A supplemental submission from the City of London Law Society's Construction Law Committee sent to the Department for Business, Energy & Industrial Strategy (BEIS) on 3 December 2018 regarding potential proposals to introduce a statutory retention deposit scheme for construction contracts in the United Kingdom.

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SUPPLEMENTAL SUBMISSION FROM THE CITY OF LONDON LAW SOCIETY CONSTRUCTION LAW
COMMITTEE TO THE DEPARTMENT FOR BUSINESS, ENERGY & INDUSTRIAL STRATEGY'S
CONSULTATION ON THE PRACTICE OF CASH RETENTION UNDER CONSTRUCTION CONTRACTS
A. INTRODUCTION
1. On 19 January 2018, the Construction Law Committee (“CLC”) of the City of London Law
Society (CLLS) submitted its response to the Construction Unit of the Department of Business,
Energy & Industrial Strategy (BEIS) regarding its consultation on the practice of holding cash
retentions under construction contracts (“Response”). A copy of the Response can be found
on the CLLS’ website.1
2. The following are factors in the CLC deciding to provide to BEIS this supplement to the
Response (“Supplemental Submission”):
a. Although the consultation formally closed on 19 January 2018, at the time of writing, it
is our understanding that BEIS has not yet published its post-consultation report nor
made public any of its findings from the consultation although there have been recent
indications that some form of official announcement may be imminent. Nonetheless,
we anticipate that BEIS may, in the meantime, remain receptive to additional
comments;
b. The Construction (Retention Deposit Schemes) Bill (commonly referred to as the
Aldous Bill), was introduced by Peter Aldous, the Member of Parliament for Waveney,
on 9 January 2018 under Parliament’s Ten Minute Rule. As a Private Members’ Bill, it
falls outside BEIS’ remit.2 However, with regard to the subject-matter of BEIS’
consultation, it is nevertheless of interest because:
i. Its premise – that any retention monies withheld pursuant to a construction
contract should be placed on deposit in a governmental-approved deposit
scheme – is similar to the central idea proposed in BEIS’ research paper
dated 24 October 2017, “Retention Payments in the Construction Industry: A
consultation on the practice of cash retention under construction contracts”,
which accompanied its consultation (“Research Report”). Consequently, the
Aldous Bill offers an opportunity to examine the potential advantages and
drawbacks of implementing such a scheme. Ahead of its second reading3 in
the House of Commons, a draft bill was published on 23 April 2018 which
outlined how it is envisaged that the deposit scheme would operate; and
1
“Response of the City of London Law Society Construction Law Committee to the Department for Business, Energy &
Industrial Strategy's Consultation on the Practice of Cash Retention under Construction Contracts” dated 19 January 2018. The
CLLS’ website is located at www.citysolicitors.org.uk.
2
It should also be recognised that the Aldous Bill has substantial hurdles to overcome in order to become law. Firstly, it is not
yet clear that it can command the support of the majority of MPs (Building magazine, however, reported in late August 2018 that
207 MPs supported the Aldous Bill). Secondly, the country’s planned withdrawal from the European Union has placed severe
constraints on Parliament’s capacity to debate any new law, not least Private Members’ Bills. Without a carry-over motion being
passed (an amenity effectively denied to Private Members’ Bills), the Aldous Bill will fail if it has not passed into law by the close
of the current parliamentary session (which would occur in May or June 2019). This parliamentary session (and indeed this
Parliament) will end even earlier should a general election be held pursuant to section 2 of the Fixed-term Parliaments Act 2011
between now and then. Earlier postponements of the second reading may have been a careful calculation between using the
extra time to drum up further support for the Aldous Bill and increasing the prospects of it being “lost”.
3
This is currently scheduled for 25 January 2019, having been postponed on four occasions.

