Common retentions provisions in subcontracts may be unenforceable. In Maxcon Constructions Pty Ltd v Vadasz  HCA 5, the High Court of Australia recently held that on its proper construction, the retention provisions in a subcontract that made liability for payment of the retentions contingent or dependent on the completion of the whole project under the provisions of the head contract amounted to a “pay-when-paid” clause and under the relevant SOP Act the provision was ineffective and could not be used as a basis of withholding payment from a progress payment.
The decision has significant implications for head contractors who will need to review their subcontracts to ensure any retentions provisions do not amount to unenforceable “pay-when-paid” provisions by making payment contingent on practical completion (or some other event) under the head contract, and more broadly, in relation to any other provision that makes payment under the subcontract contingent on payment under the head contract ie linked entitlement/dispute resolution clauses that require the subcontractor to accept the outcome of an administrative decision or dispute resolution process under the head contract.
Under s 13 of the equivalent New Zealand SOP legislation, the Construction Contracts Act 2002, conditional payment provisions in the nature of “pay-when-paid” and “pay-if-paid” clauses have no legal effect, are not enforceable in any civil proceedings, and may not be used as a basis for withholding payments that are due and payable under the contract. Furthermore, in relation to retention monies, s 18I(1)(a) provides that any term in a construction contract is void that purports to make payment of retention money conditional on anything other than the performance of the payee’s obligations under the construction contract.
As a result of the Maxcon decision, head contractors will need to consider for future contracts whether to require subcontractors to provide security for performance by way of a bond or bank guarantee, or to agree defects notification/liability periods with subcontractors that extend beyond the anticipated completion date for the head contract to avoid having to pay out retentions to subcontractors in advance of receiving payment under the head contract – even a minor miscalculation in the completion date could result in a significant cashflow problem for a head contractor!
More critically however, many head contractors will likely face a serious cashflow issue in relation to existing subcontracts that, in terms of Maxcon, fall foul of the prohibition on conditional payment provisions. In such cases, deductions for retentions from progress payment claims will already have been made by head contractors in reliance on retention provisions that are ineffective, and which retention sums those head contractors are not entitled to retain.