New details announced for the UK Government’s plan to ban cash retentions

Following confirmation in the King’s Speech of the UK Government’s plan to ban “poor” payment practices across the UK, including retentions, we now have details of the proposals, as set out in the Small Business Protections (Late Payments) Bill (Bill), which has had its first reading in the House of Lords.

What changes are proposed?

The changes are to cover two broad areas: an extension of the powers of the Small Business Commissioner and a series of wider late payment reforms including:

• Persistently late-paying large companies to publish commentary on why payment performance is poor and what actions they are taking to fix this.
• Maximum payment terms of 60 days, with strictly limited exemptions.
• All commercial contracts to contain a right to statutory interest at 8% above the Bank of England base rate.
• A complete ban on cash retentions in ‘construction contracts’.

You can read more about the broader changes in: Time to Pay Up: The Government Responds to the Late Payments Consultation.

The ban on retentions is to be incorporated into Part II of the Housing Grants, Construction and Regeneration Act 1996 as new sections 113 A-F.  

Which contracts will be caught by the retention ban?

If passed in its current form, the retention ban will take effect in England, Wales and Scotland and will only apply to ‘construction contracts’ (as defined in section 104 of the aforementioned Act).

Which payment practices will be caught by the retention ban?

The proposed new section 113A of the Act defines a retention as being where one party to a construction contract deducts or retains sums of money ‘equating to a percentage’ of an amount payable for goods, services or works or an interim payment or the contract total until any condition for release or partial release is met.

Whilst this will serve the purpose of preventing cash retentions, it may also prevent the common practice of withholding monies against other conditional performance obligations where the amount specified to be withheld 'equates to a percentage' of a sum due.  For example, withholding monies until security documents such as parent company guarantees or performance bonds have been provided.

Will there be a transition period?

A transition period of two years is envisaged by the Bill (proposed transition period).

• Any new retention clause attempted to be agreed after the end of the proposed transition period will be void.
• Variations to pre-existing retention clauses or related terms will also be banned after the two years unless the variation makes the retention clause or related term more favourable to the payee.

Under the new section 113B of the Act, the following ‘transitional’ retention arrangements will become ineffective after three years of the section coming into force:

• retention clauses introduced into a construction contract during the proposed transition period (including where the construction contract or related agreement was entered into before the beginning of that period), or
• retention clauses in a pre-existing construction contract which are varied during the proposed transition period.  

Any retentions deducted since the start of the transition period under the above contracts which have not been repaid by the end of the three years will become repayable at that point.

What remedies will there be for failures to repay retentions?

Based upon the drafting of new section 113E, a term will be implied into the construction contract that, if a retention debt arises after the end of the two year transition period, the payee will be entitled to a fixed sum of the higher of £40 and 50% of the retention debt (in addition to statutory interest on the late payment).

What steps should businesses take in preparation for the ban?

Assuming that the Bill is passed, businesses operating in the construction sector and wider supply chains will be well advised to begin preparing now.

In particular, it may be sensible to review current contractual arrangements to understand the extent of reliance on cash retentions and to identify clauses in templates that may need to be amended in due course.

We are likely to see amendments to standard form contracts to address these issues.

Consider the extent to which alternative security arrangements such as retention bonds, extending performance bonds, parent company guarantees and other measures may help to ensure a smoother transition when the time comes.

It is equally important to consider the impact of the wider payment reforms on procurement strategies and tender documentation. The introduction of maximum payment terms, mandatory interest on late payments, and statutory deadlines for disputing invoices (where applicable) will all require adjustments to standard commercial processes.  Being clear on how the provisions of the Bill will apply to the contract in question, including whether it is a ‘construction contract’, will be fundamental.