CCAA retentions update

The government has introduced a bill clarifying that new legislation relating to retention money in construction contacts will not apply to contracts signed before 31 March 2017

The Construction Contracts Act (CCA) 2002, which covers both commercial and residential construction contracts, provides a process for dealing with payments and disputes under a construction contract.

In December last year, the Construction Contracts Amendment Act (CCAA) 2015 was passed, amending the Act in three areas in a staged process:

• Removing the differences between residential and commercial contracts (already in place).
• Design, engineering and quantity surveying work to be included in the Act (from 1 September 2016).
• Retention money withheld under commercial construction contracts must be held on trust (from 31 March 2017).

Providing more clarity

In late October 2016, the government introduced the Regulatory Systems (Commercial Matters) Amendment Bill, clarifying that the retention money provisions referred to in the CCAA 2015 will apply only to contracts entered into or renewed on or after 31 March 2017.

Under the CCAA 2015, retention money withheld under commercial construction contracts will be required to be held on trust. This will better protect retention money owed to contractors and subcontractors in the event of a business failure.

The Bill addresses concerns that the new law relating to retention money would have applied to existing contracts as well as new contracts – making it clear that the new law does not and will not apply to existing contracts.

This new trust requirement provides greater certainty of payment for contractors and subcontractors owed retention money for work done by ensuring the money held in retentions is responsibly managed.

How will it work?

Where payers withhold retention money under a commercial construction contract, the retention money must be held on trust.

The payer becomes a trustee and the payee becomes the beneficiary.

The obligations of the payee holding retention money on trust end when:

• Retention money is paid.
• The payee to whom the money is payable agrees to give up their claim.
• The money ceases to be payable by law: ie, the money ceases to be payable under the contract.

What can’t you do?

1) Prohibited contract provisions

You cannot include in a contract any terms designed to delay payment of retention money. Any such terms in a contract will be void.

Similarly, you cannot include any conditional payment provisions for retention money in a construction contract (known as pay-when-paid provisions). Conditional payment provisions have been banned since the Act came into force in 2003. The amendments make it clear that this ban also applies to provisions for payment of retention money.

NOTE: Payment of retention money cannot be conditional on anything other than the performance of the payee’s obligations under the contract.

2) Use of retention money

Retention money cannot be used for any purpose other than to remedy a payee’s breach of their obligations under the contract, such as fixing defective work.

What can you do?

Retention money:

• Does not need to be held in a separate trust account.
• May be mixed with other money: ie, it can be held in the same bank account as other money.
• May be held in the form of cash or other liquid assets.
• May be invested and interest earned can be kept provided the investment is in accordance with the trustee
  act 1956.

How must retention money be accounted for to meet the trust requirement?

Proper methods of accounting for retention money are now required. Parties holding retention money must keep proper accounts that correctly record all dealings and transactions in relation to the retention money and must make these records readily available to parties owed the money.

The accounting methods must comply with generally accepted accounting principles and be auditable.

Late payments, interest and fees in relation to retention money

• Interest must now be paid on late payments of retentions at the rate agreed under the contract. If a rate has not been agreed, the default rate of interest specified in regulations (yet to be developed) will apply.
• In the event of a payer’s insolvency, retention money will be protected. Retention money is not available for the payment of debts of any creditor of a payer and cannot be taken by a court order at the insistence of any creditor of a payer.

New regulation-making powers

Regulations may, if necessary, prescribe:

• The minimum amount of retentions that the new trust requirements will apply to.
• Methods of accounting for retention money in addition to the requirements in the act.
• The default rate of interest for the late payment of retention money that will apply where a contract does not provide a rate.
  

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  Further information on the Amendment Act and retentions is available on the MBIE website www.business.govt.nz