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Construction contracts and a PPSA reminder

Consumer Law News | June 2014

Building industry participants must be aware of the serious implications of the Personal Property Securities Register (“PPSR”) under the Personal Property Securities Act 2009 (Cth) (“PPSA”) which came into effect on 30 January 2012 and has now been in operation for over two years. Registration of your security interests under the PPSA is a necessary measure to protect your interests in personal property that is not in your possession.  Failure to do so can lead to your interests being defeated by other registered security holders or liquidators.

The importance of registering your security interests on the PPSR in relation to property used in the construction industry has been highlighted in a recent High Court decision in New Zealand [McCloy v Manukau Institute of Technology [2013] NZHC 936].

In this case, Mainzeal Property and Construction Ltd (who were in Receivership and in Liquidation) (“Mainzeal”) entered into a contract to carry out works for Body Corporate 177519 (Hobson Gardens) (“Hobson”). The Receiver appointed to Mainzeal declined to complete the contracted works.

Hobson terminated the contract and declared that it was in lawful possession of the construction equipment.  The Receiver claimed he was entitled to have the equipment returned pursuant to the “step in rights” contained in the building contract. The receiver claimed that the “step in rights” were a security interest and were subject to registration on the New Zealand Personal Property Security Register (“NSPPSR”). Hobson had not registered any security interest on the NZPPSR.

The Court held that step in rights are a security interest and are subject to registration.  The security interest created in favour of Hobson by the contract was not perfected by registration.  The Court further held that perfection of a security interest by possession would not apply in this instance as Hobson did have possession of the goods. The Court said that possession resulting from seizure or repossession did not comply with the provisions of the NZPPSA.  As a result, the Receiver was entitled to recover the equipment.

Whilst this is a decision from the New Zealand High Court, there are similar provisions in the Australian PPSA. 

“Step in rights” in construction contracts

Construction contracts generally contain clauses that set out what is known as “step in rights”.  “Step in rights” are generally a power to take the work out of the hands of a contractor or subcontractor where a substantial default or insolvency event has occurred.  Where an Administrator, Liquidator or Receiver has been appointed to a contractor and the appointee declines to complete the contracted work, “step in rights” typically allow:

The party for whom the work is being carried out to terminate the contract; and

  • Equipment and materials belonging to the contractor can become the property of the injured party in order to complete the work.
  • Under the PPSA, “step in rights” in construction contracts can create a security interest and can be protected by registering the contracts on the PPSR. 

Other PPSA considerations in construction contracts

  • Security interests in unfixed goods and materials
    Agreements regarding off-site materials may constitute a registrable security interest under the PPSA.  Where construction contracts provide for payment of unfixed or off-site goods and materials, additional provisions may need to be drafted into the contracts making the registration of a security interest in favour of the party obliged to make payment a condition to making of such payments.  
  • Hired equipment and on-site temporary works
    Most construction sites will include hired equipment that will be removed (e.g. site sheds, scaffolding, etc.). 

Traditionally the interest of the equipment owner has been protected through the retention of title clauses in contracts but now may be deemed security interests under the PPSA and are known as 'PPS Leases', which are registrable on the PPSR.  Legal title will not be sufficient to protect the owner's interests.  

Lessons for building industry professionals

The New Zealand High Court decision in McCloy v Manukau Institute of Technology highlights the following important lessons:

  • Parties to construction contracts which include step-in rights should consider registering early on the Personal Property Securities Register in order to perfect a security interest.
  • If a principal does not register a security interest on the PPSR the rights, materials and equipment secured by the step-in clause may be lost upon insolvency of the contractor or to secured creditors who have registered their security interests on the PPSR against the contractor.
  • Contractors should also consider registering their rights under step-in clauses where principals have an obligation to return the contractor’s materials and equipment once the step-in ends.
  • Developers should register their construction contracts on the PPSR to obtain the best possible protection under PPSA and to avoid losing priority to other secured creditors with a registered security in the same property.  Whilst there are no specific timeframes for registration on the PPSR, it is recommended that this is done as soon as possible in order to establish priority position over any subsequent registrations.   
If you wish to discuss how to protect your security interests through registration of your construction contracts on the PPSR, please contact us at Forum Law on (02) 9560 3388.  We can also attend to your legal concerns regarding your business, conveyancing issues, wills and estates.

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