vesting certificates, and F&G’s advice to the Bank to “take a commercial view” with regard to goods paid for in advance and stored in a warehouse was held to have caused part of the bank’s losses. The court criticised F&G’s misuse of vesting certificates, and some useful tips for those contemplating using vesting certificates can be gathered from the judgment:

• the agreed form of vesting certificate must be adhered to for all advance payments
• the parties to the transaction should be clearly identified in the vesting certificate, particularly the beneficiary
• a full specification of materials must be attached to every vesting certificate
• when stored in a warehouse, materials must be clearly marked as for the developer and project in question, and should be kept separate from all other materials stored there
• warehouse inspections must be adequately carried out on behalf of the developer. Engaging a surveyor on an appointment with a specific scope of services for inspection is highly advisable
• when a contractor suggests ordering materials ahead of time, question why. If it is not necessary to do so, storing materials in advance can increase the risk of damage or loss.

When dealing with foreign suppliers, things can be somewhat tricky, with some jurisdictions around the world, notably civil law jurisdictions such as France and Italy, not recognising vesting certificates. In those, situations, local law advice must be sought in order to put in place equivalent contractual mechanisms.

An advance payment bond may be used where a developer has agreed to pay the contractor an advance payment, but is concerned that the contractor may not be able to perform its obligations, or something else, such as solvency issues, may prevent it from doing so. A few - hopefully obvious but useful - tips regarding advance payment bonds include:

• advance payment bonds, unlike performance bonds, should be on demand to enable the developer to call on the bond at any time, without having to prove that the contractor has breached its contract
• demands under on demand bonds will be required to take a particular form, which must be followed to the letter. For example, a demand may require specific accompanying documents to be attached
• the bond amount should be the value of the advance payment
• variation of the building contract without the bondsman’s consent can discharge its liability. Wording to allow for variations should therefore be included in the bond
• consider the expiry of the bond. The beneficiary should seek for the bond to be in place at least until the value of the advance payment is repaid, or work is carried out or goods are supplied to the value of the advance payment.

Through the implementation of the correct contractual mechanisms – vesting certificates and advance payment bonds – along with appropriate legal advice and sufficient planning ahead, concerns raised by the media about the supply of building materials could be mitigated. Or as Pink Floyd put it, “we don’t need no thought control!”

Stephanie Canham is national head of projects and construction at law firm Trowers & Hamlins