New building contract regime

On March 31, 2017, commercial construction contracts will be subject to a new regime which will control the way in which retention monies are withheld under construction contracts.

The new regime only applies to commercial construction contracts which are entered into or renewed on or after March 31, 2017.

One of the key requirements of the new regime is that retention money must be held ``on trust'' as trustee for the benefit of the retention beneficiary, or the party otherwise entitled to payment.

The Act is clear that the funds can be co-mingled with other funds so it is important to determine what the parameters of any trust might be.

The first requirement is that retention money can be held either in cash or ``other liquid assets that are readily converted into cash''.

The MBIE has indicated to industry representatives that the natural and ordinary meaning of ``liquid asset'' is a financial asset that can be converted into cash in a short time with little or no loss in value and includes accounts receivable, term deposits, and securities such as bonds.

This means that a company can rely on its accounts receivable in order to fund retentions. That would require the head contractor to hold accounts receivable that both satisfy its account payable and the aggregate amount of retention money it is withholding from time to time.

There has been some uncertainty around whether or not a head contractor can fund its retention requirement through a loan facility. The MBIE has indicated that it can, but this is not reflected in the legislation itself. A loan facility is often secured by a general security interest in favour of the head contractor's bank, which could create issues given the requirement that a retention cannot be subject to any charge.

The Act provides that retention monies can be invested in accordance with the Trustee Act 1956. It should follow that any such investment would be able to be realised quickly in order to fit with the requirement that retention monies are held in cash or other liquid assets that are readily converted into cash.

One question which has been asked by subcontractors is whether they can take security over retentions in order to protect their position and avoid the losses suffered by contractors in the past. Although the Act specifically states that retentions cannot be taken by a creditor in execution of a debt, this does not apply to the party for whom the retention is held, so an opportunity does arise for the subcontractor to secure its right to receive the retention through a specific security. This would need to form part of the underlying construction contract, which would require negotiation at the outset.

Sally Peart is a partner in Marks & Worth Lawyers and IP Specialists and advises businesses on a wide range of commercial and intellectual property law issues.

 

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