Reservation of Ownership of Goods and Materials Installed by Subcontractors

Subcontractors are regularly affected by non-payment by contractors and/or employers? Although the subcontractor is generally employed by the contractor, it is the employer and/or owner of the property who gains the benefit of the works executed by the subcontractor. The question is whether the subcontractor, who has a legal agreement with the contractor, has a right to reserve ownership over the goods and materials which it has installed if full payment is outstanding? If not, what is the legal remedy available. In this article we will consider in which circumstances a subcontractor can rely on a reservation of ownership clause for security for payment for the goods and materials it has installed.

Reservation of ownership is a clause in the agreement between the contractor and subcontractor whereby the ownership of the goods & materials installed by the subcontractor, remains vested in the subcontractor, until full payment has been received by the subcontractor. Once full payment has been received by the subcontractor, the ownership in the installed goods and materials will transfer to the contractor who, in turn, will transfer it to the employer. The reservation of ownership clause must be expressly included in the agreement between the subcontractor and the contractor.

The reservation of ownership clause should expressly state that the ownership in the goods & materials installed remain vested in the subcontractor until full payment has been received, and that ownership in the goods will be passed to the owner of the property at that point in time. The reservation of ownership clause should further state that the subcontractor has a right to remove the movable goods if payment is not received in full.

The reservation of ownership clause must be agreed to by both parties at the time of the conclusion of the agreement. The clause and must be a written clause in the agreement as it will not apply as an implied term to the agreement, meaning a court will not read such a clause into the contract when interpreting same

Despite the fact that the ownership of the movable goods may remain vested in the subcontractor if payment is not forthcoming, the subcontractor may not simply dismantle the installations and remove them from the property. Installations may have attached to the building with permanence. Movable property should also not simply be removed off the property by the subcontractor without following the correct dispute procedures as agreed to by the parties.

If there is no reservation of ownership clause included in the agreement, in terms of the common law in South Africa, the subcontractor will always have a right of retention (also known as a lien) over the installed goods & materials, until full payment has been received in terms of the agreement. The right of retention is not dependant on the contractual relationship between the subcontractor and the contractor but based on the fact that value has been added to the property of the owner at the expense of the subcontractor because the subcontractor has not received payment for the works executed.

The right of retention does not have to be an express term of the agreement and applies automatically unless expressly waived in the agreement between the parties.

In terms of the right of retention, the subcontractor has the right (and the duty) to remain in possession of the works and goods installed (for example retaining the keys to enter the premises) until full remuneration has been received. Once possession has been lost the right of retention may never be exercised again. The right of retention only applies in the following circumstances;

1. If the owner of the property has been enriched by the works and installations provided by the services of the subcontractor; and
2. The works and installations must be necessary and useful, as per the agreement; and
3. The subcontractor has not been paid for the works which has been duly executed; and
4. The subcontractor remains in continuous lawful physical possession of the property to which the claim relates until full payment is received for the works and installation.

Subcontractors are seldom in a position to exercise their lien as they have access to a site and not possession thereof this means they don’t have the keys to the gate or the front door.

If the owner has paid the contractor in full, and it is the contractors responsibility to remunerate the subcontractor, the subcontractor will no longer have the right of retention. This is because the owner will no longer be unfairly enriched by the works, because the owner would have paid for the work and installations. The subcontractor will have to claim the outstanding amount from the contractor without the right of retention as the right of retention is only applicable between the owner of the property and the subcontractor.

In conclusion, a reservation of ownership clause should be expressly added into the agreement to protect the subcontractor. In the case where the retention of ownership clause has not been expressly included and the right of retention has not been waived, the right of retention will apply to the works automatically. In both cases, if there is non-payment, the subcontractor may not simply remove or dismantle the movable or installed goods and must follow the dispute process provided for in the agreement.