Should payment be made for materials off-site?

Usually, progress payments would provide for works carried out and materials on-site. But what if the materials are already manufactured but have not been transported on-site? Should payments be made for such materials?

For the supplier, they sometimes face a problem with site constraints. The site may not have a proper and secure storage location to justify the transport of the materials on-site. Yet at the same time, these materials are already manufactured and are sitting in the supplier’s warehouse, so shouldn’t the supplier be paid for them?

From the contractor’s view however, there are risks when these materials are stored off-site. For one, unless these are unique or custom-made materials, they can be used for other projects and other contractors, so why should the contractor pay for items that potentially could be shipped to others?

Secondly, if the supplier enters into liquidation or receivership, what then happens to these materials? It would involve unnecessary costs, expense, time and effort to recover these materials from the liquidator or receiver.

Thirdly, what if these materials are damaged whilst stored at the supplier’s warehouse? For instance by reason of flooding of the warehouse. How would the contractor be compensated for the loss or damage of materials which it has already paid for?

One possible compromise is to provide that:

a. The materials must be insured, and if it is stored at the supplier’s warehouse, then the insurance ought to be taken out by the supplier (equivalent to a bailment contract);

b. The materials must be specifically identified, preferably attached to a contract note, and legal ownership of the materials must pass to the contractor upon payment to avoid any claims by liquidators or receivers;

c. The materials must be properly tagged as belonging to the contractor;

d. Preferably the supplier must furnish a bond to the contractor to secure for the cost of the materials in the event that the materials are lost, damaged or subject to a claim by a third party.

The use of the bond would allow the contractor to immediately recover the monies paid for the materials, and the contractor can then source for alternative supply. This would be preferable than for the contractor to engage in protracted arbitration or litigation proceedings to claim for materials which it has already paid for, and in the meantime still have to pay for alternative supply due to the needs of its ongoing project.

As for the supplier, it should merely factor the cost of the bond into the price of the supplies, as the early payment by the contractor of the materials even before they are transported on-site would in fact be an advantage to the supplier in terms of its cash flow.

Kheng Hoe Advocates advices on CIPAA, construction litigation and arbitration cases. We can be reached at khenghoe@khenghoe.com. 

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