Sold by politicians as protection for sub-contractors, changes to the Construction Contracts Act requiring contract retentions to be held ‘in trust’ do not in fact require creation of a trust fund. First major casualties are Ebert Construction sub-contractors.
Construction law was changed in a knee-jerk reaction to the 2013 collapse of Mainzeal group where sub-contractors were left in the cold over retentions totalling $18 million. For commercial construction contracts, the head contractor became obliged to hold retentions in trust. Typically, ten per cent of a sub-contractor’s price is held back: half released when a certificate of practical completion is signed off on their work; the balance when an agreed defects liability period passes.
The High Court was told the collapse of Ebert Construction Ltd last July saw $3.67 million sitting in the company’s retention account; well short of the $9.32 million the company should have funded as a retention liability. Ebert Construction’s ongoing reconciliation of its retention account lapsed in the months leading up to receivership. Receivers from PwC have been untangling the claims. There are some 152 sub-contractors who could potentially claim against the $3.67 million retentions. Release of retention funds to some contractors had been signed off, but not actioned before receivership. Other sub-contractors had done work but their contract was not recorded in Ebert’s computer system as needing retentions.
Justice Churchman said the Construction Contracts Act did not require retention monies to be banked into a separate account; money could be mixed in with the head contractor’s other accounts. This does not create an express trust in the accepted legal sense. With Ebert’s credit facilities heavily overdrawn, retentions not paid into its retentions account simply evaporated. Sub-contractors entitled to claim against the $3.67 million retention account are those whose identified retentions were paid into the account plus those whose release had been signed off but not actioned, Justice Churchman ruled. They all receive a pro-rata payment of what is owed. Sub-contractors who did not have any retention paid into the account cannot claim.
PwC, receiver of Ebert Construction, was also appointed receiver of the $3.67 million retention fund. Since this account is a trust fund it is not ‘owned’ by Ebert; a High Court order was needed to have someone appointed to take control.
The court was told Ebert Contracts’ sub-contractors are owed approximately $33.8 million. They are unlikely to get any money other than those entitled to share in the $3.67 million retentions.
Bennett v. Ebert Construction Ltd – High Court (12.11.18)
18.223