Catrin Rees, Collyer Bristow, looks at retentions and highlights some of the issues of which to be aware.
Retentions are traditionally a form of security to the employer from the contractor or to the contractor from a subcontractor to safeguard against or in the event of non-performance. This may include, for example, a contractor not completing the works or failing to make good defects or non-compliant work during any rectification period.
The standard arrangement is for the employer to retain a specified percentage – typically three percent – until practical completion where half of the retention is released. The remainder will be released either after the expiry of a defects liability period or on condition of rectification of all outstanding defects have been rectified.
In the absence of express provisions providing otherwise, retentions are held by the employer on trust for the contractor and may only be applied in accordance with the specific directions to compensate the employer for a breach at the end of a specified period, for example practical or final completion. That affords protection in the event of the insolvency of the employer as the balance of the retention due to the contractor will be ringfenced from the general assets in trust for the contractor.
Many employers, however, insert specific provisions which allow them to deal with retention without restriction and as their own funds. Obviously, that leaves contractors and subcontractors at risk in the event of insolvency of the developer or main contractor as the retention fund will be classed as part of the insolvent company’s general assets and the contractor or subcontractor will rank in the insolvency as an unsecured creditor.
There have been quite valid calls of abuse across the industry in relation to release of retention. Retention monies due for repayment are often withheld on fairly spurious reasons, or the certificate of making good – often the trigger for release of the last final amount of retention held by the employer – goes unissued long after it is due on the basis of perceived snags which are minor or non-existent.
For that reason there has been a persistent call for reform of retention in construction contracts. A private members’ bill from Peter Aldous has received its first reading in the House of Commons but its second reading has been delayed until the end of 2018. The bill envisages that unless monies are protected, any clause in a construction contract enabling the deduction of cash retentions will be invalid unless the monies are deposited in a retention deposit scheme akin to the government backed residential tenancy deposit schemes which apply to domestic rental deposits.
Do the provisions of the Construction Act apply?
Providing the contract is not one excluded by the Construction Act, for instance, because it is made with a residential occupier. In fact, the provisions of the Construction Act may provide useful recourse when it comes to getting retention released.
The payment provisions of the Construction Act apply to retention in the same way they apply to other payments due under the contract. As such, if retention becomes due under the contract as payable to the contractor as a “notified sum”, where the employer believes it has a right of set-off or to make a deduction on some other ground, it must issue a valid payment notice within the relevant contractual deadlines. If it fails to do so, it is obliged to pay the “notified sum” without set-off or abatement.
Similarly, disputes relating to retention may be referred to adjudication. Where the unpaid party concludes that the retention should have been released and there is no valid payment or pay less notice, or it disputes the amount of any sums withheld where a payment or pay less notice is issued, then that party may refer the dispute to be determined by an adjudicator.