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RETENTION OF TITLE AND

VESTING CLAUSES – DO THEY PROVIDE


SECURITY OVER GOODS?

A paper presented to the Society of


Construction Law at meetings in London on
4th June, Belfast on 15th October 2013 and
Birmingham on 21st January 2014

Michael Mendelblat

March 2014

185

www.scl.org.uk
RETENTION OF TITLE AND
VESTING CLAUSES – DO THEY PROVIDE
SECURITY OVER GOODS?

Michael Mendelblat

Introduction
Retention of title and vesting clauses are intended to provide a measure of
security over goods and materials on or off site. The law in relation to
retention of title clauses has developed extensively since the ground breaking
case of Romalpa in 19761 but sits somewhat uneasily at the junction of various
areas of law including construction, trusts, sale of goods, agency and bailment.
It is not unknown for ‘self-help’ remedies to be attempted.

Vesting clauses are somewhat less controversial and are encountered in a


variety of different forms. The term is used in this paper to refer to any type
of clause which can lead to property (including money) being obtained by one
party although title may or may not be transferred; there may also be a power
of sale.

The problem
Retention of title issues in the construction industry manifest themselves most
strongly in the following scenario. A subcontractor has supplied unfixed
goods to the main contractor subject to a retention of title clause in his
subcontract and these goods are now in the contractor’s ‘possession’ on or off
site. Such ‘possession’ may be notional or actual.

The employer may have paid the contractor for these goods and this may or
may not be known to the subcontractor. The employer may, or may not, know
that the subcontractor has a retention of title clause in his contract and, even if
he does know of it, may not know exactly what it contains.

The main contractor may have become subject to an insolvency procedure,


whether by way of receivership, administration or liquidation. Alternatively,
if he is a sole trader, he may have become bankrupt.

The subcontractor may not have been paid but has released his goods to the
contractor’s possession and either wants to be paid for them or to recover them
for use elsewhere.

1 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd (1976) 1 WLR 676, [1976]
2 All ER 552, [1976] 1 Lloyd’s Rep 443 (CA).

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The subcontractor is therefore threatening proceedings and may be prepared to
exercise a self-help remedy by retrieving the goods from wherever they are
held.

This (not uncommon) scenario is the basis for an examination in this paper of
retention of title clauses and their practical application in modern commercial
practice.

Cases regarding retention of title clauses have been relatively few in the
construction industry. Nevertheless, many of the variables have been
addressed, allowing some conclusions to be drawn. There are, however, still
some lacunae arising from the judgments and these will be explored
subsequently.

This paper will also deal with the related question of vesting clauses and their
practical efficacy. These clauses need to be looked at again in the light of the
Belmont case in the Supreme Court in 2012.2 Whilst it is doubtful that any of
the commonly adopted clauses presents a problem in terms of the anti-
deprivation principle addressed in Belmont, vigilance must be exercised to
ensure that this principle is not accidentally called into play with unexpected
consequences.

Who is the owner?


In order to establish this issue some criteria must first be defined.
(i) Who has possession of the goods, whether notionally or actually?
(ii) Are the sub and main contracts for supply of goods or for work
and materials?
(iii) Does the main contract make provision (as for example in JCT
SBC/Q 2011 clauses 2.24 and 2.253) for the stage at which goods
become the employer’s property? In those clauses this occurs on
delivery and payment for onsite goods and payment for offsite
goods.
(iv) Does the subcontractor have a retention of title clause in his
subcontract?
(v) Does the employer know about the retention of title clause?
(vi) What does the building contract say? For example, in JCT SBQ
clause 3.9.2, specific provision is made to the effect that the
subcontractor is to accept that property passes when payment for
goods is made to the main contractor. However, is this reflected in
the subcontract itself?

2 Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011]
UKSC 38, [2012] 1 AC 383, [2012] 1 All ER 505, [2011] 3 WLR 521.
3 Standard Building Contract with Quantities, 2011, The Joint Contracts Tribunal Ltd.

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The competing principles
Two Latin maxims remain of relevance in this area. The first, is quicquid
plantatur solo, solo cedit. This may be translated in this context as ‘once
goods are fixed, they become part of the land’. Strictly speaking, title passes
to the landowner (who may not be the employer) on incorporation – the Sims
and Tripp cases.4 The second principle is nemo dat quod non habet. This may
be translated in this context as ‘no better title can be conferred than the
transferor has’.

Perhaps the only thing that is certain in this area of the law is that the first
principle always prevails. Once goods are fixed into the building (although
what ‘fixed’ means is often a live issue), their provenance becomes irrelevant
and they are owned by the employer, or landowner if different. That does not
mean that all issues are settled since the proceeds of sale in the hands of
(usually) the main contractor, may be impressed with a trust (as to which see
below). The goods may have been subject to a charge. However,
incorporation invariably kills the retention of title clause as regards title issues
in favour of the employer or landowner.

Statutory protection for sub-buyers of goods


The problem of goods being released by a seller to a buyer who may then sell
on has been recognised since Victorian times. Section 25(1) of the Sale of
Goods Act 1979 (reflecting wording originally found in the corresponding Act
of 1893, section 25(2)) reads:
‘Where a person having bought or agreed to buy goods obtains, with the
consent of the seller, possession of the goods ... the delivery or transfer
by that person ... of the goods ... under any sale, pledge, or other
disposition thereof, to any person receiving the same in good faith and
without notice of any lien or other right of the original seller in respect
of the goods, has the same effect as if the person making the delivery or
transfer were a mercantile agent ....’

