A client sought legal advice about their obligations with regards to retention funds held by them in respect of their commercial build.

Issues around handling of retention moneys have caused very significant problems in the construction industry in New Zealand in recent years, in particular for sub-contractors having difficulty getting access to moneys belonging to them when the business they contracted with gets into financial difficulties.

New amendments to the Construction Contracts Act guidelines on retention money came into force on 5 October 2023.

The retention money rules will apply if a commercial construction contract allows the client to withhold payment of an amount (retainable amount) that would otherwise be payable to the contractor, for the purpose of security for the performance of the contractor’s obligations under the contract.

Retention money is regarded as trust property since it is held on trust by the client for the contractor.

Where should a client keep retention money?

A client must keep the money in a bank account of a registered bank of New Zealand. The account holder must be either:

• The client as a trustee of the retention money;
• A lawyer or law firm;
• A charted accountant;
• The Public Trust;
• A trustee company; or
• A licenced auditor or an audit firm

The client must inform the bank or the account holder that the money kept in the account is held in trust as retention money and the account should be used solely for this purpose.

A client can be liable for a fine of up to $200,000 if they fail to meet these obligations. If the client is a company, each of its directors can be fined up to $50,000 for each offence.

Reporting obligations

The new rules state that the client must keep records such as the details of the account and any transactions to and from the account. This information must be always available for inspection by the contractor and without charge.

The client is to report this information to the contractor as soon as practicable after an amount of money becomes retention money, and then at least once every 3 months until the retention money is paid out to the contractor.

A failure to report to the contractor in accordance with these rules can make the client liable for a fine of up to $50,000.

When is the money no longer retention money?

The new rules also specify when the money is no longer regarded as trust property. This happens when:

• The money is paid to the contractor; or
• The contractor gives up any claim to the retention money in writing; or
• The retention money is used to remedy defects in the performance of the contractor’s obligations under the contract, but this will only apply if:

• The contract says retention money can be used to remedy defects; and
• The client gives to the contractor written notice at least 10 working days before using the money setting out their intention to use the money to remedy defects and the details of the defects to be remedied.

The contractor can be entitled to interest if the client fails to pay the retention money to the contractor on the date on which it becomes payable. The late payment interest rate should be specified in the contract.

These rules cannot be excluded from the contract even if both the client and contractor agree to exclude them.

It pays to get legal advice from a legal professional if you are unsure about the application of the new retention money rules for your commercial construction contract to avoid any hefty fines.

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