Protection of Retentions – Amendments to the Construction Contracts Amendment Bill

19 Mar 15

Proposed amendments to the Construction Contracts Act Amendment Bill have been announced by the Minister for Building and Housing on 11 March.  These will give subcontractors in particular greater security that they will get paid for work done, by requiring retention money under commercial  construction contracts to be held in trust.

It is long-established practice in New Zealand and internationally for retentions to be held under construction contracts to ensure that, if there are defective works, the head contractor or principal is able to recover the cost of fixing those defects. In the wake of the Mainzeal collapse, where subcontractor’s retentions were unsecured debts in Mainzeal’s liquidation, amendments were seen as necessary to protect payment of retentions to subcontractors and head contractors. The Government has introduced a supplementary order paper (SOP) in Parliament last week to make substantive changes to protect retentions by requiring them to be held on trust for their rightful owner.

The proposed changes
The SOP proposes a new subpart 2A to the Construction Contracts Act 2002 (CCA), to provide that a party to a commercial construction contract that holds retention money must hold it on trust for the benefit of the party from whom it is deducted. Initial proposals only applied to retentions from subcontractors, however the amendments now apply to all retention moneys, including those retained by the principal from the head contractor.

Key aspects of the amendments are:

  • Retention funds do not need to be put into a separate bank account or lawyer’s trust account. Instead, the retention funds are deemed to be held on trust in the relevant contractor’s bank account. This means that on insolvency of the party holding the retention, the retention will be protected and not be used to meet other preferential creditors’ claims.
  • A party holding retention money must be transparent in the reporting of funds held as retentions. This includes keeping proper accounting records of all retention money held and making those records available for inspection at reasonable times and without charge.
  •  Retention money can only be used to rectify contractor or subcontractor defects, and would not be available to be used as cash flow or for payments of debts of any other creditors. The SOP also allows for penalty interest (at a rate prescribed by regulations) to be applied to late repayment of retention money, unless otherwise agreed under the contract.
  • Retention money can be invested in accordance with the Trustee Act 1956, but if there a loss on investment, then the party holding the retention must cover those losses. Any increase through the investment and interest payable may be retained by the holder of the retention money.
  • The holder of retentions cannot amend its construction contract to avoid compliance with the new provisions, or include provisions designed to delay payment of retention money. In addition, repayment of retention money cannot be made conditional on anything other than the performance of the other party’s obligations under the contract.
  • The new regime will only apply to commercial construction contracts where the amount of retention money is more than the de minimis amount (an amount deemed so small that the protections are not required). This amount has not yet been prescribed by regulations.

Other amendments
The SOP makes a number of other amendments to provisions of the CCA Amendment Bill including:

  • In relation to contracts for “related services” (including design, engineering and quantity surveying work), which will only apply to contracts entered into or renewed on or after 31 March 2016;
  • Expanding the definition of ‘claimed amount’ (in relation to payment claims) so that any type of payment under a construction contract is covered. Previously, the Bill had specified three categories of amounts claimed within the definition for ‘claimed amount’: construction work, liquidated damages, and breach of a term implied under the Building Act 2004;
  • Clarifying that parties have the option to agree to a single payment for all construction work under a contract. Corresponding amendments have been made to other provisions of the Bill to ensure that the protections under the CCA will apply in that situation;
  • Widening the types of disputes that may be referred to adjudication to include a disagreement as to whether or not there has been a breach of a term of contract implied by the Building Act 2004.  However, the SOP does not clarify whether an adjudicator has an express right to award damages for breach of contract;
  • Replacing section 35, dealing with the appointment of an adjudicator, and making additional amendments to the new section 35A regarding notices of acceptance. The main change is that once a person has been requested to act as an adjudicator, he or she must serve a notice of acceptance within two working days (previously the requested person only had to indicate whether he or she was willing and able to act, with no time period stipulated for the issuing of the notice of acceptance);
  • The SOP also adds a new provision in section 71(2) which treats adjudications as civil proceedings for the purposes of the 10 year longstop provision (section 393(2)) under the Building Act 2004.

Where to from here?
The Bill, and therefore the SOP, will need to be considered by the Committee of the Whole House, after which it will proceed to its third and final reading. This may result in further amendments. At this stage, however, the new retention regime (if passed) will come into effect on 31 March 2016.

While the approach adopted by the Government has been touted as less “heavy handed”, limiting compliance costs and encouraging a cultural change in the industry’s attitude towards retentions, there are still a number of problems. Importantly, the Government’s solution does not address the problem of commingling of funds from various construction projects or the formidable task that would face any subcontractor wanting to obtain its entitlement to retentions in the event of head contractor insolvency. It remains to be seen whether further amendments to the Bill will resolve these issues.

For any further information please contact Mike Kerr or David Holden.

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