Construction Contracts (Retention Money) Amendment Act 2023 – ‘The Highlights’

The collapse of high-profile construction businesses such as Mainzeal and Ebert Construction and subsequent judgments dealing with the distribution/management of retentions have prompted some important legislative changes affecting the construction industry. The most recent change being amendments to the Construction Contracts Act 2002 (CCA) contained in the Construction Contracts (Retention Money) Amendment Act 2023 (“the Amendment Act”).

Scope
The Amendment Act affects retention money (commonly referred to as retentions) withheld under a commercial construction contract entered into or renewed after 5 October 2023.

Purpose
The main purpose of the Amendment Act is to provide contractors with more transparency and control over retentions held against them, and to ensure that those retentions are not intermingled with other funds of their customers, which had previously made recovery difficult if the customer became insolvent.

Retention Money Scheme
Retention money is money owed to a contractor that is held back by the customer to secure the performance of the contractor’s obligations under a construction contract. It is common for a customer to be entitled to hold back a percentage of each of the Contractor’s progress payment claims which accumulates as retentions.

In 2017, an earlier amendment to the CCA introduced mandatory rules contained in a then-new Part 2A of the CCA that determined how retentions are required to be held, accounted for and used by the party retaining them. However, deficiencies in these rules were highlighted in the context of liquidation proceedings and related cases following from the collapse of Ebert Construction in 2018. In particular, although the intention that retention money would be held “on trust” and that accounting records must be kept by the party holding those retentions was clear, it was less clear that retention money had to be held in a segregated account or what the consequences were if retention money was not held and accounted for with in the correct manner.

New Requirements
The Amendment Act clarifies and supplements the previous provisions in the CCA regarding retention money. In particular:

• the party who is entitled to withhold retentions is deemed to hold that money on trust from the point in time that it becomes entitled to withhold them (ie. the portion of a payment claim that is able to be held as a retention must be held on trust whether or not the balance of a payment claim is actually paid to the contractor);
• retention money must be segregated from other funds, for example in a trust account or escrow arrangement with a third party. This is to avoid retentions being intermingled with other funds of the customer; and
• accounting records, including a ledger for each retentions account, must be kept by the party holding retention money;
• contractors are entitled to certain information about their retention account including in what type of account, and with whom, the retentions are kept and ledger records;
• continuity of the trust applying to retention money in the event of a liquidation or receivership of the customer is expressly provided for;
• MBIE is given powers to enquire into and enforce compliance with the retentions rules directly; and
• new penalties for non-compliance are introduced including fines of up to $50,000 for a director and up to $200,000 for a company.

Next Steps
Our construction law experts at Holland Beckett Law can assist people who intend to withhold retention money under a construction contract to ensure they comply with the above requirements and to advise contractors on their rights and remedies in relation to retentions held against them.