The definition of a mercantile agent is to be found in section 26 of the Sale of


Goods Act 1979 which provides that:
‘In sections 24 and 25 above “mercantile agent” means a mercantile
agent having in the customary course of his business as such agent
authority–
(a) To sell goods …’

The effect of such sale is to be found in section 2 of the Factors Act 1889 (still
in force) which materially reads:
‘where a mercantile agent is, with the consent of the owner, in
possession of goods … any sale, pledge, or other disposition of the
goods made by him when acting in the ordinary course of business of a

4 Sims v London Necropolis Co (1885) ITLR 584 and Tripp v Armitage 150 ER 1597,
(1839) 4 M & W 687 (Crt of Exchequer).

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mercantile agent, shall … be as valid as if he were expressly authorised
by the owner of the goods to make the same; provided that the person
taking under the disposition acts in good faith and has not at the time of
the disposition notice that the person making the disposition has not
authority to make the same.’

The necessity for these sections arises from the common situation in many
commercial transactions where physical possession of the goods passes
between parties, but not necessarily in step with payment being made. Indeed,
sections 17 and 18 of the 1979 Act provide that intention is the key for
determining when property passes in respect of the sale of specific goods. By
section 18 Rule 1 the date when a contract is made, not payment or delivery, is
in general the date when property passes in specific goods, subject to any
contrary intention in the contract. Section 19 recognises that a reservation of
the right of disposal (such as a retention of title clause) may prevent property
passing.

The words of section 25(1) of the 1979 Act have been extensively pored over
by case law, not least due to the extensive number of variables which may
apply in any given situation. For example, there may be a dispute as to
whether the seller’s consent was given, whether a sale to the sub-buyer took
place and whether there was notice of the original seller’s rights. Accordingly
it is necessary to look at the development of the interpretation of retention of
title clauses through the case law beginning with the seminal case of Romalpa
in 1976.

The Romalpa case5


It is worth noting at the outset that the Romalpa case set the tone for much of
the case law since it appeared that the wording of the retention of title clause
was itself a somewhat opaque translation of a document in another language,
as has occurred in several reported cases since. The clause made express
provision in relation to the issue of whether the buyer was a fiduciary, a matter
which is not always addressed expressly in subsequent cases. The court
therefore found that the buyer had an obligation to account for the proceeds of
sale to a sub-buyer and the seller could trace such proceeds in the hands of the
buyer. Gerard McCormick, in his book on Registration of Company Charges,
says that the case has been ‘distinguished to death’.6 Whilst the case is still
cited, it may well now best be regarded as a decision on its facts, with the
result that much of the case law has had to have resort to first principles to
determine whether a retention of title clause has had the effect desired by
those putting it forward.

It was also conceded in the Romalpa case that the buyer was a bailee of the
goods, a point which again has been in dispute in subsequent cases.

5 Romalpa: note 1.
6 Gerard McCormick, Registration of Company Charges (3rd edition, Jordan Publishing
Ltd, 2009), page 171.

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Following the Romalpa decision a number of different forms of retention of
title clause developed. Case law has gradually addressed the effectiveness or
otherwise of these types of clause and in particular the issue of whether some
or all of them amount to a charge over the goods in question. If they do so,
then by section 874 of the Companies Act 2006 such a charge must be
registered against the buyer, if it is a company. A charge cannot be created
over property which the beneficiary owns and therefore any clause providing
that title to goods remains with the seller cannot, by definition, constitute a
charge.

Types of clause
The principal forms of retention of title clause are as follows:

The simple form


This is simply a provision to the effect that the seller retains title to the goods
until paid for. This does not constitute a charge and is, in some ways, the most
effective retention of title clause but is only of use in straightforward situations
where goods do not change identity on or before transfer to a sub-buyer.

All monies form


The simple form of clause may be of limited utility where effectively the seller
and buyer have a ‘running account’ so that monies are due for different
purchases at different times but the intention of the seller is that he will retain
title until all goods supplied to the buyer are paid for. The Armour case in the
House of Lords in 1990 decided that this type of clause was not a charge and
therefore it remains effective.7

Both the simple and all monies form are, however, vulnerable to being
defeated by a sub-buyer’s rights under section 25(1) of the 1979 Act if
applicable.

Proceeds of sale clause


In this situation the seller has a right to the proceeds of sale of the goods in
question but does not retain title.

It was conceded in the Romalpa case that there was a fiduciary relationship
between seller and buyer, thus effectively impressing a trust on the proceeds
of sale. No such concession was made in the subsequent case of Re Bond
Worth. 8 In that case the clause stated that the seller retained ‘equitable
ownership’ of the goods but it was held that this clearly fell short of full title
and effectively amounted to a charge. Being unregistered, the charge was
ineffective against the proceeds of sale in the hands of the buyer.

7 Armour v Thyssen Edelstahlwerke AG [1991] AC 339, [1990] 3 WLR 810, [1990] 3 All
ER 481, [1991] 1 Lloyd’s Rep 95 (HL).
8 Re Bond Worth Ltd [1980] Ch 228, [1979] 3 WLR 629, [1979] 3 All ER 919 (Ch).

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Mixed goods clause
It is frequently the case that goods supplied by a seller to a buyer do not
remain in the same form once in the buyer’s possession. There are numerous
examples in the case law, such as leather to be used in handbags or resin to be
used in chipboard.9 In the latter case (Borden) it was held that such a clause
was ineffective to retain title since, once goods lose their identity, what results
is a new product to which a seller cannot claim legal title. Accordingly, at
best he is entitled to a charge over the new product. Again, this was invalid
for want of registration leaving the seller with no effective claim.

