REUTERS | Toby Melville

Where is your retention money held?

Although we are being told that the financial meltdown has been averted and that we are “only” facing a plain old-fashioned recession now I can’t help wondering whether there will be any aftershocks in the financial world.

The legal press is debating where solicitors are putting their clients’ money and what happens if the bank they have used goes bust. My mind turned to the JCT provision which says that the employer’s interest in the retention money is fiduciary as trustee (clause 4.18 in the JCT Standard Building Contract, 2005 edition).

Leave aside any questions of trust or insolvency law for the moment. The problem is that if the employer puts the money in a bank and the bank goes bust the money won’t be there. If the employer can’t make up the shortfall then the contractor has a problem. Are contractors now sufficiently confident in the banking system to leave the choice of bank up to the employer?

And as if that’s not enough the FT has reported a warning by the Bank of England that the financial health of insurers is among the current areas of concern.

I sat in a meeting recently where a contractor was debating with an employer as to whether and when retention money could be swapped for a bond.  Even though the bond in question was to be an on-demand bond there was a definite nervousness on the part of the employer about the financial viability of the bondsman – any bondsman.

The result was a reluctance bordering on refusal to allow the swap (from retention to retention bond).  Is this all just a big panic because nobody knows what’s round the corner or is it justifiable prudence?  Are we going to see the end of retention money being swapped for bonds?

3 thoughts on “Where is your retention money held?

  1. Similar issues arise in respect of retention monies on business or asset sales and other types of finance transaction involving escrow accounts. Parties may want flexibility to get these monies moved quickly if the bank at which they are held seems to be in financial difficulties; getting a good rate of interest may become a secondary concern.

    Charges over cash deposits have, in the past, been seen as very robust security. Chargees will want to make sure that any such deposit is held at a “healthy” bank.

  2. In these unusual times where the ratings of hitherto reliable bondsmen are suffering being downgraded, and when some of the largest banks are having to be propped up by the taxpayer, are we going to find Employers abandoning the financial institutions altogether and putting retention funds elsewhere in order to ensure that they have ready cash when it comes time to release the retention to the Contractor. Who knows where one’s money is safest, but as a potential winter of discontent approaches, sticking the retention cash under the mattress might not be a bad idea. At least then it might still be there in the spring….

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