SEC Group Guidance Note, Protecting Cash Retentions
You have a large outstanding cash retention. You have concerns about the financial position of the party holding the retention. Is there anything you can do to protect the monies?
As we slowly emerge from a recession the pressure on finances becomes even greater.
“Breaking down the movements in cash we can see that contributions to cash from operations have fallen away in the last two years……Of the 11 Tier 1 contractors that provided cashflow information, six had overall net outflows in this period and only two had positive cashflow from operations in all three years. This is a strong sign that margins currently being generated are not sustainable in the long term.” (emphasis added)
Extracted from Construction Barometer: Recovery in Sight? Published by KPMG in September 2014.
The upshot is that the risk of not recovering one’s retention monies has now increased.
Returning to the question posed at the beginning it may be helpful to first consider the status of retention monies. The monies are deducted from payments you have already earned and, therefore, belong to you. In effect you have given permission to the other party to have temporary custody of your monies. The monies must be released unless the other party has had recourse to all or part of them in accordance with the contract (e.g. the monies have been used to remedy defects because you failed to return to rectify work and/or materials not in accordance with the contract).
In these circumstances English law normally implies that the other party is holding the monies on trust for you as the beneficiary (subject to the other party’s contractual rights of recourse to the monies). Consequently, as trustee, the other party must place the monies in a segregated account. If he fails to do this you have the right to refer the matter to adjudication requesting that the adjudicator decides that the monies be placed in trust in a separate account. In the event that the adjudicator’s decision is ignored a court can be invited to issue a mandatory injunction to force compliance.
To date this approach has not been tested in construction cases but it has succeeded in non-construction cases (where monies have been handed over for a particular purpose and it is expected that they are to be returned if that purpose has not materialised).
It is suggested that such an approach could be useful in cases where you have a large retention pot outstanding and during the contract you realise that the other party is unlikely to be in existence at the date for release of the monies.*
Once you’ve received your contract it would be helpful to email the other party as follows:
“Please confirm our understanding of the position regarding the retention monies which is as follows:
The retention monies will be deducted from our due payments at the rate of insert percentage amount] until practical completion or handover. Thereafter half of the accumulated retention will be due for release to us on [specify when the first half becomes due for release]. The remaining half will become due for release on [specify when the second half becomes due for release]. The retention monies will be released to us in full unless, in accordance with the contract, you have had recourse to the whole or part of the monies.”