What is the retention?

Is it, as I have suggested, the contractor’s money which the employer is holding to ransom?

Is it security for any defects discovered during the defects period which the contractor fails to put right?

Is it a form of commercial leverage?

In Yeovil v The Stepping Stone Group, the client argued that retention provided both security and leverage; retaining the money was “the way by which [the client] could force [the contractor] to put things right or pay compensation…for not doing so“.

Simple Leverage?

The court reviewed the cases and confirmed that retention cannot be used to provide the client with unjustified leverage simply because it is the party in possession.

As the client acts in a fiduciary or trustee capacity in relation to retention, then the court noted that any duty of loyalty would be ‘tested beyond breaking point by the client seeking to get more out of the retention than was justified'(!)

It is in the very nature of a ‘retention’ out of the contractual price that the parties anticipate it being released to the [contractor] at some point during the performance of the contract (even if that be at its very end and subject to whatever deductions may properly be made by the [client]  under the terms of the contract)

The court said that whilst retention could be used properly as leverage to ensure outstanding breaches are rectified and security for the loss if they are not, leverage should not be exerted by withholding the whole of the retention regardless of the true extent of any defects.

What should you do?

As a client, you must justify any deductions from the retention and pay the remainder at the end of the defects period. If there are defects that the contractor has not made right you cannot fail to remedy them and continue to sit on the whole amount. You cannot use unsubstantiated costs to hold the money to ransom!

As a contractor, you need to be alert to your client using fairly spurious arguments to either withold the statement/certificate signifying the end of the defects period (and your entitlement to the final portion of the retention), and to the amounts being deducted. Unjustified withholding of the retention is a breach of contract.

Case: Dr Jones Yeovil Ltd v The Stepping Stone Group Ltd [2020] EWHC 2308 (TCC)

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