Contractor Vesting Certificates - what legal protection do they provide?
The general perception in the construction industry is that vesting certificates provide protection against losses which might otherwise be incurred in the event of the insolvency of a contractor or supplier. The value of vesting certificates provided by suppliers and sub-contractors is well-established. Here we examine what legal protection, if any, is offered by vesting certificates provided by contractors.
1. Does a vesting certificate provide further protection than the relevant provisions of the building contract?
The Confederation of Construction Specialists ("CCS") has published a form of vesting certificate. The document is drafted on the basis that a contractor employed under a building contract provides the certificate to an employer. The form contains six short paragraphs in which, in return for payment of a sum, the contractor undertakes that any property in the materials has passed to the contractor and that the materials will be properly identified, stored and insured.
The JCT Standard Building Contract 2005 (clause 4.17) provides that a contractor will only be entitled to payment for off-site materials where (i) the contractor has provided reasonable proof that the property in the materials is vested in it (and any property in the materials is therefore free from encumbrances) and (ii) the materials are set apart or clearly marked and identified and insured. If this form of contract is being used a vesting certificate in the CCS form provides no extra protection.
The NEC3 Engineering and Construction Contract June 2005, ICE Conditions of Contract, Measurement Version, 7th Edition January 2003 and the ICHEM E Form of Contract (Lump Sum Contract), The Red Book, 4th edition 2001 all contain provisions similar to clause 4.17 of the JCT Standard Building Contract 2005. However, a vesting certificate might provide extra protection if a form of contract is being used which does not provide the same level of protection as clause 4.17 of the JCT Standard Building Contract 2005 in relation to off-site materials. In these circumstances, what extra protection is actually offered?
2. To what extent is a vesting certificate a legal contract?
On the face of it a vesting certificate sits alongside a main contract. The intention appears to be to complement the terms of the building contract that have already been agreed so as to impose further obligations in relation to the storage, identification and insurance of off-site materials. But from a legal perspective, what is a vesting certificate? There are a number of possibilities.
Is a contractor vesting certificate issued before the main contract is completed an actionable representation?
At its simplest, a vesting certificate is a bare statement by the contractor that off-site materials will be stored, identified and insured in a certain way and that any property in them is free from encumbrances. A simple statement by a party that it will do something or that certain facts are true is not a contract. In such circumstances, there would appear to be a lack of any offer, acceptance or consideration which are the key components of a legal contract. The CCS form includes consideration (the amount to be inserted by the parties), but a simple vesting certificate without consideration would not be a contract.
The Misrepresentation Act 1967 provides that where a person has entered into a contract after a misrepresentation has been made to him by another party to the contract and as a result has suffered
loss, then the person who made the misrepresentation will be liable to pay damages unless he proves that he had reasonable grounds for believing (and did believe up to the time the contract was made) that the facts represented were true.
So, if a vesting certificate is provided to an employer by a contractor before the main contract is entered into and the contractor then fails to comply with its obligations therein, can the employer seek damages by suing the contractor for misrepresentation? In order to do so, the employer would have to show that he relied on the content of the vesting certificate and entered into the main contract with the contractor as a result of the content of the vesting certificate. Furthermore, it is likely that the contractor would argue that he had reasonable grounds for believing (and did believe up to the time the contract was made) that the terms of the vesting certificate would be complied with. If the contractor can establish this, the employer will not have grounds to claim misrepresentation. Moreover, the employer may not want to avoid the contract in any event.
Is a contractor vesting certificate a variation of the main contract?
Building contracts are often executed as deeds. If a vesting certificate is to be considered a variation to the building contract, best practice would be for the vesting certificate to be executed as a deed.
Is a contractor vesting certificate issued after the completion of the main contract a stand alone contract?
If it is not possible to argue that a vesting certificate is a variation of a main contract, the employer may be able to argue that the vesting certificate is itself a contract pursuant to which a claim can be brought in the event that there is a breach.
The CCS form seems to be a contract. It provides that the contractor offers to identify, store separately and insure off-site materials in return for a sum and provides an undertaking in relation to any property in the off-site materials. This is then sent to the employer who is likely to be deemed to have accepted the offer by paying the sum identified in the vesting certificate. In the event that the employer then suffers loss or damage as a result of a failure by the certifier to comply with its obligation the employer can sue the certifier for breach of contract to recover these losses.
If a party wishes to rely on the content of a vesting certificate, it should enter into a more formal vesting deed pursuant to which the contractor would be obliged to ensure that the off-site materials are adequately stored, identified and insured. This would overcome the problem that a simple vesting certificate may not constitute a formal contract between the parties and would also remove any questions as to whether there is consideration.
(i) If a building contract is being used which contains vesting provisions, there is no need for a contractor vesting certificate;
(ii) If a building contract is being entered into without vesting provisions then employers should consider the use of a contractor vesting certificate; and
(iii) In circumstances where a contractor vesting certificate is being used, it should be executed as a deed.
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