Retentions reform progresses through Parliament

25 November 2021

On 22 November, the Transport and Infrastructure Select Committee reported back on the Construction Contracts (Retention Money) Amendment Bill. The Bill proposes significant reforms to the construction retention money regime, including the introduction of offences and penalties for both the firm holding the retentions and its directors for a failure to comply with the new regime.

The Select Committee has recommended changes to clarify the Bill and to strengthen the liability regime.

We have some concerns with the Bill, including the risk of overreaching liability for directors and the potential level of compliance costs. These are discussed below. We consider that there are a number of features of the modified regime that will require further consideration from officials and affected industry participants as the Bill continues to work its way through Parliament.

The current retentions regime

Commonly, construction contracts provide for an amount of money to be withheld by a party to the construction contract (the payer) from an amount payable to another party to the contract (the payee) as a security for the performance of the payee’s obligations under the contract. For example, a head contractor may retain money owing to a subcontractor as security for the performance of the subcontractor, and may apply those monies to remedy any defect in the performance of the subcontractor’s obligations.

A statutory regime governing retention money was introduced into the Construction Contracts Act 2002 (the CCA) in 2017.

The rules were introduced in the aftermath of Mainzeal’s failure. They were intended to protect payees from the (mis)use of retention monies as working capital, and in particular the risk of being left out of pocket in the event of the payer’s insolvency.

There has been considerable concern in the industry regarding the lack of detail in the regime, the uncertainty around how it would apply, and the perceived lack of “teeth” to discipline non compliance. The courts have since provided useful guidance on its application. In some instances, court decisions have confirmed that the legislation does not work as Parliament may have originally intended. For example, in the Ebert case, the High Court confirmed that although it may have been Parliament’s intention to create a “deemed trust” by operation of this statutory regime, the actual effect of the language used in the CCA only creates an obligation on the payer to create a trust.1

In addition, the cases illustrated some of the difficulties in permitting retention money to be co-mingled with other money (which Parliament had permitted with a view to reducing compliance costs). That led to disputes in the insolvency context over entitlements to the funds.

What could change for retentions?

The Bill is intended to address these issues and to better protect retention money should the party holding the retention money become insolvent. We highlight the key changes to the regime if the Bill passes as recommended by the Select Committee:

Retention money will be held on trust

  • Retention money will now be held on trust directly by operation of the statute.
  • A retention money trust will be formed when a construction contract allows a payer to withhold payment of an amount from a payee. However, a retainable amount will not become retention money if the payer chooses not to retain the amount and pays it to the payee, or if the retainable amount is less than a minimum amount to be specified in regulations.
  • Retention money held for different payees will be subject to separate retention money trusts.
  • The retention money must be held separate from the payer’s other money and assets, in an account with a registered bank in New Zealand used solely for that purpose or in the form of complying instruments (such as an insurance policy or a guarantee). The Select Committee has introduced a requirement that retention money must be deposited in a bank account “as soon as practicable” after it becomes retention money.
  • If the money is held in a bank account, the bank must be informed that the account is for the purpose of holding retention money that the payer holds on trust under the CCA. This requirement has been included to ensure the money is not subject to a banker’s lien or other set-off rights.

Use of retention money

  • The payer cannot use the retention money for any purpose other than to remedy defects in the performance of the payee’s obligations under the contract. Otherwise, the payer must pay the retention money to the payee when required by the contract.
  • If the payer proposes to use the retention money to remedy defects, it must give the payee 10 working days’ notice to allow the payee an opportunity to remedy the relevant defect in the performance of its obligations or to dispute the payer’s claim. This notice requirement has been introduced following a submission at Select Committee.

Liquidation or receivership

  • If the payer goes into receivership or liquidation, the receiver or liquidator becomes trustee of the retention money. That is a role that the receivers or liquidators may not wish to perform, and there are mechanisms for them to be excused of that role by the Court.
  • As trustee, the receivers or liquidators are entitled to have their reasonable fees and costs in dealing with the retention monies met from the retention money. The retention money cannot be used by the receiver or liquidator to meet the payer’s other debts.
  • The Select Committee has recommended that the High Court be empowered to review or fix the receiver’s or liquidator’s fees and costs deducted from the retention money trust.

Record keeping and reporting

  • The payer will be required to keep separate ledger records for each party it holds retention money for and, as noted below, it will be an offence if the payer fails to keep appropriate accounting and other records.
  • The payer must give the payee information about the retention money held on trust when the retention money is first retained, and then at least once in every three months. This information includes the total amount held and the details for how it is held.
  • As introduced, the Bill would also have required information about retention money to be included in the payer’s payment schedule (which are commonly issued monthly). After Select Committee, this requirement has been removed so that the payer only needs to provide information to the payee about retention money every three months.


Of particular note, the Bill introduces a number of penalties for non-compliance, with each separable offence attracting a separate penalty:

  • If the payer does not keep retention money as required, the payer commits an offence and is liable for a fine up to NZ$200,000. If the payer is a body corporate, each of its directors also commits an offence and is liable for a fine up to NZ$50,000 each. It is a defence to a charge if a defendant (including a director) proves they took all reasonable steps to ensure that the payer complied with the retention money trust requirements.
  • Subject to complying with the relevant contract and the CCA, a party holding retention funds may use retention money to remedy defects in the performance of the payee’s obligations under the construction contract. This raises legitimate concerns for payers, recognising that the question of whether they are entitled to access retention monies for this purpose may be subject to litigation risk. The Select Committee recognised that issues may arise if, after retention funds are applied for that purpose, it is later found that the payee was not in breach of its obligations. To address this concern, the Select Committee introduced a new defence for the payer to prove that it acted in good faith and honestly believed it was permitted to use retention money in that manner.
  • There are separate offences if a payer does not hold adequate records, or does not give the payee the required information about the retention money trust, or gives information that is false or misleading. If the payer commits one of these offences it is liable for a fine up to NZ$50,000. There is no separate liability for directors in the Bill if the payer commits this offence.
Next steps

The Bill will now proceed through the parliamentary process before coming into force six months after Royal Assent. The new regime will then apply to construction contracts entered into – or amended – after the Bill comes into force. The new provisions relating to receivership or liquidation will apply to receiverships or liquidations that commence after the Bill comes into force regardless of when the contract was entered into.

While in some respects the Bill might bring greater clarity to certain aspects of the existing statutory regime for retentions, there remains considerable scope for analysis and scrutiny of the Bill as it continues to work its way through Parliament. For example:

  • Given the new recording keeping obligations and penalties, and in particular the addition of director liability, there may be an increase in the number of principals requiring a bond on lieu of retentions. If this occurs, it may put further pressure on contractor cash flow, especially if principals also require a performance bond independent of retentions.
  • The scope of the criminal offences and the affirmative defences may require further scrutiny to ensure that directors are not subject to inappropriate criminal and regulatory risks and payers are not subject to inappropriate compliance costs. In particular, we question whether it is appropriate for a director to bear the onus of proof in establishing that they took all reasonable steps to ensure that their organisation complied with its statutory duties.

The response by the industry, and the courts, will therefore be important factors in the success of the new regime.

If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully advisor.

1 Bennett v Ebert Construction Ltd (in rec and liq) [2018] NZHC 2934.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.