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Jonathan Hyndman: Will lessons from Carillion lead to reform of retentions use at last?

The Construction (Retention Deposit Schemes) Bill 2017-19 – the Aldous Bill – was introduced as a Private Members’ Bill in January by Peter Aldous and is expected to have its second reading this month.

talking point retensions jonathan hyndman 01

talking point retensions jonathan hyndman 01

Jonathan Hyndman is a partner at Rosling King

The aim of the Aldous Bill is to make provision for protecting retention monies in connection with construction contracts by amending the Housing Grants, Construction and Regeneration Act 1996 – the Construction Act 1996.

The need for reform is significant. The construction sector has some of the highest new company insolvencies per year and the report published by the Trade and Industry Committee in 2002 estimated that retentions account for some £3.25bn per annum.

Many building contracts and sub-contracts provide for an employer (under a main contract) or a contractor (under a sub-contract) to retain a percentage of the value of the work carried out until completion or any defects are made good. Retentions are therefore in effect a form of “insurance policy” used as security to ensure that works are completed and/or the remedy of defects. The Construction Act 1996 does not expressly make provisions for retentions, however, the rules contained therein apply to the payment or withholding of a retention provided the contract is a “construction contract”.

In October 2017, the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation to review the use of retentions. The consultation highlighted that 44% of contractors surveyed experienced non-payment of retention monies as a result of upstream insolvencies due to funds not being ring fenced. The evidence also indicated that a proportion of construction customers may be making payment of a retention conditional on the performance of obligations under another contract. Delays in releasing retentions also appear commonplace and significantly increase further down the supply chain.

According Insolvency Service statistics from 2015, the construction sector had the highest number of new company insolvencies in England and Wales in comparison with other industries. The statistics coupled with the issues identified by the BEIS consultation only serve to support the argument for reforming the use of retentions in the construction industry.

The BEIS consultation favoured a statutory retention deposit scheme, akin to the tenancy deposit scheme that is compulsory for all residential assured shorthold tenancies. Such a scheme would ring-fence the retention and put the monies beyond the reach of an insolvency practitioner.

Many JCT contracts provide that the retention monies are to be held on trust and in a separate bank account. An example of this is JCT Standard Building Contract with Quantities, 2011 Edition. However, there are many other forms of building contracts that don’t make such provisions and this is where sub-contractors further down the chain are exposed.

The present form of the Aldous Bill amends section 111 of the Construction Act 1996. The result is that any clause in a construction contract, entered into after the passing of the Construction (Retention Deposit Schemes) Act 2018, which enables withholding cash retentions shall be of no effect unless the monies are deposited in a retention deposit scheme. Prior to the first withholding of the monies, the payer must inform the payee of the scheme administrator’s name and contact details and vice versa. A failure to comply with those requirements will require the payer to refund the cash retention to the payee no later than seven working days after the date on which the cash retention was withheld.

The bill also extends the meaning of a “construction contract” as currently provided for in the Construction Act 1996 to 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”.

If successful, the Aldous Bill will create a mandatory retention deposit scheme. However, the bill does lack specificity as the same requires the Secretary of State and Welsh Ministers, by statutory instrument, to make arrangements for securing that one or more retention deposit scheme is available for the purpose of safeguarding any cash retention withheld in connection with construction contracts. The scope of the definitions of “construction contract” and “cash retention” are wide and it remains to be seen how effective the reforms may be until the regulations put flesh on the bones of the act.

While it is rare for a Private Members’ Bill to reach the statute book, the bill has gained support, perhaps owing to the insolvency of Carillion earlier this year which created a domino effect throughout the construction industry. According to the Building Engineering Services Association, 120 members of parliament have confirmed their support for new laws which would place retention monies into protection schemes.

The widespread use of retentions might exacerbate the number of construction company insolvencies further if their use is not properly reformed. It is hoped that the Aldous Bill will increase confidence in the sector by ensuring retention monies are ring-fenced and thus potentially reducing the knock-on effect of insolvencies in the future.

  • Jonathan Hyndman is a partner at Rosling King

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