The Government is once again looking to impose further statutory controls over how contractors are to handle and protect retention moneys owed to its sub-contractors - this time with civil monetary penalties facing the construction companies and their directors for non-compliance.
Notwithstanding the earlier amendment in 2015 prompted by the Mainzeal collapse in 2013, a series of subsequent insolvencies of high-profile construction companies have revealed that many sub-contractors and their retention moneys remain vulnerable to their contractors' financial distress. The Construction Contracts (Retention Money) Amendment Bill ("Bill"), which was introduced into the Parliament on 1 June 2021, is an embodiment of calls from many sub-contractors and suppliers for better statutory guidance and penalties enforceable against contractors.
The Bill has passed its first reading last Wednesday, 9 June 2021. The Transport and Infrastructure Select Committee is calling for public submission on the Bill, and whether it proposes for a satisfactory reinforcement of protections currently available to subcontractors and their retention moneys under the Construction Contracts Act 2002 ("Act") as it stands.
The explanatory note of the Bill states:
"Subcontractors are at risk of not receiving retention money held for them by the contractor should the contractor become insolvent if retention money is co-mingled with working capital. The amendments to the CCA are intended to address this risk by better protecting retention money automatically by providing that it is held on trust from the earliest practicable point of time. As trust property, the retention money cannot be used by party A for any other person and is separate from the insolvency estate of the construction company"
The amendments proposed in the Bill include:
• Retention money is to be held on trust by Party A for Party B, in a New Zealand registered bank account separate from Party A's other money and assets. Section 18E(2) of the Act would no longer apply.
• Alternatively, Party A can hold a qualifying financial instrument (eg insurance policy or bank guarantee) that requires a prescribed third party (eg insurance company or bank) to pay to Party B an amount equal to the retention money if Party A does not pay the retention money to Party B when required.
• The trust arises as soon as the amount becomes retention money, whether or not separately set aside as required, and until the retention money is paid to Party B, or until it ceases to be payable to Party B. Inconsistencies of the Act observed in the decision of the High Court in Bennet, Fist & Longman v Ebert Construction Limited  NZHC 723 would no longer apply.
• Party A is to keep proper accounting and other records of all retention money held for Party B, in a manner that complies with the generally accepted accounting practice, and make those records available to Party B after an amount becomes retention money, and at least once every three months thereafter.
• Failure to comply with the foregoing requirements will amount to an offence with financial penalties being imposed on contractor companies (maximum fine of $200,000.00) and their directors (maximum fine of $50,000.00). It will be sufficient to show that the defendant had not taken all reasonable steps to comply with the requirements; prosecution would no longer be limited to Sections 220 and 229 of the Crimes Act 1961 where evidence of 'intention to defraud' must be established.
• Upon insolvency, the receiver or liquidator becomes trustee of the retention money for the purposes of collecting and distributing it, with entitlements to reasonable fees and costs.
These proposals appear to be a direct response to some of the shortcomings of the current regime, starkly revealed in the decision of the High Court in Ebert, and through industry participants' criticisms since the commencement of the last amendment in 2017. However, subcontractor protection is only one of many other problems facing the construction industry, and amendments proposed in the Bill is expected to result in substantial increase in costs of compliance.
In August 2019 KPMG carried out an evidence based study and presented "Retention Money Provisions - An implementation Review of the Retention Money Provisions in the Construction Contracts Act 2002". The study identified that the most common barrier to compliance of the current regime was lack of funding and working capital. Also, it identified that the early impacts of the 2015 amendment included negative impacts on the cash-flow of the payers, and that it had reduced the cash buffer available for businesses to withstand any shocks, requiring shareholders to recapitalise their businesses.
It is not yet clear whether the benefits would outweigh the costs to the industry as a whole. While the Government's reasonably prompt action since the last amendment is praiseworthy, collective input from a range of different groups of participants in the construction industry with varying interests would be crucial to achieving a meaningful change.
You can make a submission on the Bill by midnight on Friday 23 July 2021 (link).
Written by Ethan Lee.
Please direct any enquiries to:
See our Expertise pages
© McVeagh Fleming 2021
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.