The majority of standard form building contracts provide for deduction of retention of 3-5% from the contractor's interim certificates with half being released on practical completion and the other half being released upon the issue of the certificate of making good defects.
These standard form contracts usually provide that the employer's interest in the retention is 'fiduciary as trustee for the contractor (but without obligation to invest)'. Where this 'trustee' wording appears, there is also often, in longer form contracts, a requirement that the employer (if the contractor so requests) place the retention fund in a separate bank account, so designated as to identify the amount paid in as retention held on trust by the employer.
But what are the employer's obligations when the contract does not contain the latter wording? Frequently they are deleted at the tender stage and in the JCT Intermediate Building Contract (2005) they do not appear at all.
In Wates Construction (London) v Franthom Property (1991) it was held that the 'trustee' provision required the employer to safeguard the retention and created an immediate obligation to place the retention money in a separate bank account even where the express contractual obligation to do so had been deleted.
Although the employer does have an obligation to pay the retention into a separate bank account, the courts have more recently clarified that it is not required to do so immediately. In Bodill & Son (Contractors) Limited v Mattu (2007) the judge found that setting up a separate bank account, which was clearly described as a trust account, within two to three weeks of the contractor's request was reasonable.
In the event that the employer refuses to put the retention in a separate identifiable account the contractor may issue proceedings claiming an injunction to compel the employer to carry out its request. Such an injunction is likely to be granted by the court unless the employer can demonstrate that it is entitled to an amount, such as liquidated damages for delay, in excess of the retained amount (Henry Boot Building v Croydon Hotel and Leisure Co (1986) CA).
To protect their position, remove their obligation to place retention in a separate bank account and ensure that the retention is freely available to use where the contractor defaults or defects arise, employers should carefully consider the drafting of retention clauses in their contracts