Picking over the bones

Unfortunately, many construction projects are affected by the insolvency of a contractor or subcontractor, and a recent case has considered which party should bear the loss if one party in the supply chain becomes insolvent.

The case in question, P4 Ltd vs Unite Integrated Solutions plc, relates to the development of student accommodation in Southampton. The claimant, P4, had supplied emergency light fittings to Tudor, an M&E subcontractor. The defendant, Unite, was the main contractor.

At the time that Tudor became insolvent, it owed P4 about £70,000 for light fittings. Unite had paid Tudor for these. The question for the court to determine was: which firm should suffer the losses caused by Tudor’s insolvency? Should Unite have to pay twice, or should P4 not get paid?

P4 sued Unite for what is technically know as “conversion”. This happens when one party unlawfully treats goods as its own and ignores the rights of the real owner.

P4 argued that it retained ownership of the light fittings because it had a retention of title clause in its supply contracts with Tudor. It alleged that Unite knew of the retention of title clause.

P4 lost the main thrust of its case. The reasons were twofold.

First, P4 failed to establish that it had incorporated its standard retention of title clause into the supply contracts. P4 was in difficulty because it did not make any reference to its terms on the face of its quotations.

Second, Unite had a defence under section 25 of the Sale of Goods Act 1979. This statutory provision is used to alleviate the position of the innocent purchaser.

Part of P4’s case was that when looking at its quotation it was possible to see printing on the reverse

The lessons to be learned from this case are as follows:

• If you have standard terms and want to incorporate these into your offer, you need to ensure that you do what is “reasonably sufficient” to bring your terms to the notice of the other party. It is important to expressly state on the face of the offer that terms and conditions apply, even if the wording is as simple as “For conditions, see back”.

Part of P4’s case was that when looking at its quotation it was possible to see printing on the reverse. Although it can sometimes be inferred that somebody has seen terms if the relevant paper is so thin and flimsy that it is obvious there is printing on the back, this is a high-risk strategy for any company to adopt. It is safer to expressly refer to the terms on the face of the document.

• If your terms and conditions are on the back of your offer document, be careful to include these if sending by fax. If you do not send the terms on the reverse as a second page to the fax transmission, the terms will not be incorporated.

• The defendant at the end of the supply chain will be able to rely on the section 25 of the Sales of Goods Act defence if it has received the goods in good faith and without notice of the original seller’s rights, and the goods are acquired under what is technically called a “disposition”. A disposition creates new rights in respect of the goods that do not have to amount to a transfer in the actual ownership.

In this case the goods were acquired by Unite under the Construction Confederation’s DOM/2 standard subcontract, which was entered into between Unite and Tudor for the entire M&E works. Under its terms, the subcontractor gives up most of the characteristics of ownership of the goods in respect of unfixed materials or pending payment, and the contractor obtains new rights in the goods. For example there are restraints on the subcontractor’s ability to remove the goods once on site. Therefore, this contract was a disposition.

Other forms of contracts with provisions for unfixed materials delivered to site that are similar to those in the DOM/2 will also satisfy this “disposition” ingredient of the defence

The key message from this case is that if you have standard terms, don’t assume they will automatically apply. Make clear reference to them, particularly if you are dealing with somebody for the first time.