15 December 2020
Under Construction - Q4 2020 – 5 of 5 Insights
The practice of cash retention is a common feature of the construction industry and is also the subject of ongoing debate. On the latter, Build UK set out proposals for the abolition of cash retentions by 2025 and the Department for Business, Energy and Industrial Strategy is in the process of considering responses to its own consultation on the practice. The COVID-19 pandemic, putting pressure on cash flows for contractors, has only increased the importance of prompt and fair payment.
The recent case of DR Jones Yeovil v Stepping Stones  EWHC 2308 (TCC) gave insight into the release of retention where a Certificate of Making Good had not been issued; in this case some years after completion.
In brief, the DR Jones Yeovill (contractor) was engaged by Stepping Stones (employer) under two JCT 2005 design and build contracts. Practical completion was achieved in 2011 but Certificates of Making Good were not issued.
In 2018, the contractor issued proceedings to secure the release of the retention arguing there was no good reason for its employer to continue to withhold; defects had been made good, the retention should have been released. In other words, the contractor said that the trigger for the release of retention was the issue (or what should have been the issue) of the Making Good Certificate.
The employer argued that the balance of the retention only became payable as part of the sums due under the Final Statement, and that there could be no entitlement to payment if no Final Statement was issued or, if there was a Final Statement but the Making Good Certificate was not issued. Alternatively, the employer argued that if the Final Statement was issued and had become conclusive, the employer was entitled to deduct from the Final Statement alleged losses caused by breaches of contract by the contractor.
The court was clear that if a Certificate of Making Good had been issued a deduction for retention could not be made. Entitlement to retention ends with the issue of such a certificate.
The court was also satisfied that the contractor should be entitled to say that the certificate of Making Good should have been issued, relying on the decision of Henry Boot Construction v Alstom Combined Cycles (2005) that the absence of the certificate of payment did not bar the substantive right to payment. Once the right is established, it enabled the court to decide that a certificate ought to have been issued.
The nature of the retention is that it represents monies earned but retained in the anticipation of being released. While it was one thing to use retention to properly ensure that outstanding breaches were rectified, it was not to be used to provide the employer with "unjustified leverage", just because the employer had possession of those sums. The employer had to put forward any counterclaim independently of any right to retain money.
On the facts, the court was satisfied that the Certificate of Making Good defects should have been issued in 2016, the employer's counterclaim was not made out and dismissed, and the contractor was entitled to the release of the retention together with interest.
The decision provides useful guidance as to the nature of retentions. An employer cannot simply refuse to deal with release of retention indefinitely. Employers must advance any claim and quantify such claim independently of a right to retain retention.