Ownership of plant and materials under NEC4 ECC

Key Points

• Title to plant and materials cannot pass from the contractor to the client if the contractor does not have good title.
• Payment is not a pre-requisite for transfer of title under NEC4 ECC.
• Title to plant and materials will pass to the client when delivered to site or marked by the supervisor.
• Vesting certificates and bonds may provide additional security for clients.

The thorny question of ownership often arises following insolvency and termination. Most construction contracts include provisions that deal with ownership; these are often referred to as ‘retention of title’ clauses. Such provisions vary between different construction contracts.

They can sometimes be complex and misleading, particularly when payment is the trigger for the transfer of title. It has been recognised that the NEC forms of contract take a more sensible and realistic approach to ownership (Eggleston 2019). The approach is consistent with the NEC objective to achieve simplicity and clarity.

However, users do need to be aware of the limitations that comes with the approach. This article provides a summary of the principles of English law pertaining to title, examines the relevant clauses of the NEC4 Engineering and Construction Contract (ECC) and provides guidance on circumstances where additional requirements may be necessary.

English law

The question of ownership of goods and materials used in construction dates back almost 200 years to Tripp v. Armitage (1839). A construction contract involves not only the supply of goods and materials but also the services to install them. This is different to a supply-only contract, see Dawber Williamson v. Humberside County Council (1979).

When a construction contract is performed and the goods and materials (chattels) become part of a completed structure (fixture), they become part of the land on which the work was carried out (Bailey 2020).

There are two general principles in English common law relating to title. The first is that, subject to anything contrary in the contract, ownership of goods and materials transfers to the landowner once they are fixed to the land – see Appleby v. Myers (1867). The second is that no better title can be granted to the transferee than that which is possessed by the transferor.

NEC terminology

Before examining the clauses relating to title, it is important to first identify and understand the relevant defined terms in NEC4 ECC.

Plant and materials: items intended to be included in the works (clause 11.2(14)). In legal terms, plant and materials are chattels and once they are incorporated into the works they become fixtures. Plant and materials are normally purchased by the contractor either directly or via its subcontractor or supplier.

Working areas: the areas within the boundaries of the site and other areas correctly identified by the contractor in the contract data (clause 11.2(20). The working areas may be added to subject to a proposal made by the contractor being accepted by the project manager (clause 16.3).

Plant and materials outside the working areas

NEC4 ECC clause 70.1 states: ‘Whatever title the Contractor has to Plant and Materials which are outside the Working Areas passes to the Client if the Supervisor has marked them as for the contract.’

Clause 70.1 is an example of a vesting clause and there are three important points that arise:

• Clause 70.1 mirrors the position in English law that title cannot be transferred from the contractor to the client if the contractor does not have good title – see Sale of Goods Act 1979 S 21(1) and Supply of Goods and Services Act 1982 S(2).
• Title is transferred upon on the action of marking by the supervisor and not by payment. ECC does not require the contractor to provide evidence of title. It is not uncommon for parties to a construction contract to attempt to deal with this with a Z clause or by using a vesting certificate (see below).
• The contractor must allow the supervisor access to plant and materials being stored for the contract (clause 27.2). The obligation on the supervisor to mark plant and materials (and equipment) only arises once two conditions are satisfied. Firstly, that the contract identifies them for payment and secondly, the contractor has prepared them for marking as required by the scope (clause 71.1).

The contract does not specify how plant and materials should be marked so this would need to be stated in the scope. Marking just ‘as for contract’ is unlikely to be sufficient. Marking could include the use of a recognisable unique code or number stamp and require specific words to be used. Digital tagging with a bar or QR code may also be specified.

Off-site plant and materials should be stored separately and preferably in isolation. Photographic evidence of existence is also recommended using encrypted, geolocated images with date and time stored on a remote server.

However, the contract includes no express terms requiring the client to identify which items the contractor can be paid for before they are brought to site. This gap in the contract could be filled with a Z clause to allow the inclusion of a list of such items in the contract data or scope similar that adopted by other standard forms of contract.

Plant and materials brought within the working areas

Clause 70.2, which also operates as a vesting clause, states: ‘Whatever title the Contractor has to Plant and Materials passes to the Client if they have been brought within the Working Areas. The title to Plant and Materials passes back to the Contractor if they are removed from the Working Areas with the Project Manager’s permission.’

Like clause 70.1, the contract provides for title to transfer from the contractor to the client without payment. Transfer occurs simply when the plant and materials are moved into the working areas. But again, the contractor must have good title in the first place.

If the scope states that certain plant and materials must be tested or inspected before delivery to the working areas, the contractor is not permitted to make the delivery until the supervisor has given notice that the test or inspection has been successful (clause 42.1).

