Changes to the retentions regime for construction contracts
Introduction
It is common for an amount to be withheld from a payment under a construction contract. This is referred to in the Construction Contracts Act 2002 (CCA) as ‘retention money’. The Construction and Contracts (Retention Money) Amendment Act 2023 has made changes to the CCA which strengthen and clarify the provisions in the CCA relating to retention money (retention regime).
The changes affect principals, head contractors, subcontractors and insolvency practitioners.
Party A v party B
In this article (and in the CCA), the party withholding retention money is ‘party A’ and the party expecting to receive payment of the retention money is ‘party B’. For example:
under a head contract, the principal is party A and the head contractor is party B; and
under a subcontract, the head contractor is party A and the subcontractor is party B.
Overview of the changes
The changes to the retention regime include the following:
All retained amounts are captured. The retention regime applies to all amounts withheld as security for the performance of party B’s obligations under the construction contract, even if the amount withheld is not provided for in the construction contract. The CCA anticipates that a minimum threshold will be prescribed by regulations (i.e., so that the retentions regime does not apply where the total retention money under a construction contract is less than the minimum threshold), however, there are currently no regulations which prescribe a minimum threshold for this purpose.
Deemed trust. A trust is automatically created over retention money.
Using retention money. Retention money can only be used to remedy defects in the performance of party B’s obligations under the construction contract, and provided that:
the use of the retention money for that purpose is permitted by the construction contract;
any provisions of the construction contract relating to the use of the retention money are complied with; and
Party A gives 10 working days’ prior notice to party B stating:
party A’s intention to use the retention money; and
details of the defects in performance to be remedied.
Interest earned on retention money. Interest earned on retention money is not retention money and is usually the property of party A (unless the construction contract provides otherwise).
Bank account. Retention money must be held in a bank account which is separate from non-retention money. Retention money relating to different construction contracts and/or more than one party B can be held within the same bank account provided separate ledger records are kept for each party B and in relation to each construction contract. Party A must inform its bank that the bank account is for the purpose of holding retention money.
Accounts and records. There are additional requirements relating to the accounting and other records which must be kept by party A and made available for inspection by party B (free of charge).
Party A must report on retention money. Party A must report to party B after an amount becomes retention money and at least every 3 months. The information to be contained in the reports is set out in the CCA (and may be added to by regulations).
Interest for late payment. If the retention money is not paid to party B when it is due, party A must pay interest to party B. The interest rate is the rate specified in the construction contract or the rate prescribed in regulations (whichever is higher). There are currently no regulations which prescribe an interest rate for this purpose.
Effect of receivership or liquidation of party A. If party A goes into receivership or liquidation, the receiver or liquidator will typically become the trustee of the retention money. The receiver or liquidator will not be liable for any breach of the retention regime which occurred prior to their appointment.
Functions of MBIE. The chief executive of the Ministry of Business, Innovation and Employment (MBIE) has several functions in connection with the retention regime, including to monitor compliance and take enforcement action.
Failure to comply. Party A will be liable for a fine of up to $200,000 if party A fails to keep retention money as required. If party A is a company or other body corporate, its directors (or equivalent) could also be liable for a fine of up to $50,000. There are additional fines, such as for failing to keep proper records, failing to provide reports to party B and failing to provide information required by MBIE.
This is not a list of all the changes to the retention regime. Several changes are not mentioned (or not explained fully) in this list.
Do the changes apply retrospectively?
Most of the changes only apply to construction contracts entered into or renewed after 5 October 2023, except for the changes relating to receivership or liquidation (which apply to a receivership or liquidation that commences after 5 October 2023 even if the construction contract was entered into on or before 5 October 2023).
‘Commercial construction contracts’ only
The retention regime in the CCA does not apply where a party to the construction contract is a residential occupier of the premises that is the subject of the contract.
Complying instruments (an alternative to consider)
Instead of holding retention money in a bank account, party A is able to arrange a complying instrument . A ‘complying instrument’ is an insurance product, bond or guarantee issued by a registered bank or licensed insurer for the benefit of party B.
Guidance from MBIE
MBIE has published this guidance on the retentions regime, which discusses the changes in more detail (including practical steps to ensure you are compliant).
Questions?
If you have any questions relating to the retention regime or construction contracts generally, please contact Mike Kemps.
Disclaimer: This article should not be construed or acted on as legal advice. It is brief and general in nature. Specific advice should be sought.