KNOWLEDGE

Can an Employer refuse to pay back retention sums?

Morton Fraser Senior Associate Julie Scott Gilroy
Author
Julie Scott-Gilroy
Legal Director
PUBLISHED:
25 May 2021
Audience:
Business
category:
Blog

The purpose of retention is to ensure complete performance of the contract by the contractor by holding back part of the payment as a security. 

Most construction contracts allow the employer to retain a certain percentage of the value of the works although parties are free to agree that there will be no retention. This percentage is deducted from each payment due to the contractor during the project. The employer can refuse to release this, although that doesn’t necessarily mean that they are always entitled to do so.

We will again use our example contract, the SBCC Design & Build Contract 2016. The contract particulars specify the retention sum as a percentage of the gross value of the project; parties are free to agree the percentage but it is usually between 3% and 5%. Practical completion triggers the release of half of the retention sum. The issue of a certificate of making good triggers release of the remainder of the retention sum. The employer may not unreasonably delay or withhold issuing that certificate.  If however the Contractor does not make good the employer would be entitled to retain the retention to put towards the cost of remedying the defects, subject to the service of appropriate notices,

The employer retains the retention sum 'in trust' for the contractor during the project until making good has been completed. Holding the money in trust means that the employer should not use that money for any other purpose. Under the example contract, the contractor can request that the retention is placed in a separate bank account. That offers protection to the contractor in the event of the employer's insolvency. The contract terms do not however create a trust under Scots law.

It is important to bear in mind that the retention sum represents monies earned by the contractor.  The same payment rules apply to retention as to other payments under the contract. What can be deducted from the retention sum will depend on the terms of the contract. For example, the employer may have a claim against the contractor which they set off against the retention sum. Our example contract allows the employer to make a deduction from the contract sum if they have instructed the contractor not to rectify defects, for whatever reason. It also gives the employer a general right to withhold or deduct a sum due to the contractor, subject to serving the appropriate notice.

Should you require assistance with any aspect of a construction contract, we have a large and experienced construction team who would be happy to discuss this with you.

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The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser LLP accepts no responsibility for the content of any third party website to which this webpage refers.  Morton Fraser LLP is authorised and regulated by the Financial Conduct Authority.