On a Proper Construction Issue 11: “You Can’t Touch This” – Retention Money Under the New WA Security of Payment Bill

Introduction

As noted in our previous article about the new Building and Construction Industry (Security of Payment) Bill 2020 (WA) (Bill), Part 4 of the Bill introduces a statutory trust scheme for retention moneys retained under certain construction contracts.

In this article, we answer some key questions regarding the nuances of the new regime.

What is retention money?

Retention money is defined under the Bill as money that is either:

1. Retained by a party to a construction contract (party A) out of money payable under the contract by party A to another party to the contract (party B) – (Scenario 1); or
2. Paid to a party to a construction contract (party A) by or on behalf of another party to the contract (party B), as security for the performance of obligations of party B under the contract – (Scenario 2).¹

What is a retention money trust fund?

A retention money trust fund is a trust account established by a party to a construction contract who retains retention money under the contract.²

The trust account must be established with a recognised financial institution. The account may be established as a single account for all retention monies under 2 or more construction contracts or as separate trust accounts in respect of each person who is entitled to the release of the retention money.³

What are the key benefits of the retention trust scheme?

The regime goes to the heart of protecting retention money for persons entitled to it under a construction contract.

This includes those subcontractors “down the line” who may previously have been disadvantaged in circumstances where the party holding retention money became insolvent.⁴

The regime also imposes additional accountability mechanisms, such as imposing strict statutory and fiduciaries duties on trustees (in addition to the written law and equitable principles relating to trusts) and the Court’s inherent jurisdiction to supervise the administration of the trust.⁵

Who is required to establish a retention money trust fund?

The regime applies to all “construction contracts” (broadly defined) entered into in WA after the commencement of the Act, with the following exceptions:

1. Contracts where the party for whom the construction work is being performed (or related goods and services are being supplied), is a government party. A government party is defined under the Bill, and includes a Minister and a local government;⁶
2. Contracts if the value of the contract at the time it is entered into (and at any later time following a variation of the contract/the estimates which were used to value the contract) does not exceed the prescribed retention money threshold⁷; or
3. A contract for home building work which exceeds $500,000, unless:
   • The principal is a corporation;
   • The work is carried out in relation to multiple dwellings or for the purposes of a residential development business of the principal; or
   • The contract is between a head contractor and a subcontractor or other head contractor in relation to the carrying out of the work.⁸

Further exclusions may be prescribed in the regulations.⁹

When must a retention money trust fund be established?

A retention money trust account must be established within 10 business days of the parties entering into the construction contract.

Despite this, the trust will apply to the property of the party who retains the money from the retention money trust commencement date. The retention money trust commencement date is the date which the trustee is required to hold the retention money on trust.¹⁰ In relation to:

• Scenario 1 above, this is the date which the money first becomes payable to party B for carrying out construction work, or supplying the related goods and services under the contract (but for the right of party A to retain the money); or
• Scenario 2 above, the retention money commencement date is the date of payment.

If the retention money is money paid separately as security, then the trust account must be established before the money is paid as security under the construction contract.¹¹

When and how can I withdraw retention money from a retention money trust fund?

Retention money is held on trust until the retention money trust end date.¹² The retention money trust end date is either:

1. The date that money is paid to the party who has carried out the construction work or supplied the relevant goods and services under the contract;
2. The date on which party B gives notice to party A (who retains the retention money) that they will not make a claim for the release of the retention money;
3. The date party A becomes entitled under the construction contract to recourse to the retention money;
4. The date that the money is no longer required to be held as security under the construction contract (following either a determination of an adjudicator or review adjudicator, a decision of an arbitrator under the construction contract or an order of a court or tribunal); or
5. The date that is 2 years after the date on which party A gives party B written notice that the retention money is due to be released to party B.¹³

Retention money can only be withdrawn in a number of limited circumstances (for example, in accordance with an adjudicator’s decisions under Part 3, on reaching the retention money trust end date or with the agreement of both parties to the construction contract)¹⁴ and any withdrawal must be by either cheque or electronic funds transfer.¹⁵

If there are insufficient funds in the account, the obligation of the party to withdraw or release the retention money continues to apply.¹⁶

What happens if you do not comply?

There are serious penalties imposed by the Bill where a party fails to comply with:

1. The requirement to ensure the retention money is paid into a retention money trust account; or
2. The requirement to allow the other party to the construction contract to inspect and take copies of accounting records relating to the retention money.¹⁷

An individual will face a fine of $50,000 for non-compliance, whereas a body corporate faces a fine of $250,000.

What next?

Contracting parties must consider the administrative and practical realities of the statutory regime for any ongoing or future construction contracts once the Bill is enacted. It may be that another form of security (i.e. bank guarantees) are preferred given the administrative burden.

If you would like to discuss the retention money scheme further, or require advice on future contracts, please contact the authors.

This article was written by Kate Morrow, Partner, Tom Wilson, Special Counsel and Lara Scott, Law Graduate. 

Update: the Building and Construction Industry (Security of Payment) Act 2021 (WA) (Act) was assented to on 25 June 2021.

The Act will have a staged commencement, with different provisions commencing at varying times.

The details set out in this article remain current and valid under the Act.

^1. Bill, s 69(1)(a)-(b). Note: Money is taken to be ‘paid to Party A’ if it is paid into the account of, or under the control of, party A (see s 69(2)).
^2. Bill, s 74(1).
^3. Bill, s 74(1)-(4).
^4. Bill, s 71(3). Note: in addition to this statutory provision, the Bankruptcy Act 1966 (Cth) provides that property which is divisible among creditors does not extend to property held by the bankrupt in trust for another person.
^5. Bill, s 84(1). Note: The Bill states that trustees are not subject to the following duties: the duty to act personally and not delegate the payment of money held on trust, the duty to insure the property of the trust, and the duty to pay money held on trust on demand by a beneficiary if the demand is not made in accordance with an obligation imposed by this Act or by the provisions of a construction contract that are not inconsistent with this Act.
^6. Bill, s 69.
^7. Bill, s 70(1)(b). Note: The prescribed retention money threshold is likely to be $20,000 or less and will be prescribed by the regulations to the Act when passed (Explanatory Memorandum to the Building and Construction Industry (Security of Payment) Bill 2020, page 25).
^8. Bill, s 70(1)(c), 70(2).
^9. Bill, s 70(1)(d).
^10. Bill, s 71(1).
^11. Bill, s 74(3).
^12. Bill, s 70(1).
^13. Bill, s 69.
^14. Bill, 76(2).
^15. Bill, 76(3)
^16. Bill, s 76(5).
^17. Bill, s 87.
^18. Bill, s 87(a)-(b).