There is much discussion of the pros and cons of off-site manufacture and there is no doubt that it is being embraced by the industry. From a legal perspective the key issues to address in a contract where off-site manufacture is contemplated is legal ownership of the goods manufactured off-site prior to delivery and risk of damage when those goods are in storage or transit. While paying for the off-site goods or materials may be necessary, it may put the purchaser/employer at risk if the supplier/contractor becomes insolvent and the goods are not then delivered. Also who will be responsible for damage caused to the goods or materials whilst they are in storage or during transit? Another issue is quality control and monitoring progress during the manufacturing process which should be addressed in the supply contract. These risks need to be addressed when drafting the contract.
Most standard form construction contracts and parties’ terms and conditions deal expressly with what are known as retention of title provisions. A retention of title clause, at its most basic, provides that title to the goods does not pass to the purchaser/ employer until specified conditions have been met, which is usually when payment has been made. Otherwise the starting point is that title passes to the purchaser/employer upon delivery regardless of payment. The Sale of Goods Act 1979 and Supply of Goods and Services Act 1979 both provide that title will pass when the parties intend it to pass. There is a general rule that when materials are incorporated into the works, ownership passes to the purchaser/ employer whether they had been paid for or not.
It’s sensible to check that the retention of title clauses are consistent throughout the supply chain to try and avoid a situation where title is not passed to the employer despite payment having made to an insolvent supplier/contractor.
An example of a retention of title clause that deals with off-site materials is the JCT Standard Form of Building Contract 2011 and 2016 editions which provides for payment in respect of materials stored off-site and title to pass provided that certain conditions are met. The contract identifies ‘listed items’ whose value is to be included in interim payments and states that when the value of such materials has been included in an interim payment, title will pass to the Employer. There are also particular conditions that need to be satisfied before payment will be made which include: (i) the listed item is in accordance with the contract; (ii) proof that they are vested in the contractor and covered by an insurance policy covering them against loss or damage caused by specified perils until they are delivered to site; (iii) at the place of storage listed items are clearly and visibly marked as belonging to the employer and set aside from other materials; and (iv) if required, the contractor must provide a bond from an approved surety (in a form provided by JCT) which enables the employer to recover the amount it has paid to the contractor if he is unable to obtain the relevant goods.
Storage and Transit
The contract should also address the ongoing liability of the supplier/ contractor for the risk of damage to the goods in storage or in transit. This should be backed off by a relevant insurance policy from the appropriate party. As provided in the JCT forms of contract above, the items should be marked as belonging to the purchaser/ employer and proof given that they are vested in the contractor and covered by an insurance policy until they arrive at site.
The parties may also want to agree a schedule for delivery so items are delivered to site as and when needed and there is no need for extended storage on site prior to incorporation which may expose them to a greater risk of damage.
Things to consider
When drafting or reviewing the contract where off-site manufacture is intended to take place consider the following:
- A provision to allow the purchaser/employer (or its agent) to inspect quality and progress during the manufacturing process. Issues of quality control should be dealt with in the supply contract. Further, the purchaser/employer may require warranty protection from the manufacturer of the off-site manufactured materials.
- Include a retention of title provision to ensure title passes on payment not delivery. Check that the retention of title clauses are consistent in supply contracts down the chain.
- Once material/goods have been paid for and during storage/ transit ensure that these are clearly marked as belonging to the purchaser/employer and kept separate.
- Address the risk of damage caused to goods or materials in storage/ transit and ensure backed off by insurance. Include a schedule for delivery to ensure timely delivery of required components and avoid extended storage times on site.
- Obtain some form of payment security such as an off-site material bond from the supplier/ contractor to cover the value of the materials paid for, advance payment bond, escrow account or vesting certificate.