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ii. Private Members’ Bills frequently lack Government support and therefore their
proponents must solicit support from MPs of all sides, relevant industries and
the general public. In this way, the Aldous Bill can be a source of helpful
feedback for BEIS’ consultation;
c. In seeking wider public support for a deposit scheme, the Aldous Bill is clearly hoping
to direct BEIS’ thinking towards the prospect of a similar solution. Indeed, Private
Members’ Bills are often introduced in order to influence both the Government and
Parliament and the timeliness of its presentation to Parliament in the midst of BEIS’
consultation period may be no coincidence;
d. It is our observation that there is no broad industry consensus that a retention deposit
scheme is the most suitable way forward. Moreover, construction clients and
development funders are often less well represented as a collective within the
construction industry, with notable exceptions such as the British Property Federation
(which has responded cautiously to the Aldous Bill4). There are, naturally,
substantially more supply-side representative bodies since their members tend to
have more in common with each other. In order to compensate for this, the CLC
wishes to bring objectivity and greater balance to the debate on retention monies
through this Supplemental Submission;
e. The Parliamentary Under Secretary of State at the Department for Business, Energy
& Industrial Strategy, Richard Harrington MP (who serves as the Construction
Minister), indicated in a recent interview with Bloomberg that he is seeking the views
of industry and will “bring forward his own government bill to tackle the problem [of
late payment]”;5 and
f. Several months have passed since the collapse of Carillion, which dominated the
news headlines in the weeks immediately prior to, and following, the close of the
consultation. The various inquiries and media reports since have highlighted issues
with the treatment by Carillion of its suppliers, but the CLC would emphasise that this
behaviour should not be seen as representative of other contractors in the UK
construction market. It is concerned that a knee-jerk reaction (in the shape of
legislative reform) may create more issues than it solves. The passage of time should
allow for cooler heads to prevail in analysing how best the Government should
respond.
3. It is not the intention of this Supplemental Submission to make a case either for any specific
alternative to a statutory deposit scheme or for retaining the status quo.6 Nonetheless, in the
wake of Carillion’s demise, it may be tempting – to paraphrase a judicial apothegm – to ensure
that justice is seen to be done. To the extent the CLC has views, these were included in its
Response. Furthermore, it is the CLC’s opinion that there is no suitable “one-size-fits-all”
answer amongst the present options. Rather, the purpose of this document is to set out why
4
“Property Developers Do Not Want Retentions Reform” published by The Construction Index on 23 March 2018.
5
“U.K. Plans Law to Prevent Repeat of the Carillion Crisis” by Alex Morales and Kitty Donaldson, published by Bloomberg on 23
October 2018. More recently, Mr Harrington was reported as having hinted at the Construction News Summit on 20 November
2018 that he now favoured the idea of a ring-fenced protection scheme while noting that “the costs and administration involved
would pose a challenge” (“Minster: Retentions Policy to Change “Very Soon”” by Zak Garner-Purkis, published by Construction
News on 20 November 2018). However, it is possible that Mr Harrington was merely referring to the ring-fencing of retention
monies by the payer along the lines of the statutory scheme in effect in New Zealand (which is also seen in the unamended
main JCT contract forms).
6
Parts of the market have themselves advanced alternatives. The Association of Accounting Technicians, for example, has
recently suggested that the Prompt Payment Code should be made compulsory for companies with more than 250 staff. At
present, the Prompt Payment Code has 2,160 signatories.

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the CLC believes, on balance, that a statutory deposit scheme is unlikely to function effectively
as a blanket solution for the UK construction market to address the potential abuse of
retention monies by payers, or the risk of monies being lost through payer insolvency.7 Our
central arguments are set out in Section C of this document.
4. The CLC would be happy to discuss any aspect of this Supplemental Submission with BEIS, if
required. Any comments or queries should in the first instance be directed to the CLC’s Chair,
John Hughes-D’Aeth of Bryan Cave Leighton Paisner LLP.
B. ABOUT THE CLLS AND THE CLC
5. The CLLS was originally part of the City of London Solicitors' Company, which was founded in
1908. It is the largest of England and Wales’ regional law societies; 15% of the practising
solicitors in England and Wales (17,000 solicitors) are based in the City of London and the
CLLS represents 15,000 of them. Its members represent some of the world’s largest
international law firms and the Committee acts as a forum for lawyers in the Square Mile to
meet and consider topical areas of law relating to the construction industry. All areas of
construction law are catered for, including contract drafting and advice, dispute resolution,
PFI/PPP work and international and domestic projects work.
6. Committee members comprise many leading practitioners from private practice. The CLC also
includes, as co-opted members, leading in-house construction lawyers from major contractors
and consultants or insurance advisers to represent the construction industry.8 The Committee
has been active in responding to governmental consultations and responded in January 2019
to BEIS’ review of the 2011 changes to Part II of the Housing Grants, Construction and
Regeneration Act 1996 (“Construction Act”).
