Thu 31 May 2018

New Legal Rules for Retention in the Construction Sector?

The problem of people holding onto retention monies longer than they should at various levels within the contractual chain on a construction project whether retention held by an employer, a main contractor, or a sub-contractor, has long been a problem in the construction sector. Sometimes this can seriously affect the cash flow of businesses even pushing them to the brink of insolvency and sometimes beyond it.

Attempts have been made in the past to address this very serious issue but they failed. The demise of Carillion and others leaving many in the contractual chain without payment of the retention monies due to them has reinforced the call for action so that retention monies can be safeguarded.

Earlier this year, just before the collapse of Carillion, a Private Members Bill was introduced in the House of Commons under the Ten Minute Rule by Peter Aldous M.P., the Construction (Retention Deposit Schemes) Bill. It was produced to “make provision about protecting retention deposits in connection with construction contracts; and for connected purposes”.

Usually, attempts at introducing legislation in this way are not successful. In this case, however, and given the publicity surrounding those out-of-pocket as a result of the Carillion collapse, the Bill is expected to have its second reading in the House of Commons on 15th June 2018 and may progress further because there is considerable cross-party support for statutory intervention to reform practices in relation to the holding of retentions.

So what does the new legislation propose?

The Bill seeks to amend the provisions of the Housing Grants, Construction and Regeneration Act 1996, (“the HGCR Act”).

It seeks to introduce two new substantial provisions into the HGCR Act.

A new Section 111A requires the “appropriate national authority” in England and Wales and Scotland to make regulations making arrangements for securing that at least one retention deposit scheme is available for the purpose of safeguarding any cash retention withheld in connection with construction contracts. The term “cash retention” is given a wide definition in the Bill meaning “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”.

A new Section 111B provides that any term of a construction contract entered into after the passing of the Act which enables a payer to withhold cash retentions shall be of no effect unless (a) upon their withholding, the monies are deposited forthwith in a retention deposit scheme under Section 111A and (b) prior to the first withholding of the monies the payer has notified the payee of the scheme administrator’s name and contact details and the scheme administrator of the payee’s name and contact details.

If, after the coming into force of the new changes to the legislation, any cash retention withheld has not been placed in a retention deposit scheme under s.111A or the payer has not notified the payee of the scheme administrator’s name and contact details and the scheme administrator of the payee’s name and contact details, the payer must not later than 7 working days after the date on which the cash retention was withheld, refund the cash retention in full to the payee.

While the provisions will apply to construction contracts as defined in Section 104 of the HGCR Act the provisions will also apply to “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 drafting of this provision is not perhaps as clear as it might be but it appears to be aimed at achieving some anti-avoidance measure so that the aims of the legislation will not be thwarted.

It is clear that there is still some work to be done on the detail of the terms of the Bill. It will be interesting to see if it progresses through Parliament and into law.  Much may depend on whether Parliamentary time can be found for it to be properly debated and refined.  Given the current position in the construction industry this legislation may have a much better chance of becoming law than previous attempts at reform. Watch this space.

Make an Enquiry

From our offices we serve the whole of Scotland, as well as clients around the world with interests in Scotland. Please complete the form below, and a member of our team will be in touch shortly.

Morton Fraser MacRoberts LLP will use the information you provide to contact you about your inquiry. The information is confidential. For more information on our privacy practices please see our Privacy Notice