The Construction Contracts (Retention Money) Amendment Act 2023 celebrates one year in force

5 October 2024 marks the first birthday of the Construction Contracts (Retention Money) Amendment Act 2023 (Amendment Act). The legislation amended the Construction Contracts Act 2002 (the Act) and strengthened retention rules for all new commercial construction contracts entered into after its inception and any existing contracts renewed since.

To mark the event, we set out a brief reminder of the Amendment Act's purposes and application below.

Who does the Amendment Act affect?

The retentions regime applies to all parties to commercial construction contracts. The Act defines two parties, Party A (the payer) and Party B (the payee). Party A is the principal, developer or the head contractor (holding retentions for a subcontractor); and Party B the head contractor (retentions are held by the principal or developer), or the subcontractor (retentions are held by the head contractor).

For the purposes of the Act, money becomes retention money as soon as it is retained by Party A as a security for Party B's performance of its contractual obligations, under the terms of the relevant construction contract (Amendment Act, s 18B(2)).

The original retentions regime under the Act came about following the collapse of Mainzeal which resulted in substantial losses of retention payments for subcontractors in New Zealand. The changes serve as a protection for Party B and prohibit retention money held on trust from being used by Party A as working capital. The Amendment Act came about due to shortcomings in the regime identified in the High Court's decision in Ebert.

Recap of Key changes

The Amendment Act introduced the automatic creation of a trust at the point in time when the contract allows the money to be retained, whether or not it is actually deducted (ss 18B and 18C). Prior to the Amendment Act the Judge in Ebert held a trust did not automatically arise.

Changes were also made governing how retention money must be held. Gone are the days where retentions could be held on trust as cash or other liquid assets and co-mingled with other monetary commodities. Retention money is now regulated in two ways, either: it can be held as cash in a New Zealand bank account; or by the use of a complying instrument, such as a bond or guarantee (s 18D). If cash, it can no longer be comingled with other non-trust funds (ss 18D and 18E).

Retention money ceases to be trust property where it is paid to Party B; or Party B gives up its claim to the money, in writing; or where it is used to remedy defects in the performance of Party B's obligations under the contract. However, Party A must give no less than 10 working days' notice to Party B of its intention to use retention money to remedy defects (s 18C(3)).

Comprehensive reporting requirements were brought in by the Amendment Act which include an obligation for Party A to provide Party B with regular and specific information about the retention money. Party A is obliged to report as soon as practicable after an amount becomes retention money, and then report three-monthly thereafter (s 18FD). Further, detailed accounting records must be kept by Party A and be made available to Party B without charge, upon reasonable request (s 18FC).

One of the most notable changes made by the Amendment Act is the new penalties and introduction of director liability. There are limited defences to these new provisions. Valid defences exist where an individual or director can prove they took all reasonable steps to ensure they complied with the Act or acted honestly and in good faith. There are, however, no defences for a failure to keep accounting records.

Penalties apply to a failure by Party A, to hold retention money on trust for Party B, which may attract a fine of up to $200,000; and to Party A where accounting records are not kept. Party A may be liable up to $50,000 for its failure to keep such records.

Where Party A is a company, the director(s) can be held responsible for their failure to properly hold and keep retention money on trust. They face similar fines as above.

Concluding comments

Retentions are a form of contract security that is widely used in connection with construction contracts in New Zealand. We note that to date, breaches under the Amendment Act provisions have not been tested by the Courts. The hope is that the legislative changes have succeeded in deterring parties from breaching their obligations and that when the Amendment Act turns two, we will report the same level of compliance.

This article was written with the assistance of Sarah Scrivener and Victoria Bortsova, Solicitors in the Major Projects and Construction team.

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