Retention Disputes & Defect Clauses in the Construction Industry

 

Retention Disputes in Standard Form Construction Contracts

MJD Solicitors frequently help construction industry professionals with construction defect claims and retention payment disputes. 

We assist with construction contract negotiations where retentions are held on trust and in a separate bank account.

Below we discuss defect clauses, Defect Liability Periods (DLP) , and the processes to ensure the contractor is paid at the end of the DLP.

We will also look at the typical defect clause provisions under the JCT suite of contracts.

 

 

What is Retention?

Construction Retentions are contractual process operating within the construction sector where payment is withheld to ensure contractual compliance.

Retentions are withheld from interim payments until practical completion and the end of the defects liability period.

The purpose of defect clauses and the deduction of retention payments is to ensure the contractor complies with its obligations under the construct contract. If the contractor does not so comply, all or part of the withheld retention is forfeited.

Under JCT form of contract retention is 5% until practical completion, and 2.5% being until the Defect Liability Period has expired. In higher value contract sums, withholding of 3% & 1.5% is common.

The Defect Liability Period is usually 12 months from practical completion of the works under the main contract. However when residential property has been constructed it may be 24 months. Under the JCT Minor Works Contract it is usually 3 months. The JCT calls the Defect Liability Period the Rectification Period.

Subcontracts often provide for the withholding equivalent to the percentages withheld under the main contract.

Main-contractors will want to ensure that they can withhold retentions that were deducted for a period of time until the main contractor is paid, in full. This is to ensure patent defects, serial defects and all minor defects are rectified pursuant to the defects clauses and within the main contract Defect Liability Period

Subcontractors may negotiate a nil retention deduction. However, that exposes the main contractor in many respects.

Most standard forms of construction contract do provide an option for a bond to be given instead of retention being withheld against the contract sum. Bonds are expensive and are therefore not often used.

 

The risks of Retentions

There are vast sums of withheld retentions in the construction industry. Often they are never paid.

If the employer becomes insolvent the contractor may not recover retention. This is because, absent any special wording in the contract, retention deductions belongs to the employer.

The costs of recovering retentions at the end of the DLP mean small retentions are often overlooked.

Below, we look at the option of ADR & adjudication under the Housing Grants Construction and Regeneration Act to recover retentions.

 

Safeguarding Retentions Under JCT

Deducted retentions are not the employer’s money. The JCT main contracts contain provisions that stipulate retention is trust money that belongs to the contractor.

Under JCT main contracts , if the contractor requests, all deducted retention can be set aside in a separate bank account.

Upon an insolvency the money is ring-fenced as contractor money.

A contractor is entitled to an injunction compelling the employer to set aside the retention money on each interim payment. We recently succeeded on such an application in arbitration. It was critical because the employer subsequently became bankrupt.

The JCT contracts are quite unique in this respects. Bespoke construction contracts will not provide for retention to be set aside.

 

Safeguarding Under JCT Sub-Contracts

 

The subcontractor cannot request that the main contractor set aside retention in a separate bank account under JCT.

Clause 4.12 of the JCT sub-contract is concerned with how the retention is paid to the subcontractor, not with who owns it.

 

Main Contractor insolvency and retention

Subcontractor retention is at significant risk upon contractor insolvency.

• If the main contractor goes bust the subcontractor loses the retention.
• The Employer can argue that no retention is due if it has suffered losses consequent to the insolvency of the main contractor.
• The employer may agree to pay retention to the subcontractor if the employer needs something from the subcontractor.
• If the main contract retention is held in a trust by the, the employer is likely to argue there has been serial defects and refuse to release retention.
• The subcontractor cannot usually claim retention, after any period of time, from the employer. There is simply no contract link to facilitate this.

 

When is the main contractor entitled to payment of retention?

Half of the retention is usually released immediately following practical completion of the main contract works.

The other half is usually paid sometime after the end of the Defects Liability Period/Rectification Period in JCT.

The final instalment of retention under the JCT Design and Build Contract 2016 is controlled by clauses 4.18.2 and 2.36.

The trigger for the release the final retention under the JCT is not the end of the Rectification Period; it is linked to the Notice of Completion of Making Good Defects.

The absence of a certificate where all defects are remedied is a breach of contract. The employer cannot take advantage of its breach of contract.

 

When is the subcontractor entitled to release of retention?

Subcontracts typically link the payment of the first instalment to completion of the main contract works (including making good of serial defects, minor defects and patent defects).

Subcontractors engaged in the early phases of a construction project should always resist such linkage. The gap between completing the subcontract works and completion of the main contract works is too long.

What about the final release?

This is usually connected to the release of retention in the main contract

The main contractor will want to be satisfied that the subcontractor has fulfilled all obligations before paying the subcontractor the second moiety of retention.

 

How to Recover Retention

Can retention payment be withheld by the main contractor for defects that the subcontractor is not liable?

Provided the retention clause is valid there is case law to suggests the retention can be so withheld provided the Main Contractor is proceeding diligently with the defects under the Main Contract.

There are vast sums of money withheld pursuant to main contracts and subcontracts concerning retention payments.

Whether the retention is due for payment or not requires an understanding of the contractual terms and the factual matrix.

If retention payment is due for release, there are various options to compel a release:

• Insolvency proceedings would rarely be wise because any claim for set-off is likely to defeat such proceedings.
• Litigation is an option, but it is slow and expensive.
• Adjudication is the best option. To understand how the low value adjudication procedures assist in recovering retention, read our guide to adjudication and our note on low value disputes.

Adjudication under the Housing Grants Construction and Regeneration Act 1996 provides a quick and more cost-effective way to resolve disputes over retention payments. It is a form of Alternative Dispute Resolution (ADR). This process allows for a neutral third party to make a binding decision on the matter, saving time and money compared to traditional litigation.

To discuss further please contact Matthew Dillon of MJD Solicitors on 01277 280761

This article is for information purposes, does not constitute legal advice and should not be relied upon. For terms and conditions of this article please read here