Subcontractors, rights of access and receiverships
MEDIA RELEASE – For immediate use, 11 February 2013
Subcontractors, rights of access and receiverships
By Stephen Layburn
The New Zealand Law Society has received a number of questions and requests about some of the issues emerging from the media coverage of the receivership of Mainzeal Property and Construction Limited (“Mainzeal Construction”). The following article has been prepared by Auckland commercial barrister Stephen Layburn, who is convenor of the Law Society’s Commercial and Business Law Committee. The article is an opinion on general legal issues and does not constitute specific legal advice.
The Mainzeal Property and Construction Ltd receivership has raised questions about the ability of subcontractors to access building sites controlled by Mainzeal Construction to recover their property (such as tools and scaffolding equipment). Legally, matters such as this are affected by a range of sometimes overlapping rights and obligations. The terms of the construction contract under which the contractor operates the site and is, in turn, engaging with subcontractors will also be highly relevant.
Without looking at the various forms of construction contract, if we take a simple hypothetical example where a construction contractor is undertaking work on a property that is owned by a separate (unrelated) property owner, the head contractor will have control of the site for the duration of the contract. This control is needed for a variety of contractual and practical reasons – including management of the interaction between the various subcontractors working on the site.
Typically, any other party entering the site - including subcontractors - does so at the invitation of the head contractor as controller and occupier of the site for the duration of the construction contract. It follows that the head contractor also exercises control in respect of people who have no authority to enter the site. Ultimately, that control can include the issue of trespass notices warning such people to stay off the construction site.
Where a building contractor goes into receivership, the appointment of a receiver triggers a number of rights and obligations - including giving the receivers control over the rights previously exercised by the contractor. However, this will not usually cause the contractor’s occupation and control of building sites to be immediately relinquished. This is because most construction contracts will provide a breathing period (typically 10 working days) for the contractor to find a replacement contractor that is acceptable to the principal to undertake the work. During that breathing period, the contractor is not (simply because of the appointment of the receiver) in default under the contract.
Sensibly, such a breathing period allows the receiver a short window of time within which to gain control of the contractor’s activities (including building sites), and make an assessment of the state of the relevant contract and the position both in terms of the obligations to the principal and the relationships with the various subcontractors. Despite the apparent hardship to subcontractors (who have obvious concerns for their tools and equipment) this breathing space is also important in preventing chaos as various interested parties clamber to recover their property. Without it, there is a risk of people accidentally grabbing someone else’s property, damage to other property and goods and the sort of health and safety issues that would result from a free-for-all.
If the receiver decides (for example) to continue with a specific project, they will need to come to arrangements with subcontractors. A receiver is not liable for pre-receivership debts of the contractor – but there may be scope for arrangements to be made to enable a project to be completed and such important issues as a contractor’s workforce being retained to complete the scheduled work.
Without knowing all of the details of the arrangements affecting the scaffolding contractor which made the news headlines over the weekend, it seems quite natural that the access to the site without approval of the receivers was halted with the issue of a trespass notice. Equally, it was not a surprise to see that as soon as order was restored, arrangements were made to enable some scaffolding equipment to be removed from the site in a controlled manner. In doing so, it is likely that the receiver understood the need for the scaffolding contractor to be able to put the equipment that was no longer required on the site to use elsewhere. Also, it is likely that the receiver will need the scaffolding contractor’s services for completion of what work remains to be done on site.
As the Mainzeal Construction receivership is relatively large and seems likely to affect a large number of people - with reports suggesting that there are more than 50 sites involved - it is likely that the receivership will continue to attract attention. Businesses affected by the receivership would be advised to ensure that they have their own records in good shape so that they can respond to dialogue with the receivers quickly and clearly and, if in doubt about their rights and obligations, to seek professional advice.