Accordingly, the efficacy of either proceeds of sale or mixed goods clauses is


limited as in practice charges are rarely, if ever, registered by sellers. In the
event of a seller remaining unpaid and a buyer becoming insolvent, the seller
would only have rights as an unsecured creditor of the buyer since any
potential right to a charge as created by the clause would be ineffective for
want of registration – section 874 of the Companies Act 1996.

Case law in construction


The first case to address this issue in the construction field was Dawber v
Humberside County Council in 1979. 10 Dawber was a subcontractor
employed by a main contractor for the Council. The contract was in the JCT
standard form which provided that goods, once paid for, became the
employer’s property. During the progress of the contract, the contractor
became insolvent and his employment was terminated. Under the subcontract,
it was expressly provided that risk and title remained with the subcontractor
until incorporation or payment. It was common ground that the goods in
question had not been incorporated into the works or paid for. It was also
common ground that section 25(1) of the 1979 Act did not apply as the
subcontract was for work and materials, not sale of goods alone, and did not
therefore constitute a ‘sale, pledge or other disposition’. There was, of course,
no privity of contract between the employer and subcontractor.

The court applied the maxim nemo dat quod non habet and held that the main
contractor had no title to the goods and could not therefore transfer any title to
the employer. The subcontractor was therefore entitled to claim in conversion
against the employer and was not limited to his remedies against the
contractor’s insolvent estate.

Not surprisingly, this decision caused concern in the construction community


and standard form contracts began to include terms which would nullify any
attempt to rely on a retention of title clause in the subcontract. For example,
clause 11 of the CECA blue form of subcontract now provides for title to pass

9 Re Peachdart Ltd [1984] Ch 131, [1983] 3 WLR 878, [1983] 3 All ER 204 (Ch D) and
Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25, [1979] 3 WLR 672,
[1979] 3 All ER 961, [1980] 1 Lloyd’s Rep 160 (CA).
10 Dawber Williamson Roofing Ltd v Humberside County Council (1979) 14 BLR 70
(Div Crt).

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under the subcontract just before such passing occurs under the main
contract.11

The tables were turned in the subsequent case of Archivent v Strathclyde


Council.12 Again, the claimant was a subcontractor and the defendant was an
employer. This time, however, section 25(1) of the 1979 Act did apply as the
subcontract was for supply of equipment (radiators) only. They had not been
fixed. These had been received by the contractor and the main contract
deemed them to be the employer’s property once payment had been made to
the main contractor. Once delivered to site, the main contractor could not
remove the goods without the employer’s consent. The subcontract contained
a simple retention of title clause, of which the employer was unaware prior to
the goods coming into his possession.

The court held that the contractor had not received title to the goods as he had
not made payment to the subcontractor. It also held that the retention of title
clause had not imposed a charge as it provided for title to the goods to remain
with the subcontractor. However, the employer was able to make use of
section 25(1) as the goods were first in the contractor’s, then in the
employer’s, possession. Their value had been included in a certificate, the
value of which had been paid by the employer to the main contractor. The
main contractor, perhaps unsurprisingly, was held to be acting in his ordinary
course of business as a mercantile agent.

It is worth noting here that, in a sense, as far as the employer was concerned
‘ignorance was bliss’ as he was clearly better off not knowing about the
arrangements under the subcontract so that he could qualify for the ‘without
notice’ requirement in section 25(1). Furthermore, the event of delivery under
a ‘sale or other disposition’ for the purposes of that section was held to be the
point at which the employer’s surveyor had measured and not rejected the
goods on site; this amounted to control.

The next case was Sauter Automation v Goodman in which a retention of title
and trust over proceeds of sale provision in a subcontract was relied on by the
subcontractor against the liquidator of the contractor.13 Here the goods had
been incorporated into the works and the subcontractor’s claim against the
contractor’s liquidator was for a declaration as to the status of his claim,
delivery up of the goods and payment of the proceeds of sale. The claim
failed on the basis that the retention of title clause had not been incorporated
into the subcontract during a ‘battle of the forms’ process.

The court also considered the position if the retention of title clause had been
incorporated into the contract, although, of course, its observations on this
point are obiter. The subcontract contained by reference a clause in the main
contract which provided that title vested in the employer once goods were

11 CECA Form of Sub-Contract for use in conjunction with the Infrastructure Conditions of
Contract Measurement Version, Civil Engineering Contractors Association, 2011.
12 Archivent Sales and Developments Ltd v Strathclyde Regional Council (1984) 27 BLR
98 (Crt of Session, Outer House).
13 Sauter Automation Ltd v HC Goodman (Mechanical Services ) Ltd (in liquidation)
(1986) 34 BLR 81 (Ch).

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brought onto the site. The court held that the subcontractor had no enforceable
claim against the contractor for the proceeds of sale until the termination
account was settled and it could be seen if any sum was attributed to the goods
in question. The precise status of the subcontractor’s claim was not
conclusively determined and the subcontractor would have had to show that
the proceeds were impressed with a trust in his favour in order to take himself
outside the ordinary run of creditors.

It has also been suggested by Richard Davis in his book Construction


Insolvency that section 25(1) of the 1979 Act could have applied in this case in
favour of the employer as the work element of the subcontract was minor,
consisting only of commissioning.14

In Hanson v Rapid & Usborne the supplier’s contract contained a simple


retention of title clause.15 Materials were supplied by him but he had not been
paid and the materials had not been fixed by the time of the insolvency of the
contractor. However, the employer continued to use the materials in question,
even though he had already had notice of the retention of title clause. The
supplier sued the employer for damages in conversion.