7. The CLC’s members represent developers (in both the private and public sectors), lenders,
contractors, professional consultancies, specialists and insurers. The intent of this
Supplemental Submission is therefore to expound a market-facing approach rather than to
concentrate narrowly on the perspective of any single element of the UK construction industry.
8. In preparing this response, it is not our intention to influence the consultation on behalf of
specific clients or any particular part of the construction industry. Our focus instead is on
reflecting on the consultation, with the benefit of our collective experience in this area.
7
This was covered to a degree in our Response and parts of this Supplemental Submission reuse extracts from the Response.
8
The CLC currently comprises John Hughes-D'Aeth (Bryan Cave Leighton Paisner LLP, Chair), Matthew Jones (Taylor
Wessing LLP, Vice-Chair), Drew Norman (Sir Robert McAlpine, Industry Representative), Stephanie Canham (Trowers &
Hamlins LLP), Richard Ceeney (Reed Smith LLP), Julia Court (Addleshaw Goddard LLP), Paul Cowan (4 New Square), Angus
Dawson (Macfarlanes LLP), Nicholas Downing (Herbert Smith Freehills LLP), Fiona Edmond (Charles Russell Speechlys LLP),
Marc Hanson (Bryan Cave Leighton Paisner LLP, CLLS Main Committee Liaison), Richard Hill (Norton Rose Fulbright LLP),
Francis Ho (Penningtons Manches LLP), Jane Jenkins (Freshfields Bruckhaus Deringer LLP), Alistair McGrigor (CMS Cameron
McKenna Nabarro Olswang LLP), David Metzger (Clifford Chance LLP), Huw Morgan (Veale Wasbrough Vizards LLP), Victoria
Peckett (CMS Cameron McKenna Nabarro Olswang LLP), Martin Potter (Canary Wharf Contractors Limited, Industry
Representative), Timothy Reid (Ashurst LLP), Gillian Thomas (Hogan Lovells International LLP) and Andrew Thornton (JLT
Group, Industry Representative). Eleanor Milne of Allen & Overy LLP is Secretary.

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C. CONCERNS WITH A RETENTION DEPOSIT SCHEME
9. A retention deposit scheme would preserve the concept of holding retention monies to cover
defects and hence hinder efforts within the industry to abolish the practice altogether
A notable example of such efforts is the Construction Supply Chain Payment Charter
published by the Construction Leadership Council and jointly promoted by Build UK.9 It
includes the following specific commitment for its signatories:
“We will either not withhold cash retention or ensure that any arrangements for retention with
our supply chain are no more onerous than those implemented by the client in the Tier 1
contract. Our ambition is to move to zero retentions by 2025.”
Implicit in the above commitment is the fact that signatories are required to see that their
supply chains comply with the same commitment, which is ideally enforced through imposing
contractual obligations on their sub-contractors. Some major clients have instituted their own
fair payment pledges. Network Rail, for example, is not a signatory to the Construction Supply
Chain Payment Charter but has had its own such charter since 2011.
If the practice of holding retention monies can be phased out over time, this would resolve the
issues of insolvency risk and abuse of retentions. A deposit scheme, however, may become
an obstacle to such an objective.
10. Projects using development finance could be adversely affected
A good proportion of large and medium-sized projects is dependent on development finance
from banks (or funding from forward purchasers/forward funders). Under these arrangements,
monies are typically released in instalments to developers to meet construction costs as they
fall due. This reduces the risk to funders of any misuse of funds by the developer (or the
developer’s insolvency). The advance of loan monies from a bank in tranches also means that
a developer is only required to pay interest on sums presently drawn-down.
Given that retention monies are usually not released until practical completion and/or the end
of the rectification period, developers do not need their banks to provide the requisite funds
until those events have occurred. If, on the other hand, they were required to place retention
sums in a deposit scheme, lenders would invariably demand interest on those sums. This
would add to the developers’ construction costs and reduce amounts available for other
developments, thus adversely affecting the supply chain.
