Mixed or fixed? Recovering co-mingled goods

In the current climate, insolvency is usually the reason for nonpayment for goods supplied. But contractors that supply a product that becomes mixed with, or attached to, the buyer’s property face particular difficulty in retrieving those goods in the event of nonpayment. This problem is compounded when the goods supplied end up in a third party’s hands, on land owned by someone other than the original buyer. Can that product be recovered due to nonpayment?

As well as the difficulty of retrieving goods that have become mixed with other goods or added to other materials to make a new product, specialist contractors risk committing a trespass while trying to recover their goods that have been bonded to another’s property - as well as being liable for any damage caused by their removal.

What can a contractor do to protect himself in these situations? Statutes and regulations do not offer much support; the Sale of Goods Act 1979 only recognises the right of the contractor to rely upon a retention of title (“ROT”) clause in his contract (s19 SGA 1979) which is the clause often relied on in an economic downturn.

Retention of Title clauses
In its simplest form, a ROT clause is a mechanism by which a contractor attempts to prevent the passing of title in goods supplied until he receives payment in full by the buyer. This type of clause can be extended, for example, to include a claim on the proceeds of sale. Subject to the terms of the clause, if no payment is made by the date stated in the contract, the contractor has the right to repossess his goods. However, the ROT clause has proved problematic in practice. Contractors are often unable to prove that the ROT clause was a term of their contract, and a simple ROT clause does not cover goods which are mixed or bonded with other goods (“comingling”), such as during a manufacturing process, because of problems of identification.

There have been attempts to overcome the problem of ROT clauses and co-mingled goods, but none are reliable, partly due to the courts’ hostility towards extended ROT clauses. To stand any chance of success, a ROT clause must:

• be incorporated into the contract;
• where appropriate, include an ‘aggregation clause’ whereby title is claimed to goods manufactured by the buyer with raw materials from the contractor;
• give the contractor a right of access to the goods whenever the contractor wishes to exercise its rights to repossess them (but this doesn’t stop third party owners of land objecting to contractors entering to remove goods).

What else can the contractor do? This will in part depend on what the contract says. But as non-payment of goods is often the result of the buyer’s impending or actual insolvency, the following strategies are recommended:

1. Undertaking a credit check of new buyers;
2. Requiring full or at least part payment in advance (probably the best solution where the goods are likely to become a fixture – see above);
3. Clearly identify any goods to be stored before use and try to ensure that they are stored separately;
4. Accurate record keeping and good credit control practices to record the volume and type of goods delivered, delivery dates and invoices paid;
5. Look for signs of insolvency – for example a delayed payment or bounced cheque;
6. If insolvency looks likely, immediately arrange for an inspection of the goods stored and the preparation of an inventory;
7. Where insolvency has occurred, the contractor can contact the insolvency practitioner in order to take an inventory of the goods and/or inspect them. If the insolvency practitioner refuses access for these purposes the contractor can take legal action, but only if this is a cost-effective solution – the cost of legal action may outweigh the potential gain.

A contractor, supplying goods for larger projects and concerned about possible non-payment, can ask the employer to use a project bank account, which is intended to safeguard monies due to sub-contractors. The NEC3, JCT and PPC2000/ SPC 2000 standard forms of contract all now include supplements for project bank account amendments and there is no reason why one cannot be used with bespoke contracts. However, these accounts must be set up before insolvency has occurred.

Ultimately there is no guaranteed recovery of co-mingled goods. Payment up front offers the only certainty but, where that is not negotiable, there are other ways to minimise the risk of nonpayment and non-recovery of goods.

For more information on recovering co-mingled goods, please contact Philip Harris.