The High Court has entered summary judgment in favour of a steel fabricator in a dispute over retentions held by a head contractor (Stevensons Structural Engineers 1978 Ltd (in liq) v McMillan & Lockwood (PN) Ltd [2024] NZHC 2415). The Court found that provisions of subcontracts, that provided for retentions to be released on practical completion of the head contract, contravened the Construction Contracts Act 2002 (CCA), and the entire retentions regime under the subcontracts was declared void and of no legal effect.

Background

Stevensons Structural Engineers (the plaintiff) entered into three subcontracts with McMillan & Lockwood (the defendants) for steel fabrication and installation works. Stevensons was put into liquidation in March 2023. Its obligations under the three subcontracts were only partially performed and the defendants held retentions totalling more than $225,000. Stevensons’ liquidators disclaimed the subcontracts as “onerous property” under s 269 of the Companies Act 1993, while reserving Stevensons’ rights regarding the retentions. The defendants cancelled the subcontracts on the basis that Stevensons had committed an act of insolvency.

The defendants refused to release the retentions held under the subcontracts and Stevensons applied for summary judgment.

Decision

Are the relevant provisions of the retention clauses in the subcontracts prohibited under the Construction Contracts Act 2002?

Clause 12.4 of the subcontracts provided for the defendants to hold retentions. 50% of the retentions were to be released within 30 days of Stevensons completing its contract works and providing QA documentation and a PS3 producer statement. The other 50% were to be released within 30 days of the issue of a certificate of practical completion under the head contract.

The Court considered clause 12.4 was prohibited by s 18I(1)(a) of the CCA (at [44]). The issue of a certificate of practical completion for the head contract works was dependent on matters other than Stevensons’ performance of its obligations under the subcontracts. The clause therefore purported to make the payment of the balance of the retentions conditional on “anything other” than Stevensons’ performance, so it contravened s 18I(1)(a). This also rendered it a “conditional payment provision” under s 13(2)(ca).

However, clause 12.4 did not contravene s 18I(1)(b) (at [45]). Stevensons was required to remedy defects notified to it during the defects liability period under the subcontracts — this period lasted for 12 months following practical completion under the head contract. Because this obligation extended beyond 30 days, clause 12.4 did not “make the date on which payment of retention money is payable later than the date on which [Stevensons] has performed all of its obligations under the contract”, so did not contravene s 18I(1)(b).

If the provisions are prohibited, what is the consequence?

Section 18I provides that a prohibited term is “void”. Section 13 provides that a conditional payment provision has “no legal effect and accordingly … is not enforceable in any civil proceedings; and … may not be used as a basis for withholding payments that are due and payable under the contract.”

The Court considered that the retentions regime in the subcontracts was indivisible — the provision for the release of 50% of retentions after practical completion under the head contract was an integral part of the regime and could not be ignored or severed (at [57]). This meant the entire retentions regime under the subcontracts was void and of no legal effect (at [58]). The defendants were therefore not entitled to withhold retentions under the subcontracts. Stevensons had an accrued right to payment of the retentions before the liquidation, disclaimer, and cancellation of the subcontracts.

However, having considered the purposes of retentions provisions and the CCA generally, the Court considered ss 13 and 18I did not render the subcontracts “illegal contracts” under ss 71–73 of the Contract and Commercial Law Act 2017 (at [52]). The Court observed that this would create significant disruption and uncertainty for parties to construction contracts.

Other issues

Having determined that the defendants had no contractual right to withhold the retentions, the Court nonetheless determined that the retentions were still held on trust for Stevensons’ benefit (at [59]–[69]). Stevensons’ disclaimer of the subcontracts under s 269 of the Companies Act did not alter this because its right to payment of the retentions accrued before its liquidation and disclaimer of the subcontracts (at [65]).

The Court rejected the defendants’ submission that they could set off their alleged losses (arising from the disclaimer and cancellation of the subcontracts) against the retentions under s 310 of the Companies Act. Because the retentions were held on trust, there was no mutuality. While the defendants may have a personal claim against Stevensons, Stevensons had a proprietary claim against the defendants as trustees (at [75]). Section 310 therefore did not apply.

Outcome

The defendants had no arguable defence. By way of summary judgment, the retentions regime in the subcontracts was declared void and of no legal effect (at [89]). Stevensons was entitled to immediate payment of the retentions.

Our view

The decision will be of significant interest to the industry, particularly contractors and subcontractors. In our experience, many subcontracts make the release of retentions conditional on milestones achieved under the head contract (often practical completion) that are independent of the subcontractor’s performance of its obligations. It appears these provisions will be unenforceable. It would be prudent for contractors and subcontractors to consider both their current and future subcontracts in light of the judgment.

The Court’s finding that the offending part of a retentions clause is inseparable from the compliant part of the clause is of particular note. Here, it meant the entire retentions regime in the subcontracts was void and of no legal effect under ss 13 and 18I(1)(a), so the defendants never had any right to withhold the retentions and Stevensons was entitled to their immediate payment. This highlights the need for parties to carefully consider the wording of their retentions clauses to ensure they comply with s 18I, to reduce the risk of the entire clause being rendered unenforceable.

This article was co-authored by William Turner a Solicitor in our Construction and Infrastructure team.