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DECEMBER 2014

Changes to the Construction Contracts Act

Changes to Construction Contracts Act to provide better protection for Sub-Contractors

The Construction Contracts Act 2002 (“the CCA”) is to be amended to provide better protection for sub-contractors in relation to retentions. Retentions are payments withheld by the developer and/or main contractor from sub-contractors so as to ensure that any necessary repairs or remedial work can subsequently be undertaken. At the end of the defects liability period (which is usually several months after the contract has been completed) the balance of any retentions are supposed to be released to the sub-contractor. However, in the meantime, the head contractor/developer has the use of the funds. There have been instances in the past where retentions have been used by head contractors/developers to provide working capital or for other purposes. The issue was highlighted with the collapse of Mainzeal where some $18 million of sub-contractors’ retention money was lost.

In an endeavour to rectify the problem, the CCA will be amended to provide that retention moneys are to be held on trust for the sub-contractors, thereby prohibiting them from being used for other purposes. The CCA will also impose penalties where retentions are used for purposes unrelated to the specific project. However, it should be noted that whilst retentions are to be held in trust, this does not mean that they have to be kept in a separate bank account. Nevertheless, the new provisions should provide a degree of protection in the event of liquidation as retentions held on trust should take priority over the general body of creditors..

A further amendment is to be made to the CCA to extend the ban on “pay when paid” or “pay if paid” clauses to retentions. Such clauses effectively provide that a sub-contractor is not entitled to be paid until the head contractor has themselves been paid. The CCA provides that such clauses are unenforceable and the amendment will extend the ban on such clauses to retentions.

Round-up of recent decisions under the Construction Contracts Act

There have been a number of cases recently dealing with various aspects of the Construction Contracts Act (“the CCA”) including the following:

  • The High Court has held that a spreadsheet provided by a head contractor to a sub contractor in response to a Payment Claim under the CCA was not a valid Payment Schedule under the provisions of the CCA as it did not indicate the amount that it would pay and for that reason alone was insufficient. The High Court held that because no valid Payment Schedule had been served within the time frame permitted by the CCA, the amount claimed in the Payment Schedule became a debt due in accordance with the CCA. Accordingly, the High Court refused to set aside a Statutory Demand that had been issued in reliance on the Payment Claim – Sol Trustees Limited v Giles Civil Limited [2014] NZHC 1813.
  • In a case where the contractual documents provided a head contractor with the right to treat a Payment Claim received after a specified date as being submitted for the following payment period (which would effectively delay the time period for the service of a Payment Schedule and payment) the High Court held that the head contractor was required to communicate any election not to treat the Payment Claim as being received at the current payment period to the sub contractor. Because the head contractor failed to do so, the Payment Claim was to be treated as having been received during the current period for the purposes of calculating the time for the head contractor to serve a Payment Schedule (and make payment). The High Court refused to set aside a Statutory Demand that had been served on the head contractor following the failure to pay the amount claimed on the date upon which it would have been due in the current period – Watts & Hughes Construction Limited v Complete Siteworks Company Limited [2014] NZHC 1797.
  • In a situation where a party to the construction contract was a limited liability company, it was not open for that company to claim that they were a “residential occupier” within the meaning of Section 2 of the CCA (which defines a residential occupier as “an individual who is occupying, or intends to occupy the premises that are the subject of a construction contract wholly or mainly as a dwelling house”). Because the company was not an “individual”, it could not be a residential occupier. Therefore, there was no requirement for the contractor to serve the additional notice that was required to be given to residential occupier under the CCA. Therefore, the Payment Claim was valid and, as no Payment Schedule had been served in response, the contractor could recover the full amount claimed as a debt due together with its actual and reasonable costs – P3People Limited v Q S Building Limited [2014] NZHC 1455.

As the above cases demonstrate, the importance of observing the requirements of the CCA in relation to the correct form of documentation and time limits cannot be overstated. Accordingly, advice should be sought from us at the earliest opportunity.