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Thu February 20 2020

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Employer cannot suspend the works and keep retention

6 Dec 10 AMW entered into a contract to carry out plumbing and heating works on a development of 65 flats which were to be built in three blocks.

AMW completed their contract for plumbing and heating works in respect of the first two blocks on 17 October 2008. There were no defects in the works. AMW were unable to complete the contract works because Zoom did not proceed with the third block. AMW were paid but a retention of 5% was withheld as permitted by clause 5.7 of the contract. The clause stated:

"Unless otherwise agreed, a 5% retention will be held by Zoom Developments Limited which will be reduced to 2.5% on practical completion of the development. One year after practical completion of the development, provided that the works have been completed to Zoom Developments Limited satisfaction with no outstanding defects, and on written request from the Subcontractor, the balance of the sum due will be released, subject to Zoom Developments Limited (sic) rights under these conditions."

In the present action, the pursuers sought to recover the retention.

Zoom argued that it had suspended the works as it was entitled to do under clause 2.3 of the contract, which provided:

"Zoom Developments Limited reserves the right at all times and with no liability for compensation in respect thereof, to amend the development proposals, in whole or in part, to their satisfaction, cease of (sic) suspend work or vary the amount of work in the Contract at their sole discretion."

Until Zoom commenced construction of the third block, they had no requirement for AMW's plumbing and heating work. As the three blocks had not been completed and practical completion within the meaning of clause 5.7 had not been achieved, Zoom's argument went that AMW were consequently not entitled to the retention. In a letter written to AMW on 9 November 2006, Zoom had stated that the contract completion date was "as dictated by Zoom Developments Limited ongoing Contract Programme (Currently Programmes (sic) at 24 months)".

In addition, clause 3.1 of the contract provided:

"Zoom Developments Limited may without prejudice to any other of its rights or remedies immediately determine, or at Zoom Developments Limited sole discretion, suspend, for as along [sic] as Zoom Developments Limited deems necessary without determining, the Subcontractors employment under its Subcontract in respect of the whole or any portion of the Works, if the Subcontractor: …"

There followed a number of events which would entitle Zoom to exercise its rights under this clause. The Sheriff had concluded that since none of the events stipulated had occurred, they were not entitled to suspend the works and withhold the retention.


Zoom had appealed; the issue was whether the suspension referred to in Clause 2.3 was the same suspension as in Clause 3.1. The Sheriff Principal had concluded that since it was the work, as opposed to AMW's employment, which had been suspended, Clause 2.3 operated independently of Clause 3, and Zoom was not required to bring themselves within the terms of clause 3. This meant that the power to withhold the retention rested with Zoom which could defer the construction of the third block for years and lawfully withhold the retention.

AMW made an alternative submission which concerned the Housing Grants Construction and Regeneration Act 1996, and the Scheme for Construction Contracts. AMW argued that the contract did not provide an adequate mechanism for determining when payments became due. Zoom maintained that submitted that the fact that one party could postpone indefinitely the date for payment did not entitle the court to hold that the mechanism for payment contained in the contract was inadequate. AMW had made a bad bargain, and the courts could and should not interfere.

The court concluded that the payment mechanism in the contract was inadequate. It could not be deemed adequate if contractors had to wait for the employer to take a particular step which they alone control before the contractors could receive payment for work properly carried out in conformity with the contract. This was particularly so in the present case because it dealt with the re-payment of retention. The purpose of retention in building contracts is to provide the employer with some security in the event that defects arise following the employer taking possession of the site. . In the present contract the defenders alone control when Practical Completion can be achieved and thus when the retention was to be paid.

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In paragraph 12 of the Scheme for Construction Contracts, the contract price meant the entire sum payable under the construction contract in respect of the work. Since there was still work outstanding the entire sum payable under the contract could not be said to be due. This being so, it was difficult for AMW to bring themselves within the terms of paragraph 5 of the Scheme. However, paragraph 4 of the Scheme referred and applied to payments of a kind mentioned in paragraph 2. In terms of paragraph 2(1), the payment covered by the Scheme was the amount determined by paragraph 2(2)(a), less the amount determined by paragraph 2(3). This subtraction brought out the 5% retention monies which were the aggregate of the sums first and second sued for. The relevant period was as defined in the Scheme, i.e. 28 days after the work had been performed in terms of the contract. There was no dispute that the pursuers' work on the two blocks was satisfactorily completed on or before 17 October 2008. The relevant period thus expired on 14 November 2008. In terms of paragraph 4 of the Scheme, payment fell due on the expiry of 7 days following the relevant period (21 November 2008) or the making of a claim by the payee whichever occurred later.
 

Also reported  in this week's Subscription Bulletin:

Stay of Proceedings to Arbitration- Issues under the Companies Act 2006 s.994;

Site Conditions and Contractor's Risk;

Party Cannot Have Redress to the Courts whilst Adjudication is Ongoing. 

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