IN THE KNOW —
The payment retentions rules get some teeth Most members of New Zealand Certified Builders (NZCB) do high-volume or top-end architecturally designed residential projects, and some commercial work as well. Not many do high-rise or infrastructure projects. Consequently, the members of NZCB generally get to use the NZCB suite of building contracts, which don’t provide for payment retentions. However, an increasing number of members of NZCB do the kind of work that requires them to sign one of the New Zealand Institute of Architects contracts or one of the New Zealand Standards contracts. Those contracts do provide for retentions, so it is becoming increasingly important that members of NZCB become familiar with the rules that apply to them. Those rules are currently being tightened up, and parties in the building industry are going to have to take them seriously for the first time. It was the Mainzeal collapse in 2013 that motivated the Ministry of Business Innovation and Employment (MBIE) to write some rules around retentions. They studied all the overseas regimes for the protection of retentions, consulted the New Zealand construction industry, and decided that retentions were to be held in trust for the tradesmen who had earned them. The new rules were then drafted and inserted into the Construction Contracts Act 2002. The Government decided the rules were only to apply to commercial construction contracts, although the definition of “commercial” is a wide one and includes residential homes that are not going to be lived in by their owners, and all subcontracts whether they are on residential projects or not.
It is becoming increasingly important that members of NZCB become familiar with the rules that apply to retentions. The party withholding the money is required to take some affirmative action to demonstrate that the funds are held in trust (or provide a bond or an insurance policy to the contractor instead). The rules say that retention money held in trust does not need to be paid into a separate trust account and may be mixed up with other moneys. But the party withholding the money does have to keep proper accounting records that correctly record all retention money held on trust, and those accounting records must be made available for inspection by the contractor. The new rules were introduced in a bit of a rush, and without adequate consultation with construction lawyers or insolvency experts. Consequently, they lacked a lot of detail when they first came into force on 31 March 2017.
Their first big test came when Ebert Construction Ltd went into receivership on 31 July 2018. The receivers applied to the High Court for guidance and permission to administer the funds, and Justice Churchman of the High Court passed judgment on the new rules on 12 November 2018. That was followed by the judgment of Associate Judge Paulsen on 8 April 2020 in relation to a similar application by the liquidators of Corbel Construction Ltd. What these two judgments established was that every time a developer or contractor goes bust owing retentions to the contractors below them, someone has to apply to the Court to be appointed a receiver of the trust funds. The receiver’s fees and expenses will be paid out of the trust funds before the contractors’ claims. Contractors will only receive their retentions if they have been put aside in a separate account. If they haven’t been paid into a separate account, and the contractors haven’t been paid the balance of their invoice, then they are just unpaid invoices, not retentions. What that meant, is that subcontractors who are owed retentions by small-medium construction firms were inevitably going to miss out. That is either because the construction company doesn’t have a separate retentions account, or because there isn’t enough in its retentions account to cover the receiver’s fees and expenses, so no-one will apply to become the receiver. Consequently, in the vast majority of cases the whole objective of introducing the retentions-held-in-trust regime came to nothing. There are two aspects of the Ebert and Corbel judgments that were completely at odds with the legislation. The requirement for a separate bank account, flies in the face of section 18E(2) – “Retention money does not need to be paid into a separate trust account, and may be commingled with other moneys”.
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