The retentions ban under the microscope: a deep dive into the Commercial Payments Bill
As foreshadowed in the King’s Speech, the Government has brought forward a bill to prohibit the use of retentions in the construction industry and to tighten current laws in relation to late payment. The bill, if enacted, will have significant implications for the construction industry, requiring changes to contract forms and structures, as well as commercial practice. This Legal Update provides a detailed summary of the bill and some of the more significant issues which arise on its present wording.
The Commercial Payments Bill: an overview
In March this year, we reported on the Government’s consultation response on retention and late payment reform (click here for a copy of that update). The response proposed sweeping changes in both of these areas and has now been formalised in a bill placed before Parliament: the Commercial Payments Bill.
The Bill adds more detail to the proposals made in the Government’s response which include:
- The outlawing of the use of retentions in construction contracts.
- An entitlement to a penalty sum of 50% of any retention amount wrongfully deducted.
- A maximum 60 day payment period for goods and services contracts between private parties (including construction contracts).
- Removing the ability to contract out of the statutory interest rate for late payment (currently 11.75%).
- For non-construction contracts, an entitlement to a penalty sum of 1% of any amount which is disputed late or with insufficient detail by a purchaser.
In what follows below we consider some of the more significant issues posed by the drafting of the Bill.
Retentions
The Bill sets out transitional provisions for the phasing out of retentions. An initial two year period is specified within which new retention clauses can be agreed and pre-existing clauses varied (“Transitional Retention Clauses”). Any clauses agreed or varied after this period will be void. Retention money may be deducted pursuant to a Transitional Retention Clause for a further year after the transitional period. At the end of this third year, all sums retained pursuant to such clauses must be released regardless of the terms of the applicable contract. Pre-existing clauses agreed prior to the transitional period appear to be unaffected, allowing sums to be retained in accordance with the applicable contract for as long as necessary.
As anticipated, a 50% penalty sum applies in relation to “unauthorised retentions” after the end of the two year transition period, meaning that a contractor will be entitled to recover the retention sum withheld together with a further 50% of that sum. However, the drafting of the penalty provisions contain a number of difficulties and may not achieve the Government’s purpose. In particular:
- For a penalty to arise a deduction or retention must be made from a sum to which “the requirement in section 111(1) applies” i.e. from a “notified sum”. However, retentions are rarely deducted from notified sums (which must be paid without deduction and can be enforced through “smash and grab” adjudications). Rather, retentions are usually deducted in a payment notice or pay less notice and are thereby included within a notified sum. On this basis, provided a deduction for retention were included within a payment notice or pay less notice, the penalty would not appear to apply.
- Assuming the penalty were intended to apply more broadly, the Bill provides for it to apply to retentions deducted “after the end of the transition period”. This would appear to be at odds with provisions elsewhere in the Bill which permit Transitional Retention Clauses to apply for a further year after the transition period and for clauses pre-dating the transitional period to remain in effect.
The Bill’s description of what amounts to a retention clause is likely to receive considerable attention as parties attempt to flesh out the precise boundaries of the retention practices to be outlawed. The Bill refers to the practice by which one party to a construction contract “deducts or retains sums of money” as a percentage of an amount payable under a construction contract subject to a condition for the release of that sum (such as the completion of making good of defects).
This definition suggests that escrow arrangements may not be prevented by the Bill. Under such arrangements, sums which would have been retained by an employer are paid to a third-party escrow agent who is bound to release them upon the fulfilment of certain conditions, such as the issuance of a Notice/Certificate of Completion of Making Good in a JCT context. Arrangements such as these would not appear to involve the literal deduction or retention of sums of money by an employer as stated in the Bill.
The focus on the deduction or retention of sums by the employer may also encourage parties to seek alternative ways of structuring their contractual payment mechanisms to achieve similar commercial outcomes to retention, but without the need to deduct or retain sums from payments under the contract. The lack of any express provisions in the Bill dealing with circumvention will give further encouragement to such attempts. On the other hand, if such contractual alternatives are found to be unlawful, the contractor may be entitled to a 50% penalty sum.
Late payment
The provisions of the Bill as to late payment are largely as expected. The ability of parties to contract out of the statutory rate for late payment by providing for an alternative “substantial remedy” within their contracts has been removed. Paying parties will now, therefore, be subject to the full statutory interest rate, currently 11.75%, in the event of late payment. Transitional provisions apply, however, and contracts entered into prior to the legislation coming into force will remain subject to the old regime.
