CCAA increases non-retention penalties for companies and directors

The Construction Contracts Act (Retention Money) Amendment Bill has reached its first reading. The bill increases fines for companies which don’t set aside retention money, in a bid to avoid subcontractors suffering financial loss in the event the business they are contracting to goes into insolvency

The new Bill seeks to strengthen and clarify the retentions regime under the Act, because when the 2015 amendment came into force, a key criticism was the absence of any penalties for companies which didn’t comply with the new regime around non-retention. In terms of strengthening, what’s incoming is an increase in penalties for non-compliance –$200,000 for companies, and $50,000 for directors.

The act aims to ensure retention money withheld by a party to a construction contract (for example, a contractor) from an amount payable to another party (often a subcontractor) is secure.  These retentions are used as a form of security for the contractor to ensure that the subcontractor performs its obligations under the contract. Retentions are usually not released until the end of the defects liability period, so may be held for many months.

Under Construction previously reported on updates to the Construction Contracts Act in 2016. Changes at the time meant retention money under commercial construction contracts had to be held on trust beginning 31 March 2017. However, penalties for failure to comply with the Act weren’t especially strong at the time.

New obligations

Changes proposed by the bill, which construction company directors ought to know, include the following:

• Retention money must be placed on trust as soon as possible by a contractor for a subcontractor (or other party for whom retention money is being held).
• Retention money must be held on trust separately from other money or assets of the contractor.
• Retention money must be held in a trust account in a registered bank in New Zealand or in the form of complying instruments (such as an insurance policy or a guarantee).

The Bill also introduces continuing disclosure requirements saying the contractor must provide information about the money to the other party in the contract. This must be disclosed when the money is first retained, and then at least every three months thereafter. If a contractor becomes insolvent, the receiver or liquidator then becomes the trustee of the retention money for the purpose of collecting and distributing it.

Penalties introduced

Importantly, the new Bill includes offences and penalties for the company and its directors if they do not comply with the new requirements. If a contractor company fails to comply, it commits an offence and is liable for a fine up to $200,000. If a company commits an offence, its directors are also deemed to have committed an offence and are liable for a fine up to $50,000.

Under Construction has a guide available on how to work out if adjudication or escalation are required when contractual disputes occur.

The next reading of the bill has not yet been scheduled.