On October 5, 2023, the Construction Contracts (Retention Money) Amendment Act 2023 (Amendment Act) came into force, bringing about significant changes to the way construction contract retentions are required to be handled. Building Today columnist Tanya Young of Auckland legal firm Greenwood Roche summarises the key changes, providing practical advice for parties dealing with retentions.
In 2017, a statutory regime was introduced under the Construction Contracts Act 2002 in recognition of the need to better protect contractors and subcontractors against the mismanagement and/or misuse of retention money.
The Amendment Act has substantively strengthened this regime with the following important changes:
Statutory trust over retentions: A statutory trust is automatically created over all retentions, imposing fiduciary obligations on the withholding party for the benefit of the relevant contractor or subcontractor.
Use of retentions: Retentions may only be used to remedy defects in the performance of the other party’s obligations under the contract, but even then, only if this is permitted by, and the retentions are applied in accordance with, the contract terms.
Additionally, 10 working days’ prior notice must be given to the other party allowing them to remedy the defects before retention money may be applied.
Separate account or complying instrument: All retention money must be held in a compliant New Zealand bank account or be protected by a complying financial instrument, such as an insurance or bank bond, issued for the value of the retentions under the relevant contract.
Funds held in a bank account cannot be comingled with working capital of the withholding party.
Intermingled retentions: A single bank account may be used to handle multiple parties’ retention funds provided separate ledgers are maintained in respect of each individual construction contract.
If money is withdrawn/deposited through an intermingled retentions account without identifying the party it relates to, that money must be apportioned to all parties with retentions in the account, in proportion to their respective ledger balances at the time of the transaction.
Records and reporting: Section 18FC now has more rigorous accounting requirements and, in addition to making account records available to the relevant counterparty, a party withholding retentions must also report on certain information when money is first withheld, and at least once every three months thereafter, including:
• each amount retained, the relevant construction contract, the date of retention, and the total amount of retentions held; and
• details of the bank account or complying instrument relating to the retentions.
Offences: The Amendment Act creates offences for failing to comply with the new regime, with fines for companies of up to $200,000, and for their directors of up to $50,000, for each offence.
These changes serve to increase the transparency, consistency and efficiency of retentions management in the New Zealand construction industry.
They provide assurances to contractors and subcontractors that validly-earned income will not be lost due to insolvency or mismanagement by upstream parties, or unfairly withheld as leverage at the end of a contract.
Parties to commercial construction contracts entered into, or renewed after, October 5, 2023 should ensure they understand their obligations under this regime, and are able to comply. Some key tips and considerations are set out below.
Trust accounts: A dedicated trust account should be the first consideration for any party likely to withhold retentions under a construction contract.
This should involve discussion with the withholding party’s bank, including in relation to accounting and reporting requirements, and how trust accounts and transactions will be managed.
Consider “complying instruments”: Parties can exempt themselves from some requirements of the new regime if maintaining a complying instrument rather than holding retentions in a trust account.
However, withholding parties will still be required to report on the particulars of any complying instrument, and make a copy of the instrument available to the counterparty.
Maintain accurate ledgers: It is important to establish processes to ensure transparent and compliant account ledgers are maintained, and reports are issued on time.
Review and update contract terms: Contract terms should, at a minimum, permit retentions to be called on to remedy defects in contract performance, including defects in the contract works (preferably using express terms), and allow contractors a 10 working day cure period to remedy defaults.
While not strictly necessary to comply with the Amendment Act, setting out record keeping and reporting requirements in contracts may also help contract administrators remain cognisant of reporting requirements under the new regime.
