Principles Governing Cash Retention In Construction Contracts

• Published date: 23 December 2020
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Contracts and Commercial Law, Construction & Planning
• Law Firm: Shepherd and Wedderburn LLP
• Author: Mr David Anderson and Jamila Archibald

During the course of 2020, both the UK and Scottish Governments are carrying out consultations on cash retentions in the context of construction contracts. In the recent case of Dr Jones Yeovil Limited v The Stepping Stone Group Limited [2020] EWHC 2308 (TCC), His Honour Judge Russen QC analysed the operation of retention in JCT contracts. The judgment confirmed that the proper purpose of retention is to incentivise rectification of any outstanding defects, or as security for the loss incurred if they are not. In addition, the case provides a rare discussion regarding the principle of transferred loss.

The dispute

The claimant was a contractor, Dr Jones Yeovil Ltd (DRJ), which had been engaged under three building contracts to build ten assisted living units and refurbish a building into an additional unit (the "Works") by the defendant property developer, Stepping Stone Group Ltd (SSG). The two contracts to build the units were in the form of the JCT Design and Build Contract 2005 (Revision 2 2009) as amended by the parties, while the contract to refurbish the eleventh unit was in the form of the JCT Minor Works Contract 2011, meaning DRJ had no design responsibility.

The development site was not owned by SSG; instead it was owned by Nynehead Care Limited (NCL), a wholly owned subsidiary of SSG. NCL retained ownership of the freehold common parts but subsequently disposed of the units on long leases.

Practical completion of the ten assisted living units was achieved in 2011. However, there were various defects identified in the Works post-completion, including defective exhaust air heat pumps (EAHPs). The total withheld by SSG was '48,761.57 in terms of clause 4.18.3, which provided that half of 'the Retention Percentage ' (of 5%) may be deducted where practical completion had been achieved but a 'Notice of Completion of Making Good' had not been issued. In 2014, DRJ accepted a deduction of '9,280.40 in respect of a list of agreed defects.

DRJ issued its claim for '40,622.80 plus contractual interest on 6 February 2018 in respect of the balance of the sums retained and an outstanding VAT invoice. SSG sought set-off and served a counterclaim for '240,151.90.

Retention

SSG submitted various arguments in order to support its position that retention should not be released. These arguments can be summarised as follows:

1. The balance of the retention only becomes payable as part of the sums due under the Final Statement under the contracts. Therefore, DRJ has no...