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.