This post was written by Kensington Swan partner Mary Haggie.
It is common practice in construction projects for a head contractor to hold on to subcontractor retentions until the end of the defects liability period in the head contract. This practice was supported by a recent Australian Court of Appeal decision – Wright v Lend Lease Building Pty Ltd; Intercon Engineering Pty Ltd v Lend Lease Building Pty Ltd  NSWCA 463 – where the court said that there were sound commercial reasons for a head contractor to protect its risk and delay payment of subcontractor retentions until the end of the head contract defects liability period. This was the case even though the subcontractors had completed their works some considerable time earlier and there were no outstanding defects.
However, the new Construction Contract Act amendments regarding retentions (which come into force on 31 March 2017) could conflict with this practice. There are several new provisions on retentions but relevantly section 18 I provides that a term in the construction contract will be void if it purports to:
- make the payment of retention money conditional on anything other than the performance of party B’s obligations under the contract; or
- make the date on which payment of retention money is payable later than the date on which party B has performed all of its obligations under the contract to the standard agreed under the contract.
Careful attention will need to be given to wording in subcontracts to prevent the voiding of any clause which allows the head contractor to hold onto retentions once a subcontractor has completed its work and remedied all defects, even though the head contractor cannot recover its retentions from the client for some considerable time.
Click here for the abovementioned case.