Hold onto your goods

SUPPLY-ONLY contracts are not uncommon in the building industry where contractors will purchase goods through a supplier.

To protect its interest in the property, the supplier requires retention of title clause in the supply contract that enables it to retain ownership of the goods until paid. In the event that the buyer becomes insolvent after delivery, but has not paid, the supplier is then entitled to retrieve the goods.

Without such a clause the supplier will usually become an unsecured creditor and may receive little or no money when the buyer is eventually wound up.

The case P4 v Unite Integrated Solutions is a good example of such a situation.

Unite, the developer, entered into an agreement with Hiremaxi, the contractor, for the conversion of existing offices into accommodation for students and nurses.

Unite obtained a quotation from P4 for the supply of emergency lighting equipment and subsequently appointed Tudor Mechanical and Electrical as subcontractor for the m&e services. P4 was named as preferred supplier for the emergency lighting in the subcontract.

P4 sent Tudor a quotation for the supply of emergency lighting, followed by an order from Tudor. Goods were then supplied by P4, followed by an invoice for payment.

P4 sent two further revised quotations, each followed by an order from Tudor. Goods were then supplied by P4, followed by an invoice for payment.

Further light fittings were required and, because the subcontract was in delay, Unite ordered further light fittings direct from P4. Following delivery, P4 sent Tudor an acknowledgement order and an invoice for the goods. Tudor sent an urgent order to P4 for further fittings, followed by an order acknowledgement and invoice.

Liquidation

P4’s retention of title clause was not part of the agreement and inoperative. P4 was unable to claim back from Unite the light fittings it had supplied to Tudor

Tudor went into liquidation and, although P4 rendered invoices totalling £77 000, it had only been paid £3500 by Tudor for the first invoice, plus £1700 from the liquidator.

P4 contended that, because it had not been paid, Tudor did not have sufficient title in the goods to pass on to Unite.

Consequently, the title in the goods remained the property of P4. Unite disagreed with P4, which led to the court proceedings against Unite.

One of the issues for the court was whether P4 actually contracted with Tudor on terms that included a retention of title clause.

P4 pleaded that the initial quotation to Tudor had its terms printed on the back, including a retention of title clause. During the proceedings it transpired that the quotation faxed to Tudor did not have the printed terms on the back, nor were they attached to the fax. In addition there was no reference to the terms on the face of the document, such as “Please note our terms on reverse”.

It is worth pointing out at this juncture that such a statement may be worthless unless the terms are actually shown on the back or sent to the other party. The court concluded that the agreement between P4 and Tudor did not incorporate P4’s terms, and as a result, P4’s retention of title clause was not part of the agreement and inoperative. P4 was unable to claim back from Unite the light fittings it had supplied to Tudor.

This case shows how important it is for suppliers who intend to rely on retention of title clause in their terms to ensure that they form part of the agreement.

Furthermore, even if the supplier is able to rely on its retention of title clause there might still be reasons why it is ineffective.

In particular:

• The supplier’s goods have been used in the building process or mixed with other material and thus are no longer identifiable.
• The supplier’s goods such as plant and machinery have become part of the land for legal purposes.
• There is no right of access to the site clause in the terms to retrieve the goods.
• The supplier’s goods have been sold to a third party in good faith and without prior notice.