Retention money (art. 1799-1 French Civil Code): what leverage over the clearing of reservations, and what remains if the contractor fails

A shell and core package is accepted with seventeen reservations, the contractor does not return to site, and a 5% retention is released automatically twelve months later: the sequence is commonplace, and the institutional project owner (maître d'ouvrage) who goes through it often discovers too late that it has lost its only means of pressure. Retention money on works contracts is not a dormant security to be activated when the file resurfaces. It is a fixed-term mechanism, a matter of public policy (ordre public), and its release is automatic unless a reasoned objection is notified within the year following acceptance. This guide deals with two operational questions: how to use the 5% as effective leverage to have the reservations cleared, and what actually remains where the contractor is placed in compulsory liquidation before it has remedied the defects subject to reservations.

A preliminary point: retention money does not fall under Article 1799-1 of the French Civil Code

The confusion is frequent in private-sector contracts, including in contractual documents drafted by professionals. It should be cleared up at the outset, because it leads to ineffective clauses.

Retention money is governed by Law No. 71-584 of 16 July 1971 regulating retentions in respect of works contracts as defined by Article 1779-3° of the French Civil Code. It protects the project owner against non-performance of remedial works.

Article 1799-1 of the French Civil Code, introduced by Law No. 94-475 of 10 June 1994, provides for the opposite: it concerns the payment guarantee owed by the project owner to the contractor. Above a threshold set by regulation (€12,000), a private project owner that does not finance the operation by a specific loan involving direct payment of the contractor by the lending institution must provide the contractor with a joint and several guarantee (cautionnement solidaire) from a credit institution. The sanction is formidable from the standpoint of the site programme:

As long as no guarantee has been provided and the contractor remains unpaid for the works carried out, the contractor may suspend performance of the contract after a formal notice has remained without effect at the end of a period of fifteen days. (Article 1799-1, paragraph 4, of the French Civil Code)

The two mechanisms are symmetrical and both are matters of public policy. A project owner that objects to the release of the retention when it has never itself delivered the payment guarantee required by Article 1799-1 exposes itself to a contentious response: suspension of the works, termination at the project owner's fault, and a claim for damages. The trade-off must therefore be assessed on both sides of the site balance sheet.

The regime of retention money on works contracts: 5%, public policy, a single deadline

A contractual deduction, never automatic

A retention is not presumed. Article 1 of the Law of 16 July 1971 provides that payments of interim instalments may be reduced by a retention not exceeding 5 per cent of their amount and contractually securing the performance of the works, in order to meet, where applicable, the reservations made at acceptance by the project owner.

Three practical consequences follow. First, in the absence of an express clause in the contract, a project owner that deducts 5% from its payments commits a contractual breach and is exposed to late-payment interest, or even to the application of Article 1799-1. Second, the 5% ceiling applies to the amount of the interim instalments and may not be exceeded, including by means of a complementary guarantee whose economic effect would be to take the amount withheld above that threshold. Third, the purpose of the retention is confined to the performance of the works, and in particular to the remedying of the reservations. It is not a general provision against any financial dispute with the contractor.

Article 4 locks the whole system: clauses, stipulations and arrangements, in whatever form, which would have the effect of defeating the provisions of this Law are null and void. A contract clause providing for a 10% retention, or making the return of the retention conditional solely on the clearing of the reservations without any time limit, or prohibiting substitution by a guarantee, is deprived of effect. Institutional project owners relying on old CCAPs (special administrative terms) have an interest in having these provisions audited: their nullity is not cured by the contractor's signature.

Escrow, direct payment and choice of escrow holder

The Law provides that the retention is to be placed in escrow with an escrow holder (consignataire) accepted by both parties or, failing that, appointed by the president of the judicial court (tribunal judiciaire). Private-sector practice departs from this massively: the 5% most often remains in the project owner's cash. The Law itself draws the consequences by providing for direct payment to the contractor at the due date.

This divergence is not neutral, and it is one of the points where the economic reading differs from the purely legal reading. Keeping the funds provides a cash-flow advantage and places the project owner in the position of holder. But if the contractor is subject to insolvency proceedings, the 5% constitutes a debt of the project owner towards a company in liquidation, and keeping it then requires winning a debate on set-off. Conversely, funds held in escrow have legally left the cash of both the contractor and the project owner, and their release requires the withdrawal of the objection or a court decision. For a high-value contract awarded to a contractor whose credit standing is uncertain, effective escrow deserves to be required from the drafting of the contract.

