On a Proper Construction Issue 15 – I’ve paid, I own it, right? – HWL Ebsworth Lawyers

1. It is important for parties to construction contracts to consider their rights in relation to title to goods (commonly plant and equipment), the subject of the contract.
2. Project financiers who require security interests to be placed on plant and equipment will also want to know who has title to the goods under the contract from time to time.
3. In this article, we discuss what the legal position is with respect to title to goods passing between Principals and Contractors.

Standard Construction Contracts

4. Often construction contracts will contain specific terms about the passing of title to goods (although we do encounter construction contracts from time to time that are silent on this issue).
5. It is clear that precise contractual drafting should be adopted to put beyond doubt:

(a) who has title to goods and when title passes; and

(b) what is being passed (i.e. clear title).

6. It is relatively common for construction contracts to provide that:

(a) the Contractor is to supply everything necessary to execute the work under the contract. This includes the materials, equipment and machinery required; and

(b) title in unfixed plant or materials will pass to the Principal when it is paid for (unless and until additional security for the unfixed goods is provided). For example, the unamended Australian Standard Contract 2124-1992 provides that unfixed plant and material will be property of the Principal once paid for, free of any lien or charge.

7. Some contracts provide for title to pass at an earlier point in time (i.e. delivery) regardless of whether payment has been made. This is particularly problematic for contractors/subcontractors particularly if an insolvency event occurs.
8. A critical consideration will also be whether the goods in question have been fixed to the land. That is because, where the plant and equipment is fixed to land, it is typically no longer considered personal property of the contractor/subcontractor regardless of whether it has been paid for or not.
9. Project financiers who must place securities over certain plant and equipment, should also consider when title passes to the Principal under the relevant construction contracts, in order to ensure that they can effectively secure plant and equipment.

What if the contract is silent on title to goods passing?

10. If a construction contract does not provide for when title to unfixed plant and materials passes, then the Sale of Goods Act 1895 (WA) (SOGA) will apply.
11. Under the SOGA, in relation to a contract for the sale of specified or ascertained goods, title will transfer at the time that the parties intended it to transfer under the contract.¹ When ascertaining the intention of the parties, regard will be had to the terms of the contract, the conduct of the parties and all of the circumstances of the case.
12. The SOGA provides five rules, which apply in different circumstances, to help in determining the intention of the parties.
13. For example:

Rule 1 provides that:

“under an unconditional contract for the sale of specific goods in a deliverable state, property in the goods passes when the contract is made, irrespective of whether the time of payment or time of delivery is postponed“.²

Rule 2 provides that:

“under a contract for the sale of specific goods, where the seller must do something to the goods for the purpose of putting them in a deliverable state, the property will not pass until such a thing is done and the buyer has notice“.³

14. The rules are to be interpreted in light of the terms of the construction contract, which are paramount when determining at which stage title to unfixed plant will pass from the Contractor to the Principal.
15. To avoid any ambiguity, it is far preferable for parties to make express provision in their construction contracts to address this issue.

Case example: the necessity of clear drafting

NEXTracker Inc v ACN 009 906 093 ⁴

16. In 2018, NEXTracker Inc (NEXTracker) and ACN 003 906 093 (formerly RCR O’Donnell Griffin Pty Ltd (RCR) entered into contract for the supply of equipment without installation (AS 4911).
17. NEXTracker was required to supply equipment and materials to RCR to be used in the construction of the Greenough River Solar Farm. Aside from the deposit, RCR made no payment in respect of the goods, which were shipped and air freighted according to the contract. RCR subsequently went into liquidation. The goods were sold and the proceeds of the sale were held by RCR’s solicitors.
18. The main issue in this case was whether title in the goods transferred from NEXTracker to RCR, which was significant because:

(a) if the goods had passed to RCR, NEXTracker would have to contend with RCR’s other creditors when recovering the contract price; however

(b) if title did not pass, NEXTracker would receive the funds from RCR’s solicitors.

19. When determining whether title had passed, the court considered:

(a) the parties respective rights and obligations determined objectively by reference to the contract, its text, context and purpose;

(b) what a reasonable businessperson would have understood the contract terms to mean;

(c) that more weight should be given to the amended contract terms, than the standard form contract terms.

20. As to when title and risk for the equipment would pass under the Contract, at highest, language had been inserted in Item 27 of Annexure Part A (that it passed at the port of origin) which was inconsistent with language in the general conditions (that, for imported goods, it passed upon payment).
21. The court ultimately held that the words in Annexure part A prevailed over the general conditions and title to the goods transferred to RCR from the port of origin.

What if the plant and equipment is fixed?

quicquid plantatur solo, solo cedit*

*Latin for, whatever is affixed to the ground belongs to the ground.

