Retentions – Update
In this month’s article I wish to take the reader back to the proposed changes to the retentions regime brought about by the amendments to the Construction Contracts Act 2002. I have previously identified these changes in earlier articles in this column, most recently in my July 2016 article entitled “Companies may not survive sudden CCA retentions regime changes next year.”
The final details of the new retention regime have been revealed by route of the Regulatory Systems (Commercial Matters) Amendment Bill. This passed its third reading on 24 March 2017 and should receive royal assent making it law on or about 31 March 2017.
Key aspects to the retention regime brought in by the Construction Contracts Amendment Act 2015 and this soon to be passed Act are as follows:-
- It will only apply to construction contracts entered into before 31 March 2017 unless renewed after that date;
- It will only apply to commercial construction contracts, and by this it is meant that it will not apply to construction contracts entered into with residential occupiers;
- No minimum amount has been specified such that the regime applies to any amount withheld or payment arrangement that acts as a retention;
- Retention money must be held on trust in the form of cash or other liquid assets that are readily converted into cash;
- Alternatively a complying financial instrument can be used for example bond or guarantee or a combination of liquid assets and complying financial instrument;
- A complying financial instrument must be issued by a licensed insurer or registered bank;
- It must be issued in favour of, or endorsed with the interest of, the payee, require the issuer to pay retention money to the payee if the payer fails to pay when contractually due, and the payer is responsible for ensuring premiums are paid and up to date;
- The retention money need not be paid into a separate bank account and can be mixed with other funds;
- Proper accounting records must be kept of all transactions relating to retentions;
- The trust status of retention funds only ends when the retentions are paid out, the payee gives up its claim, or when the money otherwise is no longer payable under the contract or by law;
- Retention money held on trust is not available for payment of the payer’s debts and cannot be taken by a receiver of liquidator;
- Retention money can only be used by the payer to remedy defects in the payee’s performance of its contractual obligation;
- Retention money can be invested but is at the risk of the payer, and subject to the Trustee Act 1956;
- The financial obligation of administering a trust remains with the payer;
- Where a payer is late in making payment of retentions it will automatically be liable for interest at the contractual interest rate;
- Any term in a construction contract which make payment conditional upon anything other than the completion of the payee’s contractual obligations, or makes the retention release date later than the completion of the contractual obligations, or requires the payee to contribute to the cost of administering the trust, is void;
- Construction contracts that include milestone payments are most likely caught by the retentions regime.
- In the usual principal/head contractor/subcontractor scenario, it is most likely that retentions held up-stream by the principal will not satisfy the head contractor’s retention obligations for sub-contractors. Specific provision of retentions on trust, must be made by head contractor for sub-contractor.
The most likely outcome from the introduction of the new retention regime is that we are likely to see less use of the retention regime so that construction parties can avoid costly compliance. It is likely that most building contracts, (unless made with residential occupiers), or sub contract agreements, will need some adjustments/amendments to reflect the changes brought in.
The application of the new retention regime will impose challenges for the industry. It is difficult to see exactly how these will play out, but inevitably one by-product of avoiding the difficulties created by collapses such as that of Hartner Construction, is going to be increased costs of construction.
NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.