It is long-established practice in New Zealand and around the world for retentions to be held under construction contracts to ensure that – if there are defective works – the head contractor or principal is able to recover the cost of fixing those defects.
But after the Mainzeal collapse – in which the former property and construction company was placed into liquidation on 28 February 2013 with their subcontractor’s retentions being confined as unsecured debt – changes were deemed as necessary to protect payment of retentions to principals.
As such, the Government introduced a supplementary order paper (SOP) in Parliament to make substantive changes to protect retentions by requiring them to be held on trust for their rightful owner.
The proposed changes
A new subpart 2A to the Construction Contracts Act 2002 (CCA) was proposed to provide that a party to a commercial construction contract that holds retention funds must hold it on trust for the benefit of the party from whom it is deducted. Initial proposals only applied to retentions from subcontractors; however, the amendments now apply to all retention funds, including those retained by the principal from the head contractor.
Key points of the amendments
1) Retention funds do not need to be put into a separate bank account or lawyer’s trust account. Instead, the retention funds are deemed to be held on trust in the relevant contractor’s bank account. This means that on insolvency of the party holding the retention, the retention will be protected and not be used to meet other preferential creditors’ claims.
2) A party holding retention funds must be transparent in the reporting of funds held as retentions. This includes keeping proper accounting records of all retention funds held and making those records available for inspection at reasonable times and without charge.
3) Retention funds can only be used to rectify contractor or subcontractor defects, and would not be available to be used as cash flow or for payments of debts of any other creditors. The SOP also allows for penalty interest (at a rate prescribed by regulations) to be applied to late repayment of retention funds, unless otherwise agreed under the contract.
4) Retention funds can be invested in accordance with the Trustee Act 1956, but if there is a loss on investment, then the party holding the retention must cover those losses. Any increase through the investment and interest payable may be retained by the holder of the retention funds.
5) The holder of retentions cannot amend its construction contract to avoid compliance with the new provisions, or include provisions designed to delay payment of retention funds. In addition, repayment of retention funds cannot be made conditional on anything other than the performance of the other party’s obligations under the contract.
6) The new regime will only apply to commercial construction contracts where the amount of retention funds is more than the de minimis amount (an amount deemed so small that the protections are not required). This amount has not yet been prescribed by regulations.
Timeline for the new Act
The Construction Contracts Amendment Act 2015 amends the Construction Contracts Act 2002 (the Act) so that:
1) From 1 December 2015, residential and commercial construction contracts are treated the same under the Act, and adjudication and enforcement processes are improved.
2) From 1 September 2016, design, engineering and quantity surveying work is included in the Act.
3) From 31 March 2017, retention funds withheld under commercial construction contracts must be held on trust.
How the Act applies to your contract
According to Building Performance – the New Zealand Government’s guide to the business sector – the Act provides you with default payment provisions and bans the use of ‘pay when paid’. The Act also provides fast-track adjudication of disputes about your contract, along with ways to enforce payment.
Payments
1) You can make payments in two ways under the Act:over several instalments (known as ‘progress payments’) as a single payment.
2) You should make the payment obligations clear in your contract. If you don’t, default provisions of the Act will apply, which provide for monthly progress payments.
3) You can make a payment claim for any amount you believe is due under the contract. You must include a notice (Form 1) with all payment claims you make. The notice outlines: the processes for responding to the payment claim the consequences of not responding to or paying a claimed or scheduled amount.
For a full review of the Construction Contracts Amendment Act 2015, click here
What’s your take on the new Act? Any insights or observations you would like to add? Please email Ben at bfrancis@gerryrea.co.nz