The Construction Contracts (Retention Money) Amendment Act 2023 (“Amendment Act”) has recently been granted royal assent in Parliament, making way to changes to the retention money scheme under the Construction Contracts Act 2022 (“Act”). All commercial construction contracts entered into or renewed from 5 October 2023 will be caught by the changes to the Act. There are significant consequences under the Act for non-compliance and we encourage all construction businesses to review their contracts to ensure that their retention money processes are in line with the amendments.

Retention money is part of a payment under a construction contract that is held back as security to ensure that a contractor performs all of its obligations under a contract. In most construction contracts, the amount of retention money is usually 10 percent of the total contract value and it is released either on practical completion or after the end of a defects notification period. This can sometimes be for a significant period of time.

Current Requirements

Currently, retentions are only merely required to be held on trust by a party to the construction contract (“Party A”) to the benefit of the other party (“Party B”) (section 18C of the Act).  However, there have been instances where Party A has used retentions as working capital for their business. Since Party B has limited ability to manage the financial risks undertaken by Party A, they can become insolvent before the retention is paid and the monies owed by way of retentions effectively become unsecured claims.

When the Amendment Act comes into force, retention money will automatically be deemed to be trust property that is held on trust

New Regime

When the Amendment Act comes into force, retention money will automatically be deemed to be trust property that is held on trust by Party A. The trust is created when an amount becomes “retention money” in accordance with section 18B.

The retention money must be dealt with in accordance with various statutory obligations, including:

• Not using the retention money for Party A’s own purposes and such funds are not available for the payment of the debts of Party A;
• Retention money must be held either in the form of cash or in other “liquid assets” that are readily converted into cash. Party A will no longer be able to use “other liquid assets” such as accounts receivable. Therefore, retention cannot be used as working capital.
• Retention money must be held separate from Party A’s other money and assets. If it is held in an NZ bank account, the bank must be informed that the account is for the purpose of holding retention money and that Party A holds it on trust under the Act. This ensures that the funds are not subject to bank fees (section 18E).
• The retention money may not be used for any purpose than other than to remedy defects in the performance of Party B’s obligations under the relevant contract. In that case, Party A must provide to Party B 10 working days’ notice to allow it to remedy the relevant defect or to dispute Party A’s claim.

Liquidation or Receivership

If Party A goes into liquidation or receivership, the liquidator/receiver becomes the trustee of the retention money and will deal with the funds in the same way as Party A is required to. As the trustee, they may be paid reasonable fees and costs in dealing with the retention money, from the retention money.

Penalties

There are significant penalties in place for parties who do not comply with the trust requirements under the Act, with each separable offence creating a separate penalty.

Parties who do not comply with the various new requirements set out in the Amendment Act will be seen to be committing an offence and be liable for a fine up to $200,000. If Party A is a body corporate, each of its directors also commits and offence and is liable for a fine up to $50,000 each (section 18D).

It is a defence if Party A shows it took all reasonable steps to ensure it complied with section 18D.

Our recommendation

Industry participants should act now to ensure their processes and contracts are ready to face the new retention monies regime. Businesses holding retentions should ensure they are familiar with and understand the new requirements as the Amendment Act creates greater risk and penalties for non-compliance. They should also be aware of their new rights in light of the changes in the event they are Party B under a construction contract.