Retentions to be held under statutory trust

Building and Construction Minister, Dr Nick Smith, has today announced the Government’s solution to remedy problems with retention security – The imposition of a statutory trust. Click here to read the an article by KS on the change.

In a move that will align New Zealand law with that in the US and Canada, New Zealand will introduce legislation requiring all subcontractor retention funds to be held on trust and only applied for specific purposes associated with the related construction contract. This requirement will be introduced through a supplementary order paper (SOP) to the Construction Contracts Amendment Bill; a Bill is currently awaiting its third and final reading in Parliament.

We note that Minister Smith’s approach takes a different track to earlier SOP introduced by Labour and the Greens. These earlier proposals advocated for a separate trust account to be set up and administered by an independent overseer (click here to read a post on Labour’s proposal, and here to read a post on the Greens proposal). Under the Minister Smith’s approach contractors will administer the trust themselves, without any express requirement to place funds into a separate account. This self-administered approach has been chosen after industry consultation indicated the costs of maintaining an independent account would be too high.

The SOP will also introduce a statutory interest rate (set by regulation) that will apply to any late payment of retentions.

While exact details are scarce at this stage, more information on how the scheme will operate will become clear once the SOP has been officially drafted. Some further questions the SOP will be required to address are:

  • Whether the trust will apply between principals and contractors, or only subcontractors (principal/developer insolvency is equally as concerning for contractors as contractor insolvency is for subcontractors).
  • Whether the change would apply retrospectively, to projects under construction or already completed but with retentions still held.
  • Whether the scheme will be audited to ensure compliance, or whether a hands off approach will be taken.

Click here to read the Minister’s press release.

We are keen to hear your views on the Government’s approach to retentions.

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