Retentions under the spotlight … third time lucky?

We have previously reported on attempts to reform retention practices within the UK construction industry (see our our previous Law-Nows, here and here). A Private Members’ Bill introduced last year did not reach its second reading before parliament was dissolved ahead of the General Election. A further Private Members Bill introduced this year looks likely to go further.

In January this year, six days before the liquidation of Carillion, a Private Members’ Bill to “protect retention deposits in connection with construction contracts” was introduced by Mr Peter Aldous, the member for Waveney. The Construction (Retention Deposit Scheme) Bill (the “Bill”) intends to amend the Housing Grants Construction and Regeneration Act 1998 (the “Construction Act”) and ring-fence retention monies so that they are available to be paid.

The Bill, as currently drafted, creates two new provisions for the Construction Act:

• Section 111A: requiring the appropriate national authority to make regulations setting out arrangements for at least one retention deposit scheme to be available for the purpose of safeguarding any cash retention withheld in connection with construction contracts.
• Section 111B: puts a statutory obligation on any party holding retention money to put it in a retention deposit scheme and notify the payee of the scheme administrator’s details and vice-versa. If the payer fails to comply with these provisions any withheld money will have to be repaid to the payee within seven days after the date on which the cash retention was withheld.

The term “cash retention” is widely defined in the Bill as being “monies which are withheld from monies which would otherwise be due under a construction contract, the effect of which is to provide the payer with security for the current and future performance by the payee of any or all of the latter’s obligations under the contract”.

The Bill also applies to a broader range of contracts than those governed by the Construction Act. A “construction contract” in the Bill is defined as “in addition to the meaning given by section 104 [of the Construction Act] shall also include any contract created to have a similar effect to a construction contract for the purposes of withholding monies which would otherwise be due under the contract”. The intention behind this broader definition appears to be as an anti-avoidance measure.

The Bill is due to have its second reading on 15 June 2018 and it is hoped that further detail as to the proposals made will emerge through the debate process. Although providing a basis for discussion, the Bill leaves a number of issues unaddressed. For example, the Bill does not answer questions such as who will bear the cost of the scheme, how will the money be held (i.e. is it in trust to protect against insolvency), when will the money be released (this is left to the regulations to be issued by the national authority) and who will be entitled to any interest accrued. The Bill also does not deal with how to resolve disputes as to whether the conditions for payment of retention have been met, bearing in mind that the level of the sums held may make any formal dispute proceedings uneconomic to pursue.

The Bill also appears not to have properly considered the effect on multi-tiered projects. In its present state, the Bill appears to require retention to be paid into a deposit scheme at every tier, entailing a significant doubling up of funds. This will worsen the cashflow burden for contractors in the middle of a contractual chain, as they need to pay out to a deposit scheme the same funds which have already been withheld from them higher up the chain. However, it may be beneficial to sub-contractors where they have fulfilled their own provisions for release of retention but the main contractor (or other subs) have not. More detailed drafting is likely to be needed to specify that retentions lower down a contractual chain can avail of payments into a deposit scheme made higher up the chain. Clarity as to the ownership of the funds held by the deposit scheme will also be needed in such circumstances to protect against the insolvency of one of the parties in the contractual chain.

Regardless of these concerns the Bill is gathering a lot of support throughout the industry and with MPs. Earlier this month, a petition on behalf of over 355,000 companies and many self-employed professionals was presented to the Prime Minister in support of the Bill. It is also thought that significant cross-party support exists for the reform of retention practices. Time will tell whether this most recent attempt comes to fruition.