22. The general rule is that once equipment or plant is brought onto land and fixed to it, it will become part of the property of the owner of the land upon which it is fixed (as a fixture). Of course, in most cases this land is owned by the head contract principal.
23. This principle applies despite the fact that the equipment or plant might, under the contract, be subject to a right or belong to a person other than the land owner.
24. When determining whether equipment or plant is fixed, there is no simple principle or formula to be applied, but courts have commonly considered the question by reference to the:

(a) intention of the person placing it upon the land: an item must be fixed with the intention that it will remain permanently, and form part of the land;

(b) degree of annexation to the land: this refers to the extent that the objects are physically attached to the land. An object that is fixed will prima facie be deemed a fixture, and it is up to the person asserting that it is not a fixture to prove that. The greater the degree of annexation to the land the more obvious it will be that the object was intended to be a fixture;

(c) object of annexation: the intention of the party placing the item on the land is also assessed when determining whether it has the character of a fixture. This includes an assessment of both the objective and subjective intention of the person who has affixed the item.

25. Recent cases have reinforced that the surrounding circumstances of each particular case, including:

(a) the period of time for which the item was on the land;

(b) surrounding economic factors;

(c) the function to be served by the annexation of the items; and

(d) the nature of the item and its contemplated use,

are relevant in determining whether an object will be deemed a fixture.

26. The outcome will always depend on the precise facts. For example:

(a) in Power Rental Op Co Australia,⁵ gas turbine generators were held not to be fixtures (notwithstanding them being attached to the ground). In that case, the turbines were on wheels and were designed to be easily demobilised at the end of the rental term); whereas

(b) in SPIC Pacific Hydro Pty Ltd,⁶ wind turbines were held to be fixtures as, having regard to the facts, they were considered ‘strongly affixed to the land’ with concrete and steel.

27. Despite the above guidance, there is still considerable difficulty and ambiguity in the case law with respect to defining whether something is fixed to the land.
28. This means that despite a contractor not yet being paid for goods which have been fixed to the land, and despite the terms of the construction contract, a contractor can still lose title to the goods if they become a fixture.

Romalpa clauses

29. Parties to construction contracts should also be mindful of the sometimes limited effectiveness of a retention of title clause, also known also as a “Romalpa” clause, which is often contained in contracts for the supply of goods. These clauses seek to enable the seller to retain title to the goods held or used by the buyer, and obtain proprietary rights in the property until the whole price of the goods are paid.
30. The scope and effect of Romalpa clauses is not uniform across all circumstances, and the courts have provided that such clauses require a “particularised application of the relevant principles of law and equity to the construction and operation of the text of each individual clause.” ⁷ However, such clauses are generally always subject to the rule regarding fixtures (discussed above) as well as any “perfected” or “registered” security interests under the Personal Property Securities Act 2009 (Cth) (PPSA) (discussed below). An effective Romalpa clause will also usually require the goods/materials to be in a collectable condition (i.e. tagged and kept separate from the other goods).

The PPSA

31. Finally, construction industry participants should also be aware of the interaction between the above and the PPSA, particularly in the case of insolvency.
32. Under the SOGA, if a Principal becomes insolvent at the stage where the Contractor still has possession of the goods and is yet to be paid, the Contractor is entitled to retain possession of the goods and will have a seller’s lien on the goods.⁸
33. However, industry participants should also consider the impact of the PPSA on the relevant scenario. The general starting point is that if a security interest applies to the same goods under the PPSA, the “perfected” or “registered” security interest has priority over all other “unperfected” security interests in the same goods.⁹ There are however situations where statutory liens, such as the seller’s lien created under the SOGA, can have super priority over “perfected” or “registered” security interests (provided certain criteria are satisfied).
34. Where the seller intends to rely on a Romalpa clause, it should ensure it registers its interest against the buyer on the register established under the PPSA in the category of a purchase money security interest (also known as a PMSI) in order to benefit from certain super priority rules under the PPSA.
35. It is important to be aware that there are a number of priority rules and exceptions that can apply under the PPSA and the application of the above will depend on the facts.
36. Construction industry participants should be aware of these legal principles and take caution to ensure that there are no ambiguities contained in the contract with respect to when title to goods passes.

This article was written by Kate Morrow, Partner, Niamh Breheny, Partner and Michael Harris, Senior Associate.

If you have any questions regarding the above, please contact the authors.

¹ Sale of Goods Act 1895 (WA) s 17(1).
² Sale of Goods Act 1895 (WA) s 18.
³ Ibid.
⁴ NEXTracker Inc v ACN 003 906 093 Pty Ltd (formerly RCR O’Donnell Griffin Pty Ltd) (in liq) [2019] NSWSC 1604.
⁵ Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd) [2017] NSWCA 8.
⁶ SPIC Pacific Hydro Pty Ltd v Chief Commissioner of State Revenue (2021) 20 BPR 41,275.
⁷ Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liquidation) and Anor [2000] HCA 25.
⁸ Sale of Goods Act 1895 (WA) s 40(1)(c).
⁹ Personal Property Securities Act 2009 (Cth) s 57(1).

Source