When are your retentions payable if you have been booted off the site?

Retentions are a common feature of commercial construction contracts, and some residential construction contracts. They are deducted from each payment claim and paid out at the end of the project, to create a financial incentive for the contractor to complete all unfinished work and rectify all identified defects after he has completed the bulk of his work and has been paid for it.

Sometimes a subcontractor has to wait a long time for the release of its retentions, especially if it did its work very early in the piece (such as site decontamination, earthworks, or foundations), and the defects notification period specified in the head contract is particularly long. It’s bad enough having to wait until everyone else has finished their work. What if you have had a falling-out with the head contractor, and it has terminated your subcontract (rightly or wrongly) long before you were due to finish? Do you still have to wait, or can you claim your retentions there and then?

 

The issue arose in a 2017 case

There doesn’t appear to be much case law on the subject, but the situation did arise in a scrap between Security Systems Ltd and Smart Controls Ltd which was fought out in the High Court in 2017. Security Systems was subcontracted to provide security services for the Fletcher Campus at Penrose, Auckland, and it sub-subcontracted the CCTV work to Smart Controls. Eventually they had a dispute over payment, and Security Systems took umbrage to an abusive phone call from the owner of Smart Controls. So before Smart Controls had completed their CCTV work, Security Systems told them to pack up and leave, which they did.

If you have had a falling-out with the head contractor, and it has terminated your subcontract long before you were due to finish do you still have to wait, or can you claim your retentions there and then?


Smart Controls then tried to recover the debt they believed they were owed, a lot of which related to retentions. The contractual arrangement was that retentions of 10% could be withheld until satisfactory rectification of all defects identified during the defects notification period, which was 12 months after the issue of the certificate of practical completion. But Smart Controls argued that it was entitled to its retentions immediately, because the sub-subcontract had been cancelled.

Associate Judge Bell expressed some doubt about whether an abusive phone call was enough to justify Security Systems in cancelling the sub-subcontract, but he didn’t need to make a final ruling on the subject. On the issue of whether the cancellation meant that Smart Controls was entitled to its retentions immediately, he was prepared to entertain the idea, but was reluctant to make a final ruling because he was concerned that the head contract (which was NZS 3910) might have something to say on the matter, but he had not been shown it. So he left the question open (quite rightly I think). The purpose of this article then, is to answer the question that Associate Judge Bell had been unable to answer.

 

What do the standard-form contracts say?

Retentions are only deductible if the construction contract says so – there is no statutory right to withhold them. However, all standard form commercial construction contracts, and some residential construction contracts such as NZS 3902, provide for retentions.

For example, the NZIA Standard Construction Contract SCC 2018 provides for retentions of 10% of the first $200,000, 5% of the next $800,000, and 1.75% of the rest, until a maximum of $200,000 is held. 40% of the accumulated total is released after certification of practical completion, and the balance is released steadily during and after the Defects Notification Period (which is typically 3 months or longer) until all omissions and identified defects have been rectified and all deferred work completed. The amount released is the total of all remaining retentions, less the cost to complete the work remaining to be done by the contractor. If the contractor fails to complete the job, any remaining retentions can be used to get someone else to do it.

Retentions are only deductable if the construction contract says so - there is no statutory right to withhold them.


Under NZS 3910:2013, the same percentages apply and the same maximum total retention, but 50% of the accumulated total is released after certification of practical completion. Under the special conditions of contract you can modify that arrangement, and you can provide for the contractor to put up a bond in lieu of retentions. If at any time during the project the contractor defaults in a major way, the Principal can either terminate the contract or resume possession of the site. Assuming the Principal elects to complete the contract works or arrange for someone else to do so, then the contractor who is owed the retentions is not entitled to any further payment until the completion of the contract works (see clauses 14.2.3 – 14.2.5).

Section 18I implies that the contractor has to receive its retentions no later than the date on which it has performed all of its obligations under the contract to the standard agreed under the contract.

 

Does the Construction Contracts Act change things?

The situation was further complicated when Subpart 2A of the Construction Contracts Act 2002 (the “CCA”) came into force on 31 March 2017. Since then, retentions in commercial construction contracts (as defined in the Construction Contracts Act 2002) are required to be held in trust for the intended recipient in cash or other liquid assets, to avoid those retentions being lost if the Principal becomes insolvent. Under the CCA a “commercial construction contract” means a contract for carrying out construction work in which none of the parties is a residential occupier of the premises. That means that even some residential projects will be subject to the CCA retentions regime - notably those where the owners don’t intend to personally occupy the premises, and all construction contracts such as subcontracts where the contractor is not contracting with the intended occupiers.

Section 18I of the CCA now provides that:

Any term in a construction contract is void that purports to:

a) make the payment of retention money conditional on anything other than the performance of [the contractor’s] obligations under the contract; or

b) make the date on which payment of retention money is payable later than the date on which [the contractor] has performed all of its obligations under the contract to the standard agreed under the contract.

Section 18E of the CCA says that retentions held in trust must not be forfeited for any purpose other than to remedy defects in the performance of the contractor’s obligations under the contract. But assuming there is no forfeiture, section 18I implies that the contractor has to receive its retentions no later than the date on which it has performed all of its obligations under the contract to the standard agreed under the contract.

That leads you to ask, when you are a contractor and you have been booted off the site (rightly or wrongly), haven’t you been prevented from remedying any defects in your work? And haven’t you been prevented from performing all of your obligations under the contract to the standard agreed under the contract? In which case, shouldn’t you be entitled to the release of your retentions right now?

I think the answer is that you have to wait. Even if the Principal was not justified in cancelling your contract, you are in no worse a position than if you had done the whole job and waited out the defects notification period. And it is not until practical completion that the architect or engineer is able to truly focus on what work remains unfinished and what defects need rectification. At that time, your work may be found wanting, and they may have to pay someone else to fix it up. Yes, the cancellation of your contract has meant that you no longer have any obligation to complete the work, but you are still liable for the extra cost of getting someone else to do so, assuming the cancellation was legitimate. And if the cancellation wasn’t legitimate, you can at least claim for the losses you suffered as a result – which would include the unlawful forfeiture of your retentions.

by Geoff Hardy
Auckland Commercial Lawyer

Geoff Hardy has 44 years’ experience as a commercial lawyer and is a partner in the Auckland firm Martelli McKegg. He guarantees personal attention to new clients at competitive rates. His phone number is (09) 379 0700, fax (09) 309 4112, and e-mail geoff@martellimckegg.co.nz. This article is not intended to be relied upon as legal advice.