What’s mine, could be yours - the passing of ownership in energy projects

In the world of energy projects, plant and materials are in high demand. It's pretty common for companies to pay upfront to lock in their supply, either directly to suppliers or through the EPC Contractor. But here's the catch: the construction industry is prone to insolvency, with about 11.5 companies in England and Wales going into liquidation every day and another entering administration every other day. This makes it crucial for employers and contractors to think about how they can protect themselves.

Employers want to make sure any advance payments are safe and that they actually own the materials they've paid for. On the flip side, contractors and suppliers prefer to get paid upfront and keep ownership until they've been fully paid.

Figuring out who owns the plant and materials can be tricky. It often depends on the contracts in the supply chain and what's actually happened on-site or with payments. But when a contractor or supplier goes bust, including entering into a formal insolvency process, no one wants to get tangled up in a long battle over ownership.

What's in the contract?

The Supply of Goods and Services Act 1982 or the Sale of Goods Act 1979 could apply to contracts on a construction project and imply certain terms around ownership of plant and materials - however most supply and construction contracts should and do include provisions dealing with this. These can be useful proof to an administrator or liquidator as to where ownership sits. Here's a very broadbrush summary of how some standard contracts handle it:

• NEC4 (ECC) - title passes when the plant and materials are marked as for the contract or brought into the working areas. There are then provisions dealing with which plant and materials should be marked as for the contract. However, title then transfers back if they are removed from the working areas with the project manager's permission.
• IChemE (Red, Green, Burgundy) - ownership passes on the earlier of (a) delivery to site or (b) when the Contractor has received the final payment with obligations on the Contractor to arrange for the materials to be marked as the Purchaser's property and that they are stored and handled separately.
• FIDIC (Yellow, Red, Silver) – ownership passes on the earlier of (a) delivery to site and (b) payment although this is only to the extent consistent with the laws of the country specified in the contract. There are also some example additional provisions dealing with removing plant and materials from the site (which again can be done with the engineer's consent) and an indemnity from the contractor relating to any defect in title.

The above is largely theory, as all of these provisions rely on the contractor complying, in practice, with the Contract when it comes to marking and storing plant and materials separately, passing such provisions down their supply chain correctly and in the case of the NEC and FIDIC (as above) assumes the Project Manager understands the title implications if they approve the removal from site. There is clearly room for error, the implications of which may not be clear until it's too late.

So how can you protect yourself:

• Limit advance payments and install quickly - where plant and materials purchased have been incorporated into the works or mixed with other plant and material it is likely ownership will pass to the Employer regardless of who has paid what. However, if there is an insolvency, and the position relating to ownership is not clear at the point of insolvency, the liquidator or administrator may seek to demand the Employer pays for those materials again, although such a payment could potentially be set off against the costs an Employer would be likely to incur where the Contractor has become insolvent and cannot continue the works.
• Check any milestone payment schedule – it is not uncommon for early milestone payments to act as advance payments but expressed in a different way. The key is considering whether, when the payment is made, will you have received the equivalent value of work, plant or materials from the Contractor.
• Ensure your contracts and sub-contracts / supply agreements further down the supply chain deal with title transfer in a consistent way, don't include competing retention of title clauses, and consider all eventualities such as delivery to a storage facility rather than the site. How this works on a termination is also important.
• Consider forms of security – advance payment bonds, off-site materials bonds and vesting agreements.
• Think about your overall strategy - if you are ordering plant and materials at an early stage consider whether you or the intended Contractor is the right person to procure, make sure title is dealt with and what will happen when the Contractor is appointed or if they are not appointed. "What ifs" need to be carefully considered.
• Include rights of access and inspection to where plant and materials are manufactured and stored so you can check if provisions dealing with marking and separation are being complied with.
• Implement site procedures as to when plant and materials can be removed from site and whose approval is required.
• Itemise plant and materials being paid for in payment applications and certificates.
• Secure the site, particularly when there's an insolvency.

Finally, if you think a contractor or supplier may be facing financial difficulties, seek advice at an early stage. It can make all the difference. Once a contractor or supplier enters a formal insolvency process, this can create tensions between enforcing contractual rights and the principles of insolvency law. Forewarned is very much forearmed.