A retention may be held by an employer, but the money does not belong to it. This inconvenient fact is often overlooked by clients and main contractors – it’s so good for business, you see
Retentions cropped up in a recent case called Bodill & Sons (Contractors) vs Harmail Sing Mattu. Retentions always take me back to my boss of long ago telling me how he thought retention funds were a really good thing for main contractors and he would fight tooth and nail to prevent them from being abolished. He was a main contractor, you see, and he didn’t mind one jot that we had what I thought, and still think, is a clumsy, half-baked and expensive contraption called “retention funds”. I can tell you that that old boss of mine was canny. He had a system for making money out of all that retention money. Come to think of it, his outfit survived on its retention funds. I will tell you what he was up to in a minute.
First though, what is this case all about? Bodill is the contractor for a development worth £4m under a JCT contract. It seems to have taken its employer by surprise over a £125,000 retention fund. The contractor wanted JCT98 followed to the letter; it wanted the retention to be placed in a bank account set up as a trust in the name of the builder. And because the employer did not act sharply enough, the builder got its solicitor to go to court for an injunction. The employer gave an undertaking that it would all be in place within days.
You might be wondering why all this fuss was necessary. My guess is that when the employer received the letter asking for the retention fund nine-tenths of the way through the building work, it did not believe for one minute that the builder was entitled to make such a demand. The reason is that most employers in a building contract think that the money deducted for retention belongs to the employer. It does not. It belongs to the main contractor; it is its property, but in the hands of the employer. True, in certain circumstances the employer is entitled to “have recourse” to the pot of cash to ensure any defects will be put right.
My boss was very good at getting his retention paid and very bad at passing them on to his subbies. Result? A helluva lot of cash to run the firm
So the first surprise is that it is the contractor that owns the fund. The next surprise is the status of the cash. It is held on trust by the employer. Now then, trust funds are a neat device in English law. Folk put money in them, then engage an independent trustee to manage the money for the benefit of a named beneficiary. The job of the employer under a building contract is to be trustee but without obligation to invest. Then the JCT edition 28 years ago (JCT80) added the idea of a separate bank account. But it is only set up when the main contractor pipes up with a specific request. Truth is, it does not happen that often, mainly because it is buried away in the JCT smallprint.
That old boss of mine was around when something called the Banwell Report was published. Banwell was the Latham of the sixties. It was an inquiry into relationships in the construction industry. One of the many pokes that Banwell made was about retention. Banwell thought the whole “blunt and clumsy instrument” should go. Most contractors did not need a retention threat to do the work properly and the others did not give a damn anyway.
One remark of Banwell struck me forcibly: “The abolition of retentions would greatly simplify contract documents and payment procedures.” My boss winced. He was very, very good at getting his retentions paid by the employer. He was very, very bad at passing on retentions to his subcontractors. That gap in time left one helluva load of cash to run the firm. Letters from subbies pressing for retention release would be ignored, but nobody sued. Why? Oh, because it was a mass of modest sums. A few hundred pounds here and a few thousand there; but multiplied by hundreds of accounts, hundreds of pots. The canny old boss never lied to anyone; he relied on fatigue. The subbies would get fed up asking. And if anyone did take a look at the rules for retention release in the forms of subcontract, they would eventually fathom that it was all dependant on the rules in the main contract, which become a blur the longer you wade through them. So the recommendation 40 years ago to abolish retention fell on deaf ears. Terrible shame.
Tony Bingham is a barrister and arbitrator