Piling up trouble

I run a piling company and have been asked to sign a DOM1 subcontract for works on a new library and community complex. I’m a bit worried about signing. By linking the recovery of the second half of my retention with the issue of the final certificate on the main contract, I could be waiting for my money for years. Also, it doesn’t seem to me that these provisions comply with section 110 of the Construction Act. What would you suggest?

Try to amend the clause

The release of the second half of your retention could be held up for a long time if the provisions of DOM1 comply with section 110 of the Construction Act. This says a contract has to provide an “adequate mechanism” for determining what payments become due under the contract and when.

No guidance is given in the act as to what would constitute an “adequate mechanism”, but the Scheme for Construction Contracts (which would apply if the contract does not comply with the act) provides some help. If the parties fail to agree the amount of any instalment or stage payment, or the intervals at which or circumstances in which such payments become due, the short timetable for payment in the Scheme would apply.

Clause 21.5.3, to which the question refers, deals with payment of “any retention retained”. The first question is: is the amount agreed? I think by implication it is. The subcontractor agreed to a certain amount being retained and to its being released in two tranches. The fact that this is done by reference to a percentage of another amount does not, in my view, affect the position. We know what payment is due.

As to when this should be paid, clause 21.5.3 says this is at the end of the month in which is issued the certificate of completion of making good defects under the main contract, or the certificate under clause 18.1.3 of the main contract conditions, where the subcontract works “have been the subject of” those certificates.

Thus, the clause has provided for “the circumstances in which such payments become due” and that provides the necessary certainty for the “when” part of section 110.

If it were possible to show that any subcontract works did not or could not become “subject to” (which I take to mean “included in”) such certificates, there would be no mechanism for providing the “when” and the Scheme would apply. The Construction Act did not, however, fix any maximum periods for payment, so the fact that payment “could take years” would not of itself render the mechanism inadequate.

I would recommend, however, that in future you seek to amend clause 21.5.3 so the second half of your retention is paid at a different time, such as when you have remedied any defects in the subcontract works, or that you require the contractor to tell you when the relevant certificate has been issued so you know the money is due.

Rachel Barnes is a partner in Beale & Co

Section 113 might be your friend

It does seem most unfair that your retention should be held for the duration of the main contract works and for 12 months after that. Most of your colleagues in the piling industry will secure release of retention on the practical completion of the piling works or shortly afterwards, sometimes in exchange for a retention bond. If you can do this, the question of whether clause 21.5.3 complies with the Construction Act is irrelevant.

In any event, I wonder whether your better argument might arise not under section 113. This provides that: “A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective.”

Your argument is that clause 21.5.3 makes payment of retention conditional on the issue of a certificate of completion of making good defects under the main contract. Although this is not a provision relating to “receiving payment from a third person”, it might be argued that it has the same effect.

In a recent case (Midland Express Way vs Carillion Construction), the court was prepared to construe a clause, which provided the contractor could not be paid any money in respect of certain variations until the employer had established its entitlement to payment under its agreement with the transport secretary, as infringing section 113. You might persuade the court to take a similarly robust view of the purpose of the statute and strike out clause 21.5.3.

The legal costs of doing this will be huge, however, and you could expect to face an appeal. I would recommend that you ask your trade association to take on this point for you rather than risk your own money. The argument is by no means a “slam dunk”.

Ann Minogue is a partner in Linklaters

Offer a retention bond

The reason why it is not unreasonable for a main contractor to insist on this retention is that it is liable to the employer for putting right any defects in the works that appear through to the issue of the certificate of making good defects, no matter when the relevant package was completed.

There is a question mark about whether this type of retention arrangement falls foul of section 110(1) of the Construction Act, as described above. Although the subcontract provides that the money is to be released once the certificate of completion of making good defects under the main contract is issued, it is obviously unclear when that certificate will be issued.

However, I do not consider that, if tested, this argument would be likely to succeed.

It has also been suggested that the word “adequate” means fair and that this provision is unfair because it keeps the subcontractor out of its money until a time long after it has completed its work. In my view, this argument would also be unlikely to succeed.

If the subcontractor offers a retention bond as an alternative to retention money, that should be acceptable provided the bond is truly “on demand” and it states that it continues until, at the earliest, the issue of the certificate of making good defects.

Dominic Helps is a partner in Shadbolt & Co