[2020] EWHC 2308 (TCC)

Stepping Stone, a property developer, engaged Yeovil, under three contracts (based on amended JCT Design & Build and Minor Works forms), to build assisted living units. After practical completion of the works, half the retention was released. Yeovil agreed to a deduction from the remaining retention but a final settlement figure was not agreed. Yeovil therefore began court proceedings for the remaining amount which was met by a counterclaim for defects.

Clause 4.8 stipulated that the Retention was to be deducted from any interim payments due to DRJ. Under clause 4.18.3 half of the Retention Percentage (i.e. 2.5%) could be deducted by Stepping Stone when the Works had reached practical completion but no Making Good Certificate had been issued.

Stepping Stone said that the balance of the retention only became payable as part of the sums due under the Final Statement under the contracts. 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). Second, they suggested that even if there was a Final Statement and it had become conclusive then they were entitled to deduct from the Final Statement figure sums due in respect of losses caused by the alleged breaches of contract by DRJ. Stepping Stone said the retention provided “both security and leverage”.

Stepping Stone said that the retention of the monies was the way for them to force DRJ to put things right or pay compensation for not doing so.

DRJ said 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. Clause 4.18.3 provided as follows:

“half the Retention Percentage may be deducted from so much of the total amount as relates to work where the Work 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.”

The Judge said that it was clear from the language of the contract that the sum representing the 2.5% (or any part of it) could not be withheld (“deducted”) where the Certificate of Making Good had been issued. The entitlement to do so ended with the issue of one. As to the period for which the second half of the retention may be deducted and treated as not yet payable, DRJ should be able to say that that which ought to have been done in relation to the issue of the Making Good Certificate should be treated as having been done.

For the purposes of this case, the only basis for Stepping Stone disputing the hypothetically served Final Statement would be that one or more of the defects identified in its schedule of defects had not been rectified and that they intended to make an appropriate deduction from the Contract Sum in respect of them. Yet the premise behind the issue of a Making Good Certificate by Stepping Stone was that any defects had been made good.

The parties were some eight years on from the expiry of the Rectification Period, and Stepping Stone should not otherwise be able to treat its counterclaim as secured by the retention figure and the contractual interest accruing on that sum. The retention here could not be used to provide Stepping Stone with unjustified leverage simply because it was the party in possession. Stepping Stone had to put forward any counterclaim independently of any right to hold the retention monies. HHJ Russen QC said that:

“It is in 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 under the terms of the contract).”

Here the contracts fixed DRJ’s entitlement to be paid by reference to the timing of the Making Good Certificate (or what should have been that certificate). The Judge said that Stepping Stone could not ignore the point that the retention represents monies earned and otherwise payable to DRJ:

“It is one thing for the retention to be used properly as leverage to ensure that 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 owes to DRJ, when the initial contractual expectation is that it will be released.”

DRJ was entitled to the retention subject to any loss and damage found to be recoverable on any counterclaim. In other words, Stepping Stone needed to make good its counterclaim independently of any right to retain monies. This they failed to do.