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23rd September 2012

Retaining rights over equipment

Despite these tough economic times the construction and property industry has up to date seen a lower level of insolvencies than might perhaps have been anticipated.

Despite these tough economic times the construction and property industry has up to date seen a lower level of insolvencies than might perhaps have been anticipated. However, as the recession drags on the perception is that more of those companies that have so far just managed to cling on are finding the going too tough. If there is indeed an increase in businesses becoming insolvent, suppliers need to be ever more vigilant and careful to ensure that rights to payment for equipment and other supplies are protected against the mess that insolvency can give rise to. An approach that is often taken is to contract to undertake supplies based on the equipment being subject to a retention of title (ROT) clause. The aim is to give the supplier priority over secured and unsecured creditors of the buyer, if the buyer fails to pay for the equipment because it is insolvent. The basic type of ROT clause will provide that title to the equipment is retained by the supplier until the buyer has made full payment. The wording can be supplemented by additional clauses including; a right for the supplier to enter onto the buyer's premises to repossess the equipment (to avoid an argument about trespass), an obligation on the buyer to store the supplier's equipment separately from that supplied by others and to mark the equipment as the property of the supplier, to better enable the supplier to identify its own equipment if it becomes necessary. The ROT provision in a contract will typically be linked to trigger events, such as the insolvency of the buyer. So far, so good, but there are a number practical considerations which arise in making such provisions effective. For a start, the buyer’s own terms and conditions of purchase are likely to provide for title in equipment to pass at a stage prior to payment having been made. Some standard forms of construction contract for example include for title to pass either on delivery of the equipment to site, or even before delivery to site if the equipment has been included in a payment certificate. So, including an ROT clause in a supplier’s standard terms and conditions is only the start. For the clause to be effective, it must actually be agreed to form part of the contract with the buyer. Also, be careful as to how you draft an ROT clause. A provision which reserves title over equipment until all monies due to the supplier from the buyer have been paid, including for example payment for the installation of the equipment as opposed to payment just for the equipment itself, is sometimes referred to as an all monies clause. It has been suggested in some cases that an all monies clause creates a charge in favour of the supplier which would only be effective in the event of an insolvency if the charge has been registered at Companies House in accordance with the Companies Act 2006. For this reason, ROT clauses are often only applicable to that part of the amount due to the supplier which relates to the equipment which has been supplied. Other considerations can arise. If the buyer is in administration then no action can be taken against that company without the consent of the administrator or the permission of the court to repossess equipment supplied pursuant to a ROT clause. A common issue will be where a sub-contractor has supplied equipment to a main contractor which then becomes insolvent and the question to be determined is, what rights does the employer of the main contractor have over the equipment that the main contractor has supplied. Installation of equipment into the fabric of a site or building will usually be sufficient to defeat an ROT clause (i.e. title will be deemed to pass to the owner of the site/building). However, where the equipment has not been installed then the Court has confirmed that title in equipment will not pass to the employer where title has not already passed to the main contractor, even where a clause applies to the main contract stipulating that title to unfixed materials passes when the value of the equipment is included in an interim payment certificate. So, in the case of unfixed materials the position for suppliers in sub-contracting situations may not be entirely hopeless where equipment has been supplied subject to an ROT clause. Other practical measures to be considered include for suppliers to give notice of their ROT rights directly to the end user or site owner thereby trying to ensure that all parties are aware of the suppliers rights over equipment. Also, ensuring that supplies are delivered clearly marked as being the property of the supplier is also an option, to better enable the supplier to be able to identify its equipment if recovery proceedings are necessary. Retention of title is a complex area and suppliers are best advised to undertake a regular review of their standard terms and sales practices in order to best protect their position. For further guidance, please contact Colin Jones on colinjones@hewitsons.com

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