Construction Contracts Act - new statutory trust model for retentions
Jesse Wilson
From 31 March next year, retention monies under new commercial construction contracts must be held on trust in the form of cash or liquid assets. This change to the Construction Contracts Act 2002 (CCA) represents a wider-reaching version of a similar regime recently introduced in New South Wales.1 The change – which was enacted in the wake of the collapse of Mainzeal – is intended to protect subcontractors from the insolvency of the parties holding retention monies.
The new regime has met with a mixed reception as the industry grapples with the implications. Last month, the Government decided to further amend the legislation to provide that the regime will only apply to retentions under contracts entered into, or renewed, from 31 March 2017 (rather than existing retentions, which the reforms originally covered).2 As the implementation date draws closer, this article considers the potential hooks in the regime for contracting parties, their funders, and insolvency practitioners. Existing Law Regarding Retentions Previously, the CCA did not regulate contracting parties’ ability to negotiate for the retention of a portion of the contract price in order to secure a contractor’s performance of its duties. Typically, parties agreed that a percentage of the contract price will be held back until after certain agreed events have occurred which provide comfort that the works have been completed and satisfy the stipulated quality standards – e.g., the contract may provide that retention monies are released after practical completion or after a defects notification period. The agreement can also provide that the owner holds the retention monies on trust for the contractor. This has been uncommon in the New Zealand market, though more common in the United Kingdom The New Retention Monies Regime The new regime applies to commercial construction contracts3 which provide for monies to be withheld by one party (A) from an amount payable to another (B) as security for B’s performance of its contractual obligations. The New Zealand reforms therefore cast a broad net, subject only to a de minimis threshold which is still to be set by regulation.4 This stands in contrast to the New South Wales regulation, which applies only to retention money held by a head contractor when the construction project has a value of at least AUD$20 million. From March next year, retention monies under new contracts must be: • held on trust by A for the benefit of B, • held in the form of cash or other liquid assets that are readily converted to cash,5 and • properly accounted for. However, retention monies may be commingled with A’s personal funds, as opposed to being held in a separate trust account. The intention is to create a “deemed trust model” rather than requiring the segregation of retention monies into trust accounts (as required under the New South Wales regime).