Construction Contracts (Retention Money) Amendment Act – 5 things you need to know

This article was co-authored by Alicia Alexander (Law Clerk) in our Construction team.

 

On 5 April 2023, the Construction Contracts (Retention Money) Amendment Act 2023 received Royal assent. Introduced to Parliament on 1 June 2021, the amendments aim to strengthen and clarify the retention money regime in the Construction Contracts Act 2002. Here are five things you need to know about the amendments.

1. Will the amendments apply to your contract?

The Amendment Act applies to commercial construction contracts entered into or renewed after 5 October 2023. Renewals are not typical for project-based construction contracts, but may apply to term maintenance agreements including those undertaken based on NZS3917:2013.

An interesting issue arises in the context of NZS3910:2013 where a 'Contract' is said to be formed from the Date of Acceptance of Tender, with the Contract Agreement being subsequently prepared and signed in accordance with section 2.6.2 of the General Conditions. When is the 'Contract' entered into for the purpose of the Amendment Act, the Date of Acceptance of Tender or when the Contract Agreement is finally signed by the parties? The conservative view is that it is the date the Contract Agreement is signed (on the basis that this agreement and the documents it describes then replaces the initial 'Contract' formed at the Date of Acceptance of Tender). The application of the Amendment Act to projects that are well progressed as at 5 October 2023 but where the Contract Agreement has not yet been entered into will need to be carefully considered!

2. What are retentions?

The Amendment Act introduces the concept of a 'retainable amount'. This is any amount which would otherwise be payable by one party to another party under a construction contract, but which may be retained as security for the performance of that other party's obligations under the contract. The requirement is for an amount to be 'otherwise payable' under the construction contract. Accordingly, milestone payments or instalments not yet due under the contract are not 'retainable amounts'. Retainable amounts become retentions (and must be held in accordance with the Amendment Act) at the time at which the contract allows the first party to withhold payment of the amount from the other party. This will be the case regardless of whether the first party has:

• actually withheld any amount from the other party;
• complied with the requirements for keeping and using the retention money (e.g., depositing it into a bank account), as discussed below;
• calculated the retainable amount (as long as it is capable of being calculated);
• prepared or given to the other party a payment schedule or other record of the withholding; or
• paid any amount owing to the other party under the contract.

The above is designed to protect a subcontractor/contractor from issues of the type raised by the Bennett & Ors v Ebert Construction Limited (in receivership and liquidation) (Ebert) decision. Among other things, in that case, the High Court found that, because the Construction Contracts Act at that time was prescriptive as to what 'retention money' was, then unless there was a deduction from an amount payable to a subcontractor, no 'retention money' had come into existence.

 3. How should retentions be held?

As soon as practicable after retainable amounts become retentions, the withholding party must deposit the retention money into a separate bank account. This account must be at a registered bank in New Zealand. Unless a prescribed third party (such as a law firm or a trustee company) is used, the withholding party must be the account holder in their capacity as trustee of the retention money (the bank needs to be told that the account is for the purpose of holding retention money). The account must be used solely for the purpose of holding retention money (and any interest, noting that interest does not form part of the retention and the withholding party gets the interest unless the construction contract provides otherwise). The withholding party can choose whether it operates its account to hold retention money for just one party under one or more construction contracts, or for multiple parties under one or more construction contracts.

In all cases, the records required to be maintained under the retention regime must include separate ledger records for each contractor/subcontractor, and in relation to each construction contract, for which money is held in the account. This is in addition to the other accounting and record keeping requirements imposed by the regime.  

For completeness, there continues to be an ability for a withholding party to meet its retention obligations using a 'complying instrument'. Details of an example instrument can be found here.

4. What can retentions be used for?

From the moment retainable amounts become retention money, a trust is created; the retention money becomes trust property and such retentions can only be dealt with in accordance with the retentions regime. The retaining party may use the retention money to remedy defects in the performance of the other party's obligations under the contract, but only if permitted to do so by the contract (presumably if the contract is silent on this point, this could be implied if to do so would be consistent with the law relating to implied terms). The retaining party must give at least 10 working days written notice as to the purpose of the use of the retentions and details of the defects to be remedied (in addition to complying with any other requirements under the contract). This means that where the applicable contract is based on one of the NZS standard forms, the retaining party will need to comply with both the requirements of the Amendment Act and the provisions governing notices in respect of defects arising during the Defects Liability Period (section 11.2 of NZS3910:2013).

As trust property, retentions are not available to meet the claims of secured or unsecured creditors of the withholding party.

Where there are no defects to be remedied, the retentions are required to be released in accordance with the construction contract and will cease to be trust property accordingly.

5. What if things go wrong?

In addition to seeking to address issues raised in the Ebert decision, the Amendment Act imposes criminal liability on both the withholding party and its directors where there is a failure to comply with the retentions regime. This deterrent is important because despite parliament's best efforts, there remains a risk that where the retentions regime is ignored, it will be difficult for contractors/subcontractors to recover their retentions in an insolvency. Note that the withholding party will have a defence if it has taken all reasonable steps to comply with the regime. Similarly, directors will have a defence if they have taken all reasonable steps to ensure that the withholding party complies with the regime.

Also important is the enhanced transparency requirements where principals/head contractors must give information about the retention money (including total amount and bank account details) to beneficiaries as soon as practicable after an amount becomes retention money, and then at least every three months until the retention money trust ends.

Finally, the Amendment Act clarifies the role of insolvency practitioners who are appointed to manage the affairs of principals/head contractors. This includes the ability to deduct fees for collection/administration costs when acting as trustee of retentions.

 

Next Steps

Anyone who regularly holds retentions should be reflecting on their systems and processes to ensure that they are able to comply with the Amendment Act once in force. Parties in the process of planning and implementing projects may also wish to reflect on their contracting processes and applicable timing, to ensure there is no uncertainty as to whether the new retention regime applies to relevant projects.

As always, our team is happy to assist with any queries.