A distinct regime applies to public procurement: the French Public Procurement Code (code de la commande publique) also caps the retention at 5%, but substitution takes place in principle by a first-demand guarantee, a joint and several personal guarantee being admitted only if the contracting authority does not object. The difference is substantial, as we come back to below.

Retention as leverage to clear reservations: real scope and limits

What 5% makes it possible to obtain

The leverage is economic before it is legal. On a technical package, 5% of the contract price frequently represents more than the contractor's net margin on the operation. As long as the retention has not been released, the site remains an unsettled receivable on the contractor's balance sheet, and the pressure on its trade receivables is real, in particular where it is otherwise negotiating its short-term financing.

That leverage must still be used during the window in which it exists, that is, the year following acceptance. After that date, without a valid objection, the retention is due and the project owner finds itself a claimant before the court, a position structurally less favourable than that of the holder of the funds.

Combining retention, the guarantee of perfect completion and penalties

The retention does not duplicate the guarantee of perfect completion (garantie de parfait achèvement) of Article 1792-6 of the French Civil Code, and confusing them weakens the project owner's position. The guarantee of perfect completion is the obligation, binding on the contractor for one year from acceptance, to remedy the defects notified by reservations at acceptance or by subsequent written notification. It includes a mechanism of enforced performance that many project owners do not activate: where the works are not carried out within the time set, they may, after a formal notice has remained unsuccessful, be ordered to be carried out at the cost and risk of the defaulting contractor. The formal notice and the execution of remedial works at the cost and risk of the builder are detailed in our article on the guarantee of perfect completion under Article 1792-6.

The operational combination is as follows: the guarantee of perfect completion founds the obligation to perform and the right to substitute another contractor at the defaulting party's expense; the retention provides the financial base to absorb the cost of that substitution. The first without the second leaves the project owner with a receivable to recover; the second without the first leaves it with funds whose allocation will be disputed. Both one-year periods run from acceptance, which makes joint management of them possible.

Late-completion penalties follow a distinct logic. Their set-off against the retention requires a case-by-case analysis: the retention secures the performance of the works, not the payment of a penalty claim, and a blunt set-off weakens the objection. In practice, it is better to base the objection exclusively on the non-performance of the remedial obligations and to deal with the penalties by a separate claim, if necessary asserting them later by way of set-off.

Drafting enforceable reservations

The quality of the acceptance record (procès-verbal de réception) determines the strength of the objection. Reservations drafted in generic terms ("finishes to be redone", "non-compliant paintwork") are open to argument; localised reservations, identifying the structure, the location, the nature of the defect and the time for remedying it, are not open to argument in the same way. The record should systematically include a time limit for clearing the reservations, a date for the joint inspection confirming that they have been cleared, and the identification of the responsible package where several contractors have worked on the same structure. On the drafting of an enforceable acceptance record and the effects of acceptance of works, see our dedicated analysis.

Where the reservations are not cleared and the defect is liable to develop, summary proceedings for an expert appointment (référé-expertise) under Article 145 of the French Code of Civil Procedure remain the tool for securing the evidence. It records the condition of the structure before the contractor disappears or the defects worsen, and it usefully interrupts the discussion on liability where several parties are involved.

The decision timetable: from acceptance to automatic release

The starting point is unique and does not depend on the condition of the structure. The one-year period runs from acceptance, whether it is pronounced with or without reservations. An acceptance with fifty reservations opens the same period as an acceptance without reservation. This is the central trap of the mechanism.

