On 5 October 2023, the Construction Contracts (Retention Money) Amendment Act 2023 came into force. This amends the Construction Contracts Act 2002 and introduces important changes to strengthen the retentions regime. All commercial construction contracts entered into after 5 October 2023 and all current contracts renewed after this date are subject to the amendments. For all other contracts, the unamended Act continues to apply.
Party A or party B
Before considering the changes, it is important to clarify who the changes apply to. The Act talks about party A (the payer) and party B (the payee). Often parties in a construction project default to party A being the principal/developer and party B being the head contractor, but the Act and the Amendment Act apply to every commercial construction contract and therefore equally to the subcontract between the head contractor (party A) and subcontractor (party B) and so on.
Meaning of retention money
Under the Amendment Act, section 18B(2) says that an amount will become retention money at the time at which the construction contract allows party A to withhold payment of an amount (called the retainable amount) that is payable to party B as security for party B performing its obligations under the contract.
Retention money held on trust
Under the Act, retention money had to be held on trust by party A as trustee for the benefit of party B as the beneficiary of that trust. However, according to the High Court decision in Ebert, the Act did not automatically create a trust even though it obliged retentions to technically be held on trust.
Under the Amendment Act, section 18C makes it clear that retention money is deemed to be held on trust as trust property. This trust will arise as soon as an amount becomes retention money, regardless of whether party A has actually deducted the money (section 18B).
How to hold retentions
The Act originally allowed retentions to be held on trust as cash or another liquid asset (something that could be easily converted into cash) and these could be co-mingled with other funds. This is no longer permitted.
Now, retention money must be held as cash in a bank account in a registered New Zealand bank unless there is a complying instrument in place of an equivalent amount such as a bond (section 18D). If there is a complying instrument, retentions withheld by party A are not required to be deposited or held in a bank account.
It is important to note that a complying instrument can be issued for:
- one party B – for example, where there is a contract between a principal and head contractor or head contractor and subcontractor
- party B and one or more other persons (each being a party B under the contract) – for example, where there is a single contract but there are multiple parties B such as when party B is a partnership, an alliance or a joint venture
- a class of persons – all parties B under the contract – of which party B is a member.
This is all very different to the old Act, which only contemplated a single contract – a single party B situation. Now, a complying instrument can cover a lot more scenarios – multiple parties B under a single contract or multiple contracts.
Reporting and record keeping
Under section 18FD of the Amendment Act, the party withholding retentions (party A) is now required to provide each party B specific information about the retention money. This must firstly be done through an initial report as soon as practicable after an amount becomes retention money and then a further update at least once every 3 months until the retention money trust ends.
The information to be provided includes each amount retained, the date of retention, the construction contract under which the amount is retained and details of the bank account or complying instrument (whichever applies) – see section 18FD for a complete list.
Party A must also keep accounting records of all retention money held. These records need to be made available to party B for inspection ‘at all reasonable times and without charge’ (section 18FC). This requirement is more stringent in comparison to the old Act.
Penalties and director liability
Perhaps the most significant change is the introduction of penalties for breach. If party A fails to keep retention money on trust, there is a maximum fine of $200,000. If it fails to keep proper accounting records of retentions, there is a maximum fine of $50,000. If it fails to provide regular reporting, there is a maximum fine of $50,000.
Directors now also face liability. Where party A is a company and it fails to keep retention money on trust, its directors can be fined up to a maximum of $50,000 (section 18DA).
Where party A fails to keep retention money on trust, it will be a defence if it can prove that it took ‘all reasonable steps’ to ensure compliance with the Amendment Act. This defence is also available to directors. It is also a defence if party A can prove that it acted ‘in good faith’ and ‘honestly and reasonably believed’ that the use of retentions was permitted by the Amendment Act.
Note that there are no defences available for failing to keep proper accounting records or for failing to provide regular reporting.
What does this mean?
The Amendment Act is now in force. If your commercial construction contract was entered into after 5 October 2023 or was renewed after this date or is coming up for renewal soon, it is subject to these amendments and you should familiarise yourself with the key provisions.
Ensure that you review your current templates and become familiar with how these changes will work in practice. Consider whether you should be using a complying instrument rather than a traditional retentions arrangement. Even consider whether the imposition of retentions is required.
While the reporting requirements mention 3 months, we recommend you report on retentions every month.
Note: This is intended as general advice only. For specific advice, contact your legal advisor.