Furthermore, the requirement to advance loan monies earlier (in order to fund a retention
deposit) may adversely affect several key ratios which lenders use to measure their risk
factors, such as loan-to-value or loan-to-cost. It is possible that they may look to offset this risk
by restricting the loan amount available, with the developer then obliged to obtain or contribute
more of its own monies. This could affect the viability of some developments. It will also
reduce the funders’ security, since the retention will no longer be available to fund the
completion of work in the event of (for example) developer insolvency. Further, it may
adversely impact on lenders’ willingness to offer development finance – and, since the
9
It should be observed that three major trade associations for suppliers and sub-contractors, the Civil Engineering Contractors
Association (CECA), the Construction Products Association and Build UK, as well as the Chartered Institute of Credit
Management, have publicly rejected the Aldous Bill, citing reasons including a lack of consensus among their members in
favour of the proposed law and a preference for a roadmap to phase out retentions altogether. That said, it is acknowledged that
a large number of construction trade associations are reported as having indicated support for the Aldous Bill.

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liquidation of Carillion, we have already witnessed a retrenchment in the funding market and
an increasing shortage of available finance for construction projects.
One unknown with any possible retention deposit scheme is how the costs of operating it
would be met. At the first reading of the Aldous Bill, it was suggested that any interest
generated on the retention monies would be retained by the scheme operators to cover their
costs, with any surplus being donated to charities involved in construction training. Payers
may regard it as adding insult to injury if not only are their funds tied-up in the deposit scheme
(or the need to pay banks loan interest on such amounts) but also any interest generated is
siphoned off by a third party. An alternative to scheme operators benefiting from the interest
would be to levy an administrative charge, as does the retention deposit scheme operated in
New South Wales.10 Neither solution is perfect. Financing the scheme through interest may
prejudice larger and longer-term projects, whereas a flat fee may penalise smaller projects
unduly.11
11. A retention deposit scheme could be a disproportionate solution to the problem
As we stated in the Response, the CLC’s members are certainly aware of instances where
retention monies have not been released (or have been released late) and there are no valid
reasons for this under the construction contract. However, in the CLC’s view this is not normal
practice and, where it occurs, it is sometimes explicable, although perhaps not legally
justified.12 Where there is no valid reason, the recipient generally has immediate recourse to
adjudication under the HGCRA13, which offers the prospect of speedy recovery.
Whilst a retention deposit scheme may eliminate these issues, on balance we would question
whether it represents the most suitable option. Indeed, there is an issue of proportionality
regarding whether the scheme should be introduced at all, in light of its potential downsides.14
The Research Report found that the median amount lost per contractor due to non-payment
arising from insolvency was £10,000 over three years and seemed to indicate that this figure
covers all lost payments, not just retention monies. While this is simply the median, for those
parties entering into construction contracts, this does not seem such a substantial loss that it
would drive many SME participants out of business.
10
Currently this is a flat rate of AUD$1,500, although it is unclear whether the sums generated are sufficient to make the
Australian deposit scheme self-funding. For projects over AUD$20m, the level of charge being used seems relatively affordable.
Whether it becomes more burdensome if applied to lower value projects (which, commensurately, should have lower retention
sums) is another question.
11
The cost of operating a deposit scheme is primarily a function of the amount of administration involved, rather than the total
amount of money deposited or the length of time for which it is to be maintained. A retention deposit scheme, with more
frequent deposits and withdrawals, is likely to demand more administrative time.
12
For example:
a. The payer itself is unaware of an issue with the works (e.g. construction defects), but a third beneficiary (such as a
tenant, purchaser or development finance provider) makes a deduction or withholds a payment on account of
perceived defects, or challenges a certificate of practical completion or making good of defects. In this scenario, the
payer may not wish to release the retention (and lose leverage over the payee in respect of potentially necessary
remedial works) until the corresponding payment has been released to it; or
b. The payer believes that the payee is effectively insolvent and that it is likely to have claims against the payee which
will either outweigh or at least match the level of retention. The payer’s logic in this scenario is that it may not
otherwise obtain suitable redress for its claims, due to the payee’s insolvency.
13
Part II of the Construction Act (as amended).
14
The idea of a retention deposit scheme is, in part, inspired by the residential tenancy deposit scheme. However, while the
National Association of Citizens Advice Bureaux concluded that the evidence indicated the case for reform for residential
tenants was “overwhelming” and that these failures damaged the image and reputation of the private rented sector, the scale of
the problem is markedly lower for construction retentions. Furthermore, and pertinently, the majority of residential renters have a
particularly weak negotiating position with landlords, due to issues with the availability of accommodation in the UK. This is less
so with those in the construction sector and, if tenderers are uncomfortable with the level of retention monies being demanded,
they can (and the Research Report indicates that they often do) increase their tendered contract sums to address the risk.

