Lawyers warn of illegal retention clauses

Subcontractors are being given contracts containing illegal retention payment provisions, over three months after they were first outlawed, lawyers have warned.

As of last October it became illegal for a client or main contractor to retain part of a payment for work completed because a separate contract was not yet complete, under changes to the Construction Act.

Before the change in the law, the practice of clients or main contractors holding retention payments, which are often 5% of the value of a job, until the entire project had been signed-off had been a source of irritation to subcontractors.

You cannot hold on to a payment when there’s a defect to another part of the project

Rudi Klein, SEC Group

“Now those provisions are outlawed and the industry has not caught on to this,” said Rudi Klein, chief executive of the Specialist Engineering Contractors Group.
“You cannot hold on to payment when there’s a defect to another part of the project and there’s many instances of this going on.”

Klein said it left subcontractors exposed to the insolvency of clients and main contractors further up the chain, which would likely result in them not receiving full payment.

He said it damaged subcontractors’ cash flow at a time when borrowing from banks has become difficult.

Kim Teichmann, associate at lawyer Thomas Eggar, said the problem often stemmed from mistaken use of old JCT contracts that did not account for the change in the law. “It’s just incompetence,” she said. “You would think people would know to adapt their contract by now.”

Rupert Choat, head of construction disputes at lawyer CMS Cameron McKenna, said he had seen such provisions since October but that it was unsurprising given the overhaul of contracting that the law change had required.