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Are retentions necessary after all?

LAW

The DTI Select Committee says that it is 'in everyone's interest' for retentions to disappear. Other remedies for defective work do exist but the solution is not as simple as some people think, writes Catriona Dodsworth

IT SEEMS everybody is up in arms over the Government's response to the Department of Trade and Industry Select Committee report following its inquiry into the use of retentions in the industry.

A lobbying campaign by contractors apparently persuaded the select committee to call on the Government to phase out retentions in public contracts by 2007. But, when the Government rejected the recommendation, contractors' groups reacted angrily.

On the face of it, there may be good reason for the reaction. Many seemed encouraged by the line taken by the committee, whereas the Government's overall response can be summed up in its somewhat sweeping statement: 'The onus should be on the industry to deliver defect-free products so that retentions are not necessary.'

This might sound glib to some. But the statement continued: 'The Government considers that it is not appropriate to adopt a target that focuses on a feature that results from poor client confidence but rather on ways to remove the cause of this lack of confidence.'

It is easy to see why many people feel offended by such a statement. For a start, several of those at the forefront of the campaign against retentions have repeatedly said that there is no direct link between retentions and quality of work. They see the Government's rejection of the report as a betrayal. But, on the other hand, it might also be said that those who have reacted most vociferously to the Government's response do seem to have looked back on the select committee's report through rosetinted spectacles.

For many people one of the most striking things about the report was that it actually said very little of substance.

The Government statement was in response to one of a handful of conclusions in the report that recommended change. The committee saw no reason why Government departments should not attempt to phase out retentions in their procurement contracts by 2007.

This is hardly revolutionary stuff compared with other radical developments in the industry over the past 10 years - the Construction Act, for example. But it is quite positive compared with the main tenet of the report, which could be summarised as: 'Retention provisions are generally bad news but the perceived need for such provisions will surely disappear if the industry improves and modernises.'

Whether or not you find this convincing depends on whether you see retentions as one of the causes of mistrust and lack of confidence in the industry, or as a symptom.

The lack of adventure on the committee's part is perhaps understandable.

It was presented with submissions that reflected very diverse views.

So it chose to steer a middle path saying, for example, '. . . for many the present client-contractor relationship is not sufficiently robust that clients have the confidence defects will be rectified by the contractor in the absence of a specific remedy available to them', while at the same time stating that 'it would obviously be in everyone's interest for retentions to disappear'.

But there is a wider issue emerging from the report, which has been overlooked. If the committee is right in pointing to a perception that retentions are necessary, why might this perception exist?

If it is merely a perception, surely all parties in the industry - clients included - are responsible for correcting it?

It is not made clear, neither in the report nor in the Confederation of Construction Client's submission to the inquiry, exactly why employers perceive there to be an absence of specific remedies available to them for defects.

If the Certificate of Practical Completion is delayed because of defective work under a traditional contract, the client might have at least four remedies available to it. For example, it can deduct liquidated damages; exercise legal remedies such as set-off or abatement; exercise contractual provisions that exclude work not carried out in accordance with the contract from valuations and, finally, continue to hold the retention.

Where defects arise during the maintenance period, the industry standard forms give the contractor the right (and oblige the employer to permit the contractor) to return to site to remedy the defects, while all the while the employer is holding the second half of the retention.

If the contractor fails to return, the employer retains its common law remedies - for breach of contract, for example.

So are retentions really necessary after all?

Whatever the answer to that question, it seems clear that money will continue to be retained for the foreseeable future and any reform in this respect will inevitably be driven, as at present, by a relatively small number of clients who are seizing the initiative themselves (and who reported to the committee that they are reaping the benefits of doing so).

So it seems that retentions should be either permitted, or eradicated, across the board. While clients still insist on retentions, main contractors are forced to pass the burden on to subcontractors and are often placed in the position of having to accept standard form bonds in lieu of retention notwithstanding concerns as to the potentially prohibitive cost of such a regime and the fear that the bond market might be unable to sustain the demand if this method were adopted across the industry.

Catriona Dodsworth was assisted in the preparation of this article by Richard Davies, assistant solicitor in the construction department at Masons' London office.

Key points Are retention provisions a cause or a symptom of a lack of co-operation and trust in the industry? It all depends on one's point of view.

Evolution not revolution - the select committee's report steers a middle path and encourages the Government to phase out retentions by 2007.

The law and contracts provide remedies for defects in the absence of retention.

If retention is required, it should apply to the whole supply chain.