Retention clauses in construction contracts delaying payment until after a project is complete cannot be enforced against sub-contractors. Construction Contracts Act prohibits any requirement linking subcontractor payment to final completion by the head contractor.
BDO Wellington as liquidators of insolvent Palmerston North engineering company Stevensons Structural Engineers 1978 Ltd recovered some $225,000 retentions withheld by McMillan & Lockwood for sub-contracting work on two projects: Sarjeant gallery in Whanganui and a NZ Army project at Linton Camp.
Stevensons went into liquidation without completing its share of the work on these two projects.
Mc Millan & Lockwood claimed it could keep retentions held in name of Stevensons to cover the cost of getting new sub-contractors to finish this work.
In its sub-contract, Stevensons had agreed to funds being withheld from progress payments. Its contract stated fifty per cent of retentions would be released on satisfactory completion of Stevensons’ work, the balance within thirty days of each of the two projects being complete.
In the High Court, Associate Judge Skelton ruled this retention clause was void and ineffective.
Construction Contracts Act prohibits clauses which tie payment to performance by someone else. This saw the end of ‘pay when paid’ clauses, in which head contractors could refuse to pay sub-contractors until they themselves were paid.
Judge Skelton ruled the McMillan & Lockwood retentions clause was similarly in breach of the Act; it sought to refuse full payment until the project was complete, something over which sub-contractors had no control.
McMillan & Lockwood had no right to retain the $225,000 held back.
It could not set off these retentions against the cost of having another contractor complete Stevensons’ steel work.
This retention money was held in trust. Claiming a set-off against a company in liquidation requires ‘mutuality;’ the set-off must arise from mutual dealings between the two parties having the same interest.
There was no mutuality of interest in this case. McMillan & Lockwood as trustee holding retention money was not the same as McMillan & Lockwood claiming breach of contract.
It could not set off monies held as trustee for the benefit of Stevensons against its corporate claim against Stevensons for damages.
Stevensons Structural Engineers 1978 Ltd v. McMillan & Lockwood Ltd – High Court (27.08.24)
24.206