Contract Law - review of retention

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Closes 5 May 2025

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Reforming the law

To address the deficiencies in the law of retention and to bring the necessary clarity to the law, it is proposed that the following provisions could be placed on a statutory footing.  The provisions would be default in nature and would not preclude parties’ ability to contract out of them.  See the Fact Bank below for the provisions.

Related Information

  1. Retention is the temporary withholding or suspending of performance of contractual obligations that are due to be performed.
  2. A party (A) who is to perform a contractual obligation(s) after the time at which the other party to the contract (B) is due to perform an obligation(s) has a right to retain her performance until B has performed his obligation(s) or has paid damages to A in lieu of such performance, subject to the following provisions.
  3. The performance retained by A must be a counterpart obligation to that which B has failed to perform or performed defectively.
  4. There is a rebuttable presumption that all of the obligations in a contract undertaken by A are counterparts of the obligations undertaken by B.  This presumption can be rebutted where the terms of the contract or its structure indicate that the parties do not intend all of A’s obligations to be the counterparts of all of B’s obligations.
  5. Despite being in different contracts, obligations may be counterparts  where they form part of one transaction.
  6. For A to have the right to retain there is no need for B’s breach of contract to be material.  The breach by B must have non-trivial adverse effects for A.
  7. A’s retention of her performance must not be clearly disproportionate to the effects of B’s breach of contract.  Where the retention would be clearly disproportionate, A may still retain such part of her performance as is not so disproportionate.  The courts have a discretion to refuse to allow A to exercise her right to retain performance should they consider that the right is being used inequitably.
  8. These are default provisions and the parties can contract out of the right to retain performance.
  9. Retention can be, but is not limited to, securing future performance and can be used even if the contract has come to an end in respect of obligations subsisting when it ends.
  10. Retention can be pled as a defence to an action on the contract, to justify why the defender has not yet performed her obligations.
  11. Nothing in the rules set out here affects the remedy of special retention, that is retention which can be permitted by the court, in the exercise of its equitable discretion, and which does not depend on the principle of mutuality of contract.  The court can allow a liquid debt to be retained pending the making liquid of an illiquid claim and in respect of which there need be no connection between the claims.
  12. Should A have obligations to perform before B performs, but before A has performed her obligations B makes clear that he will not perform his obligations when the time comes to perform or will do so in such a manner that he will be in material breach of the contract, then A has the right to retain her performance notwithstanding that her obligations are due to be performed before B’s obligations.  With the exception of permitting retention of performance in response to an anticipatory refusal to perform, as set out in this rule, nothing in these rules affects the law in relation to anticipatory breach of contract.
  13. Nothing in the rules set out above affects the law in relation to lien.
1. Would the statutory scheme set out in the consultation paper address the concerns about the law of retention?

The statutory scheme

To address the deficiencies described above and to bring the necessary clarity to the law, it is proposed that the following provisions could be placed on a statutory footing. Some are a restatement of the current law, others reform and innovate the law. The provisions would be default in nature and would not preclude parties’ ability to contract out of them.

  1. Retention is the temporary withholding or suspending of performance of contractual obligations that are due to be performed.
  2. A party (A) who is to perform a contractual obligation(s) after the time at which the other party to the contract (B) is due to perform an obligation(s) has a right to retain her performance until B has performed his obligation(s) or has paid damages to A in lieu of such performance, subject to the following provisions.
  3. The performance retained by A must be a counterpart obligation to that which B has failed to perform or performed defectively.
  4. There is a rebuttable presumption that all of the obligations in a contract undertaken by A are counterparts of the obligations undertaken by B. This presumption can be rebutted where the terms of the contract or its structure indicate that the parties do not intend all of A’s obligations to be the counterparts of all of B’s obligations.
  5. Despite being in different contracts, obligations may be counterparts  where they form part of one transaction.
  6. For A to have the right to retain there is no need for B’s breach of contract to be material. The breach by B must have non-trivial adverse effects for A.
  7. A’s retention of her performance must not be clearly disproportionate to the effects of B’s breach of contract. Where the retention would be clearly disproportionate, A may still retain such part of her performance as is not so disproportionate. The courts have a discretion to refuse to allow A to exercise her right to retain performance should they consider that the right is being used inequitably.
  8. These are default provisions and the parties can contract out of the right to retain performance.
  9. Retention can be, but is not limited to, securing future performance and can be used even if the contract has come to an end in respect of obligations subsisting when it ends.
  10. Retention can be pled as a defence to an action on the contract, to justify why the defender has not yet performed her obligations.
  11. Nothing in the rules set out here affects the remedy of special retention, that is retention which can be permitted by the court, in the exercise of its equitable discretion, and which does not depend on the principle of mutuality of contract.  The court can allow a liquid debt to be retained pending the making liquid of an illiquid claim and in respect of which there need be no connection between the claims.
  12. Should A have obligations to perform before B performs, but before A has performed her obligations B makes clear that he will not perform his obligations when the time comes to perform or will do so in such a manner that he will be in material breach of the contract, then A has the right to retain her performance notwithstanding that her obligations are due to be performed before B’s obligations.  With the exception of permitting retention of performance in response to an anticipatory refusal to perform, as set out in this rule, nothing in these rules affects the law in relation to anticipatory breach of contract.
  13. Nothing in the rules set out above affects the law in relation to lien.
2. Do you think there are any components missing from the scheme?
3. Do you think any of the components listed should not feature in the scheme?
4. Do you have any general comments on the proposed scheme?
5. In relation to provision (f) do you consider that the non-trivial adverse effect requirement is necessary?
6. Do you have any concerns about a statutory statement of the law of retention given the general approach of the SLC not to recommend a general statutory statement of the law of remedies for breach of contract?
7. Do you have any views on whether retention should be available in response to an anticipatory refusal to perform?
8. Do you have any views on whether these provisions should be made in primary or secondary legislation?

If you think these provisions should be made by way of secondary legislation, do you have a  view on which piece of primary legislation may enable Ministers to make such changes?