June 2022

The loopholes in the Construction Contracts Act’s (Act) retentions regime are about to tighten. Contractors are set to face an increased administrative burden when managing retentions. There will also be significant consequences if the Act is not complied with. This article outlines the changes that are currently being considered by Parliament.

A retention is part of a payment in a construction contract that is held back by a contractor from the subcontractor to secure performance of their work [1]. Retentions are ordinarily paid to the subcontractor, in full, at the end of a defects liability period.

The current retentions regime was introduced into the Act in March 2017 with the aim of offering greater security to subcontractors. Since then, contractors have been required to hold retention moneys ‘on trust’ for the benefit of their subcontractors.

However, subsequent High Court decisions have revealed gaps in the regime on the contractor’s insolvency. In Bennet v Ebert Construction Limited (in receivership and liquidation)[2] the Court found that the Act did not actually create a trust. A trust had to be intentionally formed by the contractor with certainty about the property held and its beneficiaries. Furthermore, a contractor must actually withhold the retention money. In Ebert, Ebert Construction had only fully complied with the Act’s requirements for a portion of its subcontractors.

Parliament is currently addressing these gaps. On 8 June 2021, the Construction Contracts (Retention Money) Amendment Bill had its first reading. On 22 November 2021, the select committee reported back on the Bill. In summary, the Bill is proposing to change the following features of the regime:

• Creating a trust as soon as funds become retention money. This will prevent the Ebert scenario. Retention money will become trust property whether or not the contractor complies with the Act. As trust money, retentions will be legally separated from the company assets and, therefore, protected in the event of the contractor’s liquidation.
• Contractors will be required to place retentions into a separate trust account. This addresses the issue of contractors using retention money for their own working capital.
• Harsher penalties for a company and its directors for non-compliance with the Act. The Bill proposes a fine of up to $200,000 for a company and $50,000 for directors (and those falling within a wide definition of ‘director’).
• The Bill also proposes changes to record keeping requirements and disclosure and reporting obligations.

The select committee has suggested a number of changes to the Bill, including making it clearer when an amount withheld becomes retention money (when the construction contract allows), adding a requirement for the contractor to give notice to a subcontractor before retention money is used to rectify defects, some changes to the proposed banking requirements for retention monies, lessening some of the financial reporting requirements, and adding new provisions to be followed in the event of receivership or liquidation.

Regardless of whether or not all, or some, of the proposed changes are adopted, the overall message is clear: change is coming and you need to ensure that you understand what you need to do.

We hope to provide further updates as the Bill tracks towards enactment but when you need advice about construction contracts, please contact your lawyer.

[1] The regime also applies to principals and contractors, however. For ease of reference, we refer to contractors and subcontractors.
[2] Bennet v Ebert Construction Limited (in receivership and liquidation) [2018] NZHC 2934