| Date | 22 January 1997 |
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| Judgment | P C Harrington Contractors Ltd -v- Co-partnership Developments Ltd and Others (Unreported), 18 December 1996 |
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| The Issue | Payments of works contractors retentions following the insolvency of the management contractor. |
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| Implication |
Unless a valid set off has been raised by the management contractor prior to its demise, where works contractors retentions have been held on trust by the employer, the employer has no general right of deduction against such sums. |
printIf all the retention monies which are held in overdue accounts for contractors and sub contractors were put together it might generate a sum larger than the lottery. The JCT Forms of Contract generally set out detailed rules for the treatment of retention and particularly provide that the employer's interest in the retention is to be treated as fiduciary as trustee for the main contractor. This will mean that in the event of the employer's insolvency, retention monies will not fall to be considered within the general assets of the employer for distribution amongst other creditors. This of course is easily said but considerably more difficult to apply in practice, for it may be impossible to trace and separate these retention monies apart from any other assets. Accordingly the JCT have also provided that contractors may, upon request, require that retention should be held in separate banking accounts by the employer. Whilst these steps can hardly be said to provide total security they are not however to be ignored. How these procedures might operate in the case of the JCT Management Forms of Contract was examined in the case of P C Harrington Contractors Ltd -v- Co-Partnership Developments Ltd on 18 December 1996. In 1989 Co-Partnership had engaged Lelliot Management Limited as management contractor for the construction of flats and houses in Abbey Road, London. Lelliot in turn had entered into a works contract with P C Harrington. During the course of the works P C Harrington made a formal request to Lelliot that all retention monies in connection with their works be placed in a separate account in accordance with management contract clause 4.8.3 and the works contract clause 4.24. Lelliot's reply, enclosing a copy of a letter signed by their client, said that retentions on the development were held in an account with Barclays Bank under a separate name. In due course practical completion was certified, the defects liability period concluded and approximately six months later the final account agreed between the management contractor and works contractor. The final account showed that retentions of £22,000 remained payable to the works contractor. None of these retentions having been paid, about one year later administrative receivers were appointed to Lelliot, whose appointment under the management contract then automatically determined. Not surprisingly the employer drew up an account which showed substantial loss as a consequence of this determination and issued statements showing that sum far exceeded the total balance in the retention fund account. Accordingly, when P C Harrington made their claim against the employer for their retention, they were told that the entire sum had been swallowed up and that no further monies would be payable. The question before the Court was therefore whether the retention fund was held in trust for P C Harrington, and if so whether the employer was entitled to deduct from the entirety of that fund or only from that part of it in which they or the management contractors had a beneficial interest. Recorder Tugendhat QC examined carefully the clauses relating to retentions in both management contract and works contract. Importantly he considered that the retentions under the two contracts were to be treated separately. This would also assist in clarifying the right of deduction from retention. The right of deduction from the works contractor's retention is provided by the works contract clauses 4.33 and 4.34. That right of deduction is exerciseable only by the management contractor, not the employer, and is made subject to two conditions. First, it is stated that these amounts must arise out of or under the works contract or where a management contractor has a claim by reason of any breach of the works contract by the works contractor. Secondly, the right of deduction is limited to amounts agreed by the works contractor or finally awarded in arbitration or litigation. These benefits are passed through to an employer through the vehicle of the management contract clause 3.21. But 3.21 gives the employer rights of recovery against the management contractor in such case; not from the works contractor direct. In other words where the management contractor has made proper deductions from the works contractor in accordance with the works contract, the employer will have rights to make such deductions from the works contractor's retention because they will then be "monies to become due to the management contractor" within the meaning of clause 4.33 of the management contract. But in the absence of such valid deduction "or set off" having taken place, there is no right vested in the employer to make a deduction from the retention retained pursuant to the works contractor. Accordingly the total amount of the retention held against the works contractor's account was held on trust and would therefore be payable to the contractor. This case certainly suggests that management contracts provide greater security to works contractors in these matters than has proved to be the case with sub contractors under other standard forms.
CJ-9703
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