Retentions Regime wilts under scrutiny in first court case
John mckay
The retentions regime, brought into effect on 1 April 2017 through an amendment to the Construction Contracts Act, wilted under the scrutiny of its first test in the Wellington High Court this month
The Court had to struggle against “gaps in the legislation" and “imprecise language" as it sought to resolve issues which should have been resolved by the lawmakers – in particular, how, and by whom, retention monies should be allocated in a receivership. Either we await the accumulation of case law to inject some much needed clarity into this regime, which will be a slow and expensive process, or the Government appoints an expert panel to review it and recommend improvements. At issue The Court was asked to do three things: - appoint the receivers for Ebert Construction Limited (Ebert) as receivers and managers of the company's Retention Account in order that they could distribute the monies, and deduct any expenses and costs incurred in making the distribution -determine who of the 152 subcontractors had a claim to the fund, and on what basis, and -decide how the fund should be allocated in the very likely event of a shortfall. The receivers’ status as receivers for Ebert did not give them any rights over the fund because, although the legal title was held by Ebert, the equitable ownership of the money lay clearly with the subbies (having been withheld from payment as a security against poor work). The Court had no problem granting this appointment. Neither of the subbies who were parties to the litigation - Auckland Ventilation Services and Taslo Steel Security Ltd - had any objection to the arrangement and it was clearly the most elegant solution available. Allocation of the fund The Court found that the claims of 131 of the 152 subbies were “clear and not contentious”. At issue for them was not whether they would be paid but how much they would get. That would depend on how the eligibility of the remaining 21 was decided because, if any of them were found to be eligible, a “fractional adjustment” would be needed to the pay-out for each person. The problems for the 21 stemmed from two factors: -a progressive breakdown in Ebert’s approval and payment mechanisms over the last few months before its collapse, and -a software glitch which meant contracts entered into after the regime, that came into force on 31 March 2017, were not recognised as being subject to the Act. The criteria the Court applied The three “certainties” the Court applied in determining the status of the claims were: -whether there was an intention to create a trust in relation to the retention monies -the subject matter of that trust (i.e. the obligations created), and