16.11.2020

Making up the shortfall: Subcontractor awarded an interim injunction requiring head contractor to hold its retentions in a separate trust account

In a recent High Court decision,[1] Hanlon Plumbing Limited (Hanlon) successfully obtained an interim injunction on a without notice basis requiring Downey Construction Limited (Downey) to pay retention funds into a separate trust account pending determination of Hanlon’s claim.

Despite the introduction of the retentions trust regime in 2017 (the Regime) under the Construction Contracts Act 2002 (CCA), many subcontractor retentions have still been left unprotected.  The shortcomings in the Regime were highlighted by the high-profile insolvency of Ebert construction and resulting litigation by its Receivers for directions on administering an inadequate retentions account.

However, it appears that change is in the air.  In the present case, Justice Venning found that it was seriously arguable that the practice of Downey in relation to the retention monies did not comply with section 18C(1) of the CCA which requires that “[a]ll retention money must be held on trust by Party A, as trustee, for the benefit of Party B”.  

The Court considered that while Downey held almost $590,000 in retentions for various sub-contractors, the bank statement purporting to cover retentions had only $190,000 in it.  The balance of convenience therefore favoured the retention monies being held in a clearly identifiable trust account, rather than co-mingling them with other retentions.    

The Court also considered that there was a risk of the retention money being dissipated, which the injunction was intended to prevent. 

This decision reflects the recent steps taken by the Government to bolster the Regime.  Late last year, MBIE commissioned KMPG to undertake an implementation review of the Regime to assess its impacts and the industry’s response to the Regime.  MBIE also released (on a limited basis) a consultation paper in February this year.  The Government has subsequently announced several in-principle changes to strengthen the Regime in May, including strengthening trust requirements and introducing new offences and penalties for non-compliance.  See our article on the announced changes here.  

While further details of the Government announced changes are yet to come, this decision is an encouraging step toward strengthening how retention money is held to prevent firms from dipping into retention money to use it as working capital.

Regardless of the changes, the CCA requires that retentions are held on trust (or via a complying instrument) and contractors / subcontractors are entitled to seek evidence that this is actually the case.  

If you have any questions about the article, please get in touch with our Construction Team or your usual contact at Hesketh Henry.

See our previous commentary on the Retentions Regime:

Administration of Retentions Trust:  Oorshot v Corbel Construction

Ebert Construction:  Court provides Guidance on the Retentions Regime

Ebert Construction:  Receivership and Liquidation

Ebert Construction:  What you need to know

Clarification of retentions requirements for construction contracts

Changes to the Construction Contracts Act 2002

[1] Hanlon Plumbing Ltd v Downey Construction Ltd [2020] NZHC 2457

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