By Alexander Lyall
Parliament has recently enacted legislation allowing for comprehensive changes to the Construction Contracts Act 2002. The Construction Contracts (Retention Money) Amendment Act 2023 passed its third reading on Wednesday 29 March and received Royal assent on April 5.
The legislation concerns the use and protection of retention money held by head contractors. It intends to strengthen current requirements for the purpose of giving subcontractors added security.
Current requirements
The Construction Contracts Act 2002 (the CCA) currently requires that when a head contractor (referred to in the CCA as party A) holds retention money for a subcontractor (referred to in the CCA as party B), it must be done in a trust with the subcontractor as the beneficiary. The sum may be held in cash, liquid assets, or a financial instrument.
Changes
Clarification on what is retention money
Sums of money will be deemed to be retention money regardless of whether they have actually been retained, or whether a portion of the sum has already been paid to the subcontractor. The effect of this change will be seen in situations where the head contractor becomes insolvent. A subcontractor who has been partially paid should no longer be in a better position than one who has not.
Retention money held in trust
The Construction Contracts (Retention Money) Amendment Act 2023 (the Act) clarifies that retention money is automatically held on trust by the head contractor. This removes the necessity for an explicit intention to be made that the retention money will be stored in the trust.
Once the retention money is paid to the subcontractor, it will no longer be trust property. This may also occur when the funds are used by the head contractor to rectify errors.
Holding retention money
The head contractor is to hold retention money in either a bank account or make it the subject of a suitable financial instrument, such as insurance or a payment bond.
The requirements for such maintenance will be set once the retention money is held in the bank account. In this event:
- the account must be used only for the purpose of holding the retention money; and
- the head contractor must inform the bank that the account is a trust account for the purposes of holding retention money.
Status of retention money to be reported
The head contractor will be mandated to give the subcontractor specified information at the time the sum is held. From that point, the relevant information should be given to the subcontractor every third month, at least. To be included in that information are:
- the latest amount withheld, the particular construction contract to which that pertains, its date of retention; and
- the total amount of retention money that the head contractor holds for the subcontractor.
In these situations, it is necessary for the head contractor to communicate this information:
- if a bank has been selected, the head contractor will then need to communicate the name of that bank, as well as the respective branch and name of the bank account;
- if the account in which the sum is stored has a separate ledger, the name of the subcontractor’s ledger and the total balance held for the subcontractor; and
- if the head contractor is using a financial instrument, the name of the issuer, information relevant for identifying the instrument, and the amount protected.
A penalty will apply if the information given is either false or misleading.
Liquidation or receivership
If the head contractor is placed into either liquidation or receivership, the liquidator or receiver will use a trust to hold the retention money. The responsibilities held by the head contractor are then transferred to the liquidator or receiver. The Act seeks to change the current situation for liquidators and receivers where they must make an application to the court for directions. It does so by clarifying that liquidators and receivers will not be liable for any improper or unlawful action taken prior to their appointment.
Compliance
One of the biggest changes to the CCA is that it now includes penalty provisions for noncompliance. These penalties are:
- a fine of up to $200,000 for failure to keep retention money in a way described by the CCA;
- a fine of up to $50,000 for failure to keep proper accounting; and
- a fine of up to $50,000 for failure to provide regular reports of retention money.
Each director can also be personally liable for failure to properly hold retention money if the head contractor is a company. A director in this situation could find themselves with a fine of up to $50,000. Of note, this penalty refers to a single breach. It is not one penalty for several breaches. If a director were to be prosecuted for ignoring the CCA’s directions for five different subcontractors, then the sum of that penalty would be increased fivefold.
The Ministry of Business, Innovation and Employment will be able to investigate and enforce retentions money offences. Further penalties may be incurred if the head contractors do not provide the Ministry with information required to assist investigations.
The legislation will come into effect in October 2023, providing construction companies time to review their financial strategies.