P.C. Harrington Contractors Ltd v CO Partnership Developments Ltd

In construing linked building contracts, the primary management contract must be considered first, with its effect then reconciled with the works contract. Retentions made under a works contract, and held by the employer on trust for the works contractor, are not money due or to become due to the management contractor merely because the overall project cost is payable through the management contract. The employer’s contractual right of set-off against money due to the management contractor therefore does not extend to those works-contract retentions. The retentions remain trust property for the works contractor until released under the contractual mechanism.

The works contractor claimed £22,695 from a retention fund held by the employer. The fund arose under linked JCT management and works contracts for a development project. After the management contractor entered administrative receivership, the employer sought to set off its losses against the whole fund, including the amount attributable to works-contract retentions.

The High Court held that the relevant sum was held on trust for the works contractor and was not available for set-off against the management contractor’s liability. The employer appealed, raising the construction of the payment, retention and set-off provisions in the two contracts.

1. Appeal dismissed. The employer’s right of set-off under clause 4.3.2 of the Management Contract did not extend to the part of the retention fund attributable to retentions made under the Works Contract.
2. The proper constructional approach was to begin with the Management Contract, which was the primary source of the obligations concerning money emanating from the employer. Its effect had then to be traced through and reconciled with the Works Contract.
3. Under the Management Contract, amounts due and payable under works contracts were included in the prime cost, but works-contract retentions were excluded from the relevant interim certificates. They were therefore not money due or to become due to the Management Contractor.
4. Clause 4.8 applied to the retention fund, recognising separate beneficial interests in management-contract and works-contract retentions. The works-contract retentions were held by the Employer on trust for the Works Contractor. Clause 4.29 of the Works Contract reinforced that any interest of the Management Contractor was fiduciary and held for the Works Contractor.
5. The Employer’s set-off right could operate against management-contract retentions once they became due, but never against works-contract retentions. The later issue, or non-issue, of a certificate of completion of making good defects could not convert trust property held for the Works Contractor into money due to the Management Contractor.
6. The Court of Appeal regarded the differently worded authorities on retention funds as not directly assisting the construction of these contracts. Order: appeal dismissed with costs; leave to appeal to the House of Lords refused.

• High Court of Justice, Queen’s Bench Division: Mr Michael Tugendhat QC held that £22,695 was held on trust for the Works Contractor and was not available for set-off against the Management Contractor’s liability.
• Court of Appeal (Civil Division): The appeal was dismissed with costs. Leave to appeal to the House of Lords was refused.