The milestones to include in a portfolio monitoring tool:

• Contract drafting phase: express stipulation of the 5% retention, designation of the escrow holder, notification address of the contractor and of its guarantor, if any, joint liability clause in the event of joint contracting, arrangements for clearing the reservations.
• Day of acceptance: signature of the record, detailed reservations, time limit for remedial works. This day simultaneously triggers the period for the retention, that of the guarantee of perfect completion and the start of effect of the damage insurance policies.
• Acceptance + 1 to 3 months: written reminders, formal notice to clear the reservations by registered letter, joint inspection of the remedial works carried out.
• Acceptance + 6 months: interim review. If the reservations have not been cleared, commence summary proceedings for an expert appointment and, where appropriate, consult a third-party contractor with a view to performance at the cost and risk of the defaulting contractor.
• Acceptance + 9 months: systematic review of retentions falling due within the quarter. This is the alert milestone to automate in organisations managing several dozen operations.
• Acceptance + 10 to 11 months: notification of the reasoned objection by registered letter to the escrow holder, the contractor and, where a guarantee has been provided, the guarantor institution itself.
• Acceptance + 12 months: automatic release of the retention and extinction of the guarantee commitment in the absence of a valid objection. Simultaneous expiry of the guarantee of perfect completion.

The reasoned objection: form, addressee, content

Article 2 of the Law of 16 July 1971 makes the maintenance of the retention conditional on an objection notified by registered letter and based on the contractor's failure to perform its obligations. Three errors recur regularly.

The first is the late objection, notified after the expiry of the annual period: it has no effect, and return of the retention is then due as of right. The second is the unreasoned objection, formulated in general terms ("we object to the release of the retention"), the validity of which the courts assess strictly. The objection must identify the failings: reservations not cleared, listed one by one, with reference to the acceptance record and to the formal notices that remained without effect. The third error is the wrong addressee: an objection addressed to the contractor when the funds are held in escrow, or addressed to the contractor when the retention has been replaced by a retention guarantee, has no effect as against the escrow holder or the guarantor. The notification must target each third party concerned.

What the objection achieves, and what it does not

The objection freezes the situation. It does not amount to an award of the funds. The project owner who objects retains a blocking position, but, failing agreement, it will need an enforceable title to apply the sums definitively to the cost of the remedial works. The objection is therefore part of a procedural strategy: it must be followed, within a reasonable time, by an action on the merits or a measure of inquiry, failing which it turns into an abusive withholding, giving rise to interest and a risk of damages.

Retention money or joint and several personal guarantee: the real trade-off

The choice belongs to the contractor, not to the project owner

Article 3 of the Law of 16 July 1971 provides that the retention may be replaced, at the contractor's option, by a joint and several personal guarantee given by a financial institution appearing on a list fixed by decree. The words at the contractor's option are decisive: the project owner may neither refuse the substitution, nor impose it, nor make it subject to its discretionary approval. A clause to the contrary falls foul of Article 4.

The substitution may take place at any time, including after acceptance, and entails immediate return of the sums already retained. A project owner that refused to return them in the presence of a valid guarantee would be in breach.

What the guarantee changes when the contractor's credit standing deteriorates

From the project owner's point of view, cash retention and the guarantee do not have the same value depending on the contractor's financial health.

As long as the contractor is solvent (in bonis), cash retention is preferable: the funds are available, set-off is simple, and no third party is involved. A guarantee requires notifying a call, arguing the case, and facing a guarantor which, being a true suretyship and not an independent guarantee, may raise defences inherent in the debt since Ordinance No. 2021-1192 of 15 September 2021 reforming the law of security interests (Article 2298 of the French Civil Code). The guarantor is therefore entitled to dispute the existence of the reservations or their attribution.

The trade-off is reversed when the contractor's credit standing deteriorates. The guarantee shifts the counterparty risk to a solvent credit institution, and that shift survives the insolvency proceedings of the principal debtor. Corporate guarantors benefit neither from the stay of individual proceedings on the terms provided for natural persons, nor from the time limits and reductions granted under a plan (Articles L. 622-28 and L. 626-11 of the French Commercial Code). The project owner's claim against the guarantor therefore remains payable even though the contractor has ceased all activity.

This is why an informed institutional project owner does not systematically oppose a substitution requested by a contractor whose indicators are deteriorating. It secures it: checking the identity and approval of the guarantor, checking the duration of the commitment (a fixed-term guarantee expiring before the end of the year following acceptance is a classic trap), checking the amount guaranteed and the conditions for calling it, and recording the guarantor's notification address in the monitoring tool.

