Out off site, out of mind?

Let’s hear it for modular construction. This method of building first became popular after the Second World War and is now being heralded as a possible solution to the current housing crisis. With improvements in build quality and a growing reputation as a cost (energy and financial) and time-efficient way of volume building, modular has gained support from the great and the good, including the likes of the NHS, The Berkeley Group, Laing O’Rourke, Fluor and Bouygues UK (to name but a few). It is recommended in the Farmer Review on the construction industry, and the UK’s largest modular construction contract so far has recently been awarded to provide temporary accommodation at Hinkley Point for the 5,600-strong workforce. Other announcements in the trade press suggest that modular is also becoming popular outside the residential sector.

There is a “but”, of course. Most of the components of modular buildings are manufactured and stored off site. Unless a developer or contractor has an in‑house construction facility for manufacture and storage of the constituent parts, there are a number of potential issues which are similar to those affecting routine purchases of off‑site goods and materials.

What can be done if the parts and materials are manufactured and stored elsewhere, possibly even in a foreign country?

One of the main risks, (apart from matters of quality control, which should be dealt with carefully in the supply contract) is that of the insolvency of the contractor/supplier. The point at which legal ownership of the off‑site goods, modular buildings and materials has passed to the purchaser becomes a crucial question. The general rule is that unless otherwise stated in the contract, title passes from the contractor/supplier to the purchaser/employer at the time of delivery, whether or not the materials have been paid for. It is not unusual, however, to see construction contracts providing for ownership to pass on payment. If such arrangements have been made, the purchaser/employer is at risk financially and it is wise to verify that these arrangements are back to back throughout the supply chain to make sure that supply contracts lower down do not contain inconsistent retention of title clauses.

So what other practical measures should a prudent purchaser/employer consider to protect its investment, particularly where there is a danger that modular parts or materials paid for upfront could be included in the insolvent supplier’s assets, liquidated and shared between all its unsecured creditors?

What can be done if the parts and materials are manufactured and stored elsewhere, possibly even in a foreign country?

At the beginning of a project, the purchaser/employer will usually have carried out due diligence regarding the contractor’s financial status. It is also worth checking that the contractor has done likewise with its own subcontractors/suppliers. The purchaser/employer may additionally negotiate a parent company guarantee (if appropriate) or a bond (which would ordinarily reduce in value as deliveries are made) in the amount of the value of the modular building or off‑site materials. Further, there must be adequate insurance until the buildings and materials are delivered to site, when they should then be covered by the usual all-risks insurance.

There must be adequate insurance until the buildings and materials are delivered to site, when they should then be covered by the usual all-risks insurance

Another step could be for the purchaser/employer to state in the contract that a supplier/contractor will not be entitled to payment until (as a condition precedent) it provides sufficient evidence that it has ownership of the off‑site items and it is entitled to pass that ownership on to the employer. One method of achieving this is by use of a vesting certificate. A vesting certificate can be used for the supplier/contractor to confirm in writing that property has passed to it and that the items in question are properly stored, identified and marked as intended for the relevant project.

Even if the above suggestions are put into place, there is no absolute guarantee of protection in a supplier/contractor insolvency situation, or that this would not cause serious difficulties if the supplier is a major one in the context of the project. However, short of sending round the boys with the large dogs to reclaim outstanding items, the above proposals may be some of the best precautions to take.

The most important thing to note if there is any kind of contractor/supplier insolvency risk, is that forewarned is forearmed. Out of sight, out of mind? Not likely.

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