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In Stevensons Structural Engineers 1978 Ltd (in liq) v McMillan & Lockwood (PN) Ltd & Anor [2024] NZHC 2415, the High Court held that the timing for payment out of retentions in certain subcontracts fell afoul of s 18I (and s 13(2)(ca)) of the Construction Contracts Act 2002 (the Act). The significant consequence for the head contractor was its entire contractual retentions regime under the subcontract fell over, and it had no entitlement to withhold retentions at all.
Background
Stevensons Structural Engineers 1978 Ltd (Stevensons) was subcontracted on two projects by, respectively, McMillan & Lockwood (PN) Ltd, and McMillan & Lockwood Central Ltd (collectively, McMillan & Lockwood).
As set out in the subcontracts, McMillan & Lockwood deducted and held retentions.
After partially performing the subcontracts, Stevensons went into liquidation, and the subcontracts were cancelled. The liquidators demanded release of all the retentions and, when McMillan & Lockwood declined to do so, applied for summary judgment. Stevensons (in liq) took the position that the retentions clauses contained a prohibited provision under the Act and therefore the retentions funds had to be released.
The Subcontracts
The subcontracts across the projects were in materially the same form.
They contained a defects liability period, which spanned completion of the subcontract works through to the end of the defects liability period under the head contract (being the date of practical completion of the head contract works plus 12 months).
The retentions clause generally followed SA-2017, providing for release of retentions in two stages. Stevensons’ quotations contained the agreed timing for release which was, broadly, 50% released within 30 days of completion of the subcontract works, and the balance due within 30 days of the certificate of practical completion of the head contract works.
Stevensons argued the second part of the clause (payment out of the balance) was prohibited under s 18 of the Act (the Impugned Provision).
The Construction Contracts Act 2002 and Prohibited Provisions
Section 18I of the Act makes void any provision of a construction contract which, among other things, purports to make payment out of retentions (a) conditional on anything other than the performance of the recipient’s contractual obligations, or (b) at a date later than the date the recipient has completed all its contractual obligations.
Further, s 13 of the Act makes conditional payment provisions ineffective. Under s 13(2)(ca), a “conditional payment provision” includes one of a kind described in s 18I(1)(a).
High Court Judgment
The Court held the Impugned Provision is a prohibited provision under s 18I(1)(a) (and was therefore also a conditional payment provision under s 13(2)(ca)).
The trigger for the payment of the balance of retentions was the issue of the certificate of practical completion for the head contract works; obtaining that certificate was also dependent on the performance of others (the head contractor and other contractors). That trigger therefore fell afoul of s 18I(1)(a) in that payment out of retention money was conditional on anything other than performance of Stevensons’ contractual obligations.
The Court held the Impugned Provision is not a prohibited provision under s 18I(1)(b).
The subcontract defects liability period extended to 12 months beyond practical completion of the head contract works, and during that period Stevensons continued to have the obligation to remedy any notified defects. The trigger for payment of the balance of retentions (within 30 days of the certificate of practical completion of the head contract works) pre-dated the end of the defects liability period, so was not a date later than the date on which Stevensons had performed all of its obligations to the standard agreed.
The consequence of the finding under s 18I(1)(a) (and s 13(2)(ca)) was that the entire retention regime in the subcontracts was rendered void and of no legal effect; the Impugned Provision could not be ignored or severed. McMillan & Lockwood was not contractually entitled to withhold retentions (or now retain the retention money).
Our Comment
The effect of a retention provision being a prohibited provision under s 18I has considerable practical consequences for head contractors (and, in the case of head contracts, principals).
The key cautionary point for contract drafters is to not tie payment out of retentions to any event that relies on others to occur – notwithstanding the subcontractor’s own performance may influence the occurrence of that event, and notwithstanding the subcontractor may have its own obligations still on foot at the time. As with the Stevensons case, such a trigger for payment may be brought in as a trojan horse through the subcontractor’s own terms.
Given the potential for significant adverse consequences, a cautious contractor may wish to re-visit their timeframes in commonly used SA-2017. That form provides that the subcontract defects liability period will run for a specified period from completion of the subcontract works, and the final tranche of retentions are due for payment 25 working days after the later of: completion of the subcontract defects liability period; and 7 working days after rectification of all defects in the subcontract works. Further, the final account is due no later than 20 working days after the date of practical completion of the head contract (unamended clause 12.3.1).
This means the final account may have already been dealt with prior to the end of the subcontract defects liability period. If the subcontract defects liability period then ends (with any remediation completed), then SA-2017’s addition of +25 (or +7) working days to the due date for the final retention release (clause 12.4.2 of the specific conditions) may lead a subcontractor/liquidator to argue that s 18I(1)(b) means the date on which payment of retention money is payable is later that the date on which the subcontractor has performed all of its obligations i.e. it is a prohibited provision.
On the standard terms, one answer the contractor might give is that there is one obligation remaining, namely the subcontractor’s obligation to submit a payment claim when retentions are due for release (clause 12.2.6) – so s 18I(1)(b) does not apply. There is a risk a court would not find this sufficient. To mitigate, we suggest a contractor consider amending clause 12.3.1 so that the more fulsome final account is not due until after the end of the subcontract defects liability period (and after any notified defects are rectified).
Of course if special or amended specific conditions alter the standard position, then contract-specific advice should be sought to protect the contractor from a worst-case scenario.
If you have any questions about retentions or your subcontracts, please get in touch with our Construction Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