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Furthermore, the Research Report stated that “of the three-quarters of contractors with
experience of retentions, contractors say retentions are not held on an average of 35% of all
their current contracts”. Retention monies are important but insolvency has the potential to
cause far greater losses for those in the supply chain. Given this finding of the Research
Report, we would question whether the (perhaps significant) cost of implementing the
proposed new scheme could really be justified.
The Research Report indicated that the experiences of Tier 2 and Tier 3 contractors regarding
non-release or late release of retention monies tend to be markedly poorer than those of Tier
1 contractors. This is unsurprising. The relationship between construction clients and Tier 1
contractors with regard to retention and other payments is straightforward, with clients typically
sourcing their financing on a project-specific basis from a combination of debt and equity. In
contrast, contractors further down the chain suffer not only from upstream pressures but also
from cash-flow issues due to non-performance or difficulties on other projects. In this vein, it
may be noted that the New South Wales retention deposit scheme, which appears to have
influenced the Research Report, only applies to Tier 1 contractors and their Tier 2 contractors
for projects with a value of more than AUD$20m.15
Moreover, those construction clients who favour the status quo would argue that the industry
is not yet ready for the abolition of retentions. Some contractors are better than others but a
“zero defects” culture does not yet exist across the sector as a whole. In that context, the
holding of retention monies may be seen as an encouragement for contractors to improve the
quality of their performance and focus on “getting it right first time”, thus boosting the
reputation of the construction industry generally. The retention deposit scheme is likely to
have the opposite effect since the money is secured and there is little incentive on the
contractor to remedy defects until he is ready to do so (if at all). This may, in turn, prevent a
building from being handed over, with consequential costs and liabilities falling on the
developer.
Similarly, it is important to remember that the issue of retentions is only one aspect of the
wider problem of payment practices within the industry, including lengthy payment terms, late
settlement of invoices and unfair deductions from payments due.16 It should be recognised
that the thin profit margins borne by some large Tier 1 contractors can leave them vulnerable
and may contribute to such behaviour.17
It is also noteworthy that the Research Report strayed away from commenting on whether any
late or non-payment of money uncovered by its survey was justified. It seems that the
researchers were not comfortable that the survey results enabled them to draw such
conclusions. Given the difficulty of independently establishing the scale of abuse, the costs
and benefits of a retention deposit scheme must be carefully evaluated.
15
Approximately £11.55m at the time of writing, noting that the value of the Australian dollar has been volatile recently.
16
The CLC notes that BEIS has been consulting publicly on several of these issues.
17
For instance, in the Building article “Top 150 Contractors and Housebuilders: Split Fortunes” of 27 July 2018 by Joey
Gardiner, with regard to the magazine’s table of the UK’s largest contractors and housebuilders, Mr Gardiner makes the
comment that “For contractors … the tables paint a worrying picture, with the top 10 businesses making a pre-tax profit margin
of just 0.38% on their £31bn of turnover – that’s less than £120m.” He posits that the cause of such low margins is problem
projects which lead to weak balance sheets.

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12. There are means by which payers could legitimately avoid paying into a retention deposit
scheme and these may be less favourable to payees than the situation at present
It may of course be a primary objective of any retention deposit scheme that it encourages
payers to employ an alternative to retention monies, so as to avoid the potential drawbacks of
the scheme. Even so, this may lead to unintended consequences.
The nearest alternative for payers is a retention bond which, if expressed to be “on demand”,
gives the client an immediate right to recover the cost of rectifying defects. Which party bears
the cost of the bond is a matter of bargaining power. If the payer is to bear the cost, then it
may feel entitled to ask for a discount on the contract price, since retention monies currently
come at no extra cost. If, as the Research Report suggests, contractors simply “price in” the
retention through higher contract sums, then the impact on overall cost may be minimal.
As with all surety products, the viability of a retention bond will depend on the ability of the
contractor to procure the bond in a suitable form at the required level (usually 3% or 5% of the
contract price to match the level of monetary retention that would otherwise be required) and
at a reasonable cost. Businesses with fewer assets, at higher risk of insolvency, less
established in the construction field, with a poor claims history or committed to projects that
are sizeable relative to their respective balance sheets may find that bonds are not readily
available, are expensive or come with onerous counter-indemnity requirements. This may in
turn create a point of differentiation between bidders, unlike retentions which (at least in
theory) provide a level playing field. There is already anecdotal evidence that some
contractors (even large ones) are having more difficulty in obtaining bonds than prior to
Carillion’s insolvency.
