Avoid Retention Tension by Opening a Dedicated Bank Account Straight Away

Many of the commonly used forms of building contract provide for a retention fund, typically of 3% of the amount(s) certified as due to the Contractor to be withheld by the Employer when payments are made during the contract period.

Half of this money is then released when practical completion of the works is achieved and the other half remains in the Employer’s possession either until the defects liability period has come to an end, or the making good defects certificate has been obtained.  Although this money remains in the possession of the Employer, it belongs to the Contractor and is held for the Contractor’s benefit.  The Contractor has the right to insist that the retention is placed in a separate designated bank account, which should be clearly named in favour of the Contractor.  Over the years, a number of useful principles have been established by the Courts.  These are:-

• A Contractor does not have to make a separate request to the Employer that the retention money is placed in a separate bank account each time a certificate is issued.  A single request is enough.
• Under some of the JCT forms of contract, an Employer has an obligation, upon request, to keep the retention money in a separate bank account even if there is no clause to that effect in the contract, or if the relevant part of the clause has been deleted.
• The Employer is required to act in good faith and has no right to use the retention for its own purposes; otherwise the Employer will be in breach of trust, but legitimate rights of set-off can be operated against the retention.
• Under some JCT contracts, an Employer has no obligation to invest the retention monies for the benefit of the Contractor, who will have right to any interest that may accrue whilst the retention is held by the Employer. 
• If an Employer goes into administration or otherwise becomes insolvent, and the retention has been set aside, it can still be paid direct to the Contractor.  The Contractor does not then have to take his chances along with any other creditors.  However, the separate bank account must be established before the Employer goes into administration, otherwise the Contractor may lose its right to the money.

The decision of Mr Justice Akenhead in Bodill & Sons (Contractors) Limited v Mattu [2007] EWHC 2850, TCC, also provides some further guidance for both Employers and Contractors.  Towards the end of September 2007, Bodill requested that Mattu place approximately £125k of retention in a designated bank account, in accordance with the provisions of the contract.  By mid-October the account was open and funds had been earmarked, but owing to an oversight on the part of Mattu’s bank, no money was transferred.  Bodill subsequently applied for an injunction requiring the retention to be paid into the new account. 

The judge considered the extent of the Employer’s obligation.  He found that a reasonable period, within which a separate account should be set up following a Contractor’s request, was two to three weeks.  The judge emphasised that such accounts should be clearly described as trust accounts.  In this case, the name “Harmail Singh Mattu, trading as Urban Suburban, re Bodill retention money account” was not sufficiently clear as to make it obvious that the funds were held on trust.  By reason of these joint failures to promptly open the account and transfer funds, Mattu was in breach of contract and of trust. 

This case makes it clear that an Employer must act promptly when a Contractor requests that a new account be set up for the retention funds.  The Employer must take steps to ensure the account is clearly designated as a trust account.   If the Employer unreasonably delays in opening such a new account following a request, then that Employer is in breach of trust and/or contract and the Contractor is entitled to apply to the Court.  In the present economic climate, Contractors are advised to ensure during pre-contract negotiations that there is a term in the contract that the contractor may require all the retention monies to be paid into a separate, properly designated trust account.