Understanding your obligations under the Consumer Guarantees Act 1993

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.

The purpose of the Fair Trading Act 1986 (FTA) is to promote confidence and fair competition amongst business and provides a number of rights to consumers. The Commerce Commission works hard to enforce fair and proper trade practices of businesses providing goods and services to the New Zealand market. A recent example being the $840,000 fine recently received by TheMarket.com for misleading conduct (charged under s10 of the FTA). The Fair Trading Amendment Act 2021 (Amendment Act) came into force on 16 August 2022. The Amendment Act has introduced a further restriction to consumer contracts, extended the scope of business that must now comply and prohibited door-to-door salespeople from entering or remaining on residential property when told to leave. Unconscionable conductThe Amendment Act now prohibits any conduct in trade that is ‘unconscionable’. The Amendment Act has not provided a definition of what unconscionable conduct consists of, but does provide some guidance for the Courts at s8 of the FTA. We can expect a similar approach to be taken in the New Zealand Courts as has been in the Australian Courts, where it has been defined as being “against conscience or to offend conscience” (Stubbings v Jams 2 Pty Ltd [2022]). Small Trade ContractsPrior to August 2022, the prohibition of unfair contract terms at s26A of the FTA only applied to standard form consumer contracts – this is the contract between a company and the consumer (typically the person at the end of the chain). The Amendment Act has extended the scope of s26A of the FTA to apply to small trade contracts. The criteria for this is: Each party to the contract is engaged in trade; The contract is not a consumer contract; and The contract does not form part of a trading relationship that exceeds an annual threshold of $250,000 at the time the contract is entered into. Door-to-door salespeopleSection 36RA of the Amendment Act states any uninvited direct salespeople must immediately leave the residential property (or not enter) if told to do so by the person residing at the property. A breach of this provision can result in a fine of up to $10,000 for an individual and $30,000 for a business. How can we help?Businesses should be taking a proactive approach when drafting and negotiating consumer contracts or contracts that fit the small trade contract criteria. Holland Beckett Law can review your standard form contracts or provide drafting advice to ensure your contracts are acceptable to commercial standards. If you would like to know more or need help with your contracts please get in touch.

What is a guarantee and indemnity? When approaching a lender for finance, they may request a guarantee be provided as security alongside the loan documents. A guarantee is a separate promise to the lender stating if the borrower doesn’t meet their obligations under the loan, you as guarantor will fulfil them. Lenders require you to see a lawyer before you sign a guarantee. This is because when they go wrong, they can go really wrong, and (before you sign up to a guarantee) you need to have a good understanding on the risk involved and your rights and obligations under the guarantee. A ‘bank’ guarantee can take various different forms such as: A couple guaranteeing their family trust’s borrowings Parents guaranteeing their child’s borrowings A person guaranteeing their company’s borrowings There are other forms of guarantees which we do not discuss here, such as providing a guarantee under a lease or an agreement for sale and purchase.  What you should know about guarantees What is an indemnity? Often called a “Guarantee and Indemnity”, an indemnity is actually a separate obligation to a guarantee. A guarantee relates to the debt or default of the person who is primarily responsible for the loan (the borrower) while the guarantor has the secondary obligation. An indemnity is a contract by one party, to prevent the other party against loss. An indemnity creates a primary obligation from the guarantor to the lender. Meaning an indemnity can be enforceable, even when the guarantee may not be. Limited vs Unlimited A guarantee can be unlimited, meaning any debt created by the borrower will be captured, or the guarantee can be limited to a specified amount. This limits your exposure under a guarantee as you would only be liable to the extent of the guaranteed amount. Lenders lean toward unlimited guarantees as this is a better credit position for them. All Obligations Under an “all obligations” guarantee you are liable for any current and future debts the borrower owes to the lender. Do you know every debt the company, trust or child you are guaranteeing has, or may get in the future? If not, you may be signing up for debt you are not aware of.  If you are the sole director and shareholder of your company, you likely have a fair idea of the company’s financial situation. However, if you are guaranteeing your child to help them into a house, you may not have the full picture of debts they have (such as credit cards or car loans).  It is important to have clear communication and transparency between parties.  You can also consider asking for financial information or accounts to give you additional comfort, if available. Joint and Several If you are not the sole guarantor, the lender will often include wording that the guarantors are “jointly and severally liable”. This reserves the lender’s right to seek payment from any person on foot under the guarantee (to the exclusion of the others). In the event that one has more valuable assets and a higher prospect of meeting the guarantee liability were it called up, then they could pursue that person singularly. If you are looking at entering into any sort of guarantee (including those not discussed above, such as a guarantee in a Deed of Lease for example), we recommend you touch base with our property law team who will assess your particular circumstances and give tailored advice about any risk and your rights and obligations in respect of the proposed guarantee.