How a Contractor Can Recover a Retention Payment Under a Contract for Work and Services

What Is a Retention Payment and When Is It Returned

A retention payment is a portion of the contract price that the client withholds from the contractor during the warranty period to ensure the quality of the completed work. Typically, this amounts to a few percent of the contract price, with the size and conditions for its return specified in the contract. In practice, the contractor receives these funds with a delay—either after the agreed warranty period expires or upon the occurrence of other specified conditions (for example, commissioning of the project), provided that the client has no claims regarding the quality of the work.

From a legal perspective, a retention payment is considered a security payment (Article 381.1 of the Civil Code of the Russian Federation)—it is not part of the main contract payment but a separate obligation to guarantee the quality of the work. The return of this amount is the client’s obligation, which arises once the contractor has properly fulfilled their warranty obligations (upon the end of the agreed period or upon the occurrence of the specified event).

Conditions and Deadlines for Returning the Retention Payment

The specific conditions and deadlines for returning the withheld amount are usually set out in the contract. Generally, the money must be returned after completion of the work and the end of the warranty period, provided no defects are detected.

For example, a construction contract may stipulate that 5% of the contract price is withheld and returned two years after the commissioning of the project. Upon the occurrence of the specified period (or another agreed-upon condition), provided that the contractor has properly performed the work, the client is obligated to pay the retention amount to the contractor.

If defects are discovered during the warranty period and the contractor fails to remedy them, the client may use the withheld funds to cover the cost of correcting these defects. In such cases, the amount to be returned is reduced by the costs incurred, or the retention may not be returned at all—but only to the extent of reasonable expenses for correcting the defects. If the work was performed properly and on time, and there are no claims regarding quality, the client has no legal grounds to withhold the money.

Failure to return the retention amount within the established period is considered a breach of monetary obligation by the client. From the date the funds were due for return, the contractor is entitled to claim interest for wrongful use of their money (Article 395 of the Civil Code of the Russian Federation).

The existence of a contractual penalty for late payment does not deprive the contractor of the right to interest under Article 395 of the Civil Code in the event of a delayed return of the retention payment, since the retention amount is not considered a payment but has a different legal nature.

It is also impermissible for a contract to completely release the client from liability for the late return of the retention amount—such a provision may be declared invalid as violating the balance of interests between the parties. In other words, if the client delays returning the security amount without legal grounds, they are subject to sanctions (interest under the law or a contractual penalty if provided for).

Actions for the Contractor if the Client Refuses to Return the Retention Payment

First, it is necessary to formalize the delivery and acceptance of the work results. According to the law, the transfer of work results is documented by a bilateral acceptance certificate. If the client refuses to sign the acceptance certificate without valid reasons, the contractor has the right to prepare a unilateral certificate. This unilateral certificate should be sent to the client (preferably by registered mail) and will serve as evidence that the work has been completed and submitted for acceptance. Judicial practice holds that a unilateral certificate has legal force and can only be invalidated if the client proves the legitimacy of their refusal to sign.

Next, the contractor must observe the pre-trial dispute resolution procedure. The contractor sends an official claim to the client demanding payment of the retention amount. The claim should refer to the contract terms (the date for return), the actual performance of the work, and the absence of grounds for further withholding. It is recommended to attach a copy of the signed acceptance certificate (bilateral or unilateral), an invoice for the retention amount, and specify a deadline for voluntary payment. The pre-trial claim procedure is now mandatory in most commercial disputes, and failure to comply may prevent the court from accepting the claim, so this step should not be skipped.

If the client fails to respond to the claim within the specified period or unjustifiably refuses to pay, the contractor must file a statement of claim in arbitration court to recover the retention payment and interest for late payment. The claim should outline the circumstances: conclusion of the contract, performance of work, delivery of results (with supporting certificates), the date when the retention payment was due, and the client’s refusal to pay. Copies of the contract, acceptance certificates, correspondence (including the claim and proof of its sending), invoices, and other evidence of the contractor’s performance should be attached to the claim.

The court will side with the contractor if it determines that the client created obstacles to the acceptance of the work or commissioning of the project to which the retention payment was tied.

During the court proceedings, the contractor is also entitled to claim interest under Article 395 of the Civil Code for the delayed payment period or a contractual penalty (if provided for in the contract). These amounts are generally recovered in addition to the principal debt. Any unfounded objections from the client (such as attempts to offset non-existent penalties or references to defects that do not exist or were remedied by the contractor) will be dismissed by the court, and the retention amount will be recovered with interest.

Good Faith as a Last Resort for Recovering Retention Payments

There are situations where a contract for work and services is drafted in a way that favors the client at the expense of the contractor’s interests, and the client exploits these provisions to impose their will, exceed the contract’s scope, or avoid returning the retention payment. It is important to understand that reliance on the restrictive nature of contract terms is only effective in exceptional cases.

In such situations, the principle of good faith, established in Article 10 of the Civil Code of the Russian Federation, may be invoked. This principle prohibits abuse of rights and bad-faith behavior. Courts often uphold claims based on good faith in disputes over retention payments.

Recovery of Retention Payments with Support from KDpartners

The team at KDpartners has extensive experience handling disputes under contracts for work and services. We support cases at all stages: from legal analysis of contract terms and supporting documents to pre-trial negotiations and court proceedings. The firm’s practice includes successfully recovering retention amounts and interest for delayed payment on behalf of contractors in both construction and industrial sectors. Our deep understanding of the specifics of contractor relationships and arbitration practice allows us to manage cases of any complexity.