Most Read Contributor in New Zealand, September 2016
The Government is promising better protection for
sub-contractors' retention payments through a Supplementary
Order Paper (SOP) to be introduced to the Construction Contracts
Amendment Bill when Parliament reconvenes after the election.
Drafting instructions for the SOP have been issued. Much will
depend on how well it is drafted as this is a difficult area to
legislate and there will not be the usual opportunity for public
Retentions are payments held back by the developer from the head
contractor or by the head contractor from sub-contractors,
traditionally as a security for performance. But the money is
commonly used as working capital in the meantime, and generally
falls to the liquidator in the event of insolvency, meaning
contractors and sub-contractors are left partly unpaid for work
they have completed.
These problems were thrown into sharp focus by the collapse of
Mainzeal, creating pressure for reform to protect sub-contractors
The Government's proposal will:
impose an obligation on the retention-holder to treat the
retentions as if they were held in trust, with penalties imposed if
they are used for other purposes
clarify that the 'pay when paid' ban in the
Construction Contracts Act also applies to retentions, and
provide for a default rate of interest to be set by regulation
and applied to late payment of retentions.
Building and Construction Minister Nick Smith says the
decided against requiring that retention funds be put into a
separate bank account or a lawyer's trust fund, as sought by
some in the industry, because the compliance costs would be too
However, in the absence of this segregation, it is difficult to
see how the retention monies can be identified among the other
funds held in a contractor's bank account, and how those funds
are to be adequately protected if the contractor becomes
These are difficult issues. Presumably attempts will be made to
address them in the drafting of the SOP but we question whether
they are inherent in the chosen model. We await the SOP with
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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