Currently, clients typically require retention bonds to be on demand and the banks issuing
them invariably mandate, in return, that they are backed by cash.18 In terms of cash-flow
during the course of a project, a contractor is drip-fed the contract price against works carried
out. Consequently, the cash-flow advantage sometimes said to be associated with on demand
retention bonds may be overstated.
The alternative type of bond - a “conditional” bond – requires the client to prove both breach
and resulting loss before a claim will be met. It is therefore difficult to call upon, which reduces
its usefulness as both an alternative to cash and an effective incentive to compel the
contractor to return to site to remedy defects. Other issues with the use of bonds (whether
conditional or on demand) include that:
a. Most performance bonds given in the current market expire at practical completion.19
In order to cover defects arising during the rectification period, they would need to be
extended (if possible), which will increase the premium cost substantially because of
the longer exposure of the surety to the contractor’s potential insolvency;20
18
Note that the JCT form of retention bond (the best known in the UK market) is an on demand bond.
19
On demand bonds typically also have a fixed long-stop expiry date.
20
A substantial risk if the demand for bonds increases substantially is that the quality of the sureties used may diminish. This is
because there may be a temptation for contractors, particularly those with weaker covenants or claims records, to obtain bonds
from providers in offshore locations as these may be less expensive or easier to obtain. Some of these offshore sureties may
have no presence in the UK and therefore may have no local assets to enforce against in the event of a default. They may also
not be suitable to provide this type of business to customers in this country, again increasing the prospect of non-recovery. A
further point is that if sureties are providing a higher number of conditional bonds, then they may be more prepared to resist any
attempt to call upon them, including by relying on technical points. This business of insurers is, after all, founded on paying out
less than they receive in premia. This, in turn, may encourage clients to insist upon retention bonds being on demand. Not all
construction clients may be cognisant of these risks.

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b. Another difficulty is that sureties generally will not give bonds which expire later than
two to three years from issue. On larger commercial projects, and on residential
developments where the defects rectification period tends to be two years (to align
with the coverage offered by the National House-Building Council (NHBC) and from
similar home warranty schemes), this may preclude the use of retention bonds; and
c. A call on a bond will inevitably prejudice the contractor’s credit rating. This will
increase the cost of bonds for future projects, as well as any other security products
that the contractor may require (e.g. trade credit insurance). This situation does not
occur with retention monies.
Furthermore, for large projects procured under a construction management route – where,
instead of one main contractor, the client engages with multiple trade contractors - the
retention bond alternative (and indeed the retention deposit scheme itself) will be highly
burdensome and costly. It does not seem right that sophisticated clients should be inhibited
from choosing this procurement approach by a scheme that is designed to address a
perceived problem in an entirely different part of the construction supply chain. Yet a further
question is whether retention bonds are likely to be workable at lower tiers of the supply chain
(is it feasible to ask, say, every Tier 3 contractor to seek retention bonds from their Tier 4
contractors, given the likely lower contract values and levels of sophistication?).
A primary difficulty of regulating retention monies is that those with greater negotiating power
may simply move the goalposts.21 They may require higher levels of bonding, seek to drive
down the contract price, restrict less established businesses from tendering, extend payment
periods (as Carillion notoriously did) or even make a single payment at practical completion.
More critically, the burden of these measures may then be pushed down the supply chain,
leaving it to be borne by those lower tier contractors who are least able to do so and do not
have the bargaining power to resist. It cannot simply be assumed that developers and their
funders will be content to bear the cost of a retention deposit scheme (or any alternative
measures).
13. The potential impact of Brexit on the construction industry is still unknown, so the timing of any
fundamental change may need to be carefully weighed up
On 26 November 2018, leaders of the other member states of the EU endorsed a draft
withdrawal agreement between the UK and the EU, as well as a non-binding political
declaration regarding the parties’ post-Brexit relationship. However, the secondary legislation
necessary for the UK to implement the deal cannot be introduced until the arrangements have
been approved by Parliament in accordance with section 13 of the European Union
(Withdrawal) Act 2018. At the time of writing, it is not certain whether the controversial deal will
clear this Parliamentary hurdle. Even then, the political declaration provides for certain
aspects of future relations to be negotiated and resolved later, which leaves considerable
uncertainty for the construction sector in the interim (including during any transition period that
may follow).
