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12 February 2019

Retentions – The Continuing Saga

Retentions are an ongoing issue in the construction industry.

Despite changes to the Construction Contracts Act which were intended to provide additional protection for subcontractors, there are still problems with unpaid retentions when the head contractor goes into liquidation.  Initial concerns that the changes to the Act relating to retentions did not go far enough to protect the relevant parties appear to be well founded.

The case of Bennett & ors v Ebert Construction Limited (in receivership and liquidation) & ors [2018] NZHC 2934 illustrates the issues.

As at the date of the receivership, Ebert had a retention account for retentions covered by the Construction Contracts Act (Act) with a balance of $3,678,832.53.  However, at the date of receivership, Ebert owed its trade creditors (including subcontractors) approximately $24.517 million and a further $9.324 million (excluding GST) in subcontractor retentions.  The money held in the retention account represented Ebert’s only significant cash asset.  There were 152 subcontractors who potentially had a claim against the funds in the retention account.

The court had to consider how the funds held in the retention account should be distributed, as the funds were insufficient to satisfy the claims of all 152 potentially affected subcontractors.

The key findings in the High Court were:

  • While the intention of the amendments to the Act relating to retentions (which relate to construction contracts entered to after 31 March 2017) was that retention funds are deemed to be held in trust, the actual provisions in the Act did not seem to create a deemed trust; rather they created an obligation for the head contractor to hold the retention money on trust for the affected subcontractors.
  • In order for a trust over the retention money to form, there had to be an intention to create a trust, subject matter of the trust, and beneficiaries of the trust.

There were three main categories of retentions considered:

  • A reconciliation of the retentions being held had been undertaken and money was physically transferred to the retentions account in relation to those retentions.  It was held that those funds were all held in trust for the affected subcontractors.
  • Retentions had been calculated, but the retentions money was not transferred into the retentions account.  It was held that the subcontractors did not have an interest in the funds held in the retentions account.
  • Retentions had not been calculated and no money had been transferred in respect of those retentions.  It was held that those subcontractors did not have any interest in the funds held in the retentions account.

The Ebert case reinforces the following for subcontractors:

  • As it has been held that the Act does not automatically create a trust over retention money, it is essential to ensure that your retention money has been properly reconciled and has been transferred to a separate retentions account.  We suggest that you ensure that the amount of the retentions due are reconciled, reach an agreement that such money is being held on trust (in writing) and request evidence that the retention money has in fact been transferred into a separate retentions account.
  • You are entitled to inspect accounting and other records relating to your retentions under section 18FC(4) of the Act.  You should do so to ensure that a trust has been properly formed and your retention money is being held in a separate retentions account.
  • If you fail to do this, there is a risk that the retention money will not be held in trust and, if the head contractor goes into liquidation, you will simply be an unsecured creditor in that liquidation.

 

If you have any questions about retention or about this case, please do not hesitate to contact us to discuss these issues.

The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstances.

 

Melissa Borcoski

About Melissa Borcoski

Melissa is head of our Litigation Team and specialises in commercial and civil litigation. She also has specialist expertise in insurance law having acted for both insurers and policy holders throughout her career.

View all posts by Melissa Borcoski