After starting with an industry survey in 2010, then drifting into a pointless focus on the misuse of retentions, the Construction Contracts Amendment Act 2015 (CCA) finally came into force on 1 December 2015.
There will be four sets of rules depending on when the contract is entering:
- construction contracts entered into before 1 December 2015, the principal Act continues in force without amendment;
- construction contracts entered into from 1 December 2015, most of the amendments apply;
- from 1 September 2016, construction work includes related services (design, engineering and quantity surveying); and
- retention moneys held after 31 March 2017 will be subject to a new statutory trust.
The main changes (for post 1 December 2015 contracts) are:
- removal of the distinction between residential and commercial construction contracts;
- adjudication procedures include a right of reply; and
- determinations over liability for payment and rights and obligations may be enforced on an equal footing.
Practitioners should be alive to the following additional changes to the adjudication procedures:
- there are new forms to accompany all payment claims and notices of adjudication prescribed in the new regulations;
- if an authorised nominating authority is to make an appointment, that request can not be made sooner than two (and no later than five) working days after the notice of adjudication is served; and
- more words have been thrown at the grounds for extensions of the time for a response.
There have been other helpful clarifications, for example any disagreement over a breach of contract is now capable of adjudication, and any finding (for example an obligation to compensate a party for breach) is enforceable. But the core opportunity to improve enforcement has been missed.
Bringing residential construction contracts into the enforcement provisions of Part 4 will have an impact, but the amendments do little to provide for effective enforcement.
The period of 15 working days within which a defendant may oppose enforcement of a determination has been reduced to five working days, and two new grounds for opposing entry have been added, including where there has been a change in circumstances. Quite what change in circumstance means in practice is any one’s guess at this stage.
There has been considerable angst over bringing consultants into the CCA regime. The reality is more prosaic; consultants will get the protection of the payment provisions, but the quid pro quo is that it will be easier for clients to adjudicate perceived breaches of appointment agreements, including breach of professional duty.
The new trust regime for retentions is far more problematic. Critically, unlike the other transitional provisions, the new retentions regime applies from 31 March 2017, regardless of when the contract was entered into.
- The regime only applies to commercial construction contracts where retentions are more than de minimis. De minimis has yet to be set, but we can expect a lower threshold than $20 million adopted in New South Wales.
- All such retention is held on trust, in cash or other liquid assets readily converted into cash, and retention moneys may be comingled with other moneys.
- Auditable accounts recording all dealings with the money must be kept, and made available to the contractor.
- The retention moneys may not be appropriated for any purpose other than to remedy defects.
Retention money may be invested in terms of the Trustee Act 1956; however the trustee may retain any interest or other investment gains on the moneys, and is liable for any losses.
The retention money is protected from claim by any creditor of the party holding retentions.
Compliance with this new regime will almost certainly have a huge adverse impact on cashflow in the industry, with limited beneficial effect. The real test will be in an insolvency, when it is unlikely the funds will have been set aside. In such cases, there are bigger problems than retentions.
Taking the Mainzeal example, $18 million of retentions were unpaid (against $11 million payable under the head contracts). Conversely, the receiver’s latest report reveals $151 million owing to unsecured creditors; largely subcontractors and suppliers. Even had there been a trust in place, retentions weren’t the real problem.
If we revert to Lord Denning’s fine rhetoric in Dawnays case (Dawnays Ltd v F G Minter  2 All ER 1389). “There must be a cashflow in the building trade for the very lifeblood of the enterprise,” he said. In light of that, complex legislation about retentions looks like fiddling while Rome burns.
Had the CCA done something to ensure that payments actually flow down the contract chain, and provided for effective enforcement of adjudicators’ determinations, then there might be cause for optimism.
For most projects, there is little point in continuing with retentions when bonds are cheaper and more effective. Cashflow, however, will continue to be a problem.
John Walton is a commercial barrister, arbitrator, construction contracts adjudicator and mediator, practising at Bankside Chambers in Auckland. Mr Walton is also the President of the Arbitrators’ and Mediators’ Institute of New Zealand.