This insecurity has the potential to cause substantial disruption to an industry dependent on
EU workers and goods and materials arriving from the rest of the EU. Some areas of
construction demand have also been impacted by the possible loss of EU passporting rights,
21
One simple way to avoid a deposit scheme would be to agree fixed interim or stage payments during the construction period,
set at (say) 95% of the anticipated value of work done, with the balance of the contract price being paid by instalments during
the defects rectification period. The amount withheld from each instalment would then be nil, and thus the retention deposit
scheme would not be engaged.

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such as a slowdown in requirements for new prime office space in London. Against that
background, there may be merit in BEIS undertaking additional consultation (perhaps once the
fate of the Government’s deal is known) before any legislative measures are considered to
address retention monies.22 In the meantime, there is a danger that any unintended
consequences of new construction legislation may further impact on confidence in an already
fragile sector.
The flip side of this argument is that Brexit risks delaying reforms which BEIS may conclude
are necessary following the consultation. It is, of course, still unclear what the ultimate impact
of Brexit will be on the industry. There is also the potential to adopt a halfway-house on
reform; for example, by including changes similar to New Zealand’s recently-implemented
scheme (i.e. requiring retention monies to be placed on trust in a separate bank account, but
without any obligation for ring-fencing), with the prospect of more substantial change taking
place after Brexit. However, making changes in two stages may also be disruptive – there
would, at least, need to be several years’ gap between them.
14. A retention deposit scheme has to deal with complex issues and will consequently be difficult
to get right
We accept the Research Report’s finding that retentions are often paid late, particularly to Tier
2 and Tier 3 contractors, and that there is a case for reform. That said, a retention scheme
covering all the construction sector (aside from domestic residential clients) is highly ambitious
and may well encounter a number of technical and practical obstacles, which are likely to
require time and public money to resolve. Three of the key issues to tackle are set out below.
Scope
Construction contracts can take many forms. They may include letters of intent, agreements
made through less formal means (e.g. an exchange of email correspondence) and even oral
contracts. Whilst a revised Scheme for Construction Contracts could dictate minimum criteria
for monetary retentions in the absence of contractual provisions (or where those provisions
are non-compliant), contracting parties may well not have given any thought to how to deal
with retention monies. For instance, under a letter of intent retention is usually deducted, since
the parties will follow the terms of the construction contract which it is anticipated will follow
and supersede the letter. However, the parties may not have considered the retention
provisions when negotiating the letter of intent (if indeed there is any negotiation at all). On
this basis, BEIS should consider whether construction contracts of short duration should be
exempted from any statutory retention deposit scheme.23 It may be disproportionate to use the
statutory retention deposit scheme where the construction contract will be completed in, say,
two weeks. There is also an argument that parties should not be punished for failing to comply
with the scheme if, in fact, the payees have not actually suffered any delay in payment, nor
any deduction from the retention amounts they are properly due.
The Aldous Bill leans on the definition of “construction contracts” under the Construction Act
but goes further, catching “… any contract created to have a similar effect to a construction
contract for the purposes of withholding monies which would otherwise be due under the
contract.”24 This appears to be an anti-avoidance measure, intended to avoid the
22
Indeed, given that a substantial amount of parliamentary time is presently being consumed by Brexit, it may be some time
before adequate capacity to consider fresh and rather intricate legislation is available.
23
Also note that the Aldous Bill envisages that agreements between residential occupiers and contractors would be exempted,
similar to the position under sub-section 106(1) of the Construction Act. We assume that any Government bill on a retention
deposit scheme would seek to do likewise.
24
Section 1(2)(2)(c) of the draft text of the Aldous Bill.

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circumvention of the legislation through side letters or similar instruments. Potentially it could
also cover associated contracts, such as novation agreements.
The draft legislation also offers a broad definition of the “cash retentions” that would be
caught:
“…monies which are withheld from monies which would otherwise be due under a
construction contract, the effect of which is to provide the payer with security of any or all of
the latter’s obligations under the contract.”
