3/05/2023·4 mins to read
A strengthened retentions regime: What this means for parties to construction contracts
Parliament passed the Construction Contracts (Retention Money) Amendment Act 2023 (Amendment Act) on 5 April 2023. The Amendment Act introduces measures aimed at providing greater protection over retention money than under the current retention regime in the Construction Contracts Act (CCA).
The Amendment Act comes into force on 5 October 2023, and will apply to commercial construction contracts entered into after this date (and contracts entered into before this date and renewed afterwards).
A stronger regime
Key measures that will be brought in by the Amendment Act are:
- Retention money is deemed to be held on trust: This means that a party owed retention money (eg a head contractor or subcontractor) will not need to rely on the party withholding retentions (eg principal/employer or head contractor) to actively create a trust to be able to claim an interest in the retention money.
- Use of retention money: The Amendment Act clarifies that retention money can be used to remedy defects caused by the other party’s failure to comply with its obligations under the construction contract. This is, however, subject to the use of retention money for this purpose being permitted by the contract and compliance with the provisions governing the use of retention money. Notably, the retentions holder must notify the other party of its intent to use the retentions to remedy defects in performance along with details of the alleged defects, and allow a period of at least 10 days to remedy the defects.
- Separate bank account or complying instrument: All retention money needs to be held in either:
o a separate trust account used solely for holding retention money, in a New Zealand registered bank; or
o in the form of a complying instrument such as an insurance policy or bank guarantee.
The party holding retention money can have one trust account for multiple construction contracts or multiple contractors. However, separate ledger accounts must be kept to identify each party and each construction contract. The bank must be notified that the funds in the account are retention money.
- Record keeping and reporting: The party holding retentions must provide the party entitled to payment, initially and then at least once every three months, information about the retention money, including:
o each amount retained, the relevant construction contract under which the money is retained, the date of retention, and the total amount of retention money held; and
o details of the account or instrument in or under which the money is held.
The accounts and records related to those accounts must be available for inspection at reasonable times and without charge.
- Penalties: Companies that fail to comply with the new retention regime face significant fines of up to $200,000 and directors can be fined personally for up to $50,000 for each breach. Intentionally providing false information about retention money is an offence with fines of up to $50,000.
What does this mean for parties to construction contracts?
Parties to commercial construction contracts will be wise to ensure that they have a good understanding of, and can comply with, the new legislation when it comes into force in October. The following, in our view, are some of the key considerations.
Separate trust accounts
Holders of retention money will need to discuss the requirements for holding retention funds in separate trust accounts with their banks. This should include how the trust accounts are to be managed, notification requirements, and processes for the withdrawal of retention funds before and after the Amendment Act comes into force.
The Amendment Act requires detailed and frequent (at minimum, every three months) reporting and good record keeping for the benefit of parties from whom retention money is withheld.
The level of information needed goes well beyond what is generally recorded about retention money in a payment schedule or what is commonly provided in the industry. It will be important for parties who hold retention money to examine their contract processes and update these if they are not compliant with the requirements for reporting under the new regime.
Bonds in lieu of retentions
We expect that strengthening of the retention regime under the CCA is likely to result in more parties opting instead of holding cash retentions to accept, as security, bonds in lieu of retentions. We have seen a trend toward this already.
While the NZS 3910:2013 standard form contract includes an option for a bond in lieu of retentions (clause 12.3.3), the general conditions of contract do not (or do not adequately) deal with issues of when the bond is to be provided or when it is to be released. The general conditions of contract also do not permit the bond to be used to remedy defects in the performance of the contractor’s obligations or include a requirement for notice and a ‘cure’ period before the principal can call the bond and use the bond proceeds.
We consider that amendments to construction contracts to provide for these matters will be necessary to ensure that bonds in lieu of retentions can be used, as intended, to remedy defects in the other party’s performance.
Review template agreements
Parties should consider what amendments to their construction contracts are required to ensure that the retention money (regardless of whether a bond in lieu is provided or not) can be used to remedy defects in performance by the other party. At minimum, the requirements for notice to the other party and a 10 working day period (minimum) to remedy defects should be incorporated into construction contracts going forward.
We note that the NZS 3910 Review Committee (appointed by Standards NZ) will consider the Amendment Act as part of its review of NZS 3910. However, publication of the revised NZS 3910 is not scheduled until October 2023.
If you would like advice about the new retention regime, please get in touch with one of our contacts.