It was held that property in the materials did not pass to the employer. The
building contract provided that property did not pass until payment by the
employer to the contractor for the materials in question. Although there had
been an interim valuation in general terms of materials on site and that
valuation had been paid, this did not amount to a purchase of the material (and
therefore a ‘sale, pledge or other disposition’ for the purposes of section 25(1)
of the 1979 Act) as the valuation was only in general terms. The court said:
‘... valuation of work and materials for that purpose [interim payments]
do not usually connote the purchase by the employer of site materials so
valued. The assessment is 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.’16

Potentially, this judgment presents difficulties for employers in interim


valuation situations although, as we shall see in P4 v Unite, there are many
variables of the factual matrix.17

In P4 v Unite, a retention of title clause in simple form was contained in a sub-


subcontract for supply of goods, being an electrical lighting system. The sub-
subcontractor supplied these goods which were then to be passed to the main
contractor for use in a development. The goods had been delivered to the site
but were not fixed and the subcontractor became insolvent before the goods
were paid for. The sub-subcontractor claimed against the main contractor for

14 Richard Davis, Construction Insolvency (4th edition, Sweet & Maxwell, 2011),
page 201.
15 W Hanson (Harrow) Ltd v Rapid Civil Engineering Ltd (1987) 38 BLR 106; also 11 Con
LR 119 (QBD).
16 Hanson v Rapid Civil Engineering, note 15, page 113.
17 P4 Ltd v Unite Integrated Solutions Plc [2006] BLR 150 (strike out application); P4 Ltd
v Unite Integrated Solutions Plc [2006] EWHC 2640 (trial).

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conversion. The contractor sought to strike out the action on the basis that
section 25(1) of the 1979 Act gave him an absolute defence.

The court held on the application to strike out (which did not, of course,
involve any evidence or detailed examination of the facts), that although
delivery to site and a ‘disposition’ had taken place, what had ensued was only
an agreement conditional on payment for the sale of goods. As no payment
had been made, it could not, therefore, be said that there had been an effective
transfer of title and therefore there was a realistic prospect of arguing that
section 25(1) would not assist the main contractor. Accordingly, the action
was not struck out but went to full trial.

At trial further consideration was given to section 25(1). The court considered
the meaning of the word ‘disposition’ in that section and held that it does not
necessarily denote a full transfer of property in the goods. It needs to be
shown that title has passed in some way and that a new legal or equitable
interest has been created. On further consideration of the events which had
occurred, the court held that a ‘disposition’ was effected by delivery of the
goods to site under a subcontract which provided that they could not be
removed by the subcontractor without the consent of the main contractor.
There was no ‘sale’ as the contract was for work and materials but a clause in
the subcontract said that property passed to the contractor once the goods were
paid for. The court said:
‘... the general valuation of a lump sum for work carried out does not
indicate what materials or goods have been paid for and is insufficient
for property in particular goods to pass … A general lump sum interim
valuation is insufficient and does not lead, in this case, to certain goods
becoming the property of [the subcontractor] or the Employer …’18

The court, having considered further the factual evidence, held that there was a
specific agreement to pay for these particular goods, rather than their simply
being included in a general valuation and therefore property had passed to the
contractor free of the retention of title clause. It is of interest that the court
considered that section 25(1) could apply, notwithstanding that the contract
was for work and materials, if it could be shown that a ‘disposition’ had taken
place even though no ‘sale’ could be identified.

The latest case in the construction area on this topic is Wilson v Holt.19 This
related to a contract for sale of generators. After delivery of the generators,
the buyer sold them to a sub-buyer under a sub-sale. There was a retention of
title clause in the contract for the initial sale but this permitted the buyer to re-
sell in the ordinary course of business, although he was required to account to
the seller for the proceeds of sale.

The seller brought an action for the price, thus avoiding the need to claim
damages at large. Such an action can be brought under section 49 of the 1979
Act but this only applies where property in the goods in question has passed to

18 P4 v Unite, note 17 (trial), para [144].


19 F G Wilson (Engineering) Ltd v John Holt & Company (Liverpool) Ltd [2013] EWCA
Civ 1232, [2012] BLR 468.

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the buyer and he wrongfully refuses to pay. The advantages to the seller of
proceeding under section 49 were that he would not need to address arguments
as to mitigation or remoteness of damage, and that no set-off could be applied
to the price by the buyer.

The buyer said that, by virtue of the retention of title clause, title had been
retained by the seller and therefore property had not passed to the buyer. At
first instance, the court agreed with the seller and held that property passed
from the seller to the buyer for a scintilla of time before the sub-sale took
place. The Court of Appeal disagreed and found in favour of the buyer. They
concluded that a claim under section 49 was an exclusive remedy for the price.

By a majority, they applied the language of the clause to find that the buyer
sold as agent of the seller and could therefore pass property in the goods direct
from the seller to the sub-buyer without ever having itself had property in the
generators. The seller’s only claim would be in conversion rather than for the
price.

The lower court’s decision had been criticised, in particular in the Building
Law Reports, referring to Chitty on Contracts. 20 The Court of Appeal’s
decision is in line with this criticism in that it has applied the wording of the
retention of title clause to prevent an action for the price as, by virtue of that
clause and by definition, the property in the goods is retained by the seller
until the sub-sale. The seller was therefore (and perhaps somewhat
paradoxically) worse off in relation to his claim for the price by reason of a
retention of title clause than if he had not made such provision.

