Last week the Construction Contracts (Retention Money) Amendment Act 2023 (Amendment Act) received royal assent. It amends the Construction Contracts Act 2002 (CCA) in relation to retentions. The Amendment Act comes into force on 5 October 2023 and will apply to commercial construction contracts entered into or renewed from that date onwards.
The Amendment Act’s primary purpose is to strengthen the CCA’s retentions regime and give confidence to subcontractors that they will be paid what they are owed if their head contractor becomes insolvent. It also gives the Ministry of Business, Innovation and Employment (MBIE) the ability to investigate and prosecute newly-created retention money offences. The Hon Megan Woods said “The changes made today provide important protections for subcontractors so they can be certain their payment is kept safe, can’t be used for any other purpose, and will be paid out should the head contractor’s business fail … [the changes] ensure that there are strict penalties in place for companies who fail to meet their obligations to those who carry out work for them”.
Commencement and application
The Amendment Act will come into force on 5 October 2023 and will apply to commercial construction contracts entered into after that date, or that were entered into before that date and renewed afterwards.
Retention money is automatically held on trust
Section 18C deems retention money to be trust property that is held on trust by the holding party – the trust is created when an amount becomes “retention money” under section 18B.
How retention money must be kept and used
Section 18D requires retention money to be deposited into a compliant bank account (i.e. one that complies with section 18E; see below) and kept there until it ceases to be trust property. Interest earned on retention money is not part of the retention money and can be retained by the party holding the retention money (unless the construction contract provides otherwise or there is a delay between the date on which the money is payable and the date on which it is paid).
Compliant bank account
Section 18E provides that a compliant bank account must be a registered bank in New Zealand and comply with either subsection 2 or 3. In either case, the party depositing the retention money must inform the bank / account holder that the account is to hold retention money on trust under the CCA.
Criminal penalties for failure to comply with section 18D
Section 18DA makes it a criminal offence for a party to fail to comply with section 18D. On conviction, that party is liable to a fine not exceeding NZD200,000 for each offence (or in the case of a body corporate, each director is liable to a fine not exceeding NZD50,000 for each offence). It is a defence if the party shows it took all reasonable steps to ensure it complied with section 18D, or if the defendant is a director, that they took all reasonable steps to ensure the party complied with section 18D.
Section 18EA provides for where a party holds retention money for multiple parties. If retention money is withdrawn/deposited from the bank account and it is not clear which party the withdrawal/deposit is attributable to, the amount withdrawn/deposited is to be apportioned between the parties in proportion to their respective balances in the ledger records at the time the withdrawal/deposit was made.
Accounts and records
Section 18FC has been amended to create more robust requirements for accounting and other records of retention money. In summary:
- The records must be appropriate, having regards to the amount of retention money and the circumstances of the case.
- The records must identify the relevant bank account and construction contracts, and include details of payments made in and out of the account.
- The records must include complying instruments and details relating to these.
- All records required by section 18FC must be made available (at all reasonable times and without cost) for inspection by the party for whom the retention money is held.
- Failing to comply with section 18FC is an offence – on conviction, a party is liable to a fine not exceeding NZD50,000 for each offence.
The party holding the retention money must provide certain information to the party for whom the retention money is held, as soon as practicable after an amount becomes retention money and at least every three months until the retention money trust ends. Failing to comply with section 18FD is an offence – on conviction, a party is liable to a fine not exceeding NZD50,000 for each offence.
The Amendment Act imposes other penalties for compliance offences, including for failing to comply with requests to provide information or documents to MBIE or to intentionally obstruct, hinder or resist MBIE in the execution of its powers.
The Amendment Act goes some way to remedy the concerns that many have expressed on the current retentions regime, which were brought to the forefront by the collapse of Ebert Construction in 2018 and the litigation that followed. Of particular note is the creation of an automatic trust as soon as an amount becomes “retention money” as defined in section 18B. As is the requirement for a party holding retentions to deposit these into a compliant bank account, which is intended to mitigate the risk of parties using retention money as working capital. The requirement to provide information about the retentions every three months will improve the accountability of retention holders to parties for whom the retentions are held.
The six month period before commencement gives industry participants time to establish proper processes and amend their standard construction contracts before the new obligations, offences and penalties are created. Principals and contractors holding retentions should ensure they understand and comply with the new requirements to avoid prosecution under the newly-created offences. Contractors and subcontractors should ensure they understand their rights in relation to retentions held for their benefit.
This article was co-authored by William Turner, a solicitor in our construction and infrastructure team.
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