Should withheld retention be paid even if a certificate of making good hasn’t been issued?

Retention is a mechanism commonly used in construction contracts where a percentage of the contract sum (usually between 3% and 5%) is deducted from interim payments to the contractor as security for the employer for defects in the works. Half of the withheld retention is usually paid to the contractor on practical completion and the remaining half paid after a defects liability period (which is usually between 6 and 12 months).

The concept of retention as described above sounds appropriate in theory although can be subject to abuse in practice. For example, retention is often withheld longer than agreed, subject to spurious deductions, and used as leverage in negotiations not connected to defects in the works.

The usual position under JCT contracts is that the second half of withheld retention should be paid when a certificate of making good defects is issued. Many employers use the non-issue of a certificate of making good defects as a reason not to pay the balance of withheld retention, even where one should have been.

In DR Jones Yeovil Ltd v The Stepping Stone Group Ltd [2020] EWHC 2308 (TCC) the court considered whether an employer should pay the balance of withheld retention where a certificate of making good defects had not been issued.

Relevant background

Between 2009 and 2012, Stepping Stone Group Ltd (“SS”) engaged DR Jones Yeovil Ltd (“DRJ”) to construct eleven assisted living units at a site in Somerset under three separate contracts. The relevant contracts were for phases 1 and 2 (the “Phase 1 Contract” and the “Phase 2 Contract” respectively and the “Contracts” collectively).

The Contracts were based on the JCT Design and Build 2005 (revision 2, 2009) standard form.

The works under the Phase 1 Contract and Phase 2 Contract were certified as practically complete by January and December 2011 respectively. On practical completion, SS paid DRJ the first half of retention withheld under the Contracts and continued to withhold around £48,000.

In December 2014, the parties and the contract administrator (the “CA”) met to discuss outstanding defects. The CA’s email the following day recorded that the parties had agreed a deduction from the withheld retention of around £9,000 for outstanding defects.

By 2015, DRJ had made good all defects in the works under the Contracts, when it replaced some exhaust air heat pumps with air source heat pumps. SS did not issue a certificate of making good (which would have triggered payment for the balance of withheld retention) to DRJ.

The court’s decision

The judge firstly stated that retention cannot be withheld where a certificate of making good defects has been issued.

The judge then referred to Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] EWCA Civ 814, which addressed whether an interim payment under an ICE Standard Form contract should be made where a certificate should have been issued by the engineer. In Henry Boot, the court said (at [23]) that:

[…] the right to payment arises when a certificate is issued or ought to be issued, and not earlier. It does not, however, follow from the fact that a certificate is a condition precedent that the absence of a certificate is a bar to the right to payment. This is because the decision of the [contract administrator] in relation to certification is not conclusive of the rights of the parties, unless they have clearly so provided. If the [contract administrator’s] decision is not binding, it can be reviewed by an arbitrator (if there is an arbitration clause which permits such a review) or by the court. If the arbitrator or the court decides that the [contract administrator] ought to have issued a certificate which he refused to issue, or to have included a larger sum in a certificate which he did issue, they can, and ordinarily will, hold that the Contractor is entitled to payment as if such certificate had been issued and award or give judgment for the appropriate sum.

The judge stated that, where a certificate of making good defects should have been issued by SS, in line with the principle in Henry Boot above, DRJ would be entitled to the balance of withheld retention. The judge made the point that the absence of notices generally should not affect a party’s substantive contractual rights.

The judge held that SS should have issued a certificate of making good defects by May 2016 and, on that basis, SS had no defence to DRJ’s claim for £39,000 (being £48,000 in withheld retention less £9,000 as agreed at the meeting in December 2014).

In giving his decision, the judge made some observations about retention generally, including:

  • that retention is money earned by a contractor and otherwise payable to it; and

  • that withheld retention should not be used as leverage where the cost of rectifying later defects is less than the amount withheld.

Summary and practical tips

The decision in DR Jones confirms that the non-issue of a certificate of making good is not a valid excuse for withholding retention which is otherwise due. The test will be whether, objectively, a certificate of making good should be issued. In other words, all properly notified defects have been completed by the end of the rectification period.

Employers should notify of defects in the contractual timescales and pay any withheld retention when it becomes due. Withheld retention should not be disproportionately used as leverage where minor and/or low-value defects are outstanding.

Contractors should rectify valid defects in a reasonable time after notification. Contractors should also diarise the date on which any withheld retention should be repaid and chase payment accordingly. Adjudication would be a swift and relatively cost-effective forum in which to recover overdue retention if necessary.

Expert
Liam Hendry
Solicitor