Valuation and payment - Construction Contracts - page 201

122 What is the significance of retention
being in trust?
Retention is when an amount is withheld from sums otherwise certifiable to the contractor
to serve as a safeguard against the possibility of defective work or materials or even failure
to carry out the Works by the contractor. It is usually termed a 'retention fund'. The amount
retained is usually 3 per cent (or sometimes 5 per cent of smaller value contracts) of the
work properly executed by the contractor. It is accumulated by deducting the appropriate
percentage from the valuation of work at each interim payment. SBC clause 4.18.1, DB
clause 4.16.1 and ACA clause 16.4 all state that the employer's interest is as trustee. Not all
contracts create a trust fund for the retention. The retention fund under the IC, ICD, MW
and MWD contracts is not held in trust.
Where someone is in a position of trust, that person has a duty to exercise any rights and
powersforthebenefitofthepersonforwhomthetrustwascreated.Somebuildingcontracts,
such as SBC in clause 4.18.1, provide that the employer's interest in the retention monies
is fiduciary as the trustee for the contractor. The clauses often stipulate that the employer
has no obligation to invest the retention money retained. The legal effect of this wording is
doubtfulandappearstobecontrarytotheTrusteeAct1925andtheTrusteeInvestmentsAct
1961, which impose a duty on a trustee to invest trust monies in specified investments.
Many standard form contracts provide for the employer to set the money aside in a sep-
arate bank account at the request of the contractor. This reflects a requirement of the gen-
eral law whenever the contract provides that the retention money is to be held in trust. The
requirement applies in law whether or not the contractor actually makes a request. 5 The ac-
count name should make it very clear that it is a designated trust account 6 and be very clear
as to the identity of the beneficiary. It is good practice, although not prescribed in the con-
tract, for the employer to certify the action to the architect. The purpose of holding the re-
tentionintrustistosafeguardthecontractor'smoneyintheeventoftheemployerbecoming
insolvent. Therefore, the obligation to set trust money aside cannot be overcome bydeleting
such clauses. The court would simply imply a clause to similar effect.