Retentions – like blood from a stone, but maybe not for long
“Let it go, let it go
Can’t hold it back anymore” – Elsa, Frozen
In the Disney film “Frozen”, Elsa sings the above lines in celebration of the fact that she can finally, without hindrance, use her superpowers and move on from the past. Elsa takes the gloves off and moves on. It would seem that the UK government is edging closer to deciding that the gloves are off in relation to the use of retentions in contracts, and the theme is very much that you “can’t hold it back anymore”.
What is a retention?
Retentions are used frequently in the construction industry but there is a growing trend for using retentions in other industries particularly in the context of manufacturers who also install their manufactured product. By way of high-level summary, a retention clause allows the person paying for the product and its installation to keep a percentage of any payments that fall due. The retained monies (“the retention”) should then be released upon the occurrence of a certain event in the future (for example, once the installed product has passed certain performance tests or has been working without fault for a specific duration). This retention gives the customer a level of financial security and comfort that if the product doesn’t perform well during the period that follows installation, there is an incentive on the manufacturer to come back and fix it (or a pot of money to fix the product using a third party if that is needed).
What’s the problem?
The problem is the impact that the increased use of retentions has on the cashflow of manufacturers, particularly given that there is widespread misuse of retention clauses.
Some customers take longer than envisaged by the contract release the retention monies, and some customers simply refuse to release the retained monies at all.
Perhaps of most concern is that some customers become insolvent meaning that manufacturers only get back small percentage (if anything) of the retention.
Why is this relevant now?
The collapse of construction giant Carillion has led many people to examine again how smaller companies are impacted by the insolvency of larger companies.
Many small companies continue to suffer because of retention monies that are gobbled up by the insolvency process. Peter Aldous, the Member of Parliament for Waveney and quantity surveyor, is the latest politician to champion the possible regulation of retentions to try to ensure that smaller companies are better protected.
He has introduced a Private Members’ Bill in the House of Commons in which he has proposed amendments to legislation that would impose a mandatory retention deposit scheme on the parties to certain contracts. The idea, it seems, is that all relevant retention monies would be deposited in a government-controlled scheme and released once specific conditions have been achieved regardless of the insolvency of customers or reluctance of customers to release retentions.
While Private Members’ Bills only occasionally become law, it should be noted that if this Bill does become law, the current draft of the Bill would mean that the mandatory deposit scheme for retentions would apply to many manufacturing contracts. The second reading of the bill takes place on 15 June 2018 and it will be interesting to see if this Private Members’ Bill can pass or at least influence legislators to adopt the concept of a mandatory retention deposit scheme.
What can we do in the meantime?
The concept of retentions is going to become more prevalent in the manufacturing industry. It is important to ensure that all contracts set out very clearly in writing:
- what the retention is;
- how it is to be held;
- who holds it;
- when it gets deducted and how;
- when it gets released and how; and
- what happens if the retention is not released as per the contract requirements.
Once that contract is in place it is then important for both parties to adhere to it unless there is a clearly documented amendment to the contract.
Where retention monies are owed but not paid, there are various options available to manufacturers and for many it might be possible to adjudicate and recover those monies relatively painlessly within a period as short as one month.
With the growing use of retentions across all industries, but in particular the manufacturing industry, Mills Selig have the understanding and expertise necessary to provide specialist advice to ensure that contracts reflect what has been agreed between the parties and disputes are dealt with efficiently.
To speak to a market-leading specialist solicitor, visit www.millselig.com.
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