Cash Retention Abuse
Thursday, 19th February 2015
In the aftermath of the recession, cash retention abuse has been a hotly debated topic in the construction industry. With insolvency affecting a significant number of contractors and employers, retention monies have often been used to pay the latter's creditors, as opposed to their contractors and sub-contractors.
In a normal retention scenario, contractors are paid in instalments throughout the duration of a project, with a percentage of payments withheld by the employer. The retained money functions as an added layer of protection for the employer. Retention ensures that if defects arise once a contract has finished, the contractor will not receive this money until it provides an adequate remedy.
In theory, retention should be unproblematic for contractors who have diligently carried out their duties under the contract. However, in the instance where an employer or main contractor becomes insolvent prior to paying the retention monies to their contractor, is it right that contractors' money is used to pay off an employe's creditors generally?
The JCT Design & Build contract states that "…the Employer's interest in the Retention is fiduciary as trustee for the Contractor." This means that the party holding the retention money does not hold it absolutely and cannot therefore treat the funds as its own. As such, these funds ought to be released to the contractor, unless the other party has a right of recourse against the money i.e. there is a defect in the work. As such, the fiduciary duties of an employer include an express requirement that the retention monies are held in a separate bank account, upon request of the party whose money is being retained. This requirement does not apply where the employer is a local authority. The employer is not obliged to invest the monies and has a right to any interest accruing on the retention monies being held in the separate bank account. In spite of these obligations, it is common for parties to amend clause 4.16 of the JCT Design & Build to remove all fiduciary duties towards the contractor or any third party in relation to retention provisions and to remove the obligation on the employer to set aside an amount representing the retention in a separate account.
In light of the frequency of retention monies being used to pay employers' creditors upon liquidation, the debate has reached Parliament in the UK. Politicians are currently assessing whether retention monies should be automatically placed in trust. This is seen as a way to redress the apparent unfairness towards small and medium-sized contractors and subcontractors, whereby retention monies are used to bolster the working capital of large employers. These moves parallel recent legislation introduced in New Zealand, where construction company ''Mainzeal'' collapsed, leading to the loss of $18 million of subcontractors' retention money.