Contractor failure before the reservations are cleared: what actually remains

The company failure statistics published by the Banque de France consistently place construction among the most exposed sectors. The possibility of compulsory liquidation being opened between acceptance and the expiry of the annual period is therefore not a hypothetical one.

Retention not held in escrow: set-off for connected claims and proof of claim

Where the retention has remained in the project owner's cash, the latter is a debtor for a sum owed to a company in insolvency proceedings. The liquidator will claim payment. The prohibition on paying pre-opening debts laid down by Article L. 622-7 of the French Commercial Code expressly reserves payment by set-off of connected claims, a mechanism applicable in compulsory liquidation.

Connection is hardly in doubt where the claim for remedying the defects and the retention debt arise from the same works contract. But the enforceability of the set-off depends on the claim being filed in the proceedings. The period is two months from publication of the opening judgment in the BODACC (French official gazette of civil and commercial announcements), extended to four months for creditors domiciled outside metropolitan France (Articles L. 622-24 and R. 622-24 of the French Commercial Code). A project owner that lets this period pass, having failed to monitor the situation of its contractors, loses the benefit of set-off and will have to return the 5% while ranking among the unsecured creditors, where applicable after relief from foreclosure (relevé de forclusion).

The claim to be filed must be valued: estimated cost of remedying the reservations not cleared, on the basis of a third-party contractor's quotation, to be filed on a provisional basis if the final figure is not available.

Retention held in escrow: a markedly more comfortable position

If the retention has actually been placed in escrow and a reasoned objection has been notified in time, the funds appear neither in the project owner's cash nor among the contractor's available assets. The liquidator will have to act to obtain release, and the debate will concern the merits of the reservations, not the validity of a set-off. The project owner remains in a defensive position which, in liquidation litigation where cash and speed make the difference, constitutes a substantial tactical advantage.

The guarantee: the only asset truly insulated from liquidation

This is the central point of the trade-off. Where a retention guarantee has been validly taken out, the contractor's liquidation does not deprive the project owner of its security. Two conditions apply, however. First, the objection must have been notified to the guarantor before the expiry of the one-year period following acceptance: automatic release operates as against the guarantee as it does as against the retention. Second, the project owner must be able to establish the reality of the reservations not cleared and their attribution to the guaranteed contractor, since the guarantor may raise defences inherent in the debt.

Other avenues where neither retention nor guarantee suffices

The 5% rarely covers the full cost of remedial works by a third-party contractor, in particular where the new contractor has to take over an existing structure whose substrates it did not build. The avenues to examine are as follows: the joint liability of co-contractors where the contract was awarded to a joint and several consortium; the liability of the general contractor or main contractor where the defaulting party is a subcontractor; the contractor's ten-year liability insurance for defects falling within Article 1792 of the French Civil Code, bearing in mind that defects that are apparent and subject to reservations at acceptance are in principle excluded from the statutory guarantees after acceptance; and the liability of the works supervisor (maître d'œuvre) where the defects arise from a design fault or from a breach of the mission of supervising the execution of the works.

A frequent illusion must, however, be set aside: structural damage insurance (assurance dommages-ouvrage) does not fund the clearing of reservations. It covers, after expiry of the guarantee of perfect completion, defects of a ten-year nature, and is not intended to replace a defaulting contractor in respect of defects apparent at acceptance.

Points of attention when drafting the contract

Several lawful stipulations significantly strengthen the project owner's position without running up against Article 4 of the 1971 Law: the naming of the escrow holder and the obligation of effective escrow; the obligation of immediate disclosure in the event of a change in the contractor's financial situation or the opening of an amicable or collective procedure; the joint liability clause in the event of joint contracting; the precise identification of the contractor's notification address, kept up to date; the obligation to provide the updated ten-year insurance certificate before each interim payment application; and the contractual fixing of a time limit for clearing reservations, backed by a specific penalty distinct from the penalties for late completion.

Conversely, three clauses are to be avoided because they are void and give the contractor an argument for a general challenge: a retention above 5%, making the return conditional solely on the clearing of the reservations without a time limit, and any restriction on the right of substitution by a guarantee.

Conclusion

Retention money is not a security, it is an option with an expiry date. Its value to the project owner is concentrated in the twelve months following acceptance and evaporates entirely on the anniversary if no reasoned objection has been notified to the right addressees. Organisations managing portfolios of operations lose significant sums every year, not because they lost a legal argument, but because a milestone was not followed.

