Construction: safeguarding cash retention’s with deposit schemes

Construction retention deposit schemes are expected to be introduced under government proposals, in the wake of the collapse of Carillion. The plans set out in the Construction (Retention Deposit Schemes) Bill are intended to safeguard cash retentions withheld under construction contracts.

If the Bill is passed, the Government (which recently consulted on construction cash retentions) will require regulations to be passed for the introduction of retention deposit schemes.

What is a ‘retention deposit scheme’?
A retention deposit scheme is defined in the Bill as a scheme which is made “for the purpose of safeguarding cash retentions withheld in connection with construction contracts and facilitating the resolution of disputes arising in connection with such cash retentions”, and which complies with the requirements. Note that separate legislation will be required to govern the final form of the deposit scheme.

What is a ‘cash retention’?
A cash retention includes any monies withheld from the amount which would otherwise be due under a construction contract, thus giving the payer security for the current and future performance by the other party of any or all of their contractual obligations.

What’s proposed?
The proposals are wide-ranging and will also have retrospective effect.  From the date the new rules come into effect, all retentions must be placed in a retention deposit scheme; whatever form the scheme will take in practice.  This means that the new scheme will apply to existing contracts where retentions are held.  This will therefore need to be monitored carefully by employers who hold retentions to ensure they comply with any laws which are implemented.

Under the proposals, any clauses purporting to withhold retentions in contracts coming under the ambit of the rules will be ineffective unless:

  • the retention monies are placed “forthwith” in a deposit scheme
  • the payer notifies both the payee of the scheme administrator’s name and contact details and the scheme administrator of the payee’s details – before the first withholding

Under the proposals, regulations will govern the selection and appointment of a scheme administrator, as well as the funding and management of a retention deposit scheme, and the mechanism by which retention deposits are released from a scheme.  If these requirements are not complied with, the individual holding the retention monies will be required to repay it to the payer within 7 working days of the money being withheld.

Furthermore, the new rules will apply both to construction contracts within the meaning of the Construction Act1 as well as “any contract created to have a similar effect to a construction contract”.

What’s next?
The details of the proposals are not yet clear, and the second reading of the Bill has yet to take place (this is expected on 26 October 2018).  We will be watching closely to see how the final details emerge, and what this means for businesses in the construction sector.

How can we help?
We advise construction companies and other business organisations working in the construction industry on their contractual and statutory duties.  For specialist advice on the potential implications of the cash retentions deposit scheme proposals on your contractual relationships, contact the experienced company and commercial solicitors at Herrington Carmichael as early as possible.

Please contact our construction team.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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