4.06.2020

Retentions Regime: Government Announces Changes

On 27 May 2020 the Government announced several in-principle changes to strengthen the retentions regime (Regime) in the Construction Contracts Act 2002 (the CCA).

Despite the Regime’s introduction in 2017, many subcontractor retentions have still been left unprotected and various gaps in the legislation have been exposed. These shortcomings were highlighted by the high-profile insolvency of Ebert Construction and resulting litigation by its Receivers for directions on administering an inadequate retentions account. 

In view of this, MBIE commissioned KPMG to undertake a review in 2019 before releasing (on a limited basis) a consultation paper in February this year.  Although the KMPG review suggested a tolerable level of compliance, on closer examination the survey evidence would tend to indicate that around one third or more of retentions holders are not complying with the Regime in light of Ebert.  The consultation paper therefore focused on amendments to the CCA that aimed to clarify the obligations for holding retentions on trust and impose sanctions for non-compliance.

The recently announced changes appear to be a progression of that paper.  Perhaps surprisingly, to our knowledge, MBIE has not consulted more widely despite the limited circulation of the paper, nor publically considered other models including the possibility of abolishing retentions altogether.  It is unclear at this stage whether the changes have been brought forward by the government in response to the Covid-19 crisis.

The announced changes include:

  • Trust requirements: Strengthening how retention money is held to prevent firms from dipping in to retention money to use it as working capital;
  • Transparency: Requiring those who hold retention money to issue a “transparency statement” stating how much is being held and where; and
  • Penalties: Making non-compliance an offence with fines of up to $ $200,000 for businesses and $50,000 for company directors.

Further details of the amendments, including the legislative drafting, and when they might be implemented are still awaited.  For example, it is currently unclear what the modified trust requirements will be, when the “transparency statement” will need to be issued and what it must contain, or whether the Courts will publically administer fines.[1]  There is also currently no indication as to whether the changes will include statutory machinery for administering retentions in an insolvency (to avoid the need for Court orders), which would seem to be essential.

That said, subject to the details, the changes should tighten up the Regime, provide greater certainty for the industry, and seem to be in line with the information sharing objectives from the Construction Sector Accord.  For those reasons they are encouraging.  The introduction of statutory offences represents the most significant change, which should see improved compliance and help redress the problem of those who do not comply being afforded a commercial advantage. 

The announcement focuses on tweaking the existing Regime.  In doing so, it is hoped that the process to get here has not been unduly narrow or rushed, and that we will not be revisiting the Regime once again in a few years time.  Another update will be provided once more is known.

See our previous commentary on the Retentions Regime:

Administration of Retentions Trust:  Oorshot v Corbel Construction

Ebert Construction:  Court provides Guidance on the Retentions Regime

Ebert Construction:  Receivership and Liquidation

Ebert Construction:  What you need to know

Clarification of retentions requirements for construction contracts

Changes to the Construction Contracts Act 2002

[1] MBIE’s consultation paper had floated the idea of adjudicators having jurisdiction to administer fines, noting that adjudication under the CCA is a confidential process.

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