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What's yours is mine
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
“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”
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.
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.
Readers are invited to forward recent
judgments for reporting in this column (with full
acknowledgement) to: Tony Bingham, 3 Paper Buildings, Temple,
London EC4Y 7EU. DX: 37164 Biggleswade
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