The position taken is as follows: cash retention is preferable while the contractor is sound, the joint and several personal guarantee is preferable as soon as its credit standing deteriorates, and effective escrow is the most defensible intermediate position in the event of insolvency proceedings. In every case, the retention is worth something only when combined with the guarantee of perfect completion and a written formal notice opening the way to performance at the cost and risk of the defaulting contractor.

Set up a systematic alert nine months after each acceptance and have the retention clauses of your standard CCAPs audited against Article 4 of the Law of 16 July 1971: a void clause discovered at the time of litigation costs more than rewriting it beforehand.

Frequently asked questions

Is retention money automatically released one year after acceptance? Yes. Article 2 of Law No. 71-584 of 16 July 1971 provides for the sums to be paid to the contractor on expiry of a period of one year from acceptance, with or without reservations, unless the project owner objects by registered letter, stating that the contractor has failed to perform its obligations. The existence of reservations not cleared does not suspend that period: it must be relied on in a formal objection. Once the deadline has passed without a valid objection, return of the retention is due as of right.

Can the project owner refuse the substitution of the retention by a bank guarantee? No. Article 3 of the Law of 16 July 1971 reserves this choice to the contractor, who may replace the retention by a joint and several personal guarantee given by a financial institution appearing on a list fixed by decree. Any contract clause making the substitution subject to the project owner's agreement is void under Article 4. The project owner may, however, and must, check that the guarantor is authorised, that the commitment covers the amount of the retention and that it does not expire before the end of the year following acceptance.

How should a valid objection to the release of the retention be drafted? The objection must be notified by registered letter before the one-year period expires, and be based on the contractor's failure to perform its obligations. In practice, it lists the reservations in the acceptance record that remain uncleared, locates them, refers to the formal notices that remained without effect and, where possible, states the estimated cost of the remedial works. It must be addressed to each addressee concerned: the escrow holder if the funds are held in escrow, the contractor, and the guarantor institution if a retention guarantee has been provided.

What happens to the retention if the contractor is placed in compulsory liquidation? If the retention has remained with the project owner, it is a debt owed to the company in liquidation. The project owner may set it off against its claim for remedying the defects, since Article L. 622-7 of the French Commercial Code reserves payment by set-off of connected claims, but on condition of having filed its claim in the proceedings within two months of publication of the opening judgment in the BODACC. If the retention has been placed in escrow and an objection has been validly notified, the funds remain blocked until agreement or a court decision. If a guarantee has been provided, it remains callable, the corporate guarantor not benefiting from the time limits and reductions of the plan.

Are reservations not cleared covered by structural damage insurance? No. Structural damage insurance pre-finances the repair of defects of a ten-year nature, after expiry of the guarantee of perfect completion. Defects that are apparent and subject to reservations at acceptance fall under the guarantee of perfect completion of Article 1792-6 of the French Civil Code, which binds the contractor and is not compulsorily insured. If the contractor fails before the reservations are cleared, the only assets that can be called upon are the retention or the guarantee, the joint liability of co-contractors and, where applicable, the liability of the works supervisor.

Can the retention and the payment guarantee under Article 1799-1 of the French Civil Code neutralise each other? They operate in opposite directions and are both matters of public policy. The retention protects the project owner against non-performance of remedial works; Article 1799-1 of the French Civil Code requires the private project owner, above the regulatory threshold of €12,000, to guarantee payment of the contractor by a joint and several guarantee or by direct payment by the lending institution. A project owner that has not delivered that guarantee is exposed to lawful suspension of the works after a formal notice that has remained without effect for fifteen days, which considerably weakens its position when it subsequently relies on reservations not cleared.

Can late-completion penalties be set off against the retention? Set-off is legally debatable and tactically risky. The retention secures the performance of the works and the clearing of the reservations, not the recovery of a penalty claim. Basing the objection on late-completion penalties exposes it to being set aside for lack of reasoning in accordance with Article 2 of the 1971 Law. It is better to base the objection exclusively on the reservations not cleared and to assert the penalties in a separate claim, by way of set-off where appropriate.