The Personal Property Securities Act 2009 (Cth) (PPSA) affects the giving and taking of security interests over assets (other than land and certain leases). It has been in force in Australia since January 2012. However, many businesses remain unaware of the PPSA or are not clear how it affects their business.
In February, we looked at the effect of the PPSA on equipment hire arrangements. Whilst there may be elements of overlap between equipment hire and construction contract arrangements, we feel that construction issues deserve specific attention and we outline some common scenarios and consider the implications.
This briefing paper seeks to answer some key PPSA related questions that may be pertinent to the Australian construction industry.
Assume that ABC Pty Ltd (ABC) is a company offering civil construction, earthmoving and mining contracting services in Western Australia. ABC has been engaged by XYZ Ltd (XYZ) to provide forward earthworks at XYZ's proposed railroad site.
2.1. XYZ has given ABC a construction contract detailing the services ABC is to perform. How does the PPSA affect the contract and what do the parties need to be aware of?
The PPSA may be relevant to the construction contract in a number of ways, including:
- "Security agreement". The principal will want to ensure that it can protect itself by registering one or more security interests against the contractor (here, ABC). Accordingly, it would be usual for a construction contract to have a clause referring to the contract as a "security agreement" for the purposes of the PPSA.
- Principal's rights on take out. Such rights should be registered as a security interest by XYZ. See paragraph 2.2 below for further details.
- Contractor's rights over its temporary works. Temporary works may be registrable as a security interest by ABC. See paragraph 2.3 below for further details.
- Retention of title. If ABC only gets paid for its works after each stage has been completed or, possibly, following practical completion, ABC will be exposed in the event that XYZ goes into administration or insolvency prior to making payment. ABC may want to register a security interest over installations it has carried out under the construction contract to secure the deferred payments. It is likely that XYZ will not consent to such security. This then comes down to a risk assessment by ABC and if necessary, a negotiation exercise with XYZ.
- Confidentiality. Section 275 of the PPSA provides that certain "interested persons" may require the secured party to send to the "interested person, or any other person" a copy of the construction contract and/or other specified information. Therefore, a third party may be able to obtain potentially sensitive information. However, section 275(6) allows the parties to agree not to disclose such information. This is usually achieved through an additional confidentiality provision in the construction contract. XYZ and ABC should ensure that they are protected in this regard.
- Waiver of PPSA obligations. Chapter 4 of the PPSA provides numerous procedures for notices and enforcement on default. It is usual for parties to vary or contract out of these procedures, for administrative purposes, to the extent permitted by the PPSA. If the construction contract doesn't have a contracting out provision, both ABC and XYZ will need to understand their statutory rights and obligations to avoid being in breach of the PPSA.
2.2 The construction contract grants take out rights to XYZ. What should ABC be aware of?
A principal will usually require their contractor to grant them take out rights. Such rights enable the principal to take over the contract works in, for example, an insolvency event affecting the contractor. In this regard, AS 4000-1997 states at clause 39.4 that:
"If the Contractor fails to show reasonable cause by the stated date and time, the Principal may by written notice to the Contractor:
- take out of the Contractor's hands the whole or part of the work remaining to be completed and suspend payment...".
Further, at clause 39.5:
"The principal shall complete work taken out of the Contractor's hands and may...:
- without payment of compensation to the Contractor:
- take possession of, and use such of the construction plant and other things on or in the vicinity of the site as were used by the contractor".
In 2013, a New Zealand court  held that take out rights are a security interest for the purposes of the PPSA. It is likely that this decision will be followed in Australia.
Here, if XYZ fails to register a security interest on the Personal Property Securities Register (PPSR), it may be prevented from enforcing these rights.
Any proposed registration by XYZ may impact on any security interests granted by ABC to a third party (eg a financier) in the same equipment. For example, it could be a term of a financing arrangement for the purchase of heavy equipment by ABC that ABC does not grant any other security interest in the equipment. ABC will need to be aware of all such arrangements and restrictions affecting its equipment.
2.3 ABC will erect a significant amount of scaffolding on XYZ's site. What should ABC be aware of?
Leaving equipment on a principal's site is called "bailment". Prior to the PPSA, ABC could simply rely on its ownership of temporary works, such as scaffolding, and remove such items at the end of the contract or on a contractual default by the principal. Now, with the PPSA, a bailment may be a security interest requiring registration to protect ABC.
Whether the bailment is a security interest (a PPS lease) will require careful consideration and application of section 13 of the PPSA, specifically:
- whether the temporary works consists of "serial-numbered goods";
- how long the temporary works is bailed for;
- whether ABC is "regularly engaged in the business of bailing goods" (PPSA section 13(2)); and
- whether XYZ (as bailee) has provided "value" for the bailment itself (PPSA section 13(3)).
If ABC has a PPS lease, its interest over the bailed goods will be a purchase money security interest (PMSI). A valid PMSI ranks in priority to all other non-PMSI's granted by XYZ.
2.4 What if ABC has a PPS lease in temporary works but does not register the PMSI?
Section 19(5) of the PPSA provides that a grantor (here, XYZ) has rights in goods that are leased to it (the temporary works). This means that XYZ can grant to a third party a security interest in the equipment owned by ABC which has been bailed to XYZ.
- the temporary works is a PPS lease;
- ABC does not register a security interest to secure the temporary works;
- XYZ obtains finance and the financier registers a security interest against all the present and after acquired assets of XYZ to secure the facility made available to XYZ; and
- XYZ defaults under its arrangements with the financier,
the financier may be able to assert a greater claim to the temporary works than ABC. If ABC's leased equipment was significant in terms of ABC's overall asset base then the loss could greatly impact ABC's cash flow and balance sheet. It may also open up the directors of ABC for a claim by the company for breach of fiduciary duties (i.e. by not acting in the best interests of the company in not registering a security interest).
2.5 ABC leases some of its equipment to be used on XYZ's site from LeaseCo. What should ABC be aware of?
ABC should carefully check LeaseCo's terms and conditions or other document binding on ABC in relation to LeaseCo's equipment. These will probably give LeaseCo the right to register a PMSI in its equipment. ABC will be granting this security interest. In addition:
- the documentation may require ABC to register a security interest if ABC sub-leases the equipment or, as here, where ABC bails the equipment to XYZ. ABC will need to turn its mind to whether a security interest exists requiring registration (see paragraph 2.3 above).
- If a security interest in the equipment is registrable by ABC but ABC fails to register or registers late (in breach of contract) and XYZ enters into administration or insolvency, LeaseCo's equipment may be lost to a third party with a higher ranking security in the same equipment (see paragraph 2.3 above). LeaseCo may then have a claim against ABC for breach of contract.
- ABC should check the terms of any pre-existing financing documentation it has entered into. Such documentation will usually prohibit the grant by the borrower of a security interest ranking in priority to that of the lender. In this regard, LeaseCo's PMSI would rank ahead of the lender's security interest and ABC would be in technical breach of its financing covenants.
2.6 When must ABC register a security interest on the PPSR?
Assuming ABC is entitled to register a security interest, it should do so within 15 business days of, for example, the bailment of the temporary works.
2.7 What does registration on the PPSR cost?
This depends on the length of registration. The online fees payable are currently:
- $8 for a registration of 7 years or less;
- $40 for a registration of more than 7 years but less than or equal to 25 years; and
- $140 for a registration with no stated end time.
1 McCloy v Manukau Institute of Technology  NZHC 936 (1 May 2013)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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