Retention Reform postponed…again
When it comes to reforming retention, the ‘latest proposal’ is becoming something of a misnomer. Peter Aldous MP (Con, Waveney), a former surveyor, introduced his Ten Minute Rule Bill, the Construction (Retention Deposit Schemes) Bill 2017-19 on 9 January 2018, but its second reading has been repeatedly postponed from 27 April 2018, to 15 June 2018, then to 26 October 2018 and now to 23 November 2018.
In his 1994 report “Constructing the Team”, the late Sir Michael Latham said:
“The retention system is supposed to be a mechanism whereby clients can build up a fund during the course of a project which will act as an inducement to the contractor to remedy any defect during the liability period. The idea in principle is a sound one, though in practice the system no longer operates in that manner. A better option would be to replace it in the contracts with retention bonds, reducing in value as each milestone section of the work is completed. Some clients may prefer a cash retention system, and that option should also be available for them, provided that the money is retained in a secure trust fund….
I have already recommended such trust accounts as a necessary Core Clause to the New Engineering Contract. They should also be built into other construction contract conditions and should be underpinned by legislation.” [our emphasis]
(Constructing the Team, Chapter 11, paras 11.1 and 10.6)
It is 24 years on and, despite much talking and the redrafting of certain standard forms, there is no compulsion on the construction industry to directly address Sir Michael’s observations. The Commons’ Trade and Industry Select Committee recommended reform in 2002, but nothing happened. Although the 2011 amendments to the Housing Grants Construction and Regeneration Act 1996 (‘HGCRA’) meant that payments to subcontractors could not be linked to payment or certification under the main contract, retentions remain a massive exercise in subcontractors subsidising contractors and employers, boosting their bottom line at the expense of subcontractors’ cash flow and future growth. In his First Reading speech, Peter Aldous pointed out that £8 bn of cash retentions has remained unpaid over the last three years, and that half of businesses that have experienced non-payment of retention due to upstream insolvency, with the average amount lost per contract being £79,900. However, commercial constraints – fears over loss of future jobs, and the up-front cost of recovery action - deter subcontractors from ‘rocking the boat’. Pye Tait Consulting’s October 2017 report into retentions – BEIS Research Paper 17 – contains the detailed analysis behind this.
Various parliamentarians have been pushing for reform in recent years. Prior to the Aldous Bill, Debbie Abrahams MP (Lab, Oldham East and Saddleworth) sought to introduce amendments to what became the Small Business, Enterprise and Employment Act 2015, requiring the use of trust funds where retentions were used, but withdrew her amendment when the government agreed to look at proposals to make retentions redundant. Retentions were the subject of a Westminster Hall debate in January 2016. Alan Brown MP (SNP, Kilmarnock and Loudoun), a former civil engineer, introduced the Construction Industry (Protection of Cash Retentions) Bill in April 2017, but the general election stopped it. The pressure has steadily mounted, particularly since the collapse of Carillion, and the Aldous Bill apparently commands the support of over 80 trade bodies and 200 MPs. However, we are in choppy political waters, and the Aldous Bill could easily become a casualty like the Brown Bill. The government ran a consultation on retentions from 24 October 2017 to 19 January 2018, but the responses to that are still being considered alongside responses to its consultation to support its Post Implementation Review of the 2011 changes to the HGCRA. While consultation on retentions shows the government is listening, one wonders why this is necessary when the arguments are so well known.
The Aldous Bill would require all retentions into be paid into an authorised deposit scheme, not unlike the tenancy deposit schemes into which tenants’ deposits must be paid to keep them safe from unscrupulous landlords under the Housing Act 2004, sections 212 - 215. In this way, retentions would be ring-fenced so that they would be secure and available to be released on time. See the text of the Aldous bill here.
The Aldous Bill proposes to introduce sections 111A and 111B to the HGCRA, whereby s111A defines “cash retentions” and “retention deposit scheme”, and broadens the definition of “construction contract” 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”, which goes beyond contracts defined by section 104 of the HGCRA. Proposed section 111A also provides the powers to make regulations concerning the establishment and maintenance of the schemes, selection and appointment of scheme administrators, and “the mechanism by which retention deposits are released from such a scheme”. While this arguably embraces dispute resolution mechanisms - because there will be instances where the release of retention is disputed - I think any statute should explicitly address dispute resolution. The industry needs to know whether the scheme administrator is to simply be a stakeholder who abides by an adjudicators decision, an arbitrator’s award or a judgment obtained separately, or whether they will themselves enjoy powers to resolve disputes equivalent to those of an adjudicator under the HGCRA. Note that paragraph 10 of Schedule 10 to the Housing Act 2004 makes provision for dispute resolution by tenancy deposit scheme administrators acting as adjudicators, and the Aldous Bill ought to do the same in respect of retention deposit schemes. It may also be beneficial to allow any referral to adjudication concerning retentions to cover more than one retention per contract at a time, in order to achieve ‘back to back’ decisions on contracts and subcontracts, reduce the overall cost of dispute resolution, and put pressure on ‘repeat offenders’.