Permission to appeal to the Supreme Court was given and the outcome is
awaited.

Some problem areas


As the Sauter case indicates, there may an issue as to whether the retention of
title clause is incorporated into the relevant contract at all. 21 This may be a
particularly acute problem in relation to supplies made on a standard form
where the relevant clause may be contained on the reverse of a purchase order,
whereas the buyer indicates that his terms are to apply in preference to any
other terms proffered. The process may be further abbreviated where the
buyer simply ticks a box on the seller’s purchase ordering web site and may or
may not have brought his terms to the seller’s attention beforehand.

A practical problem for sellers seeking to recover their goods is the


moratorium which applies once an administrator has been appointed for a
corporate buyer. The moratorium, unless lifted by the court, will prevent court
proceedings being issued or repossession of goods being sought.22

20 Hugh Beale (general editor), Chitty on Contracts (31st edition, Sweet & Maxwell,
London 2012), para 43-396.
21 Sauter Automation: note 13.
22 Insolvency Act 1986, Schedule B1, para 43.

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Another practical difficulty is shown by the Sandhu case.23 Here, the buyer
had a right to resell goods subject to an ‘all monies’ clause. The buyer went
into administration and then re-sold the goods. The seller sought to recover
from him in conversion. The court held that the seller had no right to
immediate possession of the goods since he could have exercised his right to
terminate the sale contract after administration but before the resale.
Administration does not, of itself, terminate a contract. As he had not done so,
his claim based on an immediate right to possession was held to fail.

Finally, a retention of title clause is unlikely to be of significant practical use


where goods are perishable or have a low scrap value.

Vesting certificates
These are certificates given by a contractor or subcontractor to back up
obligations in contracts to the effect that materials are the property of the
certifier and will become the property of the payer once payment has been
made. They may be backed by a bond, and, for example, the JCT publishes a
form of bond.24

The usual arrangement is that the materials are insured by the contractor from
payment until the date of delivery. The materials are to be identified as held to
the employer’s order and to be delivered to the site. A delivery date may be
specified.

Although the use of vesting certificates is not uncommon, they are of limited
use if obligations in relation to them are assumed only by the contractor. Any
rights obtained are only enforceable against the contractor. Therefore, from
the point of view of the beneficiary of the certificate, a bond backing the
certificate is clearly desirable.

The certificate may or may not give the beneficiary the right of entry to collect
the materials. This is clearly desirable where they are held on third party
property, although such rights may not be effective if contradicted by terms
agreed between the certifier and third parties, for example warehousemen.

If no bond is given, then it may be possible to argue that a director, who signs
the certificate on behalf of a corporate certifier knowing that it is false, may be
liable either civilly in deceit or criminally.

The certificate has no effect on the enforceability or otherwise of the retention


of title clause in subcontracts lower down the chain. Therefore title will still
only be transferred where a retention of title clause is ineffective or section
25(1) of the 1979 Act applies.

23 Sandhu v Jet Star Retail Ltd [2010] EWHC B17 (Mercantile Crt).
24 JCT SBC/Q 2011, note 3, Schedule 6, Part 2.

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What is the optimum position for a subcontractor in a
retention of title dispute?
In some circumstances ‘less is more’. A simple or ‘all monies’ clause is more
likely to be effective than the more complex ‘proceeds of sale’ or ‘mixed
goods’ clauses. However, simple or ‘all monies’ clauses provide no effective
protection when goods have been fixed into the employer’s works without the
employer having notice of the clause; likewise if the subcontractor’s materials
are mixed with other materials to form new products, unless the clause is
registered as a charge.

In the (generally rare) event that a retention of title clause is incorporated into
the main contract, or referred to in it, this will clearly be beneficial to the
subcontractor, insofar as it will constitute notification to the employer of the
clause, thus negating the effect of section 25(1) of the 1979 Act. Alternatively
a subcontractor may exceptionally have the right to notify the employer of the
clause before commencement of the works.

In the (also comparatively rare) event that the subcontractor is able to identify
the state of account between employer and main contractor (or ascertains it via
disclosure), the subcontractor may benefit from lack of payment for the goods
in question by the employer to the main contractor (or insufficiently specific
payment) by reference to cases such as Hanson.25 Alternatively, payment to
the main contractor by the employer following notification to the employer of
the existence of the retention of title clause may exceptionally also operate in
the same way.

The subcontractor will prefer to find that the goods and materials he has
supplied have not been incorporated into the works. If they have been
incorporated into the works, but following notification of the subcontractor’s
rights, then the employer may not be able to avail himself of the statutory
protection under section 25(1) of the 1979 Act. Notice must be actual not
constructive – P4 v Unite.26 Although by application of the quicquid plantatur
rule he obtains title by fixing, the subcontractor should still be able to maintain
an action against him for conversion as a result of the act of fixing goods to
which, immediately beforehand, he did not have title.

There may, however, be issues as to whether incorporation has occurred and


the principles generally applicable from landlord and tenant law may apply.
Cases interpreting the phrase ‘part of the land’ in the Housing Grants,
Construction and Regeneration Act 1996 (as amended) may also be material.27
Some examples of cases where equipment has been connected to but not

25 Hanson v Rapid Civil Engineering: note 15.


26 P4 v Unite, note 17 (strike out application), page 156.
27 Housing Grants, Construction and Regeneration Act 1996 as amended by the Local
Democracy, Economic Development and Construction Act 2009, section 105, Meaning
of ‘construction operations’.

