When a construction contract is also a security interest

GUEST COMMENT

The High Court this week clarified another piece of the wreckage from Mainzeal’s collapse.

Mainzeal had a $15 million contract to make the 97 apartment Hobson Gardens complex in Auckland watertight. It was part way through this work when it was put into receivership, and Mainzeal’s receivers decided not to finish the job. 

The apartment owners responded by claiming possession of two large hoists owned by Mainzeal. Worth $350,000 each, they were used to lift construction materials and workers to Hobson Gardens’ upper levels. 

The apartment owners claimed their contract with Mainzeal gave them the right to use the hoists to finish the work and to sell them to recover any losses resulting from Mainzeal’s failure to complete the contract.

But the receivers insisted that the Bank of New Zealand had a better right to the hoists because it had a general security agreement (GSA) with Mainzeal that had been registered on the Personal Property Securities Register (PPSR).

The court agreed with the receivers that the BNZ’s interest in the hoists trumped any interest that Hobson Gardens had.  

In his reserved decision, Justice David Collins proceeded to identify the nature of each party’s interests in the disputed property, and then analyse whether the bank’s security interest under its GSA was extinguished by any of the dealings between Mainzeal and Hobson Gardens. 

Finding that it was not, he went on to apply the well-understood priority rules under the Personal Property Securities Act.

In addition to being a textbook approach to a priority dispute, the decision is an interesting and useful reminder that a security interest is wider than the commonly understood meaning of a mortgage or charge over personal property (generally any property other than land).

A security interest includes any interest in personal property that in substance secures payment or performance of an obligation.

Hobson Garden’s right to use, and ultimately sell, the hoists was a security interest because its purpose was to secure the apartment owners' position if Mainzeal defaulted. 

Consequently, Hobson Gardens needed to register on the PPSR to perfect their security interest, and even then the apartment owners’ rights would be subordinated to prior-registered security interests (such as the BNZ’s).

Parties to contracts need to remember that including a right to seize goods upon default is a useful start, but that right will compete with other rights in those assets. 

To be effective, the right will need to be registered on the PPSR and agreed to by any prior ranking security holder.

Hamish Foote is a partner at law firm Chapman Tripp.