Say what you mean – The dangers of ambiguous vesting certificates

Vesting certificates may be required where specific goods or materials are stored off-site but, on payment, the title in such goods or materials passes to the paying party.  In essence, vesting certificates evidence the transfer of ownership.

They are often used where off-site or modular construction is involved and are likely to become more common as more projects involve elements of MMC.

Vesting certificates provide security should the provider of goods or materials become insolvent before the items are delivered to site. They assist by defeating third party claims of retention of title in respect of those goods or materials.

However, the drafting of such vesting certificates is important.  The recent case of VVB M&E Group Limited & VVB Engineering UK Limited v Optilan (UK) Limited provides a reminder that the terms of vesting certificates must be clear, unambiguous and consistent with the underlying contract.

The background

As part of the Crossrail project, Value Realisations Limited (VRL) entered into a sub-subcontract with Optilan for the provision of telecommunications system upgrades to 12 of the Eastern Crossrail stations, such that the surveillance systems could be integrated with the Crossrail network.

Under the sub-subcontract Optilan was to procure some long-lead items.  In order to secure payment for these items the sub-subcontract contained a provision for the goods to vest in VRL before delivery to site had taken place, “with a view to securing payment under clause 60.1” (clause 60.1 relating to interim payments).

Optilan issued vesting certificates for the long-lead items. The vesting certificates largely reflected the vesting provisions of the sub-subcontract but also included the following additional condition:

“…property in the materials shall unconditionally vest [in the transferee] upon receipt of the interim payment referred to above”.

In the meantime, VRL was instructed to cease works under its subcontract with Costain (the contractor on the project). This instruction was subsequently passed down to Optilan. Following this, the parties worked towards establishing a final account.

Optilan made an interim application for payment, including for the long lead items under the vesting certificates. The payment certificate VRL issued in response included a value for these items but certified the net payment due to Optilan as ‘nil’. VRL subsequently issued a pay less notice which increased the value attributable to the long lead items, but still resulted in a nil payment being due to Optilan.

Not long after the issue of the pay less notice, VRL went into administration. VRL’s business and assets were acquired by VVB.

The dispute

The dispute between the parties was whether or not the long lead items had vested in VVB.

Optilan argued that vesting had not occurred because the conditions of the vesting certificates had not been met. Specifically, neither the payment certificate nor the pay less notice constituted “receipt” of any interim “payment”, as was required under the vesting certificate.

VVB argued that the requirement for “receipt” had been complied with as the value of the goods had been included in the pay less notice, even though that pay less notice had determined that no payment was due. Therefore, vesting took place at the time of service of that pay less notice.

The decision

The Court held that the terms of the vesting certificates were ambiguous as the additional wording included in the vesting certificate, referring to an unconditional vesting upon the receipt of the next interim payment, conflicted with the provisions which intended immediate vesting.

When faced with such an ambiguity, the Court is entitled to prefer the interpretation which is consistent with business common sense and reject other meanings.  The exercise of interpreting the document involves consideration of its language against all the background reasonably available to the parties at the time they contracted with each other.

On this basis the Court found in favour of VVB. No actual payment was required to be made to Optilan in order for the long lead items to vest.

The Court referred to the fact that the vesting certificates acknowledged the interim payment process.  The Court therefore held that the vesting certificates recorded the agreement of VVB to include the values of the long lead items in the payment certificates which would then be addressed with other certified items and against payments previously made. This may result in a nil payment.

As such the Court held that the vesting of the long lead items was not conditional on the passing of a sum of money. It was sufficient that the materials were included within the pay less notice and were taken into account as part of the interim payment certification process.  As the Court noted, the transfer of £1m of materials should not depend upon whether there is a net certification of £1 or one of zero.

Lessons learned

This case highlights the importance of ensuring that vesting certificates clearly reflect both parties’ intentions as to when title is to transfer.

Parties should also be careful to ensure that the wording included in vesting certificates is clear and consistent with the underlying contract, and takes into account the payment certification process required in construction contracts by the Construction Act 1996. To that end, the courts will generally be prepared to step in and interpret any ambiguity in favour of the interpretation which makes business common sense.

This article was written by Jane Burrows, for more information, please contact her at jane.burrows@crsblaw.com