The Bill also includes the 60-day, maximum payment period announced by the Government for construction contracts between private parties (30 days for contracts with public authorities). This period begins with the due date applicable under section 110(1)(a) of the Housing Grants Construction and Regeneration Act 1996 (as amended) (the “Construction Act”) and ends with the final date for payment under section 110(1)(b). Of note, the Bill sets out a complex exemption structure based on the comparative size of the parties to a construction contract. Five categories of business are specified, beginning with a sole trader and increasing in size up to a “large undertaking”. An exemption applies if the purchaser or employer under the contract is in a smaller category than the supplier or contractor. A separate exemption also applies where both parties are “large undertakings”. Regulations are to be issued to better define the five categories of business, which the Bill suggests may be done by reference to staff headcount, turnover or balance sheet total. The upshot is that many parties seeking to rely on the exemptions will be required to reassess their eligibility for each contract they enter into, imposing a significant administrative burden.
One oddity in the Bill’s implementation of the maximum payment period concerns payment notices in default under section 110B of the Construction Act. These notices may be given if a payer fails to issue a payment notice. They therefore provide a way for a “notified sum” to arise in the absence of a payer’s payment notice. The current wording of section 110B states that the final date for payment is to be postponed to reflect the delay in issuing a payment notice in default after the date the payment notice was due (i.e. if the payment notice in default is given the day after the payment notice was due, the final date for payment is postponed by one day).
The Bill modifies this wording to state that the postponed date may not exceed the 30 or 60 day maximum period from the payment due date. This is an odd approach for two reasons. Firstly, any delay in the giving of a payment notice in default is of the payee’s own making and should not therefore need the protection of the 30 or 60 day maximum period. Secondly, if a payment notice in default is given close to or after the 60 day limit, the final date for payment will either be in the past or too soon for a pay less notice to be given by the payer. Deprivation of the payer’s right to serve a pay less notice is unlikely to have been intended and difficult arguments are likely to arise as to the proper interpretation of the amendments in these circumstances.
Finally, the Government’s consultation response had indicated that separate measures may be required for construction contracts in relation to the proposed 1% penalty for payments which are disputed late or without sufficient detail by a purchaser. In the event, the Bill simply excludes construction contracts from this change, although it is unclear whether a more construction-specific proposal will emerge in the future.
Other Construction Act changes
Two additional changes to the Construction Act are of note and will require many parties to amend their standard construction contract wording:
- Section 111 is to be amended to require all pay less notices to be given no later than 7 days prior to the relevant final date for payment. Employers and main contractors often specify shorter periods than this and standard terms will need to be updated accordingly.
- Section 116 as to the reckoning of time has been amended so that the rule requiring bank holidays not to be counted for time periods specified by the Construction Act applies only to adjudication and not to the payment provisions of the Act. Contracts will need to be updated to reflect this change (for example, clause 1.5 of the JCT Design and Build Contract 2024).
Conclusion
The Bill broadly reflects the announcements previously made by the Government, but will introduce considerably more complexity into a contracting environment which is already elaborate and often misunderstood by construction industry participants. Employers are unlikely to accept the security risk posed by the abolition of retentions without exploring alternative ways to achieve a similar end. Bonds and escrow arrangements will require careful consideration, as well as the potential for contractual solutions to the prohibition. Contractual solutions will, however, carry the risk of a 50% penalty payment in the event that the solution is found to amount to an unlawful retention.
The maximum payment period is unlikely to pose as great an issue for most employers and main contractors. Payment periods are rarely agreed beyond 60 days and the exemptions may assist those businesses that require such lengthy periods.
The introduction of a minimum period for the giving of pay less notices may result in an increase in “smash and grab” adjudications, as the stricter deadline inevitably results in notice periods being missed. The minimum period may also give rise to legal difficulties where short payment periods are involved (i.e. less than 7 days). The current drafting of the Bill does not give any indication as to how such cases should be dealt with.
The Bill is due to receive its second reading on 9 June 2026, after which it will proceed to Committee Stage to be debated and considered in more detail. It remains to be seen whether significant changes will be made to the text of the Bill during its passage through Parliament and whether the various drafting issues noted above will be addressed.
References:
