In a situation using a JCT contract where a retention is being held and the certificate of making good defects has not been issued, but latent defects have arisen after the expiry of the defects liability period, is it within the employer’s powers to withhold the retention?
The normal position, under an unamended JCT Contract with Contractor’s Design, is that the employer may deduct and retain 5% of the gross valuation for the works. This retention will be released – half at practical completion and half on notice of completion of making good defects. The contract also provides that in order to obtain such notice from the employer, the contractor must have made good any defects specified in the schedule of defects provided by the employer and must do so within the defects liability period (DLP). The employer may issue instructions and/or supply the contractor with the schedule of defects throughout the DLP and up to 14 days after expiry of the period.
As such, any defects that the employer does not notify to the contractor within 14 days following the expiry of the DLP, cannot be defects that the contractor must make good in order to obtain the notice. There is therefore no express right to withhold the retention if defects appear after the expiry of the DLP. The retention should be released after the notice of making good defects.
However, if for any reason the retention has not been released and defects then appear, the retention can be withheld under the common law right of set-off. In that case it may be necessary, if further applications for payment are still to be made by the contractor, to ensure appropriate withholding notices are given.
If the retention has been released, the employer will have to pursue an action for damages against the contractor for the cost of remedying the latent defects if he is unable to persuade the contractor to return to site to rectify them.