Defining the boundaries of the site under the ECC should not present too many problems but careful consideration should be given to those areas outside the site to ensure they meet the requirement of being ‘necessary to provide the works’ and ‘used only for work in the contract’ (clause 11.2(20)).

There are no express provisions in ECC requiring the contractor to request permission to remove plant and materials from the working areas. If the project manager does receive such a request, they should be mindful that permission will automatically result in title transferring back to the contractor once the items are removed.

It is recommended that the project manager understands why the contractor needs to remove the items and consults with the client before giving permission. The project manager’s decision to give permission appears discretionary as there are no reasons stated in the contract as to why permission can be withheld. As such, the project manager will probably be bound to act reasonably when making their decision.

Transfer of title in the supply chain

ECC deals only with the rights of the parties to the contract, that is the client and the contractor and not the rights of others in the supply chain. The NEC4 Engineering and Construction Subcontract (ECS) includes the same clauses as the ECC but similarly concerns only the rights of the contractor and subcontractor.

Under the ECS, if the subcontractor brings plant and materials to the working areas, title is automatically transferred from the subcontractor to the client (via the contractor). This is the case providing the subcontractor has title.
 
However, if the subcontractor removes the items from the working areas following instruction from the contractor but without the project manager’s permission, title will remain with the client (Thomas and Lee 2022). Defining the working areas for subcontractors can be more complicated where plant and materials are more likely to be stored off site.

In the case where a party has received goods and become insolvent before making payment, the supplier may assert that title is retained by the supplier and consequently seek to reposes the goods. Any such entitlement to do so in English law will be subject to the Corporate Insolvency and Governance Act 2020.

Vesting certificates

Vesting certificates often feature in construction contracts, particularly for off-site manufacturing, in conjunction with a vesting clause. The primary purpose of a vesting certificate is to provide the client with greater confidence that title to the goods identified in the certificate are transferred to the client before delivery.

The drafting of the vesting clause and certificate need careful attention to avoid ambiguity and ensure consistency with the Construction Act 1996, particularly where payment is intended to trigger transfer – see VVB M&E Group Ltd v. Optilan Ltd [2020] EWHC4 (TCC). The NEC forms do not make provision for vesting certificates so, if they are deemed required, the contract requires amendment and competent advice should be sought.

Off-site materials bond

A vesting clause or certificate based on payment may give the payer legal title but not financial security. If the client has paid the contractor for plant and materials provided by a subcontractor and the contractor has not paid the subcontractor before insolvency, title will not transfer to the client (Harr, Levine and Laney 2016).

Locating and gaining access to off-site plant and materials following insolvency can be a long and complex process. The objective of an off-site materials bond (or goods and materials bond) is to provide financial guarantee to the paying party. The bond, provided by a third-party surety, is secured by the contractor in favour of the client. If the contractor has been paid but defaults on its obligations, the client may make a claim against the bond.

The NEC forms do not make provision for offsite material bonds. Secondary option X14, used for advance payments to the contractor, may include an advance payment bond if required. However, option X14 is primarily concerned with easing the contractor’s cash flow and involves payment before work is done.

The ECC also provides for performance bonds in option X13, although this relates primarily to breaches of the main contract and security is limited to an amount equal to a proportion of the contract value (Hunter 2022).

Termination under the ECC

In the event of termination under the ECC, the client is entitled to use the plant and materials to which it has title (clause 92.1 P1). In addition, the client may instruct the contractor to remove any plant and materials from site although this right only applies when the client terminates for a reason of contractor default or for convenience (clause 92.2 P2).

The amount due on termination includes the defined cost for plant and materials within the working areas. It also includes items outside the working areas to which the client has title, and the contractor is bound to accept delivery (clause 93.1 A1). The rules on payment apply whatever the reason is for termination, including contractor insolvency (R1–R10).

Conclusions

The NEC forms take a simple and pragmatic approach avoiding payment as the trigger for transfer of title. This approach has its limitations and, in some circumstances, may require additional provisions to safeguard the interests of the parties. Retention of title is a complex area of law and competent advice in this area should always be sought before entering into a contract.

References

Bailey J (2020) Construction Law Vol. 1, 3rd ed., London Publishing Partnership, para. 8.152.
Eggleston B (2019) The NEC4 Engineering and Construction Contract: A Commentary, Wiley Blackwell, Oxford, p. 273.
Harr R, Laney A and Levine M (2016) Construction Insurance and UK Construction Contracts, 3rd ed., Routledge, para 14.29.
Hunter D (2022) Understanding the use and benefits of performance bonds in NEC contracts. NEC Users’ Group Newsletter 116 (January 2022): 7–8.
Thomas D and Lee K (ed) (2022) Keating on NEC4, 2nd ed, Sweet & Maxwell, para. 8-020.