Last Updated on 19/08/2026 by Damin Murdock
Retention money occupies an unusual position under a construction contract. It commonly represents part of the price of completed work withheld by the principal as security for the contractor’s continuing performance. Its legal character, however, depends on the source of the parties’ rights.
Retention may be characterised as trust property, as performance security under statute, or as contractual security which may ultimately crystallise into a debt.
When is retention money trust money?
Whether retention money is held on trust depends on the ordinary requirements for an express trust: certainty of intention, subject matter and objects. In practice, certainty of intention is usually critical.
In Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25, the High Court recognised that an obligation to keep money separate can indicate an intention to create a trust, segregation being characteristic of a trustee’s obligations. However, segregation is not essential where the contract otherwise expressly creates a trust.
Accordingly, merely describing money as “retention” or “security” will not ordinarily establish a trust. Where the contract contains neither trust language nor an obligation to segregate the money, establishing a trust is considerably more difficult.
The distinction matters particularly on insolvency. If retention is trust property, the contractor may assert a proprietary interest in the identifiable or traceable fund rather than merely prove as an unsecured creditor.
If not trust money, how is retention characterised under statute?
Prior to 15 April 2026, the case law addressing the characterisation of retention money under the Building and Construction Industry Security of Payment Act 2002 (Vic) (the SOP Act) presented differing opinions. In Punton’s Shoes Pty Ltd v Citi-Con (Vic) Pty Ltd [2020] VSC 514, retention was described as a separate and distinct security fund, distinct from an ordinary claim for payment for construction work. However, that characterisation was qualified by the Court of Appeal in J.G. King Project Management Pty Ltd v Hunters Green Retirement Living Pty Ltd & Anor [2024] VSCA 310, where it was observed that retention may equally be characterised as an unpaid amount for construction work from which the retention was deducted. The Court rejected the proposition that retention money lost its character as money owing for construction work done merely because it was held by the principal as security.
Since 15 April 2026, the SOP Act expressly treats retention money as a form of performance security. The SOP Act provides a framework for the release of performance security (ss 9(2)–(3)), regulates when that security becomes due for release (s 12(1A)–(1B)) and when a claim for release may be made (ss 17A–17C), and restricts the circumstances in which the other contracting party may have recourse to the security (s 17H).
This statutory characterisation recognises retention money according to its ultimate function: money held as security for contractual performance. It should, however, not be conflated with a characterisation of retention money as a secured debt or as giving rise to a security interest. In the event of insolvency, the SOP Act alone would not afford a contractor priority in respect of an otherwise unsecured debt in the form of retention money. In the absence of a trust, statutory priority, security interest or other proprietary right, the contractor’s claim would rank as an unsecured claim in the winding up, pari passu—on equal footing—with other unsecured creditors.
If not determined by statute, how is retention characterised at common law?
At common law, retention is ordinarily treated as contractual security. Although derived from amounts attributable to construction work that may or may not be presently completed, the contractor may not have an immediate right to payment while the principal remains entitled to hold or have recourse to that security.
Once the contractual conditions for release are satisfied, however, the security function may end, and the obligation to return the retention may crystallise into a debt. In Clyde Contractors Pty Ltd v Northern Beaches Developments Pty Ltd [2001] QCA 314, it was held that once the contractual release conditions were satisfied, the retention became repayable as a liquidated sum.
At Leo Lawyers, we understand that retention money can represent a significant portion of a contractor’s cash flow and that disputes about its release can place real pressure on a business, particularly at practical completion or during a principal’s financial distress. Contractors may be uncertain whether retention is being held on trust, when it must be released, whether the principal is entitled to have recourse to it, and what remedies are available if payment is withheld. We assist contractors to understand their contractual and statutory rights, assess whether retention has become due for release and take steps to protect and recover amounts improperly retained.
Feel free to contact Damin Murdock at Leo Lawyers via our Website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our newsletter via our Website, to our YouTube, LinkedIn, Facebook and Instagram, and kindly give us a favourable Google Review.
DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article and if you require specific legal advice, please contact us
Damin Murdock (J.D | LL.M | BACS - Finance) has over 17 years of experience as a commercial lawyer. He helps businesses navigate construction and technology law. Damin has held several big leadership roles, including serving as a director of a national law firm and the Chief Legal Officer for Lawpath.
He has personally helped more than 2,000 startups and small businesses. With over 300 five-star reviews, his clients clearly value his practical advice and simple way of explaining things. Damin has also hosted over 100 webinars that thousands of people have watched to get reliable legal help.
