Retention – What is it good for?

A recent case discusses the issue of how long an employer can properly hold on to retention

For employers, retentions are an important means of protecting their cash outflow against defective work by a contractor. For the contractor, they are often a source of contention.

What happens if a contractor simply will not, or cannot, correct a defect over a period of months or even years, so that no certificate of making good of defects can be issued?

Can the employer keep the retention (or more precisely, the second half of it) for ever? - and if not, until when?

In the recent case of DR Jones Yeovil Limited v The Stepping Stone Group Limited heard in the Technology and Construction Court in Bristol, His Honour Judge Russen QC gave some useful guidance on these questions.

The contractor, DR Jones Yeovil Limited (DRJ) was engaged by its employer, The Stepping Stone Group Limited (SS) for the construction of various assisted living units under two standard JCT design-build contracts (2005). Although practical completion had been certified back in 2011/2012, no certificates of making good had ever been issued by SS or their agent, and SS therefore continued to hold on to some £40,000 of retention. DRJ argued that the defects have been made good and that the certificate should have been issued no later than mid-2016.

It was clear that if a certificate had been issued, the retention had to be released. It was also clear from previous case law that if a court or adjudicator were to find that a certificate should have issued, then an appropriate declaration could be made, together with an order for payment of the outstanding retention, and interest.

But what was the position if the employer was correct in never issuing the certificate of making good (because the defects had not in fact been made good)? Here, the judge accepted DRJ’s submission that in certain circumstances – in particular following a long passage of time – the retention might still fall to be released, subject to a deduction for the cost of making the defects good.

The judge referred in particular to an earlier case called Relicpride Building Company Limited v Cordara [2013] EWCA Civ 158. On the slightly unusual facts of that case (where one of the conditions for release of retention could never be satisfied, as it turned out) the Court of Appeal held that the employer could not hold the retention indefinitely.

In DR Jones Yeovil Limited some 8 or 9 years had passed since the expiry of the Rectification Period and, the judge said, SS “should not otherwise be able to treat its counterclaim as secured by the £39,481 and the contractual interest accruing on that sum”. He continued:

“It is one thing for the retention to be used properly as leverage to ensure that outstanding breaches are rectified, or as pro tanto security for the loss incurred if they are not. It is quite another for leverage to be exerted by the de facto withholding of the whole of the retention, regardless of the true extent of SS’s set-off against the debt it owes to DRJ, when the initial contractual expectation is that it will be released.”

How long to wait?

Clearly at some point, a contractor is entitled to hold its hands up, accept that it is unable or unwilling to attend to defects - e.g. because it has completely demobilised or perhaps no longer has the resources to address the problem – but nevertheless require the employer to pay over the retention, less a reasonable sum either for the cost of remedying the defects or to represent a diminution on value of the work. How long after expiry of the rectification period must it wait before doing this? The waiting period will not necessarily need to be as long as the 8 or 9 years in DR Jones Yeovil Limited. However, given that a contractor’s failure to correct defects is still a breach of contract, it is likely that courts and adjudicators will give employers a comfortable period of time to quantify their set-off, before ordering payment over of any balance.

DR Jones Yeovil Limited v The Stepping Stone Group Limited – High Court Technology and Construction Court, Bristol, 4 September 2020, His Honour Judge Russen QC