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Recovery of Retention – Recent Developments
What has changed?
How do standard terms deal with retention in light of the new Construction Act?
What are the bespoke amendments relating to retention?
How to recover retention monies due
What has changed?
The traditional position in most Sub-Contracts entered into before 1 October 2011 was to release half of the retention after completion of the Sub-Contract Works and release the balance of retention after the Certificate of Making Good Defects (or similar) has been given under the Main Contract.
The changes to the Construction Act alter this position and ensure that any construction contract entered into after 1 October 2011 can no longer link the release of retention to an act or event occurring under an upstream contract. This means that retention must be triggered for release by an act or event occurring under that contract, for example, the expiry of defects liability period in the Sub-Contract or on a predetermined date which is specified in the Sub-Contract.
Any contracts entered into after 1 October 2011 that continue to link the release of retention to an upstream contract will not be compliant with the Act and the release of retention will be governed by the Scheme for Construction Contracts.
Although we have used the example of a Sub-Contract in this article, many of the points made are also applicable to Main Contracts.
To accommodate the changes made to the Construction Act, JCT have had to make significant changes to how retention is dealt with in the JCT Sub-Contracts.
Under the JCT Sub-Contracts the release of the first half of the retention, as before, is triggered by practical completion of the Sub-Contract Works. The second half of retention will now be triggered for release on the “Retention Release Date” which is specified in the Sub-Contract Particulars. Provided that there are no defects in the Sub-Contract Works at the Retention Release Date, the second half of retention will be paid to the Sub-Contractor on the next interim payment date (usually this will be the Final Payment).
JCT have also introduced the concept of a “Minimum Retention Amount”. This is an amount that is to be agreed by the parties and specified in the Sub-Contract Particulars. If the total amount of retention that would be deducted is less than the Minimum Retention Amount, then no retention can be deducted. Once the first half of retention is released, if the balance being withheld falls below the specified Minimum Retention Amount, the balance of retention must also be released to the Sub-Contractor. If a Minimum Retention Amount is not specified in the Sub-Contract Particulars, the default amount is £250.00.
Although these changes appear to be a step forward from the traditional position, there is no guarantee of change. The JCT Sub-Contracts contain nothing that stops the Contractor specifying that the Minimum Retention Amount is zero, ensuring that retention can be withheld irrespective of its amount. The Contractor is also free to specify a Retention Release Date that is so far into the future as to almost guarantee that the Contractor will not have to release retention under the Sub-Contract until retention has been released under the Main Contract.
The position under NEC3 Sub-Contracts remains unchanged. Retention is still an optional clause that must be selected by the parties to have any application. Under the NEC3 Sub-Contract there is a “Retention Free Amount” which ensures that retention cannot be deducted until the value of work done under the Sub-Contract reaches the Retention Free Amount.
The NEC3 Sub-Contract provides that the first half of retention is triggered for release on completion of the Sub-Contract Works with the balance of retention becoming due for release after the Defects Certificate is issued under the Sub-Contract.
Bespoke Sub-Contract Amendments
A large proportion of Contractors will also have their own bespoke amendments to the JCT and NEC3 Sub-Contracts. These should be carefully examined to establish how they amend the relevant JCT or NEC3 retention clause. Amendments may introduce conditions precedent to the release of retention or amend the wording of the standard form so that the first half of retention is released later than practical completion of the Sub-Contract Works.
Recovering Retention – Common Problems and How to Avoid Them
All the defects in my Sub-Contract Works have been completed, but the Contractor refuses to release retention. What can I do?
Sub-Contracts entered into before 1 October 2011 will usually provide that retention will be due for release when the defects in the Main Contract Works are completed. In such cases the decision in Pitchmastic v Birse demonstrates the current legal position. Here the Court held that the Sub-Contractor can only successfully overturn the terms of the Sub-Contract where it can show that the Contractor is preventing the release of retention. The test to be applied is whether the Contractor is proceeding with reasonable diligence to make good the defects in the Main Contract Works. If so, the Contractor cannot be said to be preventing the release of retention.
Proving that a Contractor is not proceeding with reasonable diligence is not easy. You should gather evidence to show what the defects are, what remedial works are required and when these are scheduled to take place. If remedial works have fallen behind schedule for no good reason, this may suggest a lack of reasonable diligence.
The terms of my Sub-Contract mean that the release of retention is effectively at the Contractor’s discretion. What can I do?
The recent case of AMW Plumbing & Heating Limited v Zoom Developments Limited provides some guidance in this instance. Although this is a Scottish case, it may be followed by the English Courts.
Here the Court held that a retention clause which effectively allowed the release of retention to be at the discretion of the Contractor was not an adequate payment mechanism under section 110(1) of the Construction Act and as such the Scheme for Construction Contracts applied.
It will be necessary to seek legal advice on the terms of your Sub-Contract to determine whether they provide an adequate payment mechanism.
My retention is rarely released on the time. What can I do?
Good credit control is essential. Have a diary system in place to remind you when retention is due to be released and apply for payment.
If retention is not paid on time you are entitled to interest. Calculating this interest and claiming it in addition to your retention can be a good way of convincing the Contractor to release your retention.
Struggling to recover your retention?
Hawkswell Kilvington’s specialist Retention Recovery Service provides fixed cost solutions to contractors and sub-contractors who are struggling to recover retention.
To find out more contact Jonathan Hawkswell at firstname.lastname@example.org
This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please do not hesitate to contact one of our specialist construction lawyers.