Retention Money Revolution: New Zealand's Construction Industry Braces for Game-Changing Amendments from 5 October 2023

Members of New Zealand’s construction industry should familiarise themselves with upcoming changes to the retention money regime in the Construction Contracts Act 2002 (CCA).

 

Retention money refers to an amount withheld by a party to a construction contract (party A) from an amount payable to another party to the contract (party B) as security for the performance of party B’s obligations under the contract. Retention money is released from the trust, which it is held in, when the money is:

• Paid to party B.

• Party B agrees to give up any claim for the money.

• Or the money ceases to be payable under the contract.

 

Currently, the CCA allows for retention money to be held in cash or other liquid assets that are readily converted into cash. Therefore, the money currently does not need to be paid into a separate trust account or separated from other money.

 

Under the current regime subcontractors are exposed to the possibility of not receiving retention money if the party holding the retention money becomes insolvent and the subcontractor’s retention money has been held in a working capital account, as opposed to a separate trust account.  

 

Ebert Construction Limited v Sanson (Ebert) provides an example of this. In July 2018 Ebert was placed into receivership and the Receivers sought guidance from the High Court due to the CCA being unclear on who was responsible for distributing and administering retention money during an insolvency.

 

The Court found issues with Ebert’s retention money accounts, because while Ebert had accounting practices in place, its process of reconciling and transferring retentions broke down prior to its insolvency, which lead to retention money not being recorded and treated as such.

 

The new Construction Contracts (Retention Money) Amendment Act 2023 provides greater security for retention creditors due to 7 key changes.

 

• First, the definition of retention money has been clarified to remove ambiguity and doubt. In particular, where a contract  allows party A to retain money that would otherwise be payable to another party, party B that retainable amount become retention money.  

• Second, retention funds will be held on trust automatically. In other words, when an amount becomes retention money, a trust is automatically created under section 18C(2). An explicit intention to create a trust is not required.

• Third, the point in time when retention money ceases to exist has been clarified. Retention money will no longer be trust property when:

            - Party B is paid the money.

            - Defects in the underlying construction work are remedied with the money; or

            - The money has been given up by party B so they cannot claim it.

• Fourth, the requirements for how retention money is held on trust have been clarified. Retention money must either be held in a bank account or a complying financial instrument. Holding retention money in a complying financial instrument is not common. Separate bank accounts is best  practice. The ability to hold retention money in cash or other liquid assets that are readily converted into cash has ceased, and retention money can no longer be used as party A’s working capital.

• Fifth, while retention money is held, any interest that ensues belongs to party A.

• Sixth, reporting on retention money is required by party A as soon as practicable after a sum becomes retention money and at least once every 3 months until the end of the retention money.

• Finally, if party A is placed into receivership or liquidation, the receivers or liquidators must continue to hold the retention money on trust for party B and dispense it in the same manner as party A would have been required to do so.

 

Increased penalties have been included to the amendments of the CCA. The penalties are:

• A fine of up to $200,000 for each offence if party A fails to keep and use retention money as required. 

• A fine of up to $50,000 for each failure to account for and record retention money.

• A fine of up to $50,000 for each failure to comply with reporting on retention money.

• If party A is a body corporate, each director is liable for up to $50,000 per offence.

 

With the amendments coming into force in early November, we urge contractors in the position of party A to ensure that they are aware of the new retentions regime to avoid being caught out.

 

Subcontractors in the position of party B should become familiar with the incoming amendments, and take advantage of the reporting requirements noted above.  Be aware that, due to the current economic conditions, we foresee further insolvencies and retentions disputes arising, despite the upcoming changes providing subcontractors with more security.

 

If you want to ensure your compliance with the incoming retentions regime,  or if you have a dispute involving retention money, please do not hesitate to contact Sarah Churstain (sarah@fsl.nz), Jaesen Sumner (jaesen@fsl.nz) or Jordan Todd (jordan@fsl.nz).