Proposed subsection 111B(1) provides that any contract clauses which enable the withholding of payment of cash retentions are unenforceable unless the monies are deposited with a retention deposit scheme. It also provides for the compulsory provision by the payer to the payee of the details of the deposit scheme into which the retention is to be paid. Proposed subsection 111B(2) provides that a payer who has not deposited previously withheld monies into a retention deposit scheme 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”. It should also be noted that money withheld cannot be ‘refunded’ to a payee, it must be released. After all, the very problem with wrongly withheld retentions is that the money goes nowhere!
However, more fundamentally, there are some missed opportunities here. Firstly, the Housing Act 2004 provides sanctions against landlords who fail to place tenancy deposits into a scheme, by applying a multiplier of 3 to a tenancy deposit if the tenant is forced to take recovery action, as well as curtailing the landlord’s ability to end the tenancy. Given the egregious nature of many payers’ behaviour in withholding retentions, they too should be sanctioned by a multiplier if they fail to comply and the subcontractor is forced to take recovery action, which would help to reimburse subcontractors for their time, trouble and cost of that, and add real ‘clout’ to the resulting Act. Secondly, the bill as drafted would only apply to retentions withheld after the resulting Act has come into force, but transitional provisions could provide for existing retentions to be paid into a retention deposit scheme too, within, say, 3 months of it coming into force. This would, I daresay, force tardy payers into ‘paying up or paying in’ so that, unless subcontractors get their money, it results in a significant influx of historic retentions into retention deposit schemes, which would assist in their first year of operation. If a payer then wanted to get a retained sum back out of the deposit scheme, they would have to prove they had spent an equivalent sum on rectifying defects for which the subcontractor was responsible.
The Aldous Bill also provides that subsection 112(1) of the HGCRA is amended so that where a payer fails to comply with new subsection 111B(2) by not releasing the retention to the payee because they’ve failed to place it into a deposit scheme, the payee may suspend its performance just as if the payer had failed to pay any other ‘Notified Sum’. That makes sense, but the ability to suspend performance is only a truly effective deterrent prior to practical completion, and typically the second tranche of any retention is not contractually due until the final account is resolved many months later; an additional ‘multiplier’ sanction would be more likely to secure compliance. With the help of a sympathetic parliamentary draftsman/draftswoman, the Aldous Bill could be given more ‘teeth’.
What does this mean for you or your business?
The current fixation with Brexit means that sadly, despite the Aldous Bill, the legal situation concerning retentions is unlikely to change soon. However, it will happen at some point because it is intrinsically linked to the post implementation review of the 2011 changes to the HGCRA, and the Carillion scandal, or a repetition of it (place your bets…), will keep the issue alive. Any solution is likely to adopt a ‘trust model’ rather than abolishing retentions outright, using deposit schemes which replicate the tenancy deposit schemes introduced by the Housing Act 2004. When it happens, this be a very welcome development for subcontractors, and will allow them to grow their businesses. It would also take some of the rancour out of the industry. Employers and Main Contractors will finally have to face up to their responsibilities, which I think we should admit they have been able to evade to date mainly because the cost of recovery action faced by subcontractors for modest sums over many contracts means the cost-benefit ratio of taking action is a negative one. Before they complain too much, employers and main contractors should remember that ‘It’s not your money’!
What should you be doing now?
In the meantime, be open to alternatives to retention, such as project bank accounts, retention bonds, or even just agreeing to put retention into stakeholder account run by a professional third party. If you are owed retention, and the cost-benefit ratio of taking recovery action can be met, adjudicate once the final tranche of retention falls due. Consider court action if retention is due on more than one contract and you are confident on your position concerning alleged defects; in the absence of a Pay Less Notice, summary judgment may be an option rather than waiting for a full trial. Where there is defective work which justifies the payer rather than the payee getting the retention, that should be properly evidenced, because once the Aldous Bill (or something like it) becomes law, it will bring disputes over that to a head. Those who will administer retention deposit schemes will need to be trained as, or have recourse to the services of, qualified construction adjudicators, depending on how dispute resolution over the release of retention is to be addressed.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.