Construction update: Construction Contracts (Retention Money) Amendment Act 2023 Decoded

Construction Contracts (Retention Money) Amendment Act 2023 Decoded
Earlier in the year, we published an update discussing new requirements relating to retentions under the Construction Contracts (Retention Money) Amendment Act 2023 (Act). Given these are set to come into force in under two weeks on 5 October 2023, we thought this would be a timely reminder to any parties that are subject to these changes and that hold retentions to ensure you are in a position to comply with the Act.

Context

The Act was prompted by the collapse of Ebert Construction in 2018 and the subsequent High Court judgement that dealt with the distribution of the retentions fund. This case exposed serious flaws in the wording of the retentions provisions in the Construction Contracts Act 2002 (CCA).
The original intent of the CCA was that retentions must be held on trust for the relevant contractor/subcontractor. However, the Ebert case confirmed that the CCA did not automatically deem retentions to be held on trust; instead, the general requirements of trust creation must have been met. This meant that some retentions were not held for the benefit of the relevant contractor/subcontractor in the way Parliament intended.

What you need to know

1. Retention money now held on trustThe Act now deems an amount to be held on trust by Party A when it becomes retention money under the Act, i.e. at the time the construction contract allows Party A to withhold an amount from Party B. This is a significant change from the previous regime whereby a trust over retention money was not automatic.
2. Requirements for holding retention moneyRetention money must now be deposited in a compliant bank account as soon as practicable after it becomes retention money under the Act and must be held in this account until it ceases to be trust property. Party A may, instead of meeting this requirement, hold a complying instrument such as a bond in relation to the payment of an equivalent amount to Party B.The bank account must comply with the Act and must be with a registered bank in New Zealand. The account holder must inform the bank that the account is being used to hold retention money on trust under the Act. Alternatively, retention money may be held in accordance with the Act, which allows retention money to be held in a trust account owned by a party such as a lawyer, chartered accountant or trustee company.

   The bank account must only be used to hold retention money under the Act but may intermingle retentions for multiple different parties. Any interest earned on retention money is the property of Party
   A unless the construction contract provides otherwise or where other provisions of the Act apply.

3. Reporting and record-keeping
   After an amount becomes retention money, Party A must report to Party B on the status of the money held as soon as practicable and at least once every three months following this. This report must contain the information specified in the Act and includes:

• Each amount retained, the construction contract it relates to, and the date the amount was retained
• The total amount of retention money held by Party A for Party B under each construction contract between the parties
• Details of the bank account the retention money is held in
• A statement allowing Party B to inspect the accounts and records Party A is required to keepWhere Party A is holding retentions for different Party B’s in the same account, ledger records must be kept for each Party B detailing these amounts.

Offences

The most significant change the Act will bring is the introduction of offences for breaches of the Act. These offences are accompanied by financial penalties for parties convicted and importantly are per offence, meaning that continued breaches of the Act could have large financial implications for non-compliant parties.

Failure to hold retention money in a compliant bank account (or complying instrument), or other non-compliance with the Act is punishable on conviction with a fine of up to $200,000 for each offence. Where the party convicted is a body corporate, each director also commits an offence and is liable for a fine of up to $50,000 for each offence.

Party A may defend this charge if it can prove it took all reasonable steps to ensure it complied with the Act, or in the case of a director, that the director took all reasonable steps to ensure that Party A complied with that section.

The Act also provides for offences punishable by fines not exceeding $50,000 where the records required under the Act have not been kept or Party A does not report to Party B on the status of its retention money as required under the Act.

The way forward

The changes to the retentions regime that the Act will introduce are well overdue and we are glad to see that some issues raised in the Ebert case have been addressed in the Act. These changes should give Contractors and Subcontractors some confidence that their retentions are not being utilised as working capital and the reporting requirements will also go some way to monitoring compliance.

The financial penalties are significant, and directors should take note of the potential personal liability they now hold for non-compliance with some parts of the Act.

Principals or Contractors who hold retentions under commercial construction contracts should make themselves aware of these changes now and ensure they have the appropriate processes in place to ensure compliance come 5 October 2023. Parties who have template construction contracts will need to amend these to ensure that the contracts comply with the requirements of the Act.

Paula Nicolaou, Rebecca Saunders and Josh Taylor are Partners with Wynn Williams’ Construction, Projects and Infrastructure team, providing end-to-end legal advice to the wider construction sector.