Don’t want to run the risk of having your hard-earned money spent for you? Andrew Milner helps you hold on to your retention funds
The retention fund is intended to be available to the main contractor for the purposes of underpinning contractual performance, in particular rectifying any defects in the subcontract works.
However, main contractors usually regard retention as their own money, to do with it as they please. This conduct is tantamount to fraud.
Surprisingly, the issue of who owns the retention causes particular problems for the industry. The answer is simple – retention is money already earned and is therefore a debt due to the subcontractor – a fact that many subcontractors fail to see or overlook.
As a result, most standard forms of subcontract provide for the retention to have trust status. For example, the JCT 2005 Standard Building Subcontract (JCT05) provides this as an option called a retention bond.
The importance of trust status relates to the rights of the respective parties if the main contractor holding the retention becomes insolvent. If the retention has been segregated from the rest of the money, it is separately identifiable as trust property and the subcontractor has first call on the fund.
Difficulties frequently arise because retention is rarely, if ever, set aside into a separate fund. Unfortunately the JCT05 does not provide that a subcontractor can require this to be done.
Interestingly, it appears that a subcontractor would be entitled to request this even without a specific provision in the subcontract, on the basis that, if the retention money is a trust fund, it must be properly dealt with by the main contractor as trustee.
Release of retention
If you want to be sure of expressly written rights to release of retention, use an amended standard form of subcontract.
The JCT05 states that the first half of retention will be released on practical completion of the subcontract works, and not – as so many bespoke subcontracts state – on practical completion of the main contract.
The JCT05 does not quite manage the same provision for the final portion. However, note the wording very carefully. Final retention will be released “on the date of the expiry of the rectification period of the main contract for the main contract works”.
So even where no ‘making good defects’ certificate has been issued, provided there is no reason to the contrary, retention has to be released on the expiry date.
One of the main excuses given by main contractors for not releasing retention is that the main contract certificates have not been issued, when in fact they have.
Remember that certificates under the main contract are issued by the architect or contract administrator, so it is important to obtain those parties’ details, thus allowing the subcontractor to speak directly to the relevant party.
If the subcontractor is lucky enough to be working under the JCT05 unamended, it should seek to impose the retention bond and request that retention is placed in a separate bank account.
Check the subcontract. It should stipulate the rules governing retention and when it is to be released. If the subcontractor knows retention is due, it should write to the main contractor at once seeking its release.
If the subcontractor is having difficulty recovering its retention, sometimes all it takes is a consultant’s letter threatening legal action. This may apply sufficient pressure to ensure its release.
Adjudication is a quick and relatively inexpensive way of recovering retention. It will almost certainly be quicker and cheaper than litigation. The adjudicator is required to make a decision within 28 days of the referral.
Serving a statutory demand is quite attractive. It is relatively cheap since there is no court fee to pay and a demand should alarm the main contractor into releasing retention. Reports indicate statutory demands are so successful that in 99% of cases, a bankruptcy petition is never issued.
If the demand does not meet with payment, then a petition, while more expensive, is likely to get a better result, with its imminent threat of bankruptcy or winding up.
Going to court should always be the last resort.
Standard court cases are usually long and drawn out, but the court may give summary judgment against the main contractor. This occurs if the court considers that the main contractor has no real chance of successfully defending against the subcontractor’s claim.
This article was originally published in EMC February 2009 as Fluid retention
Electrical and Mechanical Contractor
Andrew Milner is with Integritam Construction Consultancy.