Can you trust the employer with your retention money?

The retention is a separate ‘pot’ of money, which increases in line with the price paid to the contractor.

Retention is the contractor’s money which the employer kidnaps and holds to ransom until the end of the defects period.

According to the 2017 BEIS research paper retention is “is a sum of money withheld from the payments of a construction sector project in order to mitigate the risk that such projects are not completed […] to the required quality standard“. In the Aldous Bill, the retention is “monies which are withheld from monies which would otherwise be due under a construction contract, the effect of which is to provide the payer with security for the current and future performance by the payee of any or all of the latter’s obligations under the contract“.

The level of monies withheld range from 3-5% of the contract price so is roughly the contractor’s profit margin.

What is it for?

Although these two definitions presume (as do many employers) that the retention money is to pay for defects or defaults, no standard forms explain or proscribe how the retention fund can be used. It could be used for any claim, however tenuous or unproven.

Who owns the retention?

The only UK standard form construction contract with an express terms requiring the retention to be held on trust is JCT 2016 (although this is not consistent across the suite). Even these scant provisions are routinely deleted (1) to avoid the administrative necessity to place the retention into a separate bank account; and (2) to avoid having to borrow (draw down) the full amount of money from the funder.

If the provision to hold the retention on trust is deleted, without adding in a clause saying the employer does not have to hold it on trust, what is the position? According to comments from the judge in Bodill v Mattu the retention would still have to be held on trust. Without a decisive statement though, this has been a matter for debate.

The nature of retention

In July 2011, the Court of Appeal in Malaysia in Qimonda Malaysia v Sedibena confirmed their understanding of the law on retention monies:

  • the retention monies are ‘by their nature and purpose’ trust monies for the contractor
  • no express words were required for the trust to be effective and enforceable, as a trust could be implied
  • the retention need not be held in a separate account as long as it is determinable and traceable (Re Kayford [1975] followed)
  • the purpose of the half fund retained following completion is for the making good of defects and once the relevant certificate of making good has been issued the retention must be paid to the contractor
  • the retention was not available as an asset in the event of employer insolvency.

Can you trust the employer to look after your money for your benefit?

What should you do?

For contractors: on public sector contracts, the UK government advice is for zero retentions eg Network Rail’s revised contract suite (2018). For private sector contracts, either offer a retention bond or ensure that the employer is under a clear and express duty to hold the retention on trust –  by the time you need to rely on an implied term, the money may have disappeared!

For employers: take into account the cost of borrowing the gross valuation and administering the retention fund. If this is not commercially feasible, then consider using a retention bond, a performance bond (as the retention is only about defects), a parent company guarantee, a final stage payment at the end of the defects period, or latent defects/project insurance. If your contract is entered into after the Aldous Bill is enacted then you are duty bound to use a retention deposit scheme or return the retention to the contractor within 7 days.

For contract writers: to ensure both the contractor and the employer are properly aware of their obligations, ensure there are clear terms expressing the rules for (1) holding and spending the retention (2) ownership of that money and interest on it (3) clear release terms. Without clarity, you are perpetuating retention myths.

For risk analysts: the position in most standard construction contracts is that the retention will be held on trust. If the contract deviates from this, the price for the works may need to increase to reflect the contractor’s increased risk.

See also this article by a former JCT chairman which is in favour of retention, but not the retention deposit scheme!

[Originally published November 2012 and updated November 2018]

Cases: Boddill & Sons (Contractors) Ltd v Mattu [2007] EWHC 2950 (TCC), Qimonda Malaysia Sdn Bhd v Sedibena Sdn Bhd Reported at [2012] 1BLR 6 – although a Commonwealth decision it will be persuasive in English & Welsh court.

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