Retaining Trust: The Hip Hing Construction Case and the Future of Cash Retentions in the Construction Industry

Cash retentions are commonly provided for in construction contracts. These provisions allow the employer under a contract to hold back a portion of an instalment payment. These retained portions are then paid to the contractor at specific points: usually completion of the work and some period after. This is considered a pragmatic and low-maintenance way to incentivise contractors to fulfil their obligations and to safeguard the employers' interests. However, this practice has significant financial implications, often tying up substantial funds that could otherwise be spent on operational needs or further investment. This is particularly important in an industry where cash flow is at a premium (the "very lifeblood of the enterprise" as Lord Denning famously put it) . In addition, money held in retention remains in the hands of the payer until released. This leaves the contractor vulnerable to the payer's insolvency. This issue was very live when Carillion, the UK's second-largest construction contractor, became insolvent in January 2018 holding significant amounts in retentions for a wide range of its sub-contractors. A range of alternative mechanisms have been considered, but none have overcome the attraction of cash retentions due to their simplicity and low cost. Internationally, most notably in Australia and New Zealand, the use of trusts as a way of organising these cash retentions has emerged as something of a solution to the insolvency problem. This is because trusts are relatively straightforward to set up while providing a safeguard in the event of the payer's insolvency. Trusts do not, however, prevent the money from being "tied up" in retention. Although the segregated funds could possibly be used for investment, they remain inaccessible for immediate use by the contractors, which can limit cash flow and financial flexibility. Trusts have also been the favoured vehicle for reform in England, but two private members' bills to institute these have failed to gain the required parliamentary time. Trusts were also considered by a Scottish Government working group set up to examine this issue, among a broader range of potentially viable alternatives. These relatively technical legal reform efforts lack the political heft to make them a priority. More generally, cash retention issues are seldom brought to court. As a result, significant aspects of their precise operation are unclear. In this context, the Hong Kong decision, Hip Hing Construction Co Ltd v Hong Kong Airlines Ltd, where the parties had agreed to hold the retention in trust, is an important one, especially in terms of offering insights into the application and implications of trust law in the context of cash retentions.