| Date | 20 May 1998 |
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| Judgment | PC Harrington Contractors Ltd -v- Co Partnership Developments Ltd, Court of Appeal 1997 |
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| The Issue | Payment of works contractor's retentions following 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 contractor's retentions have been held on trust by the Employer, the Employer has no general right of deduction against such sums. |
printThe withholding of retention continues to cause difficulties in the construction industry. Considerable delay in the release of retention is commonplace and in the event of the insolvency of any party in the payment chain, retention may be lost altogether. Movements within the industry to replace cash retentions in their entirety with payment guarantees backed by insurers has failed to ignite any enthusiasm. One little recognised quirk of the new construction Act is that in the absence of an adequate contractual mechanism dealing with the entitlement and amount of stage payments, the appropriate part of the Government scheme which will be imported into the contract will provide for payment free from retention. Most standard forms, including those of the JCT, set out detailed rules for the treatment of retention and particularly provide that the employer holds retention in trust for the 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. The difficulty with this type of provision is in separately tracing or identifying such sums in the event of the demise of the employer. Accordingly the JCT contracts allow for retention monies to be placed in separate bank accounts upon the request of the contractor, and this may go some way to alleviate the risk. The case of PC Harrington Contractors Ltd -v- Co Partnership Developments Ltd examined these arrangements in the context of a JCT management form of contract. The case was heard in December 1996 in the High Court and I reported the decision in Contract Journal on 22 January 1997. On 2 April of this year the case came before the Court of Appeal. John Lelliott had been engaged as management contractors for a development in Abbey Road, London. Lelliott went into receivership and in due course Co Partnership completed the project works by other means. Upon conclusion of the final accounts the architect certified that an amount of approximately £650,000 was owing to the employer. At the point of Lelliott's demise the employer had built up a retention fund amounting to £288,000. Accordingly the employer, Co Partnership, claimed to be entitled to retain the whole of this retention fund by way of set-off against the liability of the management contractor for their loss of £650,000. One particular works contractor, PC Harrington, had been studiously careful with regard to its retentions. During the course of the works, Harrington had made a formal request to Lelliott that all retention monies in connection with its works be placed in a separate account in accordance with the management contract clause 4.8.3 and the works contract clause 4.24. Lelliott had replied enclosing a copy of a letter signed by Co Partnership to the effect that retentions on the development were held in an account with Barclays Bank under a separate name. Harrington therefore argued that their retention amounting to some £22,000 was held in trust by the employer and thus the employer had no right of set-off against that amount. Clause 4.3.2 of the management contract provides that the employer is entitled to exercise any right under the contract of deduction for monies due or to become due to the management contractor, whether or not retention is included in that amount. The question before Lord Justice Morritt was therefore whether this clause within the management contract entitled the employer to have recourse to funds held on retention under a works contract. This depended on whether such works contract retention was to be regarded as "monies due or to become due to the management contractor". The Court of Appeal held that the lower court's analysis of this situation was entirely correct. The scheme of this contract provided for two entirely separate and distinct mechanisms for retention. The deduction from the works contractor was exercisable only by the management contractor, not the employer. These works contract retentions never had been "money due to the management contractor" for they were specifically excluded from the interim certificates to be issued under clause 46 of the management contract. Where the management contractor had made a proper deduction from the works contractor in accordance with the works contract, the employer would be entitled to make these deductions from works contractor's retention because they will then have become "monies to become due to the management contractor". In the absence of such valid deduction or set-off having taken place between the management contractor and the works contractor, there is no right vested in the employer to make a deduction from the works contractor's retention. At all times since the works contract retentions had been made they had been held by the employer in trust for the works contractor, and the revised certificate for payment under the management contract could not operate to alter that position.
CJ-9818
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