Construction Update: Proposed legislative changes to the retentions regime

Changes to the retention regime are afoot. 

On 1 June 2021, the Construction Contracts (Retention Money) Amendment Bill was introduced to Parliament proposing amendments to the retention money regime which aim to strengthen and clarify it.
 
No changes yet apply. However, if enacted, the Bill will come into force 6 months after its enactment and will apply to commercial construction contracts entered into, or amended, after that date.

Key changes proposed for parties holding retentions:

• Retentions held in trust are to be kept separate from other money or assets. This is a key change from the current regime, which does not require retentions to be paid into a separate trust account and allows commingling.

• Retentions are to be held in a trust account (established and used solely for the purpose of holding retentions) in a registered bank in New Zealand or in the form of complying instruments (such as an insurance policy or guarantee). 

• The party holding the retentions must give information to the contractor when the money is first retained and then at least once every 3 months. 

• The Bill introduces offences and penalties for not complying with these requirements. In particular:

  • A party ("A") who fails to keep all retention money in one or more bank accounts as required, commits an offence and is liable to a fine not exceeding $200,000;

  • If party A is a body corporate, each of its directors also commits an offence and is liable to a fine not exceeding $50,000;

  • It is a defence if the defendant proves that they took all reasonable steps to ensure that party A complied with that provision; and

  • There are separate offences (with a fine of up to $50,000) for failing to keep and provide records.

Key changes proposed for parties owed retentions:

• A trust is created automatically over retention money.

• A party holding retentions must give certain information as soon as practicable after an amount becomes retention money, and at least once in every 3 months. The required information includes:

  • The amount(s) retained, the date(s), and the construction contract it pertains to;

  • The account details for any bank account in which retentions are held or the instrument information for each complying instrument held; and

  • A statement that the party owed retention may inspect the accounts and records held.

Key changes proposed for insolvency practitioners:

• 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.   

• They are 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).
 
A copy of the Bill can be found here.

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.

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.