On 5 April 2023, the Construction Contracts (Retention Money) Amendment Act received royal assent.
The changes aim to strengthen and clarify the existing retention money regime and, with the exception of the provisions relating to receivership or liquidation (which apply immediately), will apply to new commercial construction contracts entered into, or renewed, after 5 October 2023.
These changes affect principals, head contractors, subcontractors and insolvency practitioners and reflect the concerns raised in the Ebert decision.
Key changes for parties holding and owed retentions:
Retentions: Retentions cover both:
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typical retentions, being amounts retained from progress payments; and
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other amounts withheld as security for the performance of a party's obligations under the contract, regardless of whether the contract provides for that withholding.
This creates a significantly broader class of retentions than the current regime. For example, if the contractor's mark-up is withheld until an obligation is complied with then this would be treated as a retention.
Typical retentions become "retention money" when the contract allows the party to withhold payment. Money withheld to secure performance becomes "retention money" at the time it is withheld.
Deemed trust: A trust is created automatically over retention money. This a key change from the current regime where a deemed trust does not automatically arise and steps must be taken to create a trust.
Separation of funds: The current regime allows commingling of retention money with other (non-retention) money. This is no longer permitted and retentions are to be kept separate from other money or assets of the retention holder. To smooth cashflow, the retention holder may hold retentions in the form of a complying instrument, such as an insurance policy or guarantee rather than holding cash.
Bank account: Retention money held in cash is to be held in a trust account, established and used solely for the purpose of holding retentions, in a registered bank in New Zealand. The retention holder is not required to set up separate accounts for each project or contractor, but separate ledgers (within the trust account) have to be kept for each party and each construction contract. Amounts are to be deposited "as soon as practicable" after they become retention money and the bank needs to be notified that the funds in the account are retention money.
Using retentions: As trust property, the holder of retentions can only use retentions in accordance with the purpose of the trust. The amendments clarify when retentions cease to be trust property and can be used by the retention holder. Retentions can be used by the retention holder if:
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the other party gives up its claim to the retentions in writing;
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retentions cease to be payable to the other party; or
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the retentions are used to remedy defects in the performance of the other party's obligations under the construction contract but only if:
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the use of retentions for that purpose is permitted by the construction contract;
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the provisions governing the use of retentions for that purpose in the construction contract are complied with; and
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the retentions holder has notified the other party of the retention holder's intent to use the retentions and has provided a cure period of at least 10 working days.
Reporting and record keeping: A mandatory reporting regime applies for the benefit of the party from whom the retention money has been withheld (i.e. the contractor or subcontractor). There is also an obligation on the retentions holder to maintain records. The retention holder must provide the other party with information about the retention money when it is first withheld and at least once every three months, including:
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each amount retained, the construction contract under which it is retained, the date of its retention;
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the total amount of retention money held for the other party under each construction contract;
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the account details for any bank account or instrument details in or under which the retention money is held; and
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confirmation that the other party may inspect the accounts and records that the retention holder is required to keep and any other information to be specified in regulations.
Penalties: Offences and penalties for not complying with these requirements apply to both the retention holder (up to $200,000 per offence), and if the retention holder is a company, its directors (up to $50,000 per offence).
MBIE: MBIE has new powers to investigate compliance and require parties to provide information as part of its investigations.
Key changes proposed for insolvency practitioners:
Automatically appointed trustee: If the principal or head contractor becomes insolvent, the receiver or liquidator becomes trustee of the retention money for the purpose of collecting and distributing it. This differs to the current regime where the receiver or liquidator must apply for court orders to be appointed trustee to deal with retention monies.
Remuneration: The receiver or liquidator is entitled to be paid reasonable fees and costs for doing so.
These changes are targeted at addressing some of issues identified by the High Court decision of Bennett v Ebert Construction Ltd [2018] NZHC 2934 (discussed in our previous publication).
Many retention holders will already be complying with the majority of these requirements but may need to update their documentation and processes in the next six months. Please get in touch with one of our team if you would like to discuss how the proposed changes may impact you and your business.
A copy of the Act can be found here.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.