Retention trust accounts

On 17 April 2014, Clayton Cosgrove, Labour’s commerce spokesman, issued a supplementary order paper (SOP) moving an amendment to the Construction Contracts Amendment Bill which would require subcontractor retention payments to be placed into an independent trust account.

The proposed amendments largely mirror updated legislation in New South Wales which came into force on Monday 21 April 2014 and are currently waiting for regulations to be finalised.

Under the SOP, the Government would be able to enact regulations requiring subcontractor retentions on commerical and industrial developments to be held in trust for the subcontractor, and requiring the head contractor to pay retentions into an independent trust account established in accordance with the regulations.

We have heard that the government is agreeable to some kind of trust arrangement for retentions so it may accept this amendment or introduce its own.

An important issue for head contractors is that the SOP only proposes to deal with subcontractor retentions. This means that a head contractor may have to put the amount of subcontractor retentions into trust when it does not even have that money, because the head contract retentions are held by the principal and the amount matches, or exceeds, the retentions held from subcontractors by the head contractor. Also, there is no protection in the SOP for the head contractor’s own retentions so, in the event of the principal’s refusal to pay or insolvency, the head contractor could lose its own retentions and still be required to pay the subcontractor retentions.

Hopefully the result of the New South Wales consultation on draft regulations provides a practical solution to these issues, although this will be a significant challenge as the legislation only contemplates subcontract retentions.

4 thoughts on “Retention trust accounts

  1. Hi Arie,
    It is becoming more and more common for Head Contractors and Subcontractor to provide bonds in lieu of cash retentions.
    How would this practice be reflected in any new legislation?

  2. Hi Wayne,
    That is a good question. Currently there is very little detail that has been provided to accompany the SOP as to how any schemes would work. However, my guess would be that any retention trust scheme would only apply to cash retentions, so would not apply to bonds in lieu of retentions.

    This is supported by the proposed definition of ‘retention money’ as ‘money that is retained by a head contractor…’. Further, this is similar to the NSW statute which also only applies to cash retentions.

    One result of introducing any scheme like this may be that bonds in lieu of retentions will become far more common to get around the need to any project trust accounts.

    Happy to discuss.

  3. Pingback: Further development on retention trust accounts | CONSTRUCTION LAW BLOG

  4. Pingback: Retentions to be held under statutory trust | CONSTRUCTION LAW BLOG

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