12
become part of the land are gondolas in a supermarket, recording equipment in
a sound studio and an unconnected septic tank.28

The employer’s optimum position


The employer will obviously prefer the situation where there is no retention of
title clause incorporated into the main contract or subcontract, or he is not
actually notified of such a clause before the contractor’s insolvency or fixing
of the goods in question.

The employer, having paid for goods and materials, will benefit from a clause
in the main contract providing that property passes on payment, although
always subject to the nemo dat rule. If the subcontract containing the retention
of title clause is for the supply only of materials and goods then payment may
assist him in advancing a case under section 25(1) of the 1979 Act.
Valuations and certificates which incorporate specific details as to goods and
materials paid for will also be of assistance.

Where goods and materials have been incorporated into the works and have
become part of the land, then the employer will have title to them but, as noted
before, if this is the only way he obtains title he may be vulnerable to a claim
in conversion, where immediately beforehand the subcontractor’s retention of
title clause was actually known to him and effective.

The retention of title clause may be a ‘mixed goods’ or ‘proceeds of sale’


clause in which case title will generally have passed to the main contractor so
that he can give a good title to the employer on payment. As already noted,
such clauses are rarely registered as charges against the main contractor and
are therefore void against his liquidator or other insolvency practitioner or
creditors of the main contractor. There is no authority dealing with the
question of whether a charge, if registered, would have any effect on the
employer who may be either a debtor or creditor of the insolvent main
contractor. In a practical sense, the employer should be better off if the clause
is registered as a charge since then the subcontractor will probably direct his
attentions towards the main contractor, insofar as his security permits him to
make some recovery.

JCT SBC/Q 2011 requires the subcontract to be ‘back to back’ with the main
contract and, if this actually takes place, clearly it is beneficial to the
employer.29 The employer would therefore be prudent to ensure that he is able
to police this requirement as regards the main contractor’s terms of
employment of his subcontractors although, of course, there will be no privity
of contract between employer and subcontractor.

28 Gibson Lea Retail Interiors Ltd v Makro Self Service Wholesalers Ltd [2001] BLR 407
(TCC) (gondolas); Video London Sound Studios Ltd v Asticus (GMS) Ltd [2001] All ER
(D) 168 (TCC) (recording equipment); McNeil v Ja Ron Construction (1979) 35 NSR 2d
150 (septic tank).
29 JCT SBC/Q 2011, note 3, clause 3.9.2.1.1: which reads ‘where ... the value of any Site
Materials has been included in any Interim Certificate ...’

13
Vesting clauses and the Belmont case
Another method of providing security over goods and materials is the use of a
vesting clause. This type of clause seeks to benefit the party receiving goods
or materials, usually the employer. The effect of such clauses is to adjust the
rights of the parties so that property in goods and materials passes from one
contracting party to the other. This may occur before or after termination of
employment and may be linked to the insolvency of the party transferring title.

If insolvency is, effectively, the trigger for the transfer of property then the
anti-deprivation rule may be engaged. The rule is one of two common law
principles which regulate the transfer of property in the event of insolvency by
seeking to ensure that other creditors of the insolvent company or bankrupt
individual are not inappropriately prejudiced. In insolvency or bankruptcy, it
is a basic rule that all creditors rank equally according to their status, so that
all unsecured creditors’ claims abate rateably. There are numerous methods
by which this rule is enforced, both at common law and of statutory
derivation. The two common law principles are the pari passu rule and the
anti-deprivation rule. An example of statutory regulation can be found in
section 213 of the Insolvency Act 1986, dealing with fraudulent trading. This
paper only deals with the anti-deprivation rule, as most recently explained by
the Supreme Court in its decision in the Belmont case.30

The distinction between the anti-deprivation and pari passu rules is that the
anti-deprivation rule regulates provisions in contracts which seek to adjust the
rights of the parties, so that assets never come into the general ‘pool’ as to
which all creditors’ claims rank equally. The pari passu rule seeks to regulate
contractual devices whereby, although assets are released into the ‘pool’, they
are not allocated to each creditor proportionately. It follows that the anti-
deprivation rule generally applies to provisions in contracts which may be
entered into well before the insolvency event occurred and at a stage when it
was not reasonably anticipated.

The Belmont case concerned the insolvency of Lehman Brothers which, not so
long ago, seemed to be a solid financial institution. This paper does not
discuss the details of the financial arrangements in that case (as to which,
reference can be made to the speech of Lord Collins in Belmont31). However,
the case was concerned with loan notes which stated the priority of their
beneficiaries. If an insolvency event occurred, then the priority ‘flipped’ to
benefit a particular and different class of beneficiary. The Supreme Court was
required to consider whether the ‘flip’ contravened the anti-deprivation rule
and was therefore invalid, so that another class of creditors would benefit.

The Supreme Court confirmed that the anti-deprivation rule, despite its
antiquity, was still good law. It also confirmed that, in order to engage the
principle, there must be a deliberate intention to avoid the bankruptcy laws,
whether corporate or personal, as opposed to a legitimate commercial purpose.
Further, the deprivation, if it is to be found to contravene the principle, must

30 Belmont: note 2.
31 Belmont, note 2, paras [18]-[48].

14
be stated to be triggered by bankruptcy and not another event, for example, a
breach of contract. It is to be noted that the criterion of intention is not shared
with the pari passu rule where intention, good faith and commerciality are all
irrelevant to the operation of the rule.

In considering this issue, the court touched on a number of construction and


related cases from the 19th century, which are discussed below.

Cases referred to in the Belmont judgment


In each of these cases it is necessary to consider the particular clause and then
to address the question of whether modern clauses are vulnerable to challenge
in the same way.

