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Retention Monies Under New Commercial Construction Contracts Must Be Held On Trust In The Form Of Cash Or Liquid Assets

The change, in essence is to protect vulnerable subcontractors from the insolvency of the parties holding retention monies.

The change came in to effect from 31 March 2017 and is not retrospective.

The new rule applies to commercial construction contracts which provide for monies to be withheld by one party (Y) from an amount payable to another (Z) as security for Z’s performance of its contractual obligations.

From March 2017, retention monies under new contracts must be:

  • held on trust by Y for the benefit of Z,
  • held in the form of cash or other liquid assets that are readily converted to cash, and
  • properly accounted for.

It is possible that retention monies will become commingled with Y’s personal funds, as opposed to being held in a separate trust account. Research tells us that the intention is to create a “deemed trust model” rather than requiring the segregation of retention monies into trust accounts.

The amendments provide that the retention monies are:

  • not available for the payment of debts of any creditor of party Y other than party Z, and
  • not liable to be attached or taken in execution under the order or process of any court at the instance of any creditor of party Y (other than party Z).

Under the new rule Party Y will have to maintain sufficient liquid funds  to be held on trust to cover the full value of the retention monies owing.

The reforms will stop:

  • making the payment of retention money conditional on anything other than the performance of Z’s obligations under the contract,
  • making the date for payment of retention money later than the date on which Z has performed all of its obligations to the standard agreed under the contract,
  • requiring Z to pay any fees or costs for administering a trust. 

This article is of a general nature only and is not legal advice. Please do not act upon anything contained in the article without first seeking and obtaining legal advice.