Tsunami alert over? Change to proposed construction retention regime

Corporate Update

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As discussed in our August 2016 update, on 31 March 2017 a change to the Construction Contracts Act 2002 will take effect to implement a new trust regime that will apply to retentions held under construction contracts.

Retentions are deductions from payments made to a contractor or subcontractor under a construction contract, and are only paid once a defects liability period has finished and all defects arising during that period have been remedied. 

One key feature of the change was that the new regime would apply to construction contracts in force on that date, irrespective of when the contract was entered into. This created uncertainty about the status of retentions deducted prior to 31 March 2017. Were these retentions required to be accounted for, and held on trust, as at 31 March 2017? This was referred to by commentators as the 'Tsunami effect'. Principals and contractors (in respect of their subcontractors) could potentially have been required to find large amounts of capital to fund the retentions that were to be held on trust. 

The Regulatory Systems (Commercial Matters) Amendment Bill was introduced to Parliament today to amend a number of pieces of legislation, including section 11A of the Construction Contracts Amendment 2015. In a move that will be welcomed by the industry, the Bill states that the retention regime will not apply to any construction contract entered into before 31 March 2017 (unless the parties specifically agree or if the contract is renewed after 31 March 2017). This removes the concern about retentions collected prior to 31 March 2017 needing to be funded and held in trust, and goes further by generally excluding altogether existing contracts from the retentions regime. 

However, concerns with the regime remain, and industry participants are waiting with anticipation for the release of the regulations which will provide further detail as to how the regime is implemented (including a minimum threshold, above which the trust regime will apply). 

If you have any questions, or require further information regarding any aspect of this update, please contact us.

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