England’s Court rules in favour of contractor for unpaid retention

In DR Jones Yeovil Ltd v The Stepping Stone Group Ltd [2020] EWHC 2308 (TCC), England’s Technology and Construction Court ruled in favour of a contractor in its claim for unpaid retention under a JCT contract and dismissed the employer’s counterclaim for alleged defects. Certificates of Making Good were never issued and one of the questions before the court was whether that meant there could be no recovery of the balance of retention.

Background

The Claimant contractor (DRJ) entered into three building contracts with the Defendant (SS), a property developer specialising in building “assisted living” homes for elderly residents. The site was owned not by SS, but by its wholly-owned subsidiary, NCT, which had disposed of the individual units on long leases and retained ownership of the freehold of the common parts. The Phase 1 and Phase 2 Contracts were in the form of the JCT Design and Build Contract 2005 (Revision 2 2009), as amended by the parties, and the “Engine House Contract” was in the form of the JCT Minor Works Contract 2011.

The Phase 1 and 2 Contracts achieved practical completion in 2011 and the Engine House Contract in 2012. In respect of the Phase 1 and 2 Contracts, DRJ was paid the sums due except for half of the 5% “Retention Percentage”. Clause 4.18.3 of the Conditions of the Phase 1 and 2 Contracts, provided that “…half the Retention Percentage may be deducted from so much of the total amount as relates to work where the Works or relevant Section(s) have reached practical completion but in respect of which a Notice of Completion of Making Good under clause 2.36 or a notice under clause 2.32 has not been issued.”

SS withheld £48,761.57, being 2.5% of the Phase 1 adjusted contract sum and 2.5% of the Phase 2 adjusted contract sum. DRJ issued proceedings against SS for £39,481.16, being the amounts withheld, less £9,280.40, which DRJ agreed (at a December 2014 meeting) be deducted as agreed defects from any final payment. SS counterclaimed for, and sought to set off, £240,151.90, for alleged defective works under the three contracts. SS’s largest claim was in respect of alleged additional electricity costs incurred by the residents (and leaseholders) of the units arising from allegedly defective heat pumps installed by DRJ.

SS’s Position

SS argued that discussions at the December 2014 meeting operated to displace the contract provisions so far as release of the monies categorised as retention was concerned. In the alternative, SS argued that the balance of retention only became payable as part of the sums due under the Final Statement under the contracts and DRJ had no entitlement to payment if there was no Final Statement or if there was one, but no Making Good Certificate had been issued (so that the Final Statement had not become conclusive). SS further argued in the alternative that even if there was a Final Statement and it had become conclusive (after the issue of the Making Good Certificate) then SS was entitled to deduct from the Final Statement figure, sums due in respect of losses caused by DRJ’s alleged breaches of contract.

DRJ’s Position

DRJ’s case was that there was no good reason for SS continuing to withhold the net sum of £39,481,16, which was due to it as retention under the Phase 1 and 2 Contracts. DRJ argued that SS’s contention that the retention only became due upon the Final Statement was wrong as a matter of contract. DRJ’s position was that the trigger for the release of the retention was not the issue of the Final Statement but the issue (or what should have been the issue) of the Making Good Certificate. The purpose of the retention, DRJ said, was to act as security for the employer against which it may indemnify itself for any loss or damage it suffers as a result of breach by the contractor.

Retention

The Court held that DRJ was entitled to the amount claimed together with contractual interest and it dismissed SS’s Counterclaim in its entirety. It held that:

  • It was clear from the language of Clause 4.18.3 that the sum representing 2.5% (or any part of it) could not be withheld (“deducted”) where the Certificate of Making Good has been issued. The entitlement to do so ends with the issue of one.
  • It was equally clear that the subject matter of that clause was the balance of the Retention, in respect of which the parties had expressly recognised that SS was DRJ’s debtor, and that it does not lose its identity as such.
  • Following, Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] W.L.R. 3850, DRJ was entitled to the retention because SS ought to have issued a Certificate of Making Good and failed to do so. DRJ, was entitled to treat it as having been issued.
  • The court should not be too hidebound by the existence or absence of notices which were required as part of the contractual machinery regulating the cash-flow between the parties when it comes to determination of their substantive rights.
  • It is the very nature of a “retention” out of the contractual price that the parties anticipate it being released to the payee at some point during the performance of the contract, even if that be at its very end and subject to whatever deductions may properly be made by the payor or under the terms of the contract. Clause 4.18.3 of the Phase 1 and 2 Contracts fixed DRJ’s entitlement to be paid by reference to the timing of the Making Good Certificate (or applying the reasoning in Henry Boot, what should have been that Certificate).
  • It is one thing for the retention to be used properly as leverage to ensure the outstanding breaches are rectified, or as pro tanto security for the loss incurred if they are not. It is quite another for leverage to be exerted by the de facto withholding of the whole of the retention, regardless of the true extent of SS’s set-off against the debt it owed DRJ, when the initial contractual expectation is that it will be released.

Transferred Loss

In seeking to recover damages in respect of DRJ’s alleged breaches of contract, the developer relied upon the principle of transferred loss. That principle allows a contracting party (who has suffered no loss) to recover damages from its defaulting contractual counterparty in respect of loss that has been suffered by a third party who is not party to the contract.

SS argued that its interest as employer under the three contracts enabled it to recoup losses suffered by NCL (costs in relation to snagging items) and by the leaseholders (said to have suffered increased electricity bills due to defective heat pumps installed by DRJ). The Court held that SS’s case on transferred loss fell foul of the requirement of “third party benefit” i.e. that at the time the contract was made, the contracting parties had a common intention and/or known objective that its terms should benefit the third party or a class of persons to which that third party belonged.It could not be said that the parties had a common intention to benefit future leaseholders of the units. Here, the parties had expressly agreed in the Phase 1 and 2 Contracts and Engine House Contract that “nothing in this Contract confers or is intended to confer any right to enforce any of its terms on any person who is not a party to it.” These clauses, the Court said,constituted a contractual agreement as to the factual position which was sufficient to support a contractual estoppel of the knowledge of such benefit. When the parties to the contract have specifically addressed the lack of third party entitlement, and curtailed obligations accordingly, there was no proper basis, the Court said, for overriding their agreement.

Remote hearing

Another interesting feature of this case, is that it was one of the first trials of the Technology and Construction Court to take place remotely via video-link (conducted mostly by Zoom) in accordance with the Covid-19 Protocol. A rather unfortunate incident occurred, when during a short break in the course of witness testimony (via video link on his laptop), the witness made a private telephone call to a former colleague, who was also a witness, while the microphone on his laptop was still switched on. The judge noted that the incident was regrettable and that guarding against the obvious risk of contamination of a witness’s independent recollection is the reason why there should be no consultation with others while it is being tested in the witness box. Given the brevity of the break and telephone call, the judge concluded that there was no question of the witness being “fed his lines”, but this is a cautionary tale for parties and their legal representatives involved in remote hearings.

Comments

Delay in release of retentions is common in construction contracts. Contractors facing such problem may consider whether the reasoning in this judgment can be relied on in claiming their retentions.