This goes beyond the concept of a 3% or 5% retention and would cover other withholdings,
such as those typically made to ensure the supply by the payee of collateral warranties,
performance bonds, operation and maintenance and health and safety manuals. These
provisions are usually drafted so that the withholdings are released on delivery of the
outstanding documents. Unlike the New South Wales scheme, the protection offered by the
Aldous Bill is not limited to contractors at Tier 2 and below. If the circumstances of a project
are such that the construction clients and the contractors of Tier 1, Tier 2, Tier 3 and so on all
demand monetary retentions, those would all need to be placed on deposit. This could result
in a very large number of deposits being required, which in turn will impose a large
administrative burden on the retention holder. The associated significant costs which may not
be covered by the interest earned on the amounts deposited, particularly in a period of
sustained low interest rates.25
Resolving disputes regarding the release of monies
Under the New South Wales scheme, the Tier 1 contractor may only withdraw funds from the
retention account pursuant to the terms it has agreed with its sub-contractor. This is an area
which may cause concern, for example:
 What if the parties disagree as to whether (or when) the Tier 1 contractor should be
able to call upon the funds?
 In terms of anti-avoidance, what if the Tier 1 contractor seeks to make those terms
more subjective, so that disagreements cannot arise (similar to an on demand bond)?
Construction disputes can be complicated – is the deposit scheme capable of making
a resolution and, if not, do the parties then need resort to adjudication, the courts or
arbitration?
We note that the Research Report envisaged that disputes over the release of retention would
be dealt with under existing dispute resolution procedures under the construction contract.26
This would indicate that, in the event of a dispute, the party requiring payment (either the client
for breach by the contractor, or the contractor for return of the deposit) would need an
adjudicator’s decision, arbitration award, court judgment or (where relevant) proof of the other
party’s insolvency in order to withdraw funds from the account. Inherent in this is that the
scheme’s administrators will need to be able clearly to discern that the decision, award,
judgment or other satisfactory documentation entitles a party to a certain pay-out from the
account. In any legal proceedings, the claimant would need to shape its claim to obtain such
clarity. Also, given that an adjudicator’s decision is only temporarily binding, the scheme would
need to cater for the scenario where the decision is overturned in court or arbitration, as well
25
Not forgetting, of course, that a retention is typically withheld for each payment instalment due under a construction contract.
26
Akin to what occurs under the New Zealand retentions legislation.

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as for any intervening insolvency. Would insurance be needed to cover wrongful pay-outs,
which would further add to the cost of the scheme?
Having to go through a dispute resolution procedure (even a relatively condensed one like
adjudication) would delay the ability of the construction client to recover money to repair
defects, particularly those which affect health and safety and/or are of a more urgent nature –
for instance, defects which affect life-safety systems or which are otherwise business critical,
such as the failure of multiple lifts in a skyscraper. In turn, this may lead to the client being
liable to tenants and/or purchaser for resultant losses.
The Aldous Bill envisages that companion regulations to the primary legislation in each of
England, Wales and Scotland will set up retention deposit schemes for each region. These
schemes will handle disputes over the release of retention, but no further detail has been
provided at this stage on how the dispute resolution process will work or how the associated
costs will be met.27 Moreover, some thought will be required to avoid the process treading on
the toes of statutory adjudication.
Cost and proportionality
We have covered the above subject previously, both in the Response and this Supplemental
Submission.28 At the first reading, Mr Aldous indicated that the cost of the retention deposit
scheme would be met by the interest generated on the funds held within it. The draft of the
Aldous Bill makes no mention of this, but it may be that this matter will be covered in the
regulations. Even so (and disregarding the issue of development finance29), we remain
concerned as to whether the benefits claimed for the retention deposit scheme justify the
increased cost and administrative burden associated with it, especially when the evidence of
widespread retention abuse remains at best unsubstantiated. We are also sceptical as to
whether the interest raised will actually cover the associated costs, especially in a low interest
rate environment (see page 10 above). At the very least, we would urge BEIS to undertake
further investigations into the true likely cost of implementation so that an informed view can
be taken on this key subject.
The Construction Law Committee of the City of London Law Society
3 December 2018
27
The dispute resolution schemes for tenancy deposit schemes have shown that there is a limited range of disagreements with
which they are comfortable dealing. Although tenancy deposit schemes are not an area where the CLC’s members have
specific expertise, we understand that they were introduced to curb widespread abuse of deposits demanded by landlords from
tenants with assured shorthold tenancies (or their equivalents in Scotland and Northern Ireland). The Research Report indicated
that abuse of construction retentions is less prevalent. Moreover, the Aldous Bill has not so far described how the issue of payer
set-off against retention for payee non-performance will be dealt with.
28
See paragraph 11 above.
29
See paragraph 10 above.