The first case was Ex parte Jay in which the relevant clause stated, in brief,
that all goods were forfeited to the employer on the builder’s insolvency and
could be sold.32 Such a clause operates only on insolvency and does not refer
to the builder being in breach of his obligations. The court decided that the
clause offended against the anti-deprivation principle as the intention behind it
was to take the goods out of the pool of assets available on insolvency and
vest them in the employer, who should have ranked as an ordinary creditor.

In Ex parte Barter there was a provision permitting the employer to complete


the works and use materials belonging to the builder which were left on the
employer’s premises at the onset of insolvency.33 The court held that this also
offended against the anti-deprivation principle. The trustee in bankruptcy of
the builder had a right to elect to complete the works and, if the employer was
permitted to complete the works instead, this amounted to an unlawful fetter
on the trustee’s right to complete.

Ex parte Newitt was decided by the same court as Ex parte Jay but a different
result ensued.34 The provision for forfeiture of the builder’s goods operated
on breach, although his chattels were only forfeited to the landowner/employer
after his bankruptcy. The court held that since the forfeiture was triggered by
breach, not bankruptcy, it was valid. It was suggested in Belmont that this
decision was not necessarily correct, although on the grounds that it may have
offended against the pari passu as well as the anti-deprivation rule.35 It is not
clear from the report when the breach triggering forfeiture occurred and, in
particular, whether this was before or after bankruptcy.

Finally, in Ex parte Mackay a patent was sold to two companies by an


inventor in consideration of their paying royalties.36 A provision in the sale
agreement stated that, if the inventor became bankrupt, the companies need no
longer pay the royalties and could keep the profits in their entirety. The court
held that this provision conferred an unlawful ‘additional advantage’ on the

32 Ex parte Jay (1880) 14 Ch D 19 (CA).


33 Ex parte Barter (1884) 26 Ch D 510 (CA).
34 Ex parte Newitt (1881) 16 Ch D 522 (CA).
35 Belmont, note 2, para [83], Lord Collins.
36 Ex parte Mackay (1873) LR 8 Ch App 643 (CA).

15
buyers and was designed to evade the bankruptcy laws by preventing royalties
reaching the pool of assets available for creditors.

Are the standard forms vulnerable?


There are many varieties of vesting and similar clauses in standard form
contracts. These will be considered in turn against the background of the
Victorian cases and the anti-deprivation rule.

Clauses providing for vesting before termination are commonly found, and
examples can be seen in JCT SBC/Q 2011, clauses 2.24 and 2.25 regarding on
and off site materials respectively.37 These regulate the ownership of goods
during the progress of the contract. Transfer of property takes effect upon the
happening of specified events, such as delivery or payment. They are not
stated to take effect on the bankruptcy or insolvency of the contractor and
therefore one of the principal elements of the anti-deprivation rule is not
present.

Clauses providing for the contractor to retain equipment on site during the
progress of the contract and not to remove it without consent are equally
common. An example is the FIDIC Red Book, clause 4.17.38 These do not, as
such, have an effect on title and therefore the anti-deprivation rule is engaged.
In addition, their effect is not triggered by bankruptcy or insolvency of the
contractor. However, P4 v Unite indicates that such a clause may have
implications as to the issue of when property is transferred – see also
Archivent Sales v Strathclyde.39

Most standard forms provide for the contractor’s right to payment (usually on
an instalment basis) to be replaced following termination due to insolvency or
other cause by a process of taking of accounts, whereby the sums due to each
party are set off against each other and the balance is payable to the overall
‘winner’. An example is clause 65.5 of the ICC contract.40 The purpose of
each clause is to implement the statutory set-off applicable to liquidations
under the Insolvency Rules 1986, rule 4.90 and, as such, seems
unobjectionable in terms of the anti-deprivation rule, as insolvency set-off is a
permitted mode of reduction of sums otherwise due to the insolvent company.

Clauses providing for delivery up of materials after termination are perhaps


more vulnerable to challenge. Such clauses are found, for example, in the
FIDIC Red Book, clause 15.2 and the ICC contract, clause 54(8).41 In the
FIDIC Red Book, the provision for delivery up does not depend on the goods
having vested in the employer but, once goods reach site, it is provided by
clause 7.7 that they become the property of the employer.

37 JCT SBC/Q 2011: note 3.


38 International Federation of Consulting Engineers (FIDIC), Conditions of Contract for
Construction for Building and Engineering Works Designed by the Employer, 1999
edition.
39 P4 v Unite: note 17 and Archivent Sales v Strathclyde: note 12.
40 Infrastructure Conditions of Contract, Measurement Version, August 2011, Association
for Consultancy and Engineering and Civil Engineering Contractors Association.
41 FIDIC Red Book: note 38 and ICC Contract: note 40.

16
In the ICC contract, the provision is stated only to apply if the goods are
already vested in the employer and there is a credit to the contractor for the
value of unvested goods.42 It may be that the latter provision is intended to
avoid any challenge on the grounds that the clause is similar to that in Ex parte
Jay above.43

Insofar as these clauses refer to property already vested in the employer then
they are clearly unobjectionable in relation to the anti-deprivation rule. It is
conceivable that the provision in the FIDIC Red Book might be vulnerable
insofar as it may refer to goods off site which have not yet become the
property of the employer but, by clause 15.3, valuation of such goods must be
made and clause 15.4 effectively amounts to a netting-off of mutual claims
within which the value of the contractor’s goods will be taken into account.
Therefore the contractor will, in effect, obtain value, by contrast with the
expropriation which applied in Ex parte Jay.

The employer may be given a right to seize and to use plant and materials to
complete the works, for example in the IChemE contract, clause 44.3.44 This
clause provides that plant and materials will be returned to the contractor,
where he still has title to them, if they are not used or required. In most cases
such plant will of course be hired and may, in any event, be recovered by the
hirer.

Ex parte Barter indicates a potential line of challenge to such clauses, but this
can be answered on the grounds that the insolvency practitioner has no power
to complete the works and therefore, unlike Barter, he has not been deprived
of a potentially valuable asset.45

It is also worthy of note that in the FIDIC Red Book there is no specific
mention of return of goods not used (as opposed to ‘equipment’) and the
insolvent contractor may have a claim in conversion if they are not returned.

The employer may be given the power to sell the contractor’s plant, for
example in the ICC contract, clause 65.2. Any proceeds received will be
applied to satisfy sums due to the employer and if they go beyond this they
will be refunded. This is, again, an instance of implementation of the statutory
set-off. It is to be noted that provisions of this kind are, following the House
of Lords’ decision in Re Cosslett, a species of floating charge requiring
registration in order to be effective.46

Virtually all standard forms contain provision for the automatic termination of
employment or power to terminate employment following insolvency, for
example in the MF/1 contract, clause 50.1 (power) or ACA TPC2005, clause

42 ICC contract, note 40, clauses 54(8) and 65(2).


43 Ex Parte Jay: note 32.
44 Form of Contract, Lump Sum Contracts, UK Version (The Red Book), 5th edition,
February 2013, Institution of Chemical Engineers.
45 Ex parte Barter: note 33.
46 Re Cosslett [2001] UKHL 58, [2002] 1 AC 336, [2001] 3 WLR 1347, [2002] 1 All ER
292, [2002] BLR 160, 80 Con LR 172, [2002] TCLR 7.

17
13.5 (automatic).47 The case of Lomas v JFB indicates that, despite Ex parte
Barter, it is legitimate to take away future work from a contractor on the basis
of reciprocal obligations:
‘… where the right in question consists of the quid pro quo (in whole or
in part) for services yet to be rendered or something still to be supplied
by the insolvent company in an on-going contract, then the Court will
readily permit the insertion, ab initio, of such a flaw [triggered by the
insolvency process], there being nothing contrary to insolvency law in
permitting a party either to terminate or adjust what would otherwise be
an on-going relationship with the insolvent company, at the point when
it goes into an insolvency process.’48

Finally, a recent development has been the growth of standard form provisions
for project bank accounts. Examples are to be found in the NEC 2013 and
JCT 2011 contracts.49 The arrangements are generally set up via a trust deed
by which payments under certificates are made to subcontractors in
accordance with details provided by the main contractor as the project
progresses.

Guidance on these provisions (in particular by JCT) indicates that the


arrangements continue on insolvency so that any amounts in the account will
effectively be paid out in accordance with the trust deed. This would, of
course, be subject to other provisions of the contract entitling the employer to
cease to make payment until final accounts are settled (see above).

It does not therefore appear that such provisions offend against the anti-
deprivation rule as the contractor continues to receive the value of his work.

It might be argued that payment of such monies to subcontractors rather than


to the contractor deprive the general pool of assets of monies to which the
contractor is entitled. However, the adjustment to the contractor’s entitlement
to payment made by the project bank account provisions is, it is submitted, not
motivated by a deliberate intention to avoid the bankruptcy laws but rather for
the commercial purpose of securing payment to subcontractors during the
progress of the contract.

Conclusion
This review of the case law and commercial practice in relation to retention of
title clauses indicates that a wide range of variables applies, both as to the
factual background and the type of clause encountered.

47 Standard Model Form of General Conditions of Contract for the supply of electrical,
electronic or mechanical plant with erection, Revision 5, 2011, The Institution of
Engineering and Technology and the Institute of Mechanical Engineers, clause 50.1 and
ACA Standard Form of Contract for Term Partnering, 2008 edition, Association of
Consultant Architects.
48 Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch); Ex parte Barter: note 33.
49 The NEC Engineering and Construction Contracts 2013 and the Joint Contracts
Tribunals Contracts 2011.

18
In construction, the primary battleground between disgruntled supplier and
end user is likely to be the operation of section 25(1) of the 1979 Act, although
it will often be of significance to determine whether the particular clause has
validly been incorporated into the relevant sale agreement, usually a
subcontract. Some recent cases indicate that this section is capable of
applying to work and materials contracts but much will depend on the factual
matrix.

The survey of applicable provisions in standard form building contracts


indicates that the 19th century cases do not cast a particularly long shadow
over their validity but care should still be taken to ensure that none of these
provisions amounts to effective expropriation of the contractor’s property by
reason of insolvency, as for example in the case of Ex parte Jay.50

Michael Mendelblat is a solicitor and a professional support lawyer


specialising in construction at Herbert Smith Freehills LLP:
michael.mendelblat@hsf.com.51

© Michael Mendelblat and the Society of Construction Law 2014

The views expressed by the author in this paper are his alone, and do not necessarily
represent the views of the Society of Construction Law or the editors. Neither the
author, the Society, nor the editors can accept any liability in respect of any use to
which this paper or any information or views expressed in it may be put, whether
arising through negligence or otherwise.

50 Ex parte Jay: note 32.


51 The author acknowledges the assistance of George Taft of EC Harris LLP in preparing
this paper. The latter part of this paper on the Belmont case appeared first in an
expanded form in the International Construction Law Review [2012] 29 ICLR 345.

19
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