BuildLaw, Issue 18 Editorial Part 5

Who Owns the Subcontractor’s Equipment

You might think the answer would be straightforward, but is it?
In BuildLaw Issue 16 we featured the article ‘Ownership – Sub-Contractor’s Equipment – Removal From Site’ by Lisa Kingston of Fenwick Elliot Solicitors in the UK. In that article Lisa discussed the case of Alstom Power Ltd v Somi Implanti, [2012] EWHC 2644 (TCC) which concerned an application for declaratory relief relating to the ownership of a sub-contractor's equipment that was brought to site in connection with the construction of a power station in South Wales.
Following the suspension of Somi’s mechanical and piping erection work under its subcontract with Alstom, Alstom had sought a declaration that it had property ownership of the appliances and equipment Somi had brought to the site for the completion of its work.
Akenhead J held that Alstom had contractual rights over the goods, materials and sub-contractor’s equipment, and that as Somi’s work had been validly terminated, it had possessory rights over the equipment until the work could be said to have been completed. As such work had not been completed, Akenhead J held that a declaration should be made to the effect that Alstom had possessory rights over the equipment. However, while this was the case, he held that ultimate ownership of the equipment did not in property terms permanently transfer to Alstom. 
As an aside, the court pointed out that in principle and notwithstanding the fact that title had not transferred, that Alstom would be entitled to sell SOMIs Equipment even though ownership had not been permanently transferred.
The sale of defaulting sub-contractors’ equipment could be a very effective solution for contractors, particularly on large scale projects where the value of equipment brought to site can be considerable.
A little closer to home the High Court of New Zealand has recently confirmed in McCloy v Manukau Institute of Technology [2013] NZHC 936 that the step-in rights clause in a construction contract can create a security interest in plant and equipment. These clauses grant the principal rights to complete the works, sometimes using the contractor’s equipment and materials and then sell the equipment to recover outstanding monies where, for example, the contractor has become insolvent.
The case concerned a dispute between the receivers of Mainzeal and the Principal under the contract, Hobson Gardens. In completing the works, Mainzeal had placed two large hoists on site. 

The contract provided that if receivers were appointed to the Contractor and the receivers failed to take over the works, the Principal had the right to use the Contractor’s hoists to finish the works and sell the hoists. 

The court held that these provisions were “clearly intended to provide Hobson Gardens with a form of security over Mainzeal’s interest in… the construction machinery (and therefore the hoists).” 

In summary, the particular clause granted an interest in personal property (the construction machinery) which secured the obligations of the contractor to complete the contract. This constituted a security interest.

However, the Bank of New Zealand had previously registered a General Security Agreement and a number of specific security interests over the Contractor. In a text book approach, Justice Collins identified the nature of each party’s interests in the equipment, analysed whether the bank had an enforceable security interest in the hoists and applied the priority rules set out in the NZ PPSA holding that the BNZ had a prior-ranking security interest in the relevant assets.
The case is a salutary lesson however, that while it may appear beneficial to include in construction contracts clauses of that create security interests in the nature of rights to seize goods and equipment upon default, such rights will compete with other rights in those assets and they will rank behind prior-registered security interests granted to parties such as banks and financiers. 
In ‘Construction Projects: Security and ownership of materials and equipment’ Karen Overend of Duncan Cotterill discusses the case and looks at how parties to construction contracts can protect themselves when another party collapses by registering security interests in personal property under the PPSA.
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