The Personal Property Securities Act: What every construction contractor should know
Every contractor needs to know what steps they can take under the Personal Property Securities Act:
- to secure their right to be paid for the supply of goods and services; and
- to protect their plant, equipment and tools on site from being seized and sold by the liquidator of an insolvent principal.
Amongst other things, the Act allows a supplier of goods and services on credit to secure payment for the supply if the purchaser or hirer becomes insolvent. This is relevant to building contractors as both procurers and suppliers of goods (building materials, plant and equipment and tools) and services (construction work).
Contractors need to be mindful of the Act when ordering supplies of building materials, purchasing or hiring plant and equipment and entering into contracts or subcontracts to undertake building work. Under the Act, each of these transactions creates reciprocal obligations on one party to supply something and on the other party to pay for it. Typically in construction projects, these reciprocal obligations will be replicated all the way down the contractual chain. A simple example is as follows:
- Principal enters into a lump sum "construct only" contract with head contractor for the construction of a building on its land: contractor is bound to supply labour and materials and principal, to pay for it.
- Principal engages an architect to prepare the plans and specifications and to act assuperintendent of works: architect is bound to provide services as designer, draftsperson, supervisor, valuer and certifier and principal is bound to pay for it.
- Head contractor engages a professional surveyor, a geotechnical engineer and an earthworks contractor to demarcate, classify and prepare the ground for works to commence: professionals are bound to provide services and head contractor, to pay for it.
- Head contractor engages subcontractors to perform particular parts of the agreed scope of works: each subcontractor is bound to provide labour and materials and head contractor, to pay for it.
- Subcontractors order building materials from suppliers: suppliers are bound to supply goods and subcontractors, to pay for them.
- Subcontractors hire cranes and bobcats: hire company is bound to supply equipment and subcontractors, to pay for it.
- Subcontractors hire other subcontractors and labourers to perform parts of their agreed scope of works: hired parties are bound to do work and the principal subcontractor, to pay for it.
Most of the participants in this hypothetical project are the payer or principal in some transactions and the supplier or contractor in others. For example, the head contractor is the supplier of goods and services in transaction (a) and the principal in transactions (c), and (d).
Typically too, most if not all of the goods and services in a typical construction project will be supplied on credit. In other words, the "principal" in any particular related transaction (and there may be hundreds or even several thousand in a complex project) will typically be supplied with goods or services before paying for them. In fact, at the head contract level, the principal may not even become indebted to the contractor for services provided under the contract unless and until the works under contract are substantially complete.
This creates an obvious risk for all contractors where any one or more of the principals above them in the contractual chain becomes insolvent and therefore unable to pay its debts as and when they fall due. This risk snowballs as you go down the contractual chain because of the higher number of potentially insolvent principals higher up the chain and the potential flow-on effect if any one of them becomes insolvent.
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.
