Double your money or bust: Beware of retention of title clauses

The construction industry suffers its fair share of insolvencies, and these often have an impact up and down the chain of parties involved in the delivery of a project. The main contractor can be forgiven for believing that once the materials are on site and/or used as part of the works, then that is the end of any retention of title issues. However, that is not always the case, due in part to a longstanding difference between the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982, as well as a complex Supreme Court decision.

The difference between the two acts is that transfer of title can be automatic with the Sale of Goods Act. Where a main contractor buys materials in good faith under a simple sale-only contract – to which the Sale of Goods Act normally applies – it automatically receives good title to those materials, usually on delivery, and can defend a retention of title claim from a seller further down the supply chain.

Main contractors may be shocked that a retention of title clause of which they had no knowledge  and to which they were not party may impact on them

If the contract is with a specialist subcontractor that is also providing services, however, the Supply of Goods and Services Act will apply. This provides only for an implied term that good title to the materials passes, rather than title passing automatically. As retention of title clauses are often implemented by the original supplier if a subcontractor goes bust, usually after it has been paid for the materials by the main contractor, this can leave the main contractor facing a retention of title claim from a third-party supplier. Its only remedy is the unattractive prospect of suing the now insolvent subcontractor for breach of an implied term.

A main contractor might therefore think that it is always better off if it ensures that materials are provided separately from services. However, the Supreme Court’s decision in the case of PST Energy 7 Shipping LLC vs OW Bunker Malta Ltd & Anor [2016] UKSC 23 shows that assumption could be wrong where retention of title clauses come into play. The case concerned payment for provision of marine fuel (known as “bunkers”) by OWB to PST for use in a vessel named Res Cogitans, in a multi-party supply chain. OWB subsequently entered into liquidation. A retention of title clause provided that title in the fuel would not transfer until it was paid for, but in the meantime the vessel owners had the right to use as much fuel as they liked to propel it. Effectively, the seller’s deal had been: “Here, have this fuel; pay me later. It’s not yours until you’ve paid for it, but burn as much as you like in the meantime.” This, the court held, was not a contract for the transfer of goods, it was something entirely of its own kind. As a result, the Sale of Goods Act did not apply at all.

Are retention of title clauses really acceptable in the modern age? There are a number of reasons to argue they are not

As the purchaser, PST, had no protection under the Sale of Goods Act, it would both have to pay the price of the fuel to its seller and risk a retention of title claim from an unpaid supplier further down the chain. It is often envisaged that materials for construction projects will be resold and used by an onward purchaser, despite a retention of title clause. Depending on the wording of the clause, this could prevent the Sale of Goods Act from applying.

No doubt quite a few main contractors may be shocked that a retention of title clause of which they had no knowledge of and to which they were not party may impact on them. Where their immediate supplier becomes insolvent after being paid, this often leaves main contractors and employers facing the prospect of paying twice for the materials. Of course they may still have the argument that the materials are incorporated in the works such that they cannot be removed, but that can be difficult to argue and is a complex issue of fact and law to be determined often by the court.

Are retention of title clauses really acceptable in the modern age? There are a number of reasons to argue they are not. First, the supplier can as an alternative either insist on payment before shipping or take out credit insurance to protect themselves against the risk of not being paid. Second, it is unclear why a supplier of goods and services should be entitled to extend perhaps lengthy and excessive credit to another party in the contractual chain without concern about the implications for parties further up that chain. Third, statutory measures on prompt payment such as adjudication and the prohibition of pay-when-paid clauses in construction contracts  seem to be contradicted by the practice of extending credit and relying on the backstop of a retention of title clause if payment is not made.

The Res Cogitans case demonstrates the stark difference in where the risk of retention of title claims sits in the supply chain dependant on whether or not the Sale of Goods Act applies. The end purchaser’s rights can differ from what they had thought as a result of circumstances of which they had no knowledge. For the construction industry, where goods and services are often the norm, and each subcontractor’s supply terms are generally unknown, this is an area where harmonisation would certainly be welcomed.

James Bessey is a partner in Blake Morgan. He was assisted in the writing of this piece by Simon Lewis